The Team Approach : Toys R Us, Barneys New York crack Japanese market via joint ventures.

Amid the rhetoric about the Japanese buying up America as they keep would-be business rivals out of Japan, U.S. trade officials recently have had some cause for cheer.

Two highly regarded U.S. retailers have joined forces with Japanese counterparts in efforts to crack the tough-to-enter Japanese market.

Toys R Us, the nation’s largest toy merchant, is hooking up with McDonald’s Co. (Japan) and its dynamic founder, Den Fujita, to open giant discount toy stores in Japan, some with Golden Arches appended, starting in 1991.

And Barneys New York, a classy clothier that caters to well-heeled professionals, is teaming up with Isetan, a prominent Japanese department store company.

Both U.S. merchants realized that, to get past Japan’s seemingly endless restrictions and to find sites in the island nation’s densely packed cities, they needed help from executives experienced in slashing through the bureaucracy and dealing with Japan’s labyrinthine--some would argue archaic--distribution system.

At stake for the Americans are outlets for U.S.-made goods and potentially billions of dollars in sales from one of the world’s most freewheeling consumer blocks. For the Japanese, a successful venture in their country could help open doors in the United States.

To date, Japanese retailers have met with limited success operating stores in the United States. But the plethora of well-known U.S. merchants for sale--including Bloomingdale’s, Saks Fifth Avenue and Marshall Field’s--has prompted some Japanese interest. Sogo Co., an old-line Osaka-based department store company, reportedly is looking at Saks, and Tokyu Department Store has said it is negotiating to buy Bloomingdale’s.

But Hirokazu Ishii, a research analyst with Nomura Research Institute (America) in New York, said lack of familiarity with the U.S. culture makes it tough for Japanese merchants.

“I don’t think it’s a good deal for them to buy American department or specialty stores,” he said. Better to learn from Americans, he said, praising the joint venture idea.

To U.S. trade officials, who emerged grim-faced from two days of fruitless trade talks with the Japanese last week, these deals offer signs of hope that successful American companies can blaze trails on Japanese turf and help narrow the trade gap. Although U.S. designer boutiques exist in Japan, no retailer has managed to establish a major presence there.

“This is really breaking ground,” one trade official said of the Toys R Us deal. “It’s a win-win situation.

Japan watchers have high expectations.

“This is a very practical way of leveraging on someone’s expertise and know-how,” said Yukuo Takenaka, president and chief executive of Takenaka & Co., a Los Angeles-based investment banking firm specializing in Pacific Basin transactions. “This type of joint venture will continue. (U.S. companies) will find that going it alone will be a tough and risky way of doing it in Japan.”

The same, he added, is true of the Japanese. “They want new sources of merchandise and will be looking for access overseas, including in America,” Takenaka said.

As with Mitsubishi Estate Co.’s recent agreement to buy 51% of Rockefeller Group, those involved in the two retailing ventures agreed that the most crucial ingredient was chemistry. “It’s like a marriage,” one Isetan executive said. “The most important thing is that we like each other.”

Toys n’ Burgers

If they ever erect a Retailing Hall of Fame, Toys R Us and its founder, Chairman and Chief Executive Charles Lazarus, will undoubtedly be charter members.

Resurrected from bankruptcy just 10 years ago, the Paramus, N.J., company is now a robust merchandising machine with more than $4 billion in annual sales from 404 U.S. toy stores, 74 international toy stores and 137 Kids R Us children’s clothing stores.

Having ventured successfully into Canada, the United Kingdom, West Germany, France, Singapore, Hong Kong, Malaysia and Taiwan, Toys R Us was looking to tap another market.

“Japan was a logical offshoot,” said Robert C. Nakasone, who grew up in the Sunland-Tujunga area of Los Angeles and is now vice chairman and president of worldwide toy stores at Toys R Us.

Company officials felt that the logical approach would be to get a local partner, as they had in other Far Eastern locations.

Toys R Us wanted “someone who understands American business but also understands the unique Japanese culture,” Nakasone said.

It so happened that Joseph R. Baczko, president of the company’s international division, and Takuro Isoda, chairman and chief executive of Daiwa Securities America, met two years ago while sitting on Georgetown University’s forum on Japan.

Isoda arranged a meeting six months later with Den Fujita, the Japanese entrepreneur who almost single-handedly turned the Japanese into a hamburger-loving people. McDonald’s (Japan) is half owned by McDonald’s Corp., based in Oak Brook, Ill.

Toys R Us wanted a partner willing to accept a 20% stake, in exchange for helping to secure sites and cut through stiff restrictions on store openings. Toys R Us would retain an 80% share. After training in the States, Japanese nationals would run the operation.

Baczko and Fujita hit it off.

Although he had not even heard of Toys R Us, Fujita “is a very quick study and understood . . . what the basic requirements for success would be in Japan,” Baczko said. “Fujita speaks fluent English, but more important, he’s bicultural. He can read Americans very well.”

Thanks to phones and facsimile machines, the deal came together within about 12 weeks.

After the war, Fujita attended the prestigious University of Tokyo but, instead of moving on to a career in government or law, established Fujita & Co., a trading company that sells Christian Dior handbags and other high-fashion items.

In 1969, a friend in the import-export business introduced him to Ray Kroc, the founder of McDonald’s, which was seeking an overseas partner.

“When I met Ray Kroc, he told me he had met hundreds of Japanese already” but had not really liked anybody, Fujita said in a telephone interview from Tokyo. “When he met me, five minutes later he said, ‘OK, let’s go.’ ”

Fujita suspects that the quick connection had something to do with the fact that both were born in years of the tiger under the Chinese lunar calendar. The late Kroc was born in 1902 and Fujita, in 1926.

Almost immediately, the 50-50 venture in Japan hit a stumbling block. McDonald’s wanted its Japanese partner to locate restaurants only in the suburbs. Fujita insisted that Japanese cities, with their hordes of young people, made more sense. He held out for opening the first Japanese McDonald’s in the fashionable Mitsukoshi department store on the Ginza in Tokyo.

The Japanese media predicted that the venture would be bankrupt within two weeks, Fujita recalled. “In Japan, everybody was eating rice and fish. They didn’t know what was a hamburger.”

Fujita, who still reportedly prefers noodles, proved them wrong. Today, at a vibrant age 63, he oversees almost 700 McDonald’s outlets with $1.2 billion in sales. And he taught a thing or two to McDonald’s, which now routinely puts outlets in cities. (McDonald’s Japan and U.S. will split the 20% stake in Toys R Us evenly.)

Baczko of Toys R Us admired Fujita’s entrepreneurial instincts. During lunch one day on the second floor of a Japanese McDonald’s, Fujita noticed a poster advertising french fries. Fujita called over the manager and noted that anybody on the second floor already had decided whether to buy fries. “Why don’t you put an apple pie poster up there?” he asked.

“He’s our type of guy,” Baczko said. “He’s an operator.”

In 20 years of building McDonald’s, Fujita has become intimately familiar with real estate. His staff keeps lists of thousands of properties. Moreover, he is skilled at clearing bureaucratic hurdles.

Key to the venture’s success, officials on both sides say, will be Japan’s willingness to follow through on promises announced earlier this year to smooth the way for big new stores in Japan. In the past, retailers have been required to secure an elaborate set of approvals. Many a proposal has taken as long as 10 years to wend its way through the process.

Earlier this year, the Ministry of International Trade and Industry agreed to put a cap on how long the process can take. What has been an indeterminate period has apparently been reduced to 24 months, although the new method has yet to be tested.

“Our country is very closed in many directions,” acknowledged Fujita, the McDonald’s (Japan) entrepreneur. “We are the first batter to challenge the government red tape.

“If Toys R Us people would like to open a store anywhere in Japan, I can find the information immediately,” he added. “For example, about 30 kilometers from Tokyo, I can get three to five acres easily. McDonald’s cannot go alone. But if we go together, we have the same customer. If I found three acres for Toys R Us, at the same time I can get a half acre for McDonald’s.”

Fujita said the companies are negotiating for approval on several properties. He expects that the venture can open five stores in 1991. Toys R Us plans a minimum of 100 stores in Japan.

Yukuo Takenaka of Takenaka & Co. predicts that Toys R Us “will revolutionize the Japanese toy market.” Consumers routinely pay four times as much for toys as purchasers in other countries. Mom-and-pop stores, he figures, will hustle to compete, so that Japanese customers stand to benefit on two fronts: lower prices, resulting from Toys R Us’ distribution efficiency, and improved service from smaller toy retailers.

Toys R Us has found that its presence in a country expands the overall market. The Japanese toy market, though fragmented, stands at roughly $4.5 billion, which Toys R Us views as “significantly underexploited.” (The U.S. market is nearly $20 billion.) Toys R Us figures that it can easily double demand in Japan within 10 years.

Soon after the toys-and-burgers deal was announced, Lazarus and Fujita journeyed to Washington to see U.S. Trade Representative Carla A. Hills, an outspoken critic of Japan’s exclusionary practices.

“We were received with great interest,” Lazarus said. “Everybody there was very enthusiastic about the prospects.”

Among the most excited is Fujita.

“I have confidence that Toys R Us-McDonald’s will be No. 1 in the international world,” he said. “When we open in 1991, there will be a big party.”

Barneys/Isetan

In spring, 1988, the Pressman family that founded and runs Barneys New York began to think about how to best exploit the Barneys name on a global scale.

Founded in 1923, the upscale retailer had grown from a small discount storefront operation to one of the world’s largest specialty apparel stores, with a ritzy, 170,000-square-foot Manhattan flagship store housing more than 30,000 men’s suits and a wide array of designer apparel for women, and a recently opened, 10,000-square-foot satellite store in the Wall Street area. Annual sales had grown to more than $100 million.

It called on advisers at Goldman, Sachs & Co. to raise equity capital to establish a new business called Barneys America that would open small, upscale clothing shops in malls.

At Goldman’s Tokyo office, U.S.-educated Masa Mochida sensed a good match in Isetan Co., a retailer whose president, 42-year-old Kuniyasu Kosuge, is a member of the founding family’s fourth generation. The department store chain, akin to Nordstrom in its merchandise mix, is the sixth largest in Japan, with about $4 billion in sales last year.

“The key was finding a good fit of people,” said Robert Pressman, 35, Barneys’ executive vice president of finance and operations. His father, Fred Pressman, is president, and brother Gene is executive vice president of merchandising and marketing.

Initially, the Pressmans made contact in October, 1988, with a New York-based Isetan official, general manager Yuzaburo Miyake. Soon after, Isetan and Barneys representatives met in Japan, and “it was a very good fit almost from the beginning,” Pressman said. “We liked very much that they were fourth generation and we were third.”

Largely thanks to Mochida, a University of Pennsylvania graduate who one participant said served as a bridge between the two cultures, negotiations proceeded apace. By January, an initial agreement had been struck.

The negotiation process entailed getting comfortable. “In the beginning, everything was very formal,” said J. Markham Green, a Goldman Sachs partner in New York. “As they got to know each other, the cultural differences really broke down. Now they’ve got a really kind of fun friendship.”

Isetan agreed to make a minority investment in a new retail company that would open small specialty stores in malls. Barneys, meanwhile, would make a minority investment in a joint venture with Isetan to operate stores in Japan under the Barneys New York name. The total investment will run into several hundred million dollars.

The reciprocal agreement is unusual. Other well-known clothiers, including Brooks Bros. and Paul Stuart, operate in Japan strictly under a licensing arrangement, with Japanese having full control of the franchises.

Barneys New York’s first Japanese store is planned for opening late next year near the central Tokyo train station in the Shinjuku section; first-year sales are projected to be $40 million. (By 1994, the partners also expect to have 25 small U.S. stores with revenue exceeding $100 million; one is slated to open next February in South Coast Plaza.)

Other stores are being discussed for Singapore, Thailand, Hong Kong and Malaysia, where Isetan has operations.

For Barneys, Japan represented a “wonderful consumer market,” Pressman said. “They are extremely sophisticated, with complete knowledge of fashion and quality.

“Also, we think the market in Japan . . . is shifting to more specialty stores. (The goal is) to deliver specialness.”

One of the biggest adjustments, Pressman said, has been to Japanese land prices. Prime real estate goes for as much as $35,000 a square foot, compared to $2,000 in New York or Beverly Hills. On the other hand, Japanese sales per square foot can run $3,000 a year, 10 times those of the average U.S. retailer.

Barneys will also have to cope with Japanese practices that vary drastically from U.S. methods. In Japan, for example, most of the merchandise is supplied by wholesalers who control designer labels through licensing agreements. Any unsold merchandise is returned to the wholesaler. Markdowns are almost nonexistent.

Barneys expects to take a different approach, importing some private-label and designer merchandise directly. But Pressman said full details have yet to be worked out.

He is certain of one thing, though.

Given the Japanese bureaucracy, “if you do it alone, it will be extremely difficult. If you can do it with a good joint venture partner, the process is very comfortable and pleasant.”

Pressman even took some good-natured ribbing from the golf-loving Isetan folks when the two teams were in Hawaii closing a deal. A novice golfer, Pressman was complimented for having the “most unique” score at a fancy club--120 for nine holes.

He’s planning to do a bit better next month on a ski trip with some of the Isetan principals next month in Deer Valley, Utah. He expects the friendships--and the joint venture--to last a long time.

“We view it,” he said, “as a lifetime project.”