INVASION OF THE DISCOUNTERS : JAPAN : Bargain Retailers Wage War Against Bureaucrats, the Law

The Jonan Denki Co.’s chain of electronic appliance stores sells videocassette recorders at more than 25% off the standard price here. Branching out into cosmetics, the stores recently began selling imported Chanel No. 5 perfume at 30% less than the prevailing price.

And in March, during the nation’s rice shortage, Jonan Denki’s owner--self-styled “Discount King” Toshio Miyaji-- created a sensation when he bypassed government licensing procedures to sell 12 tons of hard-to-get domestic rice at a deep discount.

In the past, Miyaji, who waged a long guerrilla war against government regulators and competitors to build his high-volume, low-profit-margin business, was viewed as dishonorable if not criminal.

But after three years of recession, Japan’s consumers are tightening their belts, and 65-year-old Miyaji, showing a natural flair for tweaking this country’s increasingly unpopular bureaucrats, is in the vanguard of a discount revolution that has made a success of a variety of low-priced specialty stores and even American-style discount malls.

A folk hero during the rice crisis, Miyaji has emerged as a favorite of talk shows, charming hosts and viewers alike with blistering attacks on bureaucrats and high prices.

Like many analysts, Miyaji blames the high prices of imported and domestic goods on layers of middlemen and a maze of regulations with roots deep in Japanese history and tradition.

“Bad laws ought to be broken,” Miyaji declared boldly to the media as 2,500 people lined up at one of his stores to buy the rice, which he bought directly from a farmer and sold without the required license from Japan’s Food Control Agency. Luckily for Miyaji, the half-century-old law he violated is not clear about punishments. So far he has been left untouched.

He railed in a recent interview against “a wall of bureaucrats” who enforce the system.

“The Berlin Wall collapsed after 28 years,” Miyaji said. “Why does Japan keep 50-year-old laws? The American President is complaining about Japan’s huge trade surplus. In spite of that, the government hasn’t improved the situation. . . . I’m ready to go to jail. Unless someone sacrifices, Japanese law won’t change.”

Regulatory changes and a leaner distribution system here could benefit the United States as well as Japanese consumers, because it would mean foreign imports wouldn’t lose their price advantage by the time they hit the shelves. That might help ease the massive U.S. trade deficit with Japan, which hit $60 billion last year.

Encouraged by the success of stores such as Jonan Denki, bigger Japanese firms are racing to build large, American-style discount stores. Such “Wal-Mart wanna-bes,” in the words of Lehman Bros. analyst Dean Perry, have started to undermine prices here.

Isao Nakauchi, president of Daiei Inc., Japan’s biggest supermarket chain, thinks his company can smash the cozy networks that keep prices high and foreign products out. Daiei’s publicly proclaimed goal is “halving prices in Japan by the year 2010.”

With businessmen such as Miyaji and Nakauchi on the prowl, old-style retailing just isn’t safe anymore.

“Department stores have to meet the price competition,” said Yoshihiro Tajima, a Gakushuin University economics professor. “Price wars have expanded from not only liquor or cosmetics or men’s suits to other broad areas. Some supermarkets started to create discount stores. Now Daiei has several different types of discount stores, including a wholesale club.”

Prices are still far from collapsing, however. Japanese media excitedly recorded the spread last month of a beer “price war” from discount liquor stores to supermarkets to department stores, which in Japan have large food and beverage sections. Major department stores announced price cuts for beer, but only of 2%. Supermarkets and convenience stores knocked off a bit more. But beer is still expensive: a 12-ounce can now costs about $2.15 at department stores, $2 at supermarkets and $1.67 at discount liquor stores.

Pressure from discounters contributed to a 6% drop in department store sales last year, following a 4.7% drop the year before. Meanwhile, Aoyama Trading Co., one of the most successful “category killers”--stores that specialize in narrow categories of goods and then “kill” their competitors by selling at roughly half the normal price--sold 2.4 million men’s suits in 1993, grabbing more than 20% of the market.

“I think this trend is very good,” said Fumihiko Taira, 36, who spoke while shopping with his wife at a suburban Tokyo discount mall. “The market should be free. It’s the law of the jungle: ‘Weak meat is food for the strong.’ Free competition has some problems, I know, but it will bring cheaper prices.”

Japan’s current retail system wasn’t designed to encourage price competition but to protect jobs.

After World War II, faced with the threat of widespread unemployment, Japan sought to protect huge numbers of small family-run retail outlets, which exist within easy walking distance of homes in every neighborhood. As Japan’s economy developed, big department stores specialized in high-quality, high-priced goods and lavish service. Laws protected these economically inefficient but job-producing stores--small and large--from the threat of cutthroat competition.

Layers of middlemen, meanwhile, developed the art of frequent small deliveries of whatever goods the stores needed, eliminating the need for large retail inventories in shops with little storage space or investment capital. Traditions of loyalty to trusted business associates provided glue for the system. Consumers paid a price, of course, but as long as no one rocked the boat and the economy grew, the system seemed to work well for everyone.

During Japan’s high-growth era, only a handful of mavericks refused to play the game. When Miyaji first attacked the system 20 years ago, trouble came quickly. Unidentified hoodlums--presumably acting on behalf of competitors whose prices were undercut--beat up a store clerk, tore down advertising posters and cut the store’s telephone line.

Miyaji persevered, gradually building a chain of six Tokyo stores. But it wasn’t until a few years ago--when Japan’s late-1980s “bubble economy” collapsed into the country’s worst post-World War II recession--that discounting really began to catch on.

Today the retail distribution sector still employs 11 million people. But irreversible change is underway. A key break came in 1990, when, partly in response to U.S. pressure, Tokyo revised its Large-Scale Retail Store Law in a way that allowed the rapid growth of big discounters, despite the threat they pose to mom-and-pop retailers. By some estimates, total annual sales at all kinds of discount stores totaled about $50 billion last year, or roughly half the sales of traditional department stores.

The power to force further change now lies with big firms such as Daiei, which is building an emerging chain of Hyper Mart discount stores.

“Prices in Japan are high because the distribution system is grossly defective,” Nakauchi, the Daiei president, declared in a recent interview with the Nikkei Weekly. “The amount of goods that a machine can produce in one minute is awe-inspiring. We have to be able to sell the goods at the same speed.”

Daiei’s strategy is to build direct links with domestic manufacturers and to take advantage of the strong yen, which makes foreign products cheaper, by selling more imported goods, Nakauchi said. Already a large firm, it took a major step toward greater economies of scale in March by merging with three affiliated general merchandising chains. It predicts that total sales this year will hit about $25 billion, making it by far the largest retailer in Japan.

Nakauchi said the merger puts his company, for the first time, in a position comparable in scale to that of major international retailers such as Wal-Mart Stores Inc., Kmart Corp. and J.C. Penney Co. “We will now, at long last, be able to buy from Southeast Asia and the rest of the world in a big way, “ he said. “In sporting terms, you could say that we have at last made it to the Olympics.”

Full-service department stores, the kind staffed with young women who chirp greetings and bow to welcome customers, thus face intense pressure from two sides: the expanding discount chains and the “category killers.” Department stores are already seeing double-digit declines in men’s clothing sales as aggressive specialty firms like Aoki International Co. and Aoyama Trading undercut prices by selling garments that are either imported or purchased directly from Japanese manufacturers.

Aoyama, now a 520-unit chain, even opened a discount store in Tokyo’s glitzy Ginza shopping district last year. Suits in Japan usually sell for about $750, but Aoyama offers them at about $300. Aoyama is now expanding its selection with J.C. Penney Co. casual clothing for men. It has projected sales of J.C. Penney products at about $75 million for the first year.

The system is also under attack from places like RISM Outlet Mall, an American-style landscaped shopping mall in the Tokyo suburb of Oimachi. About 70% of goods sold at the mall’s 36 discount shops are imports and the rest come straight from factories, according to Yoichiro Nagahashi, a planning official of R’ism Development Co. Prices at this mall are still higher than in the United States, but they run about 40% less than at ordinary Japanese shops and department stores.

Even the outlet mall’s unusual name, derived from English, reflects how things are changing in hard-working Japan. “RISM,” Nagahashi explained, stands for “the ideology of the letter ‘r’--rhythmical life, relationship and relaxation.” Despite the offbeat way they chose a name--which they haven’t bothered to explain to customers--the people running the RISM mall are serious about business.

“This is still small,” Nagahashi said. “But if outlet malls become more popular, it will influence the whole system. Customers for the first time will be able to pick and choose where to go to get products at a certain price. I hope RISM will lead a trend toward a revolution in values.”

Compared to the free-spending “bubble economy” years of the late 1980s, consumer values are already changing.

“Department stores will wrap things up very nicely, but people don’t need that anymore. Maybe they still need it for gifts, but not for their own use,” said Tsukasa Yamada, 35, who was shopping at the RISM mall with his wife and two children. “It’s not so strange that this feeling is disappearing. What’s strange is, why did it exist in the first place?”

Now, growing numbers of shoppers simply want the lowest possible price.

“Foreign products are cheaper here,” explained Mayuko Isobe as she browsed through Jonan Denki’s cosmetics department. “I look in department stores, but I never buy there. I don’t have enough money. I buy cosmetics only at discount stores.”

Times researcher Chiaki Kitada in Tokyo contributed to this report.

Can We Shop?

Discounting--one of the engines driving retail competition in the United States--is just beginning to make its impact felt on retailing in Britain and Japan. With a handful of exceptions, only home-grown staples cost less in those nations than in America.

U.S. British Japanese Product price price price Apples, 1 lb. $0.46 $0.75 $1.97 Big Mac 1.30 2.72 3.74 Bread, loaf 0.58 0.90 1.77 Cable TV, premium service, per month 16.50 47.28 38.35 Camera, Canon EOS 266.00 600.44 648.97 Chicken, 1 lb. 0.65 1.71 4.92 Coca-Cola, one can 0.25 0.38 0.79 Dry cleaning, suit 4.66 11.93 7.87 Dry spaghetti, 1 lb. 0.66 1.47 2.26 Eggs, one dozen 1.57 2.03 1.77 Film, Kodacolor Gold 100, 36 exposures 3.06 6.29 5.65 First-class letter, domestic 0.29 0.38 0.79 Laptop computer, Apple Powerbook 800.00 1,579.16 1,474.93 Potatoes, 1 lb. 0.22 0.30 1.38 Videocassette tape, 120 minutes 2.00 4.50 3.93

Note: U.S. and British prices are as of late January. Prices were converted to dollars using exchange rates for Feb. 1. Japanese prices are as of late April and were converted to dollars using exchange rates for April 29.

Sources: Los Angeles Times Tokyo bureau; Business Age magazine, London.