Transcripts

Business Is Unusual In Japan For Walmart & Toys R Us

JEFF YASTINE: Toys 'R' Us and Wal-Mart are among the retailers making a big push and expecting to do well this holiday selling season here in the U.S., but both firms are fighting head winds in Japan. Wal-Mart and Toys 'R' Us are finding it tough to compete in the lucrative and demanding, Japanese market these days. But as Lucy Craft reports from Tokyo, that wasn't always the case.

LUCY CRAFT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Toys 'R' Us used to be the poster child for how to get it right in Japan. It was among the first foreign store brands outside the luxury segment to take on the world's second largest economy. But 20 years and over 150 store openings later, it's now a company in search of a new business model. Once hailed as a rare American retail success story in Japan, Toys 'R' Us has tumbled into the red for the last two years and unless the firm can get a lift under the tree at Christmas, its slump could stretch into a third year. Toys 'R' Us' central dilemma is kids' play just ain't what it used to be. Especially for children eight and older, model airplanes, Monopoly and other traditional playthings have been forsaken for low-margin video games. Analyst Hiroshi Sasamata of AT Kearney says that's why Toys 'R' Us' nemesis isn't a rival toy store or Wal-Mart, but a purely local phenomenon: the mass-volume electronics discounter.

TRANSLATION OF: HIROSHI SASAMATA, PRINCIPAL, AT KEARNEY: The main sales channel for video games is the big electronics stores. For them, video games are just loss leaders. But for Toys 'R' Us, video games are about half their sales. So the big electronic chains have not only depressed retail prices for video games; they've taken customers away from Toys' R' Us.

CRAFT: The big discounters -- like Bic Camera, Yodobashi (ph) and Yamadadenki (ph) -- are the 800-pound gorillas of Japanese retailing. With prime real estate locations and popular loyalty rewards programs, their clout over distribution and merchandising is formidable. Unlike Toys 'R' Us, which has delegated authority to its Japanese managers, Wal-Mart has tried to run its Japan unit much like its U.S. operations. Five years after buying a stake in a nearly bankrupt supermarket chain, Seiyu, Wal- Mart is in the hole to the tune of $1 billion. Analyst Kazunori Tsuda of Daiwa Institute of Research is skeptical about Wal-Mart's prospects here.

TRANSLATION OF: KAZUNORI TSUDA, RETAIL ANALYST, DAIWA INSTITUTE OF RESEARCH: Wal-Mart has three problems. Its Japanese stores are cramped and outdated. Staff morale is low after hefty layoffs and the supermarket business itself is over-saturated, so competition is cutthroat right now.

CRAFT: Critics say the world's biggest retailer should write off Japan and concentrate on China. But Wal-Mart has said Japan, a retail market worth $1 trillion, is simply too big to walk away from and is key to its international strategy. The Bentonville, Arkansas-based firm has underscored its intention to stay the course in Japan by making a tender offer for the rest of Seiyu's shares, which runs until December 4. Retail expert Roy Larke says full ownership is crucial to turning around the 400- store chain.

ROY LARKE, EDITOR, JAPANCONSUMING MAGAZINE: At the moment, Wal-Mart is still in the hands of the Japanese distribution system; most of their product is coming from Japanese suppliers. And they're really stuck in the middle between the customer and the supplier. Wal-Mart really needs to take control of the complete supply chain. And they can only really do that if they have total control of Seiyu.

CRAFT: Both Wal-Mart and Toys 'R' Us are fighting for market share at a time of great consolidation in the Japanese retail industry. Both companies refused requests for interviews. But a source with Toys 'R' Us says the company is considering a number of strategies, including abandoning its traditional suburban stores to focus on upscale, urban outlets. Lucy Craft, NIGHTLY BUSINESS REPORT, Tokyo.