Why Carrefour failed to integrate the Japanese market

Despite being the second world biggest retailer, Carrefour ran into several problems in Japan. Number one French retailer Carrefour started his implementation in Asia in 1989 thanks to a joint venture with the Presidential Corporation of Taiwan. Carrefour gradually implemented several stores in Malaysia, China, Korea and Japan. In June 2000, the large store law has been abolished which was a great opportunity for foreign retailers to open new store in Japan. The large store law was on since 1974. The law has been created in order to protect small retailers, in Japan, “half of the stores have only one or two employees and 90 percent of the stores employ nine or fewer people” (David Luhman). In 2000, the large-scale retail store law was enacted to regulate department stores, several criteria had to be met in order to open a large store (1000m²) such as environmental concerns, traffic, noise pollution.

III – Carrefour’s competition

While Carrefour decided to exit Japan in 2005 after five years that its chief executive Jose Luis Duran described as: “a short, expensive adventure” (BBC, 2005)it is not the only international retailer that has struggled to integrate the Japanese market. Some other big international retailers such as Sephora, LVMH and Boots have also left Japan after failing to make their businesses profitable there. Meanwhile, Carrefour’s two main competitors, Wal-Mart and Tesco have had very different paths and results in Japan. In this part of the report we will be analyzing the different strategies adopted by these two international retailers, how they implemented them and how they are working out for them.

The case of Wal-Mart

Wal-Mart Stores Inc., was elected in 2010 as the world’s largest public corporation by revenue, according to the Forbes Global 2000 for that year with sales of 408.21 billion US dollars, largely ahead of the Carrefour Group who ranked 16th with a revenue of 125.36 billion US dollars and Tesco who ranked 64th with sales of 77.94 billion US dollars. Although it is one of the most successful retail companies in the world with over 8500 stores in 15 different countries, it shows mixed results in different geographical areas. For instance, while it is very successful in the United States, the United Kingdom and China, it has had to exit Germany and South Korea. In Japan, results are mixed for Wal-Mart. They spent over one billion US dollars moving to Japan and they seem to be struggling quite a lot. Identically to most of its international expansions, Wal-Mart used its acquisition strategy to move to Japan. Wal-Mart uses an acquisition strategy regardless of the region with no adaptation for the relevant market. (Strategic Direction, 2008) It first integrated the Japanese market cautiously by acquiring 6.1% of struggling Japanese company Seiyu, it then acquired a 51% stake in Seiyu stores in 2005 making Seiyu a Wal-Mart subsidiary. In December of 2007, Wal-Mart increased its ownership from 50.9% to 95.1% and in June 2008 Seiyu became a wholly-owned subsidiary. It now has over 400 stores around the country and sales showed a 0.5% rise in 2006, but this is not enough to counter the $479.5 million that the stores lost to date. (Strategic Direction, 2008)

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So why is Wal-Mart struggling so much? It is believable that this comes down to a simple cultural clash. Wal-Mart usually finds international success by applying the same simple standardization acquisition strategy by acquiring an already existing asset, adding its own management and applying its American philosophy of “always low prices”. (Strategic Direction, 2008)While this is a good strategy for price sensitive consumers, this doesn’t exactly apply to Japan as consumers enjoy fresh food and are very choosy and careful with quality of products. (The Guardian, 2004) This is a very similar strategy to the one that made Carrefour fail, and this misunderstanding of the Japanese consumer behavior could make Wal-Mart fail and exit Japan in the years to come.

The case of Tesco

Tesco plc is the fourth largest retailer in the world by revenue (behind Wal-Mart, Carrefour and Metro respectively), and the second largest by profit (behind Wal-Mart). (Deloitte, 2010)The company operates in 13 countries worldwide as well as in the United Kingdom. (Tesco, 2010)Tesco first began its operations in Japan in July of 2003 by a buy-out of C Two stores for £139 million and later on in April of 2004 by buying out Fre’C. (The Guardian, 2004)To the difference of its competitors, Tesco adopted its own strategy in Japan and spent 4 years on research after acquiring C Two-Network and only opened its first store in April of 2007. Instead of opting for the bigger, out of town cheaper shops, Tesco has been focusing on smaller shops in town, on the same model as its UK Tesco Express shops. “[By] researching the Japanese market we know that customers want to shop frequently for fresh food, which is why we acquired a chain of small supermarkets,” says Greg Sage, a spokesman for Tesco at its headquarters in Hertfordshire, England. “The launch of the Tesco Express format allows us to extend this offer in a smaller format.” (Business Week, 2007) It is essentially this amount of research that has allowed Tesco to successfully implement itself in Japan. The company even had some of its researchers live with Japanese families so that they could analyse their eating and shopping habits. “We very much go in for the model that people [in Japan] shop two or three times a week, and tend to go to quiet neighbourhood supermarkets,” Mr Trenchard, Tesco spokesman said to explain Tesco’s “very cautious attitude”. (The Guardian, 2004) As well as analyzing lifestyles and finding that most Japanese homes did simply not have enough storage space, Tesco also analysed the demographics of the Japanese population and found that by 2020, 34 million of its 127 million people will be aged 65 and over, while the working population, the target market for superstores will continue to diminish.

Although Tesco had 142 stores in Japan in February 2010 which is a very decent start, there are a very large number of convenience stores in Japan. 7-Eleven, Family Mart, Lawson, AmPm, and Circle-K Sunkus are among the largest players, and in central Tokyo it’s not uncommon to have more than one of them on every single block. 7-Eleven has 1577 stores in Tokyo alone and a total of over 12,825 in Japan (7-Eleven, 2010), Lawson have 9,763 stores in Japan (Lawson, 2010), while competitor Family Mart have 7,688 (Family Mart, 2010). In 2007, Japan already had over 40,000 convenience stores (or combini as the Japanese call them) which comes to one for every 3,200 inhabitant. (Business Week, 2007)

In their 2009/2010 annual report, Tesco noted that same as in 2008/2009 they were facing challenging market conditions in Japan and that the retail market was deteriorating. Nevertheless, Tesco continue to make good progress in Japan. The customers are giving good feedback. They enjoy the fresh food and new features that help to differentiate the offer. Amongst others, the recent in-store bakery, extensive wine range and their first 400 own-label-products are proving to be quite successful as they already represent 10% of overall sales.

From the looks of things, Japan seems to be a very difficult market for retailers to integrate. While Carrefour and Wal-Mart have not managed to implement their American and European views of superstores and low prices, Tesco is facing very tough competition by integrating the market with its convenience stores.