The Japanese distribution system

Distribution channels in Japan are very different from our own; they are as inefficient as they are complex. The system is characterized by multiple layers of wholesalers who have developed close, personal relationships with other wholesalers, manufacturers, importers, and retailers. Moreover, these intimate relationships often serve as an informal barrier to U.S. companies wishing to sell directly to end-users or retailers.

Many American exporters find retailers/end-users unwilling to disrupt their longstanding, personal relationships with Japanese suppliers even when the U.S. company can offer a product of superior or equal quality at a cheaper price. Many Japanese retailers/end-users are unwilling to make the switch to an "unreliable" foreign supplier. They fear a lack of commitment on the part of the foreign supplier will lead to problems. They also fear breakdowns in communication. This state of affairs has led many U.S. new-to-market exporters to complain of the complexity and lack of transparency of the Japanese system.

This system, while inefficient, does offer some important advantages for the participants. First, these close business relationships make it far easier for retailers/distributors to suggest product modifications and improvements. In the manufacturing arena, engineers/designers of supplying parts companies tend to have very good working relationships with the engineers/designers of the final assembler. This helps prevent friction and waste in the design stage and leads to quicker product innovation. Second, this system encourages the sharing of information on product trends, innovations, competition, and overall market opportunities. Because Japanese wholesalers handle products from a variety of sources, they can serve as objective sources of information and provide valuable insights. Third, the business loyalty demonstrated by the parties involved helps reduce uncertainty and tension while contributing to a more cooperative business relationship. In other words, all parties involved tend to work harder for each other rather than to be at odds.

The number of retail outlets in Japan is nearly the same as in the United States, despite the fact that the population of Japan is roughly half that of the United States and Japan is slightly smaller in geographic size than California. Moreover, many of these stores are small-scale operations--"mom and pop" stores--which usually cannot secure credit by themselves or maintain large inventories. They often have financial, ownership, or exclusive arrangements with major Japanese manufacturers, industrial groups, or trading companies. The strength of the multiple layer is in the ability of the Japanese wholesalers, in their capacity as middlemen, to provide appropriate and timely market information as well as financial support to smaller manufacturers and retailers with limited resources. Also, retailers want to avoid maintaining large inventories because of limited space and high storage costs, so they delegate this function to the wholesaler. Thus, it is obvious that the role of the wholesaler in commercial transactions in Japan is very important.

In many product sectors, it is virtually impossible for the manufacturer to sell in volume directly to the retailer or end-user. If the market is one in which there is a large number of smaller end-users located throughout the country, it may be necessary to rely on a network of wholesalers. Where the buyer universe is relatively concentrated among a limited number of large firms, marketing may be direct or through a single intermediary. Distribution channels in Japan vary considerably from industry to industry and product to product with particular differences between consumer and industrial goods. A key consideration is to answer the question, "Who has control over the channels of distribution which provide access to my market?" Your firm must understand existing distribution channels in order to utilize them or develop an innovative approach. To reach your potential customers, you may have to rely on a wholesaler or trading company which controls related distribution channels for your product.

Another factor to consider when exporting is that Japanese retailers and end-users rarely have import experts and must depend upon trading companies or importers with good English language capability, extensive knowledge of import procedures, and overseas financing capabilities. For this reason, even large prestigious department stores are inclined to rely on outside sources for importing.

Direct sales are more common for expensive, high-tech equipment (but only when the company has made arrangements for after-sales service). In some capital goods sectors, Japan has a number of small firms which function as subcontractors for larger manufacturers. Small- and medium-sized firms supply the majority of manufacturing industries with most of their products. To sell to these firms, it is often necessary to follow a multi-layered distribution system and develop relationships with product engineers and designers. In retail, the market is in the process of change. Significant alterations in Japan's Large Scale Retail Store Law have eased restrictions on opening of new large retail stores (supermarkets, chain stores, etc). The original law protected the smaller "mom and pop" operations. There has been a substantial increase in the number of applications to open new retail stores since the reforms have been announced, despite the fact that the smaller operations still represent very powerful local lobbies in Japan which try to impede the establishment of new large-scale stores.

Because exporting is a long-term process which requires establishing a presence in the market, developing a client base, and servicing customers, a company should thoroughly familiarize itself with the various distribution channels. Initially, finding a distributor may be desirable for successful penetration of the market in order to respond quickly to the needs of Japanese buyers and to obtain the latest information on consumer trends. The U.S. firm needs to determine the identity, locations, and needs of its customers before choosing an appropriate distribution channel. In addition, the firm should study the existing distribution system for similar products in Japan and learn how to best utilize it. It is vital that a firm choose wholesalers which distribute to retailers that sell in sufficient volume. It may be possible to circumvent existing channels or develop an innovative approach, but until a firm completely understands the existing system and personal relationships involved, it will be taking unnecessary risks that can potentially do more harm than good. The Japanese partner can be of tremendous aid in identifying and accessing the proper distribution channel. This is one of the most important reasons why a firm should take the time and effort to select a qualified Japanese business partner that it can comfortably communicate with. Industry sources stress that good communications often determine the level of commitment distributors make to products.

Once a U.S. firm is doing business in Japan, it is very important that it, and its Japanese business partner, maintain close relations with wholesalers or end-users. Developing close relationships entails making business trips and socializing after hours. In Japan, the wholesaler often performs the marketing function for overseas suppliers. Do not fall into the trap of trusting the wholesalers with full responsibility for making product presentations to retailers and end-users. Since it is your product, you are in the best position to effectively highlight your product's strengths and attributes. It is important that your Japanese business partner and personnel from your firm, along with the wholesaler, make direct and enthusiastic presentations to retailers or end-users. This also demonstrates your commitment to the market.

Normally, manufacturers in Japan provide sales support, including after-sales service, advertising, and assistance in handling consumer claims. Often it is necessary to offer rebates in order to get retailers to move a product. The practice of henpin (returning unsold items to suppliers at no cost) is also common. Because importers and wholesalers must charge more to cover their risk, henpin adds to the cost of products. Recently, manufacturers in Japan have also supplied advanced retail support involving computerized data processing systems that provide retailers with point-of-sale (POS) information about customers and electronic ordering systems (EOS). The necessity in providing retail support depends on the size of the retailers involved--smaller retailers will require more assistance from the U.S. firm, its business partner, and its wholesalers. Your firm should develop a strategy that takes these considerations into account. In general, most Japanese wholesalers and importers are not as capable of providing assistance as Japanese manufacturers, and this in turn affects their ability to compete effectively. Your firm might have to take a more proactive role. Of course, the ability of a firm to provide this level of sales promotion assistance depends on its financial strength and its willingness to invest in the Japanese market. Perhaps a cooperative venture with all parties concerned could be arranged.

An encouraging sign is the recent trend towards greater efficiency within the Japanese distribution system, resulting in fewer smaller retailers and wholesalers. Faced with deregulation and changing patterns of consumption, many Japanese companies are modifying marketing and sales strategies to take advantage of these developments. Imports are already benefiting from these trends, as seen in increased sales by Japanese department stores and other mass merchandisers and by a variety of new retailing ventures that match changing Japanese lifestyles. There are also indications that some wholesalers are modernizing and consolidating operations, thus reducing more inefficient elements in the system. However, the process is slow. The characteristics of the distribution system are deeply rooted in the cultural history of Japan.

COPYRIGHT 1993 U.S. Government Printing Office
COPYRIGHT 2004 Gale Group