Consumer and Shopper Insights July 2012 Online retail in Japan: Too late for new entrants?E-commerce sales are on track to hit $62 billion by 2016.By Brian Salsberg and Yuka MoritaTo get a reputation for foresight, here’s a drugs, food and beverage, beauty care, of online shoppers visit it. Amazon is thesimple rule: If you predict a number, omit and consumer electronics. It features 95 only non-Japanese online retailer of anya date. If you mention a date, fudge the million products and more than 35,000 significance (Yahoo! Japan, a shoppingnumbers. McKinsey opted to forgo this associated merchants; merchandise sales portal, is not a retailer) with an estimatedadvice in March 2010, when we published (i.e., excluding tickets and downloads) is 500 billion ($6.2 billion) in sales. Founderour analysis of the future of Japan’s online about ¥1 trillion (US$12.5 billion). More and CEO Jeff Bezos is aiming for 30% aretail market. We forecast then that online than three-quarters (76%) of online year revenue growth. Amazon’s service,shopping (a $33 billion market in 2009, shoppers say they visit Rakuten. including free and same-day delivery,excluding non-physical goods such as which competitors have begun to copy, hasdigital media and tickets) would grow to Amazon Japan, launched in 2000, remains earned it profound consumer loyalty. The$56 billion by 2015. We also predicted an ambitious and shrewd number 2; 62% company is pushing into new categories,that e-commerce standouts Rakuten andAmazon Japan would continue to increase Exhibit 1: The e-commerce growth opportunitytheir market share and squeeze out thosewhom we termed “slow movers.” Japan retail e-commerce revenues, actual and projected JPY trillionsSo how did we do? Pretty well. By 2011, 5,000 4,753 4,548Japanese e-commerce retail spending 4,500 4,135 4,346 3,905had already reached at least $46 billion. 4,000 3,637 3,347With growth running at 7%, that puts the 3,500 2,988market on course to exceed our headline 3,000 2,680 2,500 2,394figure of $56 billion by 2015 and hit $62 2,091 2,000billion the following year. 1,500 1,000As for the Rakuten/Amazon juggernaut: 500The two giants continue to outgrow the 0market significantly, with a combined 2006 07 08 09 10 11 12 13 14 15 2016market share that grew from an estimated32% to 40% in just two years and could Excludes CtoC, motor vehicles, ticket sales, travel, online gambling, delivery food, returnshit 50% soon. Rakuten, launched in 1997, SOURCE: Euromonitor 2012, METI, McKinseycontinues to lead most segments, including
including food and most importantly Exhibit 2: Japan’s top 10 online retailersfashion; it is also adding new distributioncenters to its current nine, and is 1 Rakuten Largest e-commerce retailer (80 million users)preparing to launch a Japanese version of 2 Amazon Biggest online book retailer; also offers general merchandisethe Kindle. 3 Yahoo Online information portal that offers online shopping in addition to its search engine and Internet directoryBut interestingly, of the top 10 Japanese 4 Japanet Takata Direct sales company, based in Kyushu. Established in 1986, startede-commerce companies, only Joshin, online sales in 2000.an Osaka-based consumer electronics 5 Senshukai Catalog retailerretail store operator with about $5 6 Start Today Operates ZozoTown website, established in 1998; specialty is apparel.billion in total sales (online and off), is 7 Nissen Mail-order/catalog retailer targeting women 25 to 59;a bricks-and-mortar player. Two others 8 Joshin Denki Leading large-scale discount consumer electronics chain operator.are traditional catalog players (Nissenand Shensuaki). Compare this to the US, 9 Dell Dell’s Japanese subsidiary; sells PCs and peripherals.where, seven of the top 10 online retailers 10 Stream Online retailer of PCs and home electronics.are traditional heavyweights like Sears, SOURCES: Fuji Keizai, company websites, Teikoku Data Bank, Toyo KeizaiStaples, Office Max, Wal-Mart and BestBuy. assortment, and the in-store experience. There are two reasons for the relative Online retail, by contrast, is all about weakness of pure online retail plays inWhy the difference? Japanese bricks- fulfillment and logistics, plus the online Japan. First, the strength of mega-portalsand-mortar players have been reluctant shopping experience and the customer such as Rakuten (and to a much lesserto invest too much online, largely lifecycle management (CLM) engine. It extent Yahoo! Shopping) and onlinebecause they generally enjoy privileged has taken a long-time for traditional fashion malls such as the Zozo network ofpositions in their traditional space. retailers (in Japan and elsewhere) shopping sites, make it more difficult toDue to self-reinforcing mechanisms to realize just how complicated and compete without significant investmentthat favor the status quo, Japanese demanding online retail is. And when in infrastructure and marketing tocompanies tend to be slower than they have tried, the going has often attract enough eyeballs. Second, inAmerican ones to accept change and to proved rougher than they expected. some categories, such as CE, convincingreinvent themselves (a case in point is the Yamada Denki, a major consumer Japanese manufacturers to source supplydistinctly old-school department stores). electronics chain, for example, launched at their best prices is a challenge.This is problematic because the keys to the online Yamada Mall in 2010, but salessuccess for online stores and physical are running well short of projections. There are some high-flyers: sales atstores are entirely different. Start Today, which operates the fashion- Even the bricks-and-mortar e-commerce forward ZozoResort site, and MOA, whichFor more than a decade, Rakuten, leaders, including Uniqlo, Japan’s runs a popular CE site called A-price.Amazon and others have grown, and top apparel retailer, get only a small com (in addition to stores on Amazontaken market share, at a fierce pace. Even percentage of their total sales online. and Rakuten), are growing fast (54%so, many traditional players still have not Consumer electronics (CE) is a particular and 57%, respectively, from 2008 tobuilt many of the capabilities required anomaly. Three firms dominate (Yamada 2010). In 2011, ZozoTown’s revenuesto succeed online. The president of Denki, Yodabashi Camera, Bic Camera). were JPY 80 billion ($1 billion). Successthe online unit for Seven&I Holdings Still, online revenues account for less has come from exploiting a gap in the(the parent company for a number than 10% of the total, compared to 24% market (online fashion) and also fromof groceries, 7-Elevens, department and growing in the U.S., according to the an innovative business model. Whilestores and other entities), recently told NPD Group. Stores in Japan have little ZozoTown holds most of its inventory onthe Nikkei, Japan’s leading business incentive to push customers online; for consignment, it provides turnkey servicesnewspaper, “We are behind devoted their part, consumers find in-person to its “tenants,” including ordering,online retailers by at least 10 years in shopping simple enough because CE shipping, warehousing and even modelsterms of services and technologies.” stores are ubiquitous, particularly near and photographic services. Interestingly, commuter train stations. ZozoTown recently launched a printedFor traditional retailers, what matters catalog, indicating that even thismost are location, merchandise
of online stands out. We believe that had never bought groceries online. The retail e-commerce in Japan will opportunity is implied in the response to continue to grow in importance. One a follow-up question: only 37% said that statistic that supports that assertion: they never would. the number of Japanese consumers shopping online from their PC ten or So there are an awful lot of people who more times per year has increased are at least theoretically willing to markedly (from 37% of total consumers buy food online. And, in fact, they are to 49%), with mobile shopping also beginning to do so: F&B is the fastest increasing. -growing online category (22.6% via personal computers, 37% via mobile) and Still, there are certain areas where among the most fragmented. (Rakuten Japanese consumers appear loathe has a dominant share, but this is an to do their buying remotely. One is aggregator of thousands of merchants luxury. In recent research on Japan’s too small to go at it alone) . Demographics luxury market, we asked consumers are also in the category’s favor: A growing what elements they valued most about number of homebound elderly people the in-store buying experience. The top could learn to value the convenience two answers were: 1) The staff was kind, of shopping by click. At the same time, and 2) The staff was knowledgeable. In younger consumers who grew up with effect, consumers were telling us that online retailing can be expected to rely they value the experience of buying on it more than their parents.successful online firm sees multichannel luxury as well as the actual ownershipas the winning model in Japan. of the product. But while we expect Aeon, Seven&I and Seiyu have all been luxury buyers to continue to favor pursuing the online F&B market, whichTwo other companies are worth a stores or e-commerce, even here, we see is beginning to reach critical mass.mention—if for no other reason than room for growth, particularly for more According to the Fuji Kezai Group, onlinethat they could be considered takeover moderately-priced items, helped along food sales are 78 billion ($9.7 billion).bait for a hungry attacker. Oisix, by the likes of Gilt.com and other event/ Ito Yokado (flagship GMS in the Seven&Iestablished in 2000, specializes in time sales sites. group) has the largest market shareonline sales of organic vegetables, and (43%), followed by Aeon, 23%; and Seiyu,has also established alliances with Catching up with Rakuten and Amazon 17%. All the major food retailers say theysome 400 physical stores. Sales are an Japan is a stretch; there is little reason are committed to increasing online sales.estimated $100 million. Then there to believe they are about to falter. Still,is Japannet, which began as a home there are some areas of particular It is too early to declare a winner here,shopping CE player. Its online division, promise, such as online groceries and but given the fact of continued retailwhich started in 2000, has estimated skincare/cosmetics. These online consolidation, we see a time when a smallsales of $577 million. categories are smaller than the top three number of firms will build nationwide (CE, apparel, and books and software), businesses with superior customer but are growing faster. experience and ordering and same-dayComing soon: The shape of the or next-day fulfillment. Gaining marketmarket to come For online grocery, look at it this way: the share won’t be easy, with the likes of UK, like Japan, is a densely populated Oisix and Amazon joining the food fight.So that is where the online market is now. island nation. In Britain, online grocery Moreover, given the razor-thin marginsWhere is it going? is massively popular. Not so in Japan. typical of the business, success willTotal retail sales in Japan have dropped The difference may be that Japanese require ensuring the right fulfillmentevery year since 2006; over the same shoppers are pickier; there is evidence model (typically a combination of in-storeperiod, online sales have grown strongly. that they like to do their own quality and warehouse); a competitive shippingThough the rate of growth is slowing checks and value the in-store shopping policy; the right combination of same day,(down from 9% in 2006-11), given the experience. Indeed, a recent survey next day and “click-and-collect” delivery;dismal overall market, the performance found that 70% of Japanese housewives and the right basket mix.
The skincare/cosmetics category is that going online would damage its a 50% market share), but the window isanother fragmented online category relationships with its own outlets as well still open in others. But maybe not forwith potential. According to Fuji Keizai, as department stores and pharmacies. long. As Amazon, Rakuten and ZozoTownonline computer sales in the category The site offers most Shiseido products to continue to grow and to please theirare growing a22% a year, and via mobile, shoppers, but also encourages them to many loyal customers, new entrants will35.8%. At the moment, the online leaders go to the actual stores, referring them to need to either (a) focus on less-developedare largely single-brand catalog players the closest ones and helping them to set sectors or (b) leverage their brick-and-like DHC and Orvis. No formidable up appointments for services. Given the mortar presence, plus mobile, to create adedicated multi-brand portal, such as a ambivalence of the sector’s major players, compelling multichannel proposition.Sephora or a Douglas, exists. (Cosmetics we think the eventual Internet winneradvice site @Cosme has tried to in this category could well be someone http://csi.mckinsey.comtransform itself to a retail category killer we haven’t heard of yet -- a disruptiveof sorts.) While Shiseido and others have attacker with little to lose. Brian Salsberg is a principal insaid they plan to invest heavily in online, McKinsey’s Tokyo office and leader ofthe reality is that they see traditional * * * the Consumer & Shopper Insights center.stores as the lifeblood of their business. Yuka Morita is a business analyst in To answer the question we started with: Tokyo. The authors would like to thankShiseido has 13,000 stores, and only Is it too late for new entrants? The short Tomoko Hibino-Niitani, a knowledgestarted its business-to-consumer answer is yes, it is too late for some specialist, for her contributions to thiswebsite last April, because it feared categories (ie, books, where Amazon has article.