When cheaper is better

As a third recession looms in Japan, Wal-Mart is betting on falling incomes to boost revenues as its 'every day low prices' strategy pays off

PUBLISHED : Saturday, 17 November, 2012, 12:00am
UPDATED : Saturday, 17 November, 2012, 4:13am

Keikichi Miyakawa says he earned about US$50,000 a month selling golf club memberships during Japan's bubble economy in the late 1980s.

Now on a pension, the 65-year-old Tokyo resident shops at Seiyu, the discount chain owned by Wal-Mart Stores Inc. He recently bought packs of bean sprouts for 29 yen (HK$2.80), and croquettes for 49 yen, sold as part of the store's Mainichi Kakaku Yasuku strategy. That's the Japanese translation of Wal-Mart's "every day low prices" slogan.

With Japan's economy on the cusp of a third recession since 2008 and household incomes falling for the last three years, the country's famously picky and brand-enamoured shoppers are in a bargain-hunting mood. Discount stores are gaining and Wal-Mart, after years of mixed results and a 20.9 billion-yen loss for Seiyu in 2007, is expanding for the first time since 2008.

Wal-Mart's Japan business saw net sales rise 2 per cent during the second quarter. Its Seiyu unit, which it has owned since 2008, will open seven new stores this year and three more next year. Wal-Mart's head of international business, Doug McMillon, has said the company will even consider acquisitions to increase its presence in Japan. Wal-Mart faces hurdles in other parts of Asia: In China it is adding fewer stores than previously planned, and its strategy in India has been hindered by regulations that until September banned foreign companies from investing in supermarkets.

Wal-Mart on Thursday reported that its investigation into violations of a United States federal antibribery law had extended beyond Mexico to China, India and Brazil, some of the retailer's most important markets.

The disclosure, made in a regulatory filing, suggests Wal-Mart has uncovered evidence into potential violations of the Foreign Corrupt Practices Act, as the fallout continues from a bribery scheme involving the opening of stores in Mexico.

The announcement underscores the degree to which Wal-Mart recognises that corruption may have infected its international operations, and reflects a growing alarm among the company's internal investigators.

Wal-Mart's fourth-quarter forecast signals the world's largest retailer also stands to face more obstacles in its home market than competitors such as Target Corp this holiday season as price-conscious consumers hold back in the sluggish US economy.

While Wal-Mart beat analysts' estimates on third-quarter profit this week, sales in the US and an earnings forecast for this quarter trailed expectations, pushing the shares down the most in more than six months. Meanwhile, Target gained 1.7 per cent after it met earnings projections.

Wal-Mart's chief financial officer Charles Holley said the economy continues to pressure its customers. At US Wal-Mart stores and at Sam's Club, the company's chain of membership warehouses, and customers traded down to cheaper products, such as going to chicken from beef and moving away from premium brands.

Wal-Mart is far more enthusiastic about Japan even as European rivals give up. In June, Britain's Tesco agreed to sell its business to Japan's Aeon. France's Carrefour left in 2005.

With Japanese family budgets under stress, Wal-Mart's "every day low-price operation is taking root", says Takayuki Kito, a consultant in Tokyo with Munich-based Roland Berger Strategy Consultants. By spending less on promotional fliers, Seiyu cut the chain's advertising expenses by 45 per cent from 2008 to 2011, according to Ryo Kanayama, an executive at Wal-Mart Japan. "They have got rid of a lot of the middlemen and managed to go more direct to consumers," says David Strasser, an analyst for Janney Montgomery Scott.

Other foreign retailers such as Hennes & Mauritz and Ikea Group are also expanding in Japan. Local retailers are catching the discounting wave, too. Supermarket chain Aeon said in June that it will lower the price of 1,000 items, while rival Daiei Inc will reduce prices for an additional 2,000 items beginning today.

Seiyu has pledged to cut the price of 2,300 items by the end of next month. All this is great news for Japanese consumers. "Our monthly budget is now 70,000 yen for the expense for food and eating out. It was about 100,000 yen a couple of years ago," says Aki Yamada, a housewife shopping at a Seiyu store in southern Tokyo. "The cheaper, the better."