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Challenging Japan With a New Brand of Retailing

TIMES STAFF WRITER

HISAYAMA, Japan

Rice farmer Yoshimi Abe, 74, stands beside a shopping cart here at the grand opening of Japan’s largest mall and thinks about his ancestors. In place of the staple Japanese grain the land produced for centuries, his 3.5 acres recently sprouted a Costco discount store.

“My father and grandfather farmed these fields. The saddest part is that this land will never again be turned back to rice,” Abe said, looking slightly uncomfortable in a suit. “But we didn’t really have any choice. . . . Most of us farmers don’t have successors anymore.”

Although the Torius Mega Mall, which opened April 23, paves over a small piece of traditional Japan, it also provides a road map for the nation’s future.

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Amid the gloom and doom of this beaten-down economy and Japan’s pronounced resistance to change, innovative companies such as Torius are breaking once-sacred rules and challenging vested interests--steps many economists believe are essential if the world’s second-largest economy is to become a modern consumer-led service and information society.

That is one reason Torius is starting in this regional suburban market, where competition and resistance are less fierce and new approaches more easily accepted. Success here, the company believes, will help it build the momentum needed to take on traditional players in markets such as Tokyo and Osaka.

The 62.5-acre project, five times the size of the Tokyo Dome, Japan’s preeminent baseball stadium, looks as if it could be in an American suburb. In fact, it’s been billed as Japan’s first American-style mall.

The shopping center has a leisurely layout astride a highway 20 minutes from Fukuoka. In cramped, mountainous Japan, a nation of 125 million people squeezed into an area smaller than California, having so much space on a single level is almost unheard-of. Most projects go high in the air and deep underground on small, cramped floors to make maximum use of the land.

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“I’ve never seen anything so big,” said Tetsuko Aratsu, 65, the wife of a local farmer, gazing across the 4,500-car parking lot. “I remember when the first bank came into town, but this is really something.”

In addition to its size, the project breaks new ground in several other respects--all of which are part of a plan to circumvent the high land costs, unusual business practices and burdensome regulations that underpin Japan’s teeth-rattling retail prices.

“With the collapse of the economy, the conventional way of doing business in Japan doesn’t work anymore. Japanese consumers are defensive, tightfisted and afraid of losing their jobs,” said Takashi Hirayama, Torius’ founder and president. “This project is my response.”

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Perhaps Hirayama’s greatest feat was gaining approval to convert rice fields to commercial space, but only after years of navigating Japan’s labyrinthian bureaucracies. Countless other Japanese and foreign developers have failed at similar conversions, including billionaire financier George Soros and Japanese real estate giant Mitsui Fudosan.

“It’s almost impossible to turn farmland to another use,” said Yoji Otani, an analyst with HSBC Securities.

In another unusual move, Torius leased rather than purchased the land, allowing aging local farmers to earn five times more money by signing a contract than they would straining their backs in their fields.

Putting farmland to more productive and efficient use is another prerequisite if Japan is going to make its creaky domestic economy more globally competitive, analysts add.

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In another departure, Torius has managed to attract retailers amid Japan’s worst postwar recession by assuming far more risk than other Japanese developers. It’s offering flexible and relatively inexpensive terms to tenants, so that instead of shelling out a fixed monthly rental amount, for example, the retailers can pay Torius 10% of their sales.

Torius also charges only limited “key money,” a nonrefundable fee most landowners here demand from renters that is somewhat analogous to points on a mortgage. These unusual steps have led some tenants to call Hirayama a “visionary” and “the movie star of Japanese retailing.”

Furthermore, Torius is not affiliated with any of Japan’s keiretsu, or main business groups. Malls have traditionally been built by major department store groups that won’t rent space to competitors. Torius’ independence allows it to work with a range of retailers, providing Japanese consumers with greater choice.

Torius’ low cost structure and its willingness to test old assumptions has also provided a Japanese foothold for foreign retailers like Costco, whose innovative (at least by Japanese standards) marketing strategies are in turn threatening to shake up other sectors of the retailing industry.

Costco is delighting customers and alarming competitors by aggressively cutting out middlemen and reducing final prices.

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Torius is even trying to bring a bit of mall rat culture to Japan. Most shopping centers here discourage customer dallying as an impediment to shopping. Torius figures to distinguish its mall with a petting zoo, Japanese bathhouse, lots of benches, a game center and free parking. “I’m sure people will come just to hang out,” Hirayama said.

On opening day, customers invaded the much-talked-about mall. They crowded the aisles of Costco, pushing oversized shopping carts laden with everything from sushi and diapers to laptop computers and dog food.

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“Things are really cheap,” said Michiko Hosino, 44, owner of a small manufacturing business, her cart overflowing with loaves of bread and tins of Danish cookies. “We tend to buy in bulk because we’re working, so this huge cart is great.”

Over at the B Mart, a Japanese version of Kmart, the goods were also flying off the shelves. And a Timberland outlet store hit its seven-hour sales target in the first two hours.

On the service front, customers also applauded Costco’s liberal return policy--there are no returns at most Japanese stores--wide aisles and selection of well-known Japanese brands at a discount.

In fact, Costco was far and away the biggest attention-grabber among customers, the Japanese press and even competitors, who flocked the aisles shaking their heads, scribbling prices in notebooks and taking pictures of the layout and decor.

“This will really have a big impact on Japan,” said a fretful Teichiro Noguchi, president of Blue Grass Co., a chain of 470 apparel stores, as he fingered towels packaged by the dozen for $24--about half the price elsewhere. “I’d buy these myself, but they’re too big to get on the plane.”

Noguchi said he made the two-hour flight from Tokyo to see what all the industry buzz was about and ran into several other competitors at the airport and in the aisles. “The prices are so much less than I thought,” he said. “The customer may be happy, but it’s bad for us.”

Indeed. Elsewhere, homemaker Shinobu Kurose, 52, waxed enthusiastic over a package of eight mackerel priced at $5.12; she usually pays $16.66. Mitsuko Kawabata, a fortysomething woman with a family, said the best price she’d seen for car baby seats before this was $250. Costco’s price: $100.

Toys R Us made a splash in 1991 when it fought its way into Japan, and Office Depot and McDonald’s have also been very successful. But Costco is the first U.S. discounter offering a broad range of consumer products. The company may also benefit from some excellent timing, as mounting pressures on the old economic order begin to force change on Japan.

“Costco is one of the most successful retailers in America,” said U.S. Ambassador Thomas Foley, who flew from Tokyo for the opening. “This is a symbol of the modernization of Japan’s retail industry.”

Seattle-based Costco, with 303 warehouse outlets worldwide and annual sales of $24 billion, enters the fray at a time when traditional Japanese retailers are under enormous strain amid a deteriorating economy and more value-conscious consumers. The collapse of the old order is perhaps epitomized by the closure this year of Tokyu department store’s Nihonbashi branch, which traced its roots to 1662.

Indeed, Costco believes Japan’s crumbling economy, newly defensive consumers and weakened old-guard competitors provide a favorable environment for the company to succeed here.

“While we certainly want to see the Japanese economy grow and develop, we tend to do well when economic times are relatively tight,” said Mike Sinegal, country manager for Costco. “People want to save money.”

In marked contrast to the strategy of other foreign discounters, 90% of Costco Japan’s inventory will be Japanese products suited to Japanese tastes, Sinegal said. “We don’t want to be here as a Japanese museum of American goods, where people come and no one buys.”

And Costco’s expansion plans will benefit from the pending relaxation of Japan’s notorious large-store retail law. That set of protectionist regulations, long opposed by Washington, has in effect required major retailers to first gain the approval of every mom-and-pop store in a neighborhood before the large retailer could locate there, and then stay closed almost a month each year so as to be less of a competitive threat.

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Costco is also taking aim at one underpinning of Japan’s much-criticized retailing industry: its middlemen.

Most major stores in Japan operate on a consignment basis, with the risk and inventory costs assumed by wholesalers. In a bizarre twist, therefore, Japanese retailers are often less in touch with their customers than are the middlemen, who actually take the risks.

Following the pattern of its successful U.S. model, Costco Japan cuts out the middlemen wherever possible by negotiating directly with manufacturers and selling in quantity to its members, who pay dues of about $30 a year.

The company is now buying more than 50% of its inventory from manufacturers, posing a direct threat to Japan’s labyrinthian distribution system--although Costco would probably need more stores to really make an impact.

Costco officials try to downplay the threat they pose to Japanese distributors, saying it is the struggling economy that is forcing less efficient players into bankruptcy or out of business.

But the threat is unmistakable.

“This is a power struggle,” said Akihiko Nagatsuka, sales director with Kashimura, a wholesaler of film, binoculars and cameras. “Whoever is strong will survive in this industry.”

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* VIRGIN TERRITORY

Entrepreneur Richard Branson has ambitious movie theater plans for Japan. C4


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