Dong-Kyu Kim
MBA Program, Loyola University Chicago
 

I. Introduction

     It is well known that Japan’s markets are very difficult to initially penetrate by overseas business as well as Japanese corporations. Among the various market impediments, greater attention should be focused on the fundamental problem – the distinctive feature of the markets and closed nature of the established distribution system in Japan.

     The purpose of my study in this paper is to focus directly on the aspect of behavior and practices, and to provide the first important step toward a proper understanding of how the distribution system works on Japan. My determination to the key factor in penetrating Japanese market is the business relationship. Examination of characteristics of the Japanese distribution system is to realize how critical business relationship is in doing business in Japan. Some important aspects to know in building a successful business relationship in Japan are my main focus. My conclusion is followed with some indication of new trends in Japanese market.

II. Characteristics of the Japanese Distribution System

1. The Historical Background

     The structural features of Japanese distribution system were developed through historical processes. The major cause dates back to the za  which was popular in the twelfth to sixteenth centuries’ medieval period and the kabu-nakama system that flourished in the sixteenth to nineteenth centuries’ Edo Period.  The za group was an exclusionary cooperative of members in a single profession, which was granted various commercial privileges in exchange for service to leading shrines, temples, or influential leaders. Without membership in a group for a specific product, nobody was permitted to sell the product. Because only single membership was allowed to merchant, each vendor was forced to specialize in a single product category.

     In the transition from feudalism to the premodern period, the trade system was abolished. Commerce enjoyed a new latitude of freedom and vitality with the emergence of many daring and innovative merchants. With the onset of social stability, however, similar specialized and closed unions called kabu-nakama were organized. In return for financial contributions to the shogunate and to the feudal lords, the unions were granted trade monopolies in their respective areas of business. The groups restricted the number of members and rigorously eliminated aspiring merchants. In this system, the product flow from producer to retailer was built according to the initiative of the wholesaler. After 1868’s Meiji Restoration, the new government ordered dismantling of the kabu-nakama system. The rigidly segmented and closed trade organizations disappeared and commercial freedom was guaranteed. Nevertheless, the characteristics of traditional distribution channels remain to this day without fundamental changes.

     The distribution system comprises an organic social body consisting of product distributors. Distributors are interlinked by specialization and competition. Specialization may be vertical or functional  or by regional or product category. The distribution system changes through competition and changes in these relationships. The growth of specialization created a complex distribution system in Japan. The development of za and kabu-nakama plus similar exclusive unions discouraged competition. This was fostered also by the Japanese preference for stability.

2. What the Distribution Systems Looks Like

     Manufacturers, importers, wholesalers, retailers, and consumers are the elements of Japan’s distribution channels which are also found in other countries. But there is a major difference in the characteristics of Japan’s distribution system compared to that of other countries. They are: large numbers of  small retailers despite the emergence of some large stores, fewer high volume discount stores, large numbers of relatively weak wholesalers, extensive vertical integration of manufacturers into downstream distribution channels and the pervasive influence of trading companies on imports. Certain features may be more prevalent in Japan than in other countries, such as the importance of nonprice factors and the prevalence of antiforeign attitudes in corporate and consumer decision making.

     The most outstanding feature of  Japan’s distribution system is the large number of retailers and wholesalers. Several factors have contributed to the large number of neighborhood stores including limited storage space in Japanese homes and congested traffic conditions that encourage walking to nearby shops. The importance of fresh food (primarily fish and vegetables) to the Japanese diet requires frequent shopping trips. While the numbers of department stores and supermarkets have increased in recent years, legal restrictions, political opposition to opening large stores from small shopowners, high land prices, and an inadequate road systems have limited the emergence of these stores. Superstores (carrying more food than general merchandise stores ), self-service stores, specialty stores, and franchise stores have increased in recent years. Other types of stores that are slowly increasing in numbers, but still account for a small portion of total retail sales in Japan, include discount stores and consumer cooperatives.

     Large numbers of primary and secondary wholesalers have emerged parallel to the development of many small retailers in Japan. The number of wholesalers in particular distribution channel varies according to the industry or product. For some consumer products, such as agricultural goods, fish food, and beverages, there are many secondary wholesalers in the distribution chain. However, in the case of clothing, products may pass directly from the primary wholesaler to the retailer. In some cases large manufacturers have eliminated wholesalers to gain direct access to retailers, and large electronics manufacturers have set up affiliated sales outlets that also serve as wholesalers. In other cases, wholesalers provide a sorting function to retailers by carrying a variety of goods from several manufacturers.

     Questions are raised as to whether the multiple numbers of retailers and distributors in Japan lead to unnecessary markups at each step in the distribution process or whether higher retail prices actually bona fide costs in the form of superior service to end users. The ratio of whole sale to retail sales for Japan was 4:1 in 1988, which was 1.8:1 for the United States, which makes the retail prices in Japan higher than those for comparable goods in other industrialized countries.  It is hard to conclude the debate over the efficiency or inefficiency of Japan’s distribution system. However, the most important concern for foreign exporters is that of access to distribution channels, regardless of efficiencies.

3. Relationships and Their Impact on Corporate and Consumer Behavior in Japan

     Japan’s distribution channels are characterized by networks, chains, or groups of relationships among businesses and consumers. The relationships take many forms such as producer-to-producer, producer-to-wholesalers, wholesalers-to-retailer, producer-to-consumer, or retailer-to-consumer.  The strength of the relationships range from long-standing ties among members of the same keiretsu  family to consumer loyalty to a particular department store. The networks or relations may be formalized or reinforced through cross-shareholding or exchange of personnel. They may also be informal such as those between a consumer and a neighborhood shopowner.

     A corollary to the relationships is sophisticated personal communications networks through which anything from local gossip to advance warning on official policy changes can be transmitted quickly. Those persons or firms outside of the networks may be disadvantaged through their lack of access to useful information.

     Japanese business relationship is based on long-term, mutually beneficial relations; loyalty; obligation; and nonadversarial conflict resolution. The prominence, strength, variety, extent of such relationships has a strong influence on corporate and consumer purchasing decisions. Business practices and activities that may seem irrational to an U.S. company or observer may be prudent, strategic, or economically sound from the Japanese viewpoint. In Japan, long-term, stable relations with other companies or customers are viewed by companies as important in reducing uncertainty and reducing risks.  Japanese corporation view individual transactions as just one part of an evolving, complex relationship which can result in more than just short-term profits. The development of trust is seen as an important by-product of a long term relationship since this can lead to exchange of information, development of new technology, or other intangible benefits to both parties in the relationship. Foreign firms generally must enter into some type of arrangements wit another Japanese company or offer a substantial price break on their product to break into long standing relationship.

III. Building a Successful Business Relationship in Japan

1. Forget Everything you know about Distribution in US

     To understand how distribution works in Japan, you should start by forgetting everything you know about distribution here in the U.S. U.S. distribution channels are fickle, margin-driven and relatively unstable, which means that you can break in easily and steal business from competitors. But it is exactly reverse in Japan. The key to all business in Japan is relationship. Distribution channels sometimes have manufacturer relationships that go back decades or generations.

2. Pure loyalty

     The most important underlying issue in Japanese business relationship is pure loyalty. In general, when Japanese purchasers make decision to buy product or service, they make a decision about a company and that decision will last, unless the vendor displays disloyalty or does not jump when asked to.

3. Don’t try to convince a Japanese distributor

     Don’t try to convince a potential Japanese distributor to eliminate “unrequited” agents. This will avert conflict, which some times the Japanese will avoid at all costs. Let the distributor figure out where to divide his margin, and he’ll decide if he can afford an extra level or two.

4. Mutually Beneficial Distributor-supplier Relationship

     A mutually beneficial distributor-supplier relationship entails an exchange of valuable commercial information like a product’s customer base, trends in sales figures, the region of distribution, size of retailers, and other key marketing factors. How competing products are doing; variation in prices; and current perception of your product in terms of quality, competitiveness, value, etc can be passed onto the supplier. This additional market research or commercial intelligence will only be imparted when the distributor has a personal interest in working with and maintaining a close alliance.

5. Cost-sharing for Appropriate Advertising

     Promotional campaigns are an important part of the strategy to develop interest in the product. Although coupons and other buying incentives are not generally used in Japan, colorful brochures and promotional materials in Japanese are necessary to attract the attention of potential customers. Dividing the cost between the supplier and wholesaler will normally enable more frequent updates and better quality promotional materials. Distributors may or may not be willing to undertake this expenditure on their own.

6. Closely tied Engagement between Manufacturer and Distributor

     Having close ties to the manufacturer is a must to engage for the long-term interest of a Japanese distributor. Distributor share insights on how to improve the product’s quality and features, which can be communicated back to the product design engineers. The Japanese philosophy of kaizen  should be built into your marketing strategy. Adaptations and improvements will be a necessary element for capturing or keeping market share and will be strengthen the supplier-customer relationship.

7. Face-to-face Contact

     Traveling to Japan is necessary to facilitate the exchange of ideas. Face-to-face contact is the only way the Japanese pursue business relationships. As long as a company doesn’t have a permanent representative in Japan, its distributor should be visited at least once a quarter.

IV. Conclusion

1. Equate the quality of a product to the quality of the relationship shared by the company

     It is not unusual for a distributor to equate the quality of the product to the quality of the relationship the manufacturer shares. Japan strategy should be established by the manufacturer’s identity as a quality company with a quality product.

     Demonstrating commitment to the market will ensure that your Japanese distributor will devote sufficient resources to market the product effectively. Because both the supplier and distributor stand to lose or gain, characterizing their relationship as a win-win situation will become the first building block for success.

2. The best solution - Joint forces

     The best solution to direct sales for most U.S. companies is to join forces with a manufacturer who already has the customer loyalty that means so much in Japan. It may seem to western observers that the Japanese manufacturers have two, three or even more superfluous levels in its distribution channel. Each level takes its share and the resulting mark-up seems very high by U.S. standards. In addition, these extra levels seem to do very little or nothing for the distributor’s percentage. But this is because of the past alliance, mentors, favors and personal responsibilities.

3. New Trends

     The pace of change in Japan is slow. The country has ingrained business practices, integration of the private and public sectors, and societal values that ensure that traditional systems will persist, at least in the short term.

     But Japanese distribution is undergoing fundamental change. The regulatory, consumer, manufacturing, and economic forces have interacted to generate some fundamental changes in Japanese distribution. Five main developments are identified: an increased concentration of retailers, growth of discounters and corresponding decline of department stores, growth of nonstore retailing, increasing pressure on wholesalers, and new sources of competitive advantage.

     These changes are collectively driven by economic and political forces. Major structural shifts in distribution, such as the growing power of retailers and the decline of department stores, have already occurred in the United States and Europe. Innovative competitors in Japan are increasingly monitoring developments and adopting practices that have proved successful in other industrialized countries. This does not mean that Japan is suddenly an easy market to enter. But distribution is becoming less of a barrier, and recent commentaries have focused not on the difficulties of doing business in Japan but on the successes achieved, particularly by U.S. companies.
 

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