Arco’s Gamble on Change in Japan : Retailing: Believing that consumers are willing to abandon high levels of service for convenience, the oil giant is boosting its stake in a gas station/mini-market operation.

On its face, it seemed an improbable match.

Here was Atlantic Richfield Co., pioneer of the “less is more” philosophy characterized by low prices and high volume through cash-only, serve-yourself gas and help-yourself hot food.

There was Kyodo Oil Co. of Japan, where service is king, gas prices are fixed and health regulations ban self-serve gasoline and prevent consumers in some parts of Tokyo from helping themselves to their own food.

Yet two years after the two oil firms entered a licensing agreement to operate am/pm mini-markets in Japan, Arco’s am/pm International announced Thursday that it would increase its involvement by taking a 25% equity stake in Kyodo’s new firm, am/pm Japan Co. The investment, whose value was not disclosed by Arco officials, will help Kyodo establish 74 new am/pm outlets this year, for a total of 100.

If the partners can succeed in transplanting Arco’s serve-yourself mentality, it would represent a startling change in the tastes of the pampered Japanese consumer. Officials say it would also give encouragement to other U.S. firms hoping to break into the Japanese market. But Kyodo President Kazushige Nagashima said profitability is still down the road. It won’t come until the firm establishes at least 200 outlets, he said.

“There are significant differences between the industries in the United States and Japan,” said Joseph Tebo, president and chief executive of am/pm International. “But we think the market in Japan has got to change. As it changes, we think Kyodo will be able to provide the services that this new consumer may want, which we believe will trend toward convenience and price, rather than quality and service.”

The idea that the Japanese consumer would ever begin to stress price over quality might startle some. But Kyodo--which operates 6,400 stations throughout Japan and ranks as the nation’s third-largest oil company--says change is definitely in the wind.

In fact, Deputy General Manager Yukiatsu Akizawa said Kyodo hooked up with Arco precisely because it sensed that consumers were changing and competition among gas retailers in Japan would begin to heat up. Prices are generally fixed through “consensus” among dealers and government officials, and, except in the Osaka area, are rarely advertised.

Yet because of extremely low sales volumes--an average of 15,000 gallons per month per station, compared to 80,000 per month in the United States and 225,000 at an Arco station--about half the stations in Japan are believed to be unprofitable and ready to go belly-up.

Meanwhile, Japanese authorities in 1988 responded to changing consumer demands by abolishing a fire regulation preventing food and fuel from being sold together.

As a result, Kyodo began looking for ways to survive in what it believed would be a new age of competition in convenience, service--and eventually price.

At about the same time, Arco was expanding its international operations and eyeing an entry into Japan. The two sides were brought together by Robert Brasch, president of Pacific Partners Inc., whose parent company, World Trade Bancorp of Beverly Hills, will take a 7% equity stake in am/pm Japan.

“Arco not only delivered gas, but met other consumer needs. They were the only ones in the world we found that could do that,” said Akizawa, who also serves as managing director of am/pm Japan Co.

Since entering a licensing agreement in 1988, Kyodo has established 26 outlets in metropolitan Tokyo. Although that number is far below the threshold level of 200 needed to accommodate mass advertising, Kyodo president Nagashima said the slow pace was deliberate.

“As in any new business, when you first start, you make sure to build a base that is strong and steady. But I do believe we will become a major player in the market,” he said.

Kyodo has had to cope with a myriad of questions on how to adjust the Arco concept to the Japanese market:

* In a nation with no self-serve gas, how do you lure consumers out of their cars and into the store? Kyodo may follow the example in Oregon, which also bans self-serve. There, am/pm requires drivers to come into the store to pay.

* In a nation with fixed gas prices, how do you lower costs? Kyodo is trying to streamline its operations, possibly by using one cashier for both food and gas, as is the U.S. practice. Currently in Japan, Kyodo uses separate cashiers and attendants for food and gas. But cost containment isn’t the only reason for leaner operations; a looming labor shortage is forcing Kyodo to make do with less.

* What does it mean when 80% of Japanese customers walk to the mini-marts, compared to the 90% of Americans who drive to them? Inventory has to be different, with more reading materials and household items for the Japanese, who view the stores as more of a place to browse than pick up quick snacks and “Thirsty Two” drinks.

Then there are the questions that never come up in the United States. How, for instance, do you keep the rice in obento, the box lunches served alongside hamburgers in Japan, from getting unappetizingly hard? Easy enough: You work with food vendors to deliver more frequently.

And some questions may have no immediate answer. Japanese health inspectors have blocked the importation of am/pm’s precooked U.S. hamburgers into Japan. Differing standards have similarly plagued U.S. sellers of baseball bats, skis, garbage disposers, citrus and a host of other products; am/pm will use the more expensive Japanese beef until it can reach a resolution.

For am/pm International, the Japanese market is just one of several it has begun to enter in the last few years. It plans to open stores in Thailand and South Korea this year and has recently entered Spain, Canada and Taiwan.

For Kyodo, the joint venture offers a chance not only to take on the other oil companies in Japan, including Esso, which recently opened about five mini-marts in Japan. With 6,400 stations, and a program to buy new sites for stores, Kyodo eventually hopes to take aim at the king of convenience stores in Japan.

“Initially, our purpose was to compete against other Japanese oil companies,” Nagashima said.

THE COMPANIES Kyodo Oil Co.

Operates 6,400 gas stations in Japan.

Largest operator in Tokyo; third largest in Japan.

Has opened 26 am/pm mini-markets in Japan.

Expects to open 74 more stores in 1991.

Annual 1989 revenue was $10.1 billion.

Atlantic Richfield Corp.

Operates 1,500 gas stations in the Western U.S.

Largest marketer in the West; eighth largest in the nation.

Operates 800 am/pm outlets worldwide.

Will open stores in Thailand and South Korea this year.

Annual 1989 revenue was $16 billion.