In an article out today Fortune highlighted many of the problems Wal-Mart is having in Japan, a topic we investigated in our report Wal-Mart in Crisis. Wal-Mart is having major issues with its Seiyu subsidiary largely because Wal-Mart is treating Japan like everywhere else and failing to adapt to the highly-developed, culturally-sensitive and retail-rich environment that Japan has been for decades. As a result of Wal-Mart’s lack of cultural and business sensitivity, Seiyu has once again reported worse than expected losses.
Wal-Mart has tried to do in Japan what it tried to do in Germany and South Korea, a strategy that lead to the company’s failure in those two markets:
1. Use an anti-employee management style that is typical of Bentonville, but culturally incongruent with local business practices.
In Germany, Wal-Mart used several techniques that not only violated German law but also ran foul with German culture and created discontent among employees (the company ran an employee “tip” line that was used as an employee snitch line, and forbade dating among colleagues.) Wal-Mart set itself on a similar path in Japan right from the onset, sowing the seeds of domestic employee discontent.
From the Fortune Magazine Article:
First, even before it took full control, Wal-Mart persuaded Seiyu’s management in 2004 to dismiss 25 percent of headquarters staff, including 1,500 employees and managers. That kind of mass firing happens rarely in Japan, which places a premium on social harmony. And when the firing is done at the behest of foreigners, it takes on added negative connotations.
2. Use of British, Canadian and American Executives to run a quintessentially foreign retail operation that relies heavily on understanding local culture.
Like it did in Germany, Wal-Mart is using English-speaking executives to run a retail operation that heavily depends on a detailed understanding of domestic culture. As in Germany, success in Japan depends on understanding local culture, but cultural differences are amplified in Japan. Japanese business culture is significantly different; as the Fortune article points out, Japanese business culture is highly suspicious of foreign-controlled businesses within Japan, and Japanese consumer preferences are significantly different than every other market Wal-Mart runs in. The American companies that have succeeded in Japan have done so by using Japanese executives and allowing a significant amount of autonomy. Wal-Mart however seems to be making the same mistake it did in Germany, relying to much on American executives, and not enough on local control.
One basic question is whether Wal-Mart has the right management in place. Most U.S. companies that have succeeded in Japan, such as McDonald’s, have installed senior Japanese executives to head up operations and allowed them a measure of autonomy. In contrast, Wal-Mart is relying on a team of outsiders, including Brits and Canadians.
Kolodzieski doesn’t speak Japanese. He started his career at Kash n’ Karry Food Stores in Florida, working his way up from store manager to senior vice president of operations. As part of an environmental project, he met with Seiyu executives and visited Japan. But there is little in his background to suggest Japanese savvy. After Kash n’ Karry, he worked at regional supermarkets in the Mid-Atlantic states. Wal-Mart tapped him in 2000 for his supermarket experience. He clearly clicked in Wal-Mart’s culture, because he emerged as chief operating officer of Wal-Mart International.
In his current role he reports to Wal-Mart vice chairman Michael Duke, who heads up Wal-Mart International from headquarters in Bentonville, Ark. Duke, a veteran of 23 years at Federated Department Stores and May Department Stores, also lacks significant international experience, but he seems to call the shots in Japan. According to outsiders and retail analysts, Wal-Mart’s decision-making regarding Japan is centralized in Bentonville.
3. Pushes for global standardized sourcing when the market has domestic loyalties and tastes.
Wal-Mart in Korea failed to understand the atmosphere and taste that shoppers demanded in the country. Wal-Mart in Germany failed to grasp German customs and the particular products Germans have in their households. In Japan, Wal-Mart is making almost identical mistakes in product selection and customer perceptions.
In addition, Wal-Mart has tried to push its monolithic “Always Low Prices” moniker on the Japanese market without fully understanding that Japanese consumers actually associate lower prices with lower quality, and are often willing to pay a premium for high-quality domestically produced products. In an affluent but space conscious society, higher quality merchandise is valued over inexpensive items that may break. Add on top of that Japan’s traditional distrust of foriegn manufactured goods, especially cheaply-made merchandize, and it begins to become clear why Wal-Mart is struggling in Japan.
Japan, like both Korea and Germany, has very selective consumers, and often product preferences will greatly vary from region to region. Local produce and other locally-produced products are valued significantly.
They are frequently quoted in Japanese media complaining about Wal-Mart’s efforts to instill an American operating model in Japan. The company says it is being flexible, but the carping persists: Wal-Mart is moving too aggressively to cut out distribution middlemen; it is making life difficult for managers by mandating that stores remain open for 24 hours; it is introducing products from China and elsewhere that don’t meet Japanese tastes or standards of quality.
“Seiyu became a completely different store after it came under Wal-Mart management,” the magazine Nikkei Business quoted one store manager as saying. “National-brand food product prices have definitely come down, but high-quality merchandise has disappeared from the shelves, and customers have left.”
The heart of the problem, the naysayers argue, is that Wal-Mart’s model of “always low prices” may work in developing, under-retailed markets such as China and Mexico, but it doesn’t work in a country like Japan, where consumers are willing to pay top prices for exclusive goods of the highest quality.
In addition to all these problems, Wal-Mart is probably singularly responsible for the US bullying Japan via the WTO to change Japanese land use policies so as to allow for big box store development. Pushing away local control and land use laws so Wal-Mart can implement its monolithic big box policy in Japan is not a way to gain favor in the Japanese market. Much like the UK, Wal-Mart’s inability to adapt to the market pushed the company to try and force change; to make another country be more like America and ignore local character for the sake of big box sprawl.
It is no wonder the Japanese are not buying into a Wal-Mart-run Seiyu. When all is said and done, Wal-Mart’s poor corporate citizenship actually runs afoul of Japanese business culture and Japanese society. In a country where social harmony and a distaste of foreign control are heavily ingrained in the social and business fabric, the highly-centralized company based in Bentonville, Arkansas, is a world away from ever being successful in Japan.
Wal-Mart Watch Report: Wal-Mart in Crisis