Japan’s System of Distribution Cited for Trade Friction
Never mind what the Japanese government says about opening markets to imports, or what the U.S. government says about the benefits of a shrunken dollar in marketing goods to Japan.
The bottom line is that a shopper in Tokyo must try awfully hard these days to find an item made in the United States.
Any number of thick books have been written about the reasons why. But this season, the latest villain in the long saga of U.S.-Japan trade friction is the very system that puts products on the shelves.
Distribution Japanese-style is faulted as arcane and irrational, dominated by clannish wholesalers and opportunistic middlemen who drive up costs to the consumer and spurn newcomers, both domestic and foreign.
When Commerce Secretary C. William Verity led a trade mission to Japan in September, he decried the fact that Japanese tourists learned to buck the system by paying about half the cost for Japanese-made cameras and electronics goods while visiting New York.
“How can this be?” Verity asked. “Obviously, there are problems with the distribution system.”
There are indeed gross inefficiencies in Japan’s traditional labyrinth of trading houses, wholesalers, sub-wholesalers, distributors and tiny retailers--but it is not easy to pinpoint them, precisely because the system itself is so opaque. Nobody seems sure how it all works, although there is a rising consensus that streamlining is long overdue.
“Distribution should be made as transparent as possible,” said Hatoko Shimizu, executive director of the Housewives Assn., a national consumer advocacy group. “The pipelines must be shortened, and all the unnecessary layers must be cut.”
Stimulus Needed
Some domestic critics, in fact, welcome the criticism from abroad because it provides a badly needed impetus for reform.
“Foreign pressure is good,” said Tadashi Saito, senior managing director of the Distribution Economics Institute of Japan. “We’d never be able to change the system on our own. We need some kind of stimulus from the outside.”
A shopping excursion in a Tokyo department store demonstrates some of the incongruities of the power of the high yen. The basement food department is likely to stock competitively priced American beef, while fashion sections carry Italian or French designer labels, uncompetitively priced to maintain snob appeal.
Thorough scrutiny of the household goods floor at the Seibu department store in the Ginza district revealed a single product line from the United States: Vita Craft cookware, built at a factory in Shawnee, Kan., of five-ply stainless steel with the sturdiness of combat tanks. The price tags, decorated with little American flags, are also hefty. An 11-inch frying pan goes for $220.
“It sells, but people tend to think about it for a while,” a sales clerk said. “It’s not an impulse purchase.”
L. Eldale Ashley, president of Vita Craft Corp., said in a telephone interview that he spent more than 10 years cultivating a distribution channel through an affiliate of Suntory Ltd., a giant food and beverage company known for its aggressive distribution tactics. The affiliate, Suntory Shopping Club, created the concept of high-quality cookware in Japan by sponsoring culinary classes and throwing Vita Craft parties.
Suntory Did Outstanding Job
Vita Craft has since been approached by a number of so-called “parallel” importers, who typically offer increased sales volume to foreign manufacturers and cheaper prices to Japanese consumers for products caught in the chokehold of an exclusive marketing agreement. But Ashley demurred.
“Suntory did an outstanding job developing the product, and we’re loyal to them,” he said. “If I’d just gone over there and put it on the shelf, it’d still be sitting on the shelf.”
It remains a mystery, meanwhile, exactly what has happened to windfall foreign exchange gains over the past few years, when the yen nearly doubled in value against the dollar.
Prices generally stayed high even though the cost to import the products fell drastically. The total foreign exchange windfall for the years 1986 and 1987 exceeded more than $200 billion, but only a third of that was passed on to consumers in the form of lower prices, according to a government study. Critics maintain that the distribution system sponged up a lot of that surplus yen.
So it is that Seibu purveys a pair of Levi 501 jeans, on sale, for $63. Capitalizing on the boom in catalogue sales, which give consumers the impression they are getting rock-bottom prices, an outfit called CBS Sony Family Club offers a pair of Timberland moccasins for $225 or a Pendleton shirt for $133 in its “Best Buy Guide.”
Inertia in the system is part of the problem, as is the fact that consumers tend to see prices in terms of constant yen figures rather than in terms of their increased dollar-denominated purchasing power. A business culture that puts a priority on the welfare of corporations instead of consumers is also at work.
Captive Distribution Channels
“When we think about distribution and flow of products, we think about it from a consumer point of view. We are a nation of consumers,” said William W. Morgan, managing director of Procter & Gamble Far East Inc. in Osaka, who heads a distribution study group for the American Chamber of Commerce in Japan. “But Japan is a nation of producers.”
Distribution in most market sectors is rigidly controlled by cartels of manufacturers organized in government-sanctioned Fair Trade Councils, which set regulations on marketing practices that in many cases stymie competition by foreign firms as well as domestic newcomers.
“When you get the corporations, the big guys, sitting down and setting the rules, you’re guaranteed to have an exclusive group,” Morgan said. “You have a system that tends to encourage the status quo.”
The system has fostered captive distribution channels where manufacturers keep a grip on market share through loyal wholesalers and retailers; Suntory and Matsushita Electric Industrial Co., the maker of Panasonic, are two of the most notorious practitioners of this approach. It also bred old-boy networks and entrenched business relationships that do not open easily to outsiders.
Consumption Tax Passed
“The overwhelming barrier is the whole warehousing and delivery situation,” said J. Dallas Pyle, president of Songo River Trading Co. of South Portland, Me., which represents Dexter Shoes and other Maine companies. “You’ve got to have somewhere to place your product when it lands in Japan, and the relationships between importers, warehousers and truckers are so well established it’s hard to get inside.”
Saito, of the Distribution Economics Institute, said the new 3% consumption tax passed by Parliament on Saturday is likely to help rationalize distribution. By requiring paper work for each transaction in the distribution chain, it will add a new burden of administrative costs and pinch the margins of redundant middlemen.
“The tax could be the excuse retailers and producers have been looking for to break these old business ties,” Saito said.
But after nearly two years of political horse trading, the tax reform package fell far short of imposing transparency on the system that its sponsors originally had advocated as a means of rationalizing distribution channels. As originally proposed, distributors would have been required to itemize for individual invoices when they reported sales to tax authorities, clarifying how the distribution system works. But now, the taxes will be calculated on a ledger basis, with companies reporting only total sales figures. Moreover, there are a slew of exemptions and loopholes that favor the smaller, less efficient operators.
Change is coming, however. The legion of mom-and-pop stores that have long been the backbone of Japan’s retail Establishment are gradually losing ground to new supermarkets and chain outlets that in many cases go directly to overseas suppliers.
The government balked at abolishing a controversial law that allows small retailers in the hinterlands to filibuster against developments by large-scale competitors. But the Ministry of International Trade and Industry, the powerful bureaucracy that regulates much of the distribution system, is grudgingly cutting down on the red tape required to build the big stores and sell liquor or rice.
“MITI is caught between the economic ideal and political reality,” said Takahide Shioya, director of the ministry’s Commerce Policy Division.
At stake is a powerful lobby of 1.6 million small retailers, as well as the hallowed tradition of full employment, which in Japan serves as a kind of alternative to a social welfare system that the government cannot afford.
“The distribution question addresses the structure of Japanese society as a whole. It ties in with everything,” Shioya said. “To demand that we change it overnight would be tantamount to saying we should stop speaking Japanese.”
