Spiked again

Consumer goods in Japan

Fashion victims

Sep 17th 2009 | TOKYO
Beleaguered firms are merging at last—but cost-cutting is still taboo

THE Japanese have long been tacit devotees of the old Gucci family motto: “Quality is remembered long after the price is forgotten.” For years, no nation has spent more per person on luxury goods, nor been more disposed to pay the earth for a potentially deadly fishy delicacy. But something is awry in the land of mass luxury. The Japanese are finally, after an economic crisis that follows almost two decades of growing hardship, turning thrifty.

Even before exports collapsed last year, wages at the national level had begun to fall as well-paid elderly workers retired, to be replaced by underpaid youngsters. Now comes what Brian Salsberg of McKinsey, a consultancy, calls a fundamental shift in consumer behaviour. People are suddenly fighting for a good deal.

The response, as so often in Japanese business, is well-intentioned but a bit muddled. Feeble prospects at home help explain why Suntory, a firm familiar to foreigners as the maker of a single-malt whisky, has made a bid for Orangina Schweppes, best known for a fizzy orange drink beloved in France. Suntory was already in merger talks with Kirin, another Japanese drinks firm, which has acquired aggressively in Australia. Both firms hope their combined heft will help them move into China and other fast-growing markets. A potentially more tangible benefit of merger—cutting costs at home to boost profitability—is less discussed.

The same is true of the more defensive mergers on the Japanese high street. As sales of luxury goods have tumbled in the past year, there is barely an upmarket national department store that has not joined forces with a rival. But when Nikkei, a Japanese business newspaper, said last month that the newly merged Isetan Mitsukoshi, the country’s largest department-store operator, planned to shed about 1,000 jobs as part of a cost-cutting drive, the company poured cold water on the report.

The episode underscored how hard it remains for Japanese companies to use cost-cutting as the logic for merging. Instead their primary focus is on driving top-line and market-share growth, says Steven Thomas, a mergers expert at UBS, an investment bank. Reducing overlaps is, at best, a secondary consideration. “It would get very exciting if a more cold-blooded attitude started to emerge,” he says.

Yet not all are struggling. Some mid-market Japanese retailers, such as Uniqlo, a clothes store, and Muji, which sells everything from belts to bicycles, have retained an edge at home and expanded abroad. Online retailers are doing well. And where there were once slow-moving rivers of people only in Tokyo’s fashion ghettos of Ginza and Omotesando, now you must fight through the crowds at determinedly cost-conscious foreign chains such as America’s Costco and Sweden’s H&M.

The latter’s compatriot, IKEA, may be the best indication in Japan that people will still shop if the price is right. It abandoned Japan in 1986, owing to poor sales. When it returned three years ago, many doubted the hard-working Japanese would have the time, let alone the inclination, to spend weekends in flat-pack frustration. They were wrong. IKEA’s sales in the year to August were up 44% from the previous year. That is another reason for the beleaguered incumbents to seek solace in each other’s embrace.

This article, in the Economist tradition, is anonymous, but I believe it was written by Kenneth Neil Cukier. The Economist does not list Japanese as one of the languages he can speak and I suspect he has not been in Tokyo very long. What is the point of sending a correspondent to a country where he cannot speak or read the language and is reliant, as in this article, on fellow foreigners and the English-language Nikkei.com website? Would the Economist employ correspondents in France or Italy that could not speak French or Italian? I don’t think so.

There’s an awful lot wrong with this article, from the headline on down.

“Beleaguered firms are merging at last—but cost-cutting is still taboo”

“Beleaguered firms are merging at last” suggests a swelling wave of M&A activity. Nothing could be further from the truth. Here’s the Nikkei on October 12:

M&As fail to top 1,000 in 1st half

Japanese companies were involved in 921 merger-and-acquisition deals at home and abroad in the April-September half, down 24% on the year and sinking under the 1,000 mark for the first time in six years, according to data by M&A mediator Recof Corp.

The number of deals in the first fiscal half fell for the fourth year in a row and was down roughly one-third from the peak of 1,356 seen in 2005. The value of the transactions tumbled 57% on the year.

Foreign firms’ acquisitions of domestic companies shrank 45% to 57. Investment funds accounted for just 14 of the deals, down by 34, due to difficulties in procuring M&A financing because of the financial crisis. The number of M&As in the retail and real estate sectors fell significantly.

Takeovers of foreign firms fell 16% to 152. The relatively small decline was attributed to aggressive purchases of overseas businesses by companies facing a shrinking Japanese market. The yen’s strength also likely helped.

“Cost-cutting is still taboo” Oh really? I couldn’t count the number of times a day I encounter the expression “cost cuts” in my translations of research on Japanese companies. Here’s a selection from the Nikkei over the last week.

Convenience Store Firm am/pm To Ax 15% Of Full-Time Jobs (October 17)

Mitsubishi Pencil Seen Beating Full-Year Profit Estimates (October 16)
Many companies have held off on buying writing instruments to cut costs, so domestic sales to offices are likely to be down 20%.

Sanei-International Limit-Up On 1H Black Ink (October 15)

The firm told Nikkei Quick that its efforts to drastically cut costs, including a sharp reduction in the number of its shops, bore fruit.

Toshiba Hits ’09 High On Rating Upgrade (October 15)
An analyst…estimated that Toshiba’s half-year operating loss will likely be 13.3 billion yen, far better than the firm’s earlier forecast of a 30 billion yen loss, citing progress in cost cuts as well as rising semiconductor prices.

Omron Rebounds On Narrower Net Loss (October 15)
The maker of automated control equipment said the better-than-expected figure reflects its efforts since the beginning of this fiscal year to cut labor expenses and material costs.

Elpida Seen Posting 1st Op Profit In 8 Quarters In July-Sept (October 15)

Elpida has raised production of smaller chips in an effort to cut manufacturing costs.

Bic Camera Seeking Better Efficiencies Via Wholly Owned Sofmap (October 15)
Bic Camera will no longer have to shell out over 100 million yen a year to keep Sofmap listed after the subsidiary is removed from the Tokyo Stock Exchange’s second section in late January. Combined with consolidated back-office operations, Bic Camera says it can cut a few hundred million yen a year in costs.

Takara Leben Limit-Up On Rosier Earnings Outlook (October 14)

The builder estimates that its group net profit will stand at 1.8 billion yen in the year ending March 2010, about double the previous forecast of 950 million yen. The upgrade is the likely result of the firm’s efforts to cut sales and general administrative costs, as well as an increase in the condominium units that affiliate Leben Community Co. is commissioned to manage.

Need we go on? Isn’t a 20% decline in domestic corporate biro sales enough to indicate enthusiasm to pare costs? I wonder how many Western companies have cut their stationery expenses by 20% over the last year?

“For years, no nation has spent more per person on luxury goods, nor been more disposed to pay the earth for a potentially deadly fishy delicacy.”

The “potentially deadly fishy delicacy” must be the pufferfish. As only the Japanese and the Koreans have the custom of eating pufferfish, there’s not much of an international competition to “pay the earth” for the pleasure of eating it. And “pay the earth”? The prices at this randomly selected small chain of fugu restaurants range from Y600 (about $6.60) to Y2,100 ($23.10) per dish, sums not likely to break most people’s banks for an occasional treat. But what has this aside got to do with an article that purports to be about consumer goods in Japan, other than to demonstrate the banality that, as with all higher-income nations, certain Japanese like to spend money on certain indulgences. “For years, no nation has been more disposed to spend more on trucks the size of barns than America.” “For years, no nation has been more disposed to fork out for spicy pickled cabbage than Korea.”

“The Japanese are finally, after an economic crisis that follows almost two decades of growing hardship, turning thrifty.”

I must have missed the two decades of “growing hardship”. “Two decades of economic stagnation” would be acceptable, but “growing hardship” implies, for instance, that GDP has been falling remorselessly (it hasn’t), that Japan is tumbling down the Human Development Index (it isn’t), and that most people are struggling to pay their utility bills and buy necessities (they aren’t).

“The Japanese are finally…turning thrifty”. Almost all sentences that begin with “the Japanese” (or “the Americans” or “the Koreans” or whatever) are intrinsically problematic, and this is no exception, as the Platonic entity does not exist. The drift to thrift has been going on for the last two decades, there is no suddenness (“people are suddenly fighting for a good deal”), no “finally” about it. The article is at least a decade late to the story and deceitful in its attempt to manufacture news when there is none to be had.

“The response, as so often in Japanese business, is well-intentioned but a bit muddled.”

Not only is this sublimely patronizing, there is no evidence for the purported muddle-headedness, unless we are supposed to take it as the lack of discussion of cost-cutting at home. It’s difficult to gauge what is occurring at Suntory from the outside, as it’s privately held and disclosure is nonexistent, but in Kirin’s 2008 annual report there is a reference to a sizeable cut in SG&A, some of which must have occurred in Japan.

Reflecting successful cost-reduction efforts, the ratio of SG&A expenses to net sales (excluding liquor taxes) fell by 3.2 percentage points, from 43.0% to 39.8%.

“As sales of luxury goods have tumbled in the past year, there is barely an upmarket national department store that has not joined forces with a rival.”

This is just good old-fashioned wrong—and, I would allege, a typical journalistic deceit. Here’s a list of the main nationwide department operators and when they merged.

Millennium Retailing: (Sogo, Seibu): June 2003
J Front Retailing (Daimaru, Matsuzakaya): September 2007
H2O Retailing (Hankyu, Hanshin): October 2007
Isetan Mitsukoshi Holdings: (Isetan, Mitsukoshi): April 2008

The only “joining forces” event that occurred within the year prior to the article was the October 2008 announcement by Takashimaya, the last standalone holdout, that it would merge with H2O by 2011.

“But when Nikkei, a Japanese business newspaper, said last month that the newly merged Isetan Mitsukoshi, the country’s largest department-store operator, planned to shed about 1,000 jobs as part of a cost-cutting drive, the company poured cold water on the report.”

Did the “newly merged” (if 18 months previously is “newly”) Isetan Mitsukoshi really pour cold water on the report? It issued a press release of a few lines saying, “This report is not based on an announcement from us. Moreover, we have not decided anything.” Japanese companies are forever putting out this kind of press release in response to the Nikkei’s more speculative articles. That does not mean the Nikkei will not eventually be proven right.

Indeed on October 13, Mitsukoshi announced it would close 11 of its 53 smaller stores, over 20%. Mitsukoshi’s payroll is down to about 5,000 people, a third of the 15,000 peak, the Nikkei reported recently. The Nikkei again reports, on October 15, that “Hokkaido-based Marui Imai, which is being rehabilitated under the guidance of Isetan Mitsukoshi…has slashed its payroll by roughly 40%.” I have written elsewhere about how all employees of the Muroran branch of Marui Imai will be dismissed when its shutters fall for the last time in January. Further down the department store food-chain, the same October 15 Nikkei article reports as follows.

[Department store operator] Daiwa will announce Thursday plans to close all three of its Niigata Prefecture stores and an Ishikawa Prefecture location. These four stores together generated sales of 16.9 billion yen in the year ended February, just over 20% of Daiwa’s total.

Hit with three straight years of group net losses, Daiwa decided to take the drastic step of closing half its stores given the question marks about returning to the black this fiscal year.

Taken together, this is hardly the picture suggested by the opening sentence of the following paragraph.

“The episode underscored how hard it remains for Japanese companies to use cost-cutting as the logic for merging.”

I’d be interested to know what the author thinks the logic for the wave of department store mergers over the last few years was if it wasn’t cost-cutting.

The bracketing of Muji and Uniqlo (or more properly their operators, Ryohin Keikaku and Fast Retailing) as retailers that “have retained an edge at home and expanded abroad” is clumsy and passé. Ryohin’s Japan September same-store sales, the preferred measure of how a retailer is faring, were down 6.6% year-on-year, its February-August Japan sales down 7.8%, and total sales down 2.9%, nothing special. Uniqlo’s same-store sales in Japan were up a whopping 31.6% in September and Fast Retailing’s August 2008-August 2009 total sales up 16.8%, putting it in a class of its own among Japanese retailers. Fast Retailing understands fast fashion and Ryohin does not.

The one fact that initially impressed me was that “IKEA’s sales in the year to August were up 44% from the previous year”. Given IKEA’s notorious secretiveness and sinister “flat-pack accounting”, I wondered how the author obtained the number. Looks as though he may have read it in this Nikkei article from July 28.

According to the first-ever published earnings estimate from Ikea Japan, its sales for the current year ending Aug. 31 will likely come to 52.03 billion yen, a 44% increase from a year earlier. That would make Ikea the third-biggest furniture seller in Japan. The company now operates just five stores, but hopes to open locations in western Tokyo, Fukuoka, and the Nagoya area, President Lars Petersson said.

But this 44% increase is clearly an all-store sales number. It’s a cinch to double sales if you only have one outlet and open another equally successful one. So when did those five IKEA stores open?

Funabashi, Chiba             24 April 2006
Kohoku, Yokohama     15 September 2006
Port Island, Kobe             14 April 2008
Tsuruhama, Osaka          1 August 2008
Shin-Misato, Saitama  19 November 2008

The 44% year-on-year sales increase for FY8/09, then, takes in one store open for only a month the previous year (Osaka), one store open for only four and a half months the previous year (Kobe), and one store open for nine and a half months in the present year (Saitama). Looked at in this light, the 44% increase in sales looks about as flat as the way the furniture is packed—a wholly misleading sleight of hand from the author.

What irks me most about this article, aside from the irrelevancies, inaccuracies, deceptions, and the pedestrian recitations of the most mind-dumbing cliché (“the hard-working Japanese”) that stray so far from the Economist’s motto, self-proclaimed in every issue, to take part in “a severe contest between intelligence…and ignorance”, is that it could have been written by anyone fresh off the boat with a half-filled Rolodex left by the departing reporter and a Nikkei.net subscription. Which it probably was.

One response to “Spiked again

  1. Agreed that the “Cost-cutting is still taboo” is highly inaccurate. As someone who has worked for a Japanese company for several years, I can personally vouch that cost-cutting has been going on for quite some time for both my employer and our clients. Today`s newspaper reported that even Hitachi had managed to narrow its full-year net loss forecast by 15% due to … cost-cutting (and cheaper material procurement).
    I do think that there is a sense of growing economic hardship in Japan, though. Admittedly it`s not like Japan has turned into Congo overnight, but bonuses and overtime have been slashed at many companies. People seem to be a lot more cautious about discretionary spending than a few years ago.

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