Yamada Denki remains one of Japan’s most aggressive and innovative retailers. It is, however, fighting a losing battle as the market around it contracts and consumers find cheaper options online. Last month it simultaneously closed 1% of its entire chain and sold a 5% share in the business to Softbank, the latter a defensive move to stave off speculative hedge funds.
Consumer electronics (CE) sector leader Yamada Denki announced the immediate closure of 49 stores last month. The news was treated with alarm by most Japanese press, but given the downturn in CE sales over the past 12 months, it is largely a positive move that once again demonstrates Yamada’s willingness to change; Yamada is simply rationalising its chain in the face of declining sales and profits. While rivals, notably K’s Denki, continue to insist that ever greater volume is the way forward – even though few can understand why – Yamada understands the need for robust action in the face of a shrinking market.
Yamada Denki remains one of Japan’s very best retailers despite recent problems. It grew from an unknown regional chain as recently as 1995 into the third largest retailer in the country by the early 2000s, as well as one of the most profitable. It remains the single largest specialty retailer – although Fast Retailing is now challenging that position and may overtake it sometime in the next two years.
The closure programme is typical of Yamada’s aggressive strategic thinking. It currently operates around 1,000 stores directly (with the odd franchise here and there). It operates several different store sizes depending on locational needs, but smaller stores, with their limited ranges and smaller parking areas, tend to perform below average. An initial 37 stores were closed permanently in mid-May with 12 more mothballed for the time being. Almost all the stores are regional, suburban stores with low and declining footfall – it closed only two stores in Tokyo, one in Tama and one in Koto-ku. A further ten stores are being converted into outlet-style discount stores or combined with Best Denki stores. Any full-time, permanent employees will be moved to other stores nearby.
For the past few years, Yamada has been judiciously closing one or two smaller stores most months, but the simultaneous closure of so many is unprecedented. Its sales forecast for FY2015 to March is ¥1.692 trillion, and an optimistic 1.7% increase on FY2014, but still 20% down on the chain’s peak performance.
Yamada will balance the closures with around ten new stores this year, half the original plan and making 2015 the first year in the retailer’s history that the chain will shrink.
The CE sector has become highly concentrated, with Yamada alone accounting for more than 28% of the total ¥5.7 trillion market, and performance continues to worsen at all major chains. As a result, speculative hedge funds are increasingly interested in these companies, with long-term supporters keen to sell their stakes and others looking for opportunities to short the stock.
When it began its expansion in the 1990s, Yamada itself was largely frozen out of local capital markets, partly due to opposition from major electronics manufacturers. It turned to overseas investors for funds and last year some 44% of its stock was still held offshore, down from almost 60% in 2008.
However, this legacy has become something of a worry. In February, Effissimo Capital Management managed to amass a stake of just over 13% in Yamada and is now the largest single shareholder. Effissimo is a Singapore-based hedge fund set up by former employees of the infamous Murakami fund that lobbied companies for more efficient capital management in the late 2000s.
In response, Yamada founder and CEO Noboru Yamada announced a buy-back of company stock, taking his own share to 9%, including that of stock holding firms he is directly affiliated with. Then, in early May, he sold a 5% share to Softbank to provide protection should Effissimo attempt to increase its stake further. This also makes business sense given that Yamada is the country’s leading seller of mobile phones and has a strong existing sales relationship with Softbank.
In return for paying ¥22.7 billion for its stake, Softbank will expand its sales presence in Yamada stores, selling not only phones, but also optical fibre broadband services, electricity supply, and its human-form robot, Pepper (see below).
Closing stores and shoring up ownership are largely defensive moves, however, and still don’t offer a response to the fact that the entire CE retail sector faces a challenging future. Sales have plummeted since the consumption tax increase in April last year, and with only six chains making up more than 80% of the market, there is no spare share to gain. K’s and Edion have both made vain attempts to take back share from Yamada, but simply opening more and larger stores is impressing neither consumers nor analysts.
Meanwhile, most consumers today prefer to shop online, where prices are lower and product choice wider. They no longer accept that high street retailers provide better service or warranties. Like its rivals, Yamada has been slow in expanding into the online channel, but by recently offering online and offline lowest price guarantees and actively promoting price competition throughout its operation, it is further along than most – it is the only chain actively competing with Amazon on price. It has also diversified into new business such as smart-homes, and is attempting to shift more sales overseas, but neither of these ventures has yet gained enough volume to make up for the decline in the core.
Last year net profits slumped by half to a mere ¥9.3 billion, partly due to increased investment in diversification, but mostly due to increased price competition. Although it is unreasonable to expect a short-term fix, Yamada needs to take even more drastic action to move back to a growth trajectory. There is at least still plenty of room for more cost cutting while waiting for the market to recover, and it is certainly true that rivals show even less taste for major strategic change, leaving Yamada to continue to lead the sector.
Softbank launches consumer sales of new robot
Japan’s fascination with robots continues. June sees the launch of Softbank’s new human-form robot, Pepper. Pepper features arms, but no legs, and a cartoon-like robot face with blinking eyes. The built-in tablet computer connects to Softbank’s broadband network through WiFi, allowing the robot to provide spoken updates on the weather, relay messages by both text and voice, and link families living apart – the robot naturally includes a built-in camera.
Although somewhat comical in appearance and seemingly an excessive and expensive accessory to a tablet computer, Softbank’s determination to push the device to market demonstrates not only Japan’s undying love of gadgets and mascots, but equally its openness to robotic technology.
Softbank’s initial ads promote the social enhancements the robot offers, with hand gestures and other interaction that isn’t possible through simple 2-D graphics on computer screens. The ads even suggest Pepper has an ability to recognise emotions and, so the PR claims, provide comfort and support as well as sharing excitement and happiness. These physical, human aspects will make Pepper part of the family – at least that’s what Softbank hopes.
Softbank is already recruiting developers to come up with new apps and uses for Pepper.
The robot goes on sale for ¥198,000, but customers are required to sign up for special three year contracts costing from ¥9,800-24,600 a month, making the total cost as much as ¥1.2 million.
While this covers network connection charges, special software services and an insurance package against any defects, the high price really acts as an instalment plan on the true cost of developing and supporting such a ‘cutting-edge’ product.
FOCUS: Leading shopping centres upgrade their way to 3.9% jump in sales in 2014-15
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