Otsuka Kagu: a house no longer divided, but does it have a future?

Apr 15

Like a scene from a TV soap drama, Otsuka Kagu finally settled its protracted leadership battle at the end of March, with the founder and chairman summarily removed by, of all people, his own daughter. While just a political spat in a company that is past its prime, the story reveals a lot about how furniture retailing has changed over the past 10 years.

For the past six months local press have delighted in reporting the in-house fight between Otsuka Kagu’s founder and chairman Katsuhisa Otsuka, and his daughter, Kumiko Otsuka. The latter became president of the company in 2009, but in June last year, father Otsuka, who still owns 18% of the business, led a boardroom coup to push out daughter Otsuka, only to receive, not filial loyalty, but public retribution. The final culmination of this family affair came at the company’s AGM in late March, when Kumiko Otsuka’s proposal for a new 10-person board was accepted over the counter proposal submitted by her father, effectively ousting her dad.

While the case reads like an unusually acrimonious business manga comic, the row began due to a clear commercial problem: Otsuka Kagu has lost touch with the market.

Otsuka Kagu is another retailer in trouble. The long-time sector number two made hay in the 1980s as the largest retailer of high-end imported furniture, quickly outselling department stores with a service intensive brand of retailing. This same market position allowed it to tick along even after the end of the bubble economy, leaving its much larger and more ambitious rival, Nitori, to expand into a competitive vacuum in the mass market.

But then along came IKEA and home furnishing retailing in Japan changed fast. It became more diverse, competitive and customer focused, and more dynamic. In 2006, Akio Nitori, founder of the eponymous leading chain, famously dismissed the soft furnishings and small item ranges in IKEA’s Market Place as being unsuited to Japan. Unlike Otsuka, Nitori quickly accepted his mistake and moved forward (see box below).

This type of modernisation was exactly Kumiko Otsuka’s plan when she took over in 2009. At the time the chain had suffered years of operating profit decline, culminating in a loss of more than ¥1.2 billion in FY2009. She set about cleaning house, immediately returning the company to profit and, in 2013 (see JC1306), opened a new select-shop style chain called Edition Blue, designed to sell both interiors and soft furnishings. While lauded in the press, Edition Blue grew to just three stores and was closed down in February.

Today Otsuka Kagu still has only 15 stores, all large scale city centre showrooms, and the style of merchandise and price positioning remains largely unchanged from 20 years ago – and consumers simply are no longer that interested. If anything, Kumiko Otsuka’s main failing was that she didn’t move far or fast enough to realign the company. She now claims her strategy was hamstrung from the start by other executives – images of family fights around unbelievably expensive dinner tables immediately spring to mind.

At the AGM in March shareholders were concerned less with the company’s financial position and future success, than they were with the public rudeness of the company’s founder. While more of a vote on standards of etiquette than business strategy, the decision to support the younger Otsuka also makes better commercial sense.

At least that’s the hope, but the firms fundemental problems still remain. Today Otsuka is a dwindling number three with IKEA already the second largest furnishing chain by volume. Although individual shareholders will likely be looking for some form of reconciliation between father and daughter, the latter must now find some way forward. She may have won the infighting with her father, but it doesn’t mean that Otsuka Kagu has made any progress at all. In the end civil war only benefits outside rivals and leaves the company exposed to takeover or relative decline. The company is simply another case of a retailer stuck in the past while the market changes around it. The question now is whether its new leadership really has the will to take it forward rather than let it continue to stand still.

Nitori defies low Yen with 16 years of rising profits

Nitori announced its 16th straight year of record profits at the end of March and the 28th year of sales increases. Not bad for a company that two years ago professed dismay at the weakening of the Yen, claiming that its dependence on imports meant it lost ¥1 billion for every ¥1 the currency dropped against the dollar. Expanded ranges, including some higher priced items, and continual efforts to cut costs have instead resulted in profit gains, with an 8% increase in net profit last year to ¥41.4 billion, with operating profit up 5% to ¥66.3 billion.

Despite deciding to take on IKEA with lower prices for much of the past decade, Nitori has maintained its pace of growth with constant improvements in product range and an equally IKEA-like eye on what its customers like best. Last year, for example, the new N-Sleep mattress lines proved a huge hit. Despite a 2% fall in footfall after the April tax-hike, price per purchase rose 3.6%.

Nitori has also begun to move into city centres with its first store opening in Ginza last month on the upper floors of Printemps Ginza. This new format features 1,500 sqm concentrating more on home fashions, interior decor and a limited range of larger furniture items. Nitori is aiming to open 20 stores in inner Tokyo alone over the next few years.

Nitori is confidently forecasting a further 5% increase in net profits for FY2015 to February next year, with average forecasts from analysts even higher. Sales are forecast to be 7% up to around ¥445 billion, along with operating profits by the same amount to ¥71 billion.