While traditional formats struggle with consumption tax increases, saturated markets, locational problems, and low consumer confidence, Japan’s budding e-commerce (EC) channel continues to grow rapidly. Despite the stereotype imagined by people who’ve never been here, Japan is not really the high-tech land where everyone has an engineering degree, doodles artistic works of manga over the breakfast table, and spends their free-time programming complex smartphone apps and discussing the wonders of monetary economics. But if anything defines Japan, it’s a love of shopping and the drudgery of long commutes, two things that e-commerce brings together in harmony.
Japanese love gadgets, especially ones that make life more convenient. Smartphones and free wifi are close to becoming ubiquitous. So far, Japanese cities haven’t gone the way of New York in suggesting wifi should be universal, free and on tap, literally the same as water, but retailers understand that the longer they can hold people in stores, the more they’re likely to buy, so finding a free to access wifi spot has become as easy as finding one of the 55,000 convenience stores across the country. Easy access is just one factor helping consumers to love e-commerce (EC) and companies are doing all they can to encourage the trend.
Measuring online: not quite anyone’s guess
For 2013, METI statistics estimate the business to consumer (B2C) market for EC transactions alone at ¥11.2 trillion, growing 18% over 2012 (Chart 1). This is in addition to ¥26.9 trillion in B2B transactions in the same year, with an estimated 25.9% of B2B transactions handled digitially.
More recent METI estimates suggest that 2014 B2C sales were close to ¥13.1 trillion, jumping another 17%.
The volume accounted for by retail and service companies was ¥7.836 trillion, about 5.6% of total retail sales, with the remainder of B2C sales from non-retail companies such as wholesalers and construction companies selling directly to the final consumer. Although the combined automobile, home furnishings and consumer electronics category is the largest merchandise category at ¥1.65 trillion, a little behind a similarly combined service category of travel and dining, the two fastest growing categories were, as in the three previous years, apparel & fashion and drugs & cosmetics.
METI’s figures are the most consistent, but other estimates co-exist alongside them. The Japan Direct Marketing Association (JADMA) estimates that the non-store retail market reached ¥5.8 trillion in 2013, an 8.3% increase on 2012 with growth accelerating from previous years – average growth for non-store sales has been 7.7% since 2003, and 2013 marked the 15th straight year of increase. JADMA’s membership includes a number of the top EC based companies, but by no means all, and while METI’s numbers are based on physical retailers selling online, JADMA’s numbers are estimated based on a survey sample biased towards traditional direct mail retailers and so partly overlap with METI’s figures, but including a lot of non-online direct mail sales too.
Nomura Research Institute publishes its own annual estimate and is the one institution willing to make some forecasts about future growth (see Chart 2). For 2013, NRI estimated the EC market already at ¥11.5 trillion, 22.6% from mobile transactions. The consultancy thinks the market will expand to ¥17.3 trillion by 2017, with mobile transactions increasing to 28.9% of the total.
Even this, however, is conservative. NRI believes that growth rates peaked at 14.8% in 2012 and will decline going forward, a prediction contradicted by METI’s latest figures. Many analysts also believe NRI underestimates the impact of mobile devices on EC transaction volumes because advances in mobile technology may well exceed all expectations, pushing the ratio of mobile EC transactions even higher.
Even if there is general agreement on growth rates, the EC market is difficult to estimate. Many players, even relatively large ones, remain privately owned or are simply subsidiaries working within larger groups, meaning their actual performance is not public – even when groups do release figures for EC performance, many remain cagey as it is still a new and imprecise business, with many (some would say most) operations still unprofitable.
Then there is the added issue of the shopping portals and the multiple sites through which retailers sell online. Fashion is a particular problem as the vast majority of online sales are through Rakuten, Amazon, Yahoo, Start Today and Locondo. METI puts total EC apparel and fashion sales in 2013 at a mere ¥220 billion, a figure that has been widely quoted, even though Start Today alone saw transaction values of more than ¥114 billion in 2013 and the two ex-catalogue leaders Nissen and Senshukai would add another ¥60 billion. Rakuten claims a third of its ‘gross merchandise sales’ are fashion items sold through Rakuten Ichiba. This means that vendors on its site alone sold around ¥550 billion in fashion items in 2013. Some of this will include sales of major independent brands selling through multiple sites, including their own, and the same is true for sales at other portals like Amazon. Taken together these numbers would suggest online fashion sales are more realistically in the region of ¥800 billion to ¥1 trillion.
The online learning curve flattens
Despite this unavoidable imprecision, what everyone agrees upon is that the channel is growing rapidly and will continue to do so for the foreseeable future. Those categories that lend themselves well to online sales, notably books, media and electronics, will continue to expand, ravaging market share from retailers who continue to rely on their high street shops.
EC sales for apparel will expand too. The more aesthetic nature of fashion product means the role of stores will remain stronger for longer, but Japan’s enthusiasm for fashion and the combination of store with online sales, along with new technologies to reduce problems of fit (see Page 11) will gradually give EC a distinct role in fashion shopping, with the best retailers all experimenting with ways to use EC to enhance their brands in readiness.
Food and FMCG are similar. Seemingly every supermarket chain (except at least for Summit, see Page 10) is experimenting with the online channel, but few would be rash enough to say they are confident of long-term success. Right now only the biggest players look to have the resources to turn FMCG retailing into a successful EC channel, although Seven & I is the only firm saying that it sees its future as the new Amazon, linking every part of its physical retail business to online – true omnichannel retailing.
The result of these rapidly evolving developments is that, while NRI forecasts a market of ¥17.3 trillion by 2017, METI figures suggest growth rates 3 to 4 points higher and others would go further still. Averaging growth in EC sales of around 15% a year from 2013 onwards means that the market could easily break ¥20 trillion by 2018, and ¥30 trillion by 2020 is a genuine possibility. This is a share of 20% of retailing at current values.
The winners in e-commerce: up 35% in FY2013
So who are the winners in today’s EC market? Again, precise data is hard to come by and companies can be reticent when it comes to splitting off their performance in online channels, no matter how prominent some of these players are. Chart 3 provides a ranking based on JC’s research and the few, braver published rankings.
The leading 50 companies in FY2013 had total sales from EC alone of around ¥2.084 trillion or about 17.7% of total EC sales using NRI’s more comprehensive estimate.
Average sales growth was 35% per company, although the figure is skewed by Askul Lohaco which grew 476% in a single year, and EpsonDirect which is estimated to have grown 279%. Omitting these two companies still leaves the average at 11.8%.
Four companies actually saw sales decline on the year. Nissen EC sales were down 1.9% due to serious problems at the group overall, A-Price fell 13.4%, PC Bomber by 27.1% and Belluna by 4%. In each case, the reasons for falling sales are lack of innovation and increased competition, although Belluna is not as committed to online sales because most of its customers are in their 60s and prefer shopping by catalogue – 86% of Belluna’s sales still come from channels other than the internet.
There are 11 companies that sell a range of mixed merchandise. In addition to online shopping portals like Amazon, Rakuten and 7netshopping (no reliable data was found for Yahoo Japan), all the traditional catalogue retailers fall into this category, as do the major TV shopping channels.
Another 18 firms are primarily electronics retailers, varying from major high street chains like Yamada Denki to dedicated online retailers, of which there are many. EpsonDirect is a new player in this area and representative of the way established brands can still make a huge short-term impact when they go online.
Six apparel firms are included in the ranking, three of which are high street brands: Uniqlo, Muji and Marui. Felissimo is a traditional catalogue retailer, while Start Today is the only dedicated online fashion vendor of any size, although there are literally hundreds of sites selling fashion of some kind.
There are two food retailers, Ito-Yokado’s netsuper operation and Oisix, the only dedicated online food retailer of any size in the country (reliable data for all or parts of the Coop network and for Radishboya was unavailable).
Three cosmetics retailers, two drug and medical retailers and two CD/DVD media suppliers also made the ranking. The top online cosmetics sellers all make large parts of their sales off-line through phone orders and catalogues, but the two drug retailers, Soukai Drug and Kenkocom, are both pure online operations taking advantage of the recent deregulation in over-the-counter drug sales.
Mix and match your vendors: the reach of online malls
All three major online malls, Amazon, Rakuten and Yahoo, continue to grow strongly, although Amazon and Rakuten are well ahead of all other players. Using specialty merchandise focus as a USP, other companies such as Mixi, Locondo, Start Today, LINE and Askul are all also developing online mall or mall-like operations, but the top three are in a class of their own in terms of breadth – today Rakuten claims to offer 168,404,968 SKUs on its main Ichiba portal, a figure made more ridiculous by its restricted search engine and lack of synergy between its 131,412 merchants.
Amazon, however, leads the way with a more integrated system that allows easier shopping and, to Rakuten’s chagrin, far greater customer trust. Rakuten continues to pour money into consolidated logistics, without which it cannot hope to compete with Amazon (or Seven & I in the longer term) and has recently revamped its payment system after increasing numbers of complaints about fraudulent vendors on its marketplace.
The portal market is rapidly progressing towards a polarised environment whereby the big players rely on size and variety, while the smaller players aim for merchandise specialisation. Rakuten and Yahoo’s model, which relies almost entirely (as opposed to partly in the case of Amazon) on independent vendors registering through their site, is all about volume, so Yahoo’s decision to remove vendor fees has helped some smaller vendors get online, but the poor reach of Yahoo alone means the move didn’t shake up the sector as much as Yahoo hoped. Its tactic of inviting 1,700 local authorities to open their own Yahoo stores for free is, however, a clever one. Far more important has been the expansion of NTT’s d-shopping mobile shopping mall, leveraging newly acquired subsidiary Magaseek, and the introduction of a shopping mall for the LINE online messaging app.
LINE is fast becoming one of Japan’s most interesting and innovative companies in any industry. It already has more than 52 million registered users in Japan alone and rapidly growing popularity overseas. LINE is currently advertising jobs in the USA, Indonesia and Pakistan, and is even opening physical pop-up shops in Japan and elsewhere in Asia selling LINE merchandise. It is already Japan’s leading SNS and is set to expand significantly and globally. The new LINE Mall, it suggests, is as much recommendation engine as online shopping mall, allowing huge numbers of connected users to talk up product reviews, while at the same time giving companies the same kind of promotional tools as Twitter.
Electronics: look here, buy there
Sales of consumer electronics are rapidly switching to online channels, although even the largest high street chains remain in denial, coming up with a stream of tactics to drive customers to their stores and limiting investment in their own online stores. With ¥65 billion in EC sales, Yodobashi Camera is widely reported as the largest independent online store, complementing its small chain of megastores, but Bic Camera is almost as large when its operations in Kojima and Sofmap are included. Joshin Denki is the third largest high street chain by online sales, with Yamada Denki, the dominant market leader overall, lagging behind in fourth. Edion and K’s Denki are both an order of magnitude smaller again.
Sales of electronics are already double those of Yodobashi at both Rakuten and Amazon. Through its host of independent vendors Rakuten sells an estimated ¥130 billion in the category, a large proportion of which comes from major brands like Bic and Kojima.
Amazon also hosts most of the major high street players, but it sells a significant volume of consumer electronics directly. In 2012, Fuji Keizai estimated Amazon’s sales of consumer electronics were already at ¥114 billion. Given its far better search and review system compared to Rakuten, Amazon is already the go-to choice for customers to check prices and brand options while studying products in physical stores.
Kakaku.com, a price comparison site, is just as popular and becoming widely known. While now expanding beyond just electronics, so far only Yamada Denki has really taken in the fact that to get listed on Kakaku.com, it needs to be online itself. Other high street retailers rarely make the price rankings.
Thanks to a closed and highly protected publishing industry, even book and magazine stores in Japan have so far managed to stave off extinction caused by online sales, but consumer electronics retailing might not be able to hold out quite so easily. Even consumer segments such as seniors, who are less savvy or trusting of online sales, are quickly waking up to the convenience and low prices of shopping for electronics online. High street chains stand on the brink of a major upheaval, and already suffer more than any other format from the growing trend of ‘showrooming’ whereby customers view products in stores before buying online – often at competitors’ sites. It is the one sector, at least after books, that may soon be largely replaced by online alternatives.
Business models for fashion online still in flux
Another area where a shake-up is taking place is in online apparel sales. Although Rakuten again claims first place in amalgamated sales, Start Today has carved out a niche as a specialty online apparel portal with a loyal customer base. Its success has even made it the largest single specialty online retailer in any category with sales in FY2013 of ¥38.5 billion and transaction values of ¥114 billion.
There are issues, however. Brands listing on Zozotown are increasingly spreading to other portals too, notably Amazon. Start Today increasingly has to fight to keep brands exclusive to its stable, and with Amazon offering free delivery across the board, Start Today has had to look for new ways to attract shoppers. Having had to scrap nationwide free delivery due to costs, it is now looking to offer easier returns and free, same day delivery in Kanto and Kansai. Its wear.jp app was greeted with some scepticism by its own brands, although it has proven popular with customers as a way to post their own look books and to comparison shop across brands.
Overall, however, brands now have more and more options and are becoming increasingly savvy at running their own online operations. United Arrows, a long time Start Today client, now offers full online inventory checking and product reservations (see Page 11) for example. Brands like these will increasingly want direct control of their sales as well as the data that this generates.
NTT’s d-shopping portal was the fastest growing fashion portal last year too, driven by Magaseek, up 18.2%, and claiming to be attracting consumers less used to buying fashion online, notably men. Using Docomo’s considerable advertising power, d-shopping is likely to go from strength to strength. It has already opened a sub-channel called Outlet Peak that aims to sell on discount in an outlet mall model.
Meanwhile both Rakuten and Amazon are increasing their interest in fashion. Amazon has opened a number of subcategories targeting particular types of segment or apparel category. Rakuten’s acquisition of Stylife still sits uncomfortably as a separate part of its overall stable, but will be used to increase direct sales within Rakuten Brand Avenue.
supermarkets online: only for big players
The third largest product category is food, although estimates of total EC food and FMCG sales of only around ¥100 billion are probably reasonable at this point. Food retailing online again splits between portal based vendors helping thousands of small independents and farmers sell direct to consumers, with Rakuten once more well ahead in terms of total food and FMCG sales, and specialty online stores, although there are very few and most are highly specialised.
What makes the sector interesting is the attempts by so many supermarket chains to develop the online channel, with the biggest players Seven & I and Aeon taking a distinct lead. Both of these major retailers are looking to put their entire inventories online and integrate EC as a major sales channel of the future. They have the volume, technical knowhow, investment funds and own brands that will give them a much higher probability of success compared to most of their rivals.
Seven & I, of course, has something extra too: Seven Eleven convenience stores. These 18,000 stores will become the consumer pick-up points or local delivery centres for what Seven & I hopes will be the world’s first and leading omnichannel retail system. Its acquisition of Nissen, and the integration of key brands like Sogo Seibu department stores, Loft, Akachan Honpo, Bals (Francfranc), and Barneys Japan will feed into the same system, with other acquisitions planned. Seven & I plans to put all product online all the time, and offer unrivalled speed and reach for deliveries. Already, people ordering from Seven & I before midnight can pick up some items at their local Seven Eleven by 7am the next morning if they so wish. Bacon and eggs, perhaps?
In food alone, Ito-Yokado runs a standard netsuper operation with the bulk of orders made by customers living near to particular stores and orders fulfilled by in-store picking. It will rapidly move to extend this, integrating the same food ordering system with products available from other parts of the group and services accessible through Seven Eleven. In 2007 Ito-Yokado’s online store had a tiny 170,000 registrations and turnover of just ¥500 million. By February 2014, it had expanded to ¥52 billion in sales and membership of 1.6 million. Last year saw the first DC-supplied orders, with two Tokyo DCs now helping with high volume items, but the majority are still picked in stores. This Spring, Ito-Yokado will begin experiments with a dedicated DC in Koto-ku. It is planning to double netsuper sales to ¥100 billion by 2020.
It remains early days, but Seven & I’s strategic intent is clear and it has the scope, and financial backing to make it happen. From a Japanese point of view, the strategy is exciting in that it could even challenge Amazon.
The online future is now
Although statistics may be hard to confirm and most players in the market still struggle to make a clear profit from online retailing, the growth of sales online and the general shift towards the channel are clear. Consumers are keen to use EC as a means to search for, evaluate and now purchase products, and new digital technologies make this easier all the time. Traditional retailers, remarkably including some of Japan’s larger direct mail retailers, remain resistant, but cynics would simply point to this as persistent conservatism.
Over the next five years at the most, online retail sales are likely to double, with a significant proportion of retail sales coming through online orders within the next decade. Japan may not be the techno-wonderland often imagined by outsiders, but consumers are using technology to both expand their shopping horizons and to break the more intransigent cartels still operating in Japanese distribution by being more informed and better able to access companies on the fringes – or even overseas.
Led by Rakuten’s advance into international markets and encouraged by the openly international position of LINE, other firms are also using EC as a means to expand overseas. Rakuten has been pushing its best domestic vendors to offer sales internationally for the past year and is rapidly integrating its own overseas businesses into a single search and order system. Again on the edges, other companies are following suit, and even traditional chains like Kojima are experimenting with letting overseas shoppers buy on their Japanese online store through an operation called buysmartjapan.com – bypassing manufacturer supply controls that even Amazon adheres to.
It may be hard to measure and some retailers might still hope to drive customers to their stores to protect their investment, but e-commerce is destined to soon become the most important channel across all major merchandise categories and an opportunity for all companies willing to embrace it.
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