Japan’s Retailers Struggle to Gain Foothold in U.S.

Shoji Watanabe, a managing director for D’Urban, one of Japan’s leading clothing manufacturers, says the American marketplace never fails to surprise him. Consider this recent experience:

When D’Urban opened the doors to a men’s clothing store called (ixi:z) on posh Rodeo Drive last month, everything seemed perfect. The Japanese firm spent $500,000 to remodel the one-story building that had formerly housed the Martindale Bookstore into an upscale boutique with an unusual name. To set (ixi:z), pronounced ick-sees, apart from other shops on the prestigious Beverly Hills street, a bar was stocked with 68 kinds of natural water imported from around the world.

Watanabe recalls that one of the first customers wasn’t interested in clothes. Instead, he wanted 22 bottles of water imported from Japan, France, Sweden, Romania and Norway. “We sold him the water,” says an amused Watanabe, who had expected the water bar mostly to provide atmosphere, not sales. “That’s business in America.”

D’Urban is one of a handful of large Japanese firms that are taking sometimes extraordinary steps to establish themselves in the United States in an effort to capture a share of the large and diverse American market.

The reason is clear. “The American market is the richest on earth,” says Katsuhiko Nitta, an executive vice president for Mitsukoshi, Japan’s largest department store chain. Nitta says Mitsukoshi has lost millions on its U.S. operations but remains convinced that “with the right product, you can make a lot of money.”

So far, most Japanese retailers are virtually unknown to most Americans. The stores owned by Japanese retailers are located in just a few large cities, especially New York and Los Angeles. And there are a number of Japanese retailers--the Yaohan and the Matsuzakaya department stores in Los Angeles’ Little Tokyo are two examples--that focus almost exclusively on ethnic Japanese.

All this may be changing, albeit slowly, as the presence of Japanese retailers in the United States grows. Consider:

- Itokin, a large Japanese maker of women’s apparel, has opened 22 women’s clothing stores in the United States over the last three years and plans to continue the pace of its expansion.

- Korakuen, a Japanese conglomerate whose vast holdings include a baseball stadium in Tokyo, has ambitious plans to open 100 gift shops in the United States by 1990.

- D’Urban, one of Japan’s largest clothing manufacturers, plans to expand its 15-store (ixi:z) men’s clothing chain to 80 stores by 1989.

At first glance, this doesn’t seem like a great time for Japanese retailers to launch an expansion. The yen has gained in value, and this has caused the price of Japanese goods sold in the United States to rise. But Japanese retailing executives display a willingness to suffer sizable losses to establish themselves in the United States.

The price may be worth it. It appears that some Japanese business executives believe “the best way to cope with currency fluctuations is to move here bodily,” says Kurt Barnard, publisher of Retail Marketing Report, an industry newsletter. This way the Japanese manufacturers can maintain a market for their more expensive goods. If the yen weakens and the price of Japanese goods falls, “even better for them,” says Barnard.

Profits Elusive

But at least so far, most Japanese retailers have found profits elusive. Those Japanese retailers who were willing to discuss finances acknowledged that their U.S. operations were losing money because of start-up costs, currency fluctuations and intense competition. Said Watanabe, the D’Urban managing director: “I really can’t honestly say when our (ixi:z) stores will make money. It could be next year, it could be the year after that, who knows?”

Much of the uncertainty for most Japanese retailers stems from gains in the value of the yen over the last year. Hideki Ikuta, executive vice president of Korakuen USA, says the company’s Shop in Tokyo novelty stores have raised prices an average of 40% due to the rise in the yen’s value, and business is suffering.

“The gifts are not affordable,” Ikuta says. As an example he cited one novelty item: a battery-powered plastic fish that makes swimming motions in a glass bowl. It was popular last year at $29, but now it costs $45 and “it sits on the shelves,” he says. Ikuta says 1986 losses will approach $300,000.

Some Japanese retailers are coping with the dearer yen by importing fewer goods from Japan. Itokin has reduced its Japanese imports to 20% from 60% two years ago. It depends to a greater extent on imports from Hong Kong, South Korea and Taiwan. Korakuen now stocks some American-made goods and imports about half of its merchandise from Japan, down from 80% a year ago.

These moves aren’t without some risk. If the yen declines in value, the prices of Japanese goods will fall but the prices of goods made elsewhere could go either up or down. “The problem is we don’t know what the exchange rate will be a year from now,” sighs Watanabe, who says (ixi:z) continues to import 90% of its merchandise from Japan. D’Urban has kept the retail prices down by absorbing most of the price increases due to the yen. “It’s totally unpredictable,” he says.

Other Problems

The increase in the yen’s value is only the latest problem faced by Japanese retailers who are trying to set up shop in the United States. The Japanese say they are continually overwhelmed by the aggressive marketing tactics of their American competitors who use sales promotions far more liberally than the Japanese. “Every month, I get a flyer in the mail that Macy’s is having a sale,” moans Eiichi Tsujumuria, managing director of Itokin America. Tsujumuria says Japanese consumers tend to buy products they like regardless of price, but in America, “unless there’s a sale, nothing gets sold.”

The aspects of Japanese culture that led to their success as manufacturers of consumer products such as cars and televisions tend to work against them when it comes to retailing, consultants say. “It sounds like a cliche, but it really is a cultural thing,” says Joseph Carideo, a retail consultant for Thorndike Deland Associates. “Their whole culture is low key and very conservative, almost unemotional. That is not the formula for success in retailing.”

Tsujumuria says Itokin, a privately held women’s clothier, has learned other painful lessons in the United States. It is replacing its Itokin Plaza stores with a new format after just two years. Tsujumuria says the Plaza stores were modeled after those in Japan and featured a wide range of garments, from inexpensive knit dresses to $120 silk blouses.

Tsujumuria says he thought American shoppers would like the variety, but instead they were confused because they couldn’t determine whether Itokin was really an upscale boutique or a budget shop. Tsujumuria said he was surprised to find “that in America, you have to target your market narrowly.”

Converting Stores

Itokin is now converting the Plaza stores, including one located in Los Angeles’ Beverly Center, into boutiques that offer either an inexpensive line of casual clothing or moderately priced sportswear. Says Tsujumuria: “We’ve learned not to mix style and price range at the same store.”

At the same time, Japanese retailers say that the tastes and preferences of American consumers differ sharply from their Japanese counterparts. Frequently, items that sell briskly in Japan do poorly in America.

Take the experience of Korakuen USA. Last year, its Los Angeles shop finally gave away dozens of unsold piggy banks shaped like feudal samurai warriors. The banks were popular in Japan but were ignored by American shoppers who “didn’t appreciate the history behind them,” says Ikuta, the Korakuen executive.

Such mistakes can be costly. Mitsukoshi lost several million dollars on an upscale Manhattan gift shop it opened in 1978. The store sold such traditional Japanese goods as china, bamboo screens and silk, but so few customers showed up that it “had become a museum rather than a shop,” says Nitta, who oversees Mitsukoshi’s American operations. “To put it frankly, it didn’t pay the rent.”

Last year, Mitsukoshi, in a massive overhaul, converted the shop into a showcase for the Japanese fashion designer Matsuda in an effort to “target affluent native Americans,” says Nitta. Now its jet-set clientele includes rock musician Mick Jagger and actress Cher, and Nitta says it is turning a small profit.

Earlier Attempt Failed

Mitsukoshi wasn’t the only Japanese retailer that failed to sell Americans on traditional Japanese goods. Seibu, a Japanese department store that was one of the first to test the American market, closed its Los Angeles specialty store in 1964 after two years of losses.

And Takashimaya recently reduced its money-losing Manhattan department store that offered expensive china, silk screens and kimonos to a modest souvenir shop for Japanese tourists. Even so, business isn’t exactly booming. “It’s doing just OK,” says Mashiro Yoshiro, manager of Takashimaya’s Los Angeles buying office.

Rather than risk failure, some Japanese firms avoid the American marketplace entirely. “Our know-how is completely useless in this country,” says Tad Tokuda, who buys American goods in Los Angeles for Hankyu, a Japanese department store. “We know the taste of the Japanese, but not the Americans, and until we know their taste, we can’t manage a store.”

However, some retailers have put their knowledge about the Japanese consumer to work in U.S. cities with large Asian populations. Perhaps the best example is Yaohan, a Japanese retailer that has opened five stores in Japanese neighborhoods in California since 1979 and plans to open a sixth store in an Asian neighborhood in northern New Jersey later this year.

The stores carry hard-to-find foods and clothing that comes in Japanese sizes. The Yaohan store in Los Angeles’ Little Tokyo section has a travel agency where ticket agents speak Japanese.

“Our basic philosophy is to go where there is a high Asian population,” says Yoshiya Watanabe, administrative manager of Yaohan USA. “Most of the know-how we have from Japan is of limited use outside Asian neighborhoods in the United States,” says Watanabe, who is not related to the D’Urban executive.

The approach used by Yaohan isn’t foolproof. Japanese merchant Matsuzakaya opened a department store in Los Angeles’ Little Tokyo to sell expensive American and European designer goods such as Gucci bags and Nina Ricci perfume to tourists from Japan.

Difficult Change

A few years ago, it became apparent that the tourist market wouldn’t support the store and Matsuzakaya began stocking traditional foods and clothing to draw Asian-American customers. Matsuzakaya executives thought ethnic Japanese would like the change, but altering the store’s image as a tourist shop has been difficult, says Mitsu Hito, administration manager for Matsuzakaya.

Those Japanese retailers who have targeted the mainstream American consumer have found ways to reduce risks--often with mixed results.

Consider the case of Mitsukoshi, which entered the Houston market by opening a boutique within Sakowitz, the upscale department store. “We wanted to reduce the risk by teaming up with a strong local partner who understood the market,” says Nitta. “Unfortunately, the partner we chose wasn’t strong enough.” Sakowitz filed for protection from its creditors under Chapter 11 of the U.S. Bankruptcy Code shortly after the Mitsukoshi boutique opened.

Undaunted, Mitsukoshi has teamed up with a second American firm, and this time the marriage is working, Nitta says. Mitsukoshi says its 3-year-old souvenir shop at Walt Disney World in Florida is successful because Disney “draws the customers. All we have to do is provide the merchandise.”

Sanrio, the maker of Hello Kitty toys, and (ixi:z) plan to expand through licensing agreements with other businesses. “We’ve found it’s more profitable and a lot less risky to be a wholesaler,” says Randall Patterson, national sales manager for Sanrio.

Sanrio has only a handful of company-owned stores in the United States, which are used for test marketing only. Last year, for example, Sanrio test marketed 6,000 items in its Gift Gate stores before distributing 100 new products to its 2,500 retail customers, including its licensees.

Similarly, D’Urban plans to expand its (ixi:z) chain through licensing and franchise agreements. D’Urban plans to open 80 (ixi:z) stores in the United States by 1989, but no more than 10% of those will be company-owned. “There’s no way we could finance an expansion like that ourselves,” says Steve Mills, an American who is president of (ixi:z) USA.