Creating A Consumer-Oriented Distribution System

4. The Benefits of Structural Reform In the Distribution System

Reduction of Domestic Prices and Expanded Consumer Choice

Consumers are developing more diverse tastes and now demand a wider range of goods and services from which they can choose. They not only want choice, but they also want products that provide greater comfort and a sense of material well-being.
Efforts by the private sector to reduce costs, in line with structural reform in the distribution industry, have led to a long-term commitment to selling cheaper yet better goods. This practice has been criticized by some, however, for generating unwanted deflationary pressure within the Japanese economy.
In general, however, productivity improvements in the manufacturing sector and streamlining in the distribution and transportation industries are indicative of a sustainable response by these industries. Resulting changes, in turn, will help to reduce domestic prices to the level of international prices and will serve to boost real income levels. Consumers now enjoy a much wider range of choice in quality as a result of the cooperative efforts of distribution and manufacturing industries, which have teamed-up to develop safer, higher-quality products tailored to the Japanese consumer.

Table 1: Decline in Consumer Prices - FY '91 vs. FY '94


Household Appliances: VCRs	-29.0%
Miscellaneous Household Goods: Tissue Paper	-13.4%
Clothing: Suits	-9.0%
Alcohol: Imported Wine	-9.4%


Source: Consumer Price Index (Economic Planning Agency)

Greater Convenience for Consumers

Consumer lifestyles have changed considerably in recent years, reflecting social changes such as the aging of the population, urban development and the rising number of women in the workforce. As a result, the distribution industry has changed as well, in an effort to provide new and different services to Japan's changing society.
Following revisions to the Large-Scale Retail Store Law, many retailers have extended their hours and reduced annual holidays, making it easier for working men and women to do their weekly shopping. The number of convenience stores, geared to customer satisfaction in location, hours and services, has increased significantly, as has the number of non-store retailers, like catalog sales firms and vending machines. These changes have also made shopping easier for the elderly and those living in rural areas.

Table 2: Closing Times at Top 20 Supermarkets


Closing Time		18:30	19:00	19:30	20:00	20:30	21:00	22:00
Before Revisions	Number of Stores	8	563	322	380	5	18	9
	% of Total	0.6	43.1	24.7	29.1	0.4	1.4	0.7
After Revisions	Number of Stores	4	98	73	1,112	5	20	12
	% of Total	0.3	7.4	5.5	84.0	0.4	1.5	0.9


Note: May '94 amendments to the Large-Scale Retail Store Law allowed retailers to extend their hours from 7:00 to 8:00 PM without submitting notification, and to reduce the number of holidays from to 44 to 24 without notification. #2 - "Before Revisions" refers to April '94 and "After Revisions" to May of '94.
Source: "Retail Reform", September '94

Table 3: Annual Holidays at the Top 20 Supermarkets


Holidays		44 or More	25-43	24	Less than 24
Before Revisions	Number of Stores	27	559	508	248
	% of Total	2	41.7	37.9	18.5
After Revisions	Number of Stores	6	98	870	368
	% of Total	0.4	7.3	64.3	27.4


Note: Same as Table 2
Source: "Retail Reform", September '94

Table 4: Rise of Convenience Stores and Non-Store Retailers
(In Billions of yen)


	1988	1991		1994
	Total Sales	Total Sales	Increase (%)	Total Sales	Increase (%)
Convenience Store	5,013	6,985	39.3	8,335	19.3
Home Sales	13,101	16,640	27.0	14,266	-14.3
Mail Order / Catalog Sales	1,359	2,122	56.1	2,462	16.0
Sales from Vending Machines	1,032	1,382	34.0	1,569	13.5




Note:

A convenience store is defined as a retail outlet with at least 50 and no more than 500 Square meters in sales floor area, of which no less than 50% is self-service, and which is open at least 12 hours daily and/or closes after 9:00 PM.
This definition includes non-chain stores and those not open 24 hours. Home Sales refers to sales in the home or similar location by visiting sales representatives, including automobile sales.


Source: "Commercial Statistical Survey" (Ministry of International Trade and Industry.)

Efficiency Improvements to the Overall Distribution System

The appreciation of the yen is steadily making our worst fears about the hollowing out of industry, into stark realities. Japan's most pressing task is to boost the overall efficiency of all domestic economic activities, from production through consumption, as a single unified system, in order to guarantee employment levels.
Distribution, manufacturing, transportation and related industries are utilizing information technologies which link diverse areas such as product planning and development, production, ordering, retailing, inventory control. transportation and accounts payable. Integrated management and operation in a number of these areas, albeit on a limited scale, are helping to reduce costs. In this way, although there is still room for further efficiency in the areas of business practices, transportation, sales management, in general, the manufacturing, distribution and retailing industries are working together to streamline and integrate the wholesaling industry. Their efforts are in fact eliminating some "wholesalers or middlemen" who have long symbolized the inefficiency of the Japanese distribution industry.

Table 5: Declining Size of Distribution Industry Relative to GDP


	1982	1985	1988	1991	1992	1993
Added Value in Distribution Industry/GDP (%)	14.9	13.4	12.9	12.8	12.8	12.6


Source: Annual Report on National Accounts (Economic Planning Agency)

Table 6: Decline in the W/R Ratio


	1979	1982	1985	1988	1991	1994
Total	2.65	2.93	2.74	2.63	2.69	2.50
Food Products	2.59	2.57	2.58	2.48	2.44	2.22


Note: W/R Ration = (Wholesale Sales - Sales to Industry - Sales to Overseas Buyers) / (Retail Sales)
Source: Commerce Industry Statistics (Ministry of International Trade and Industry)

Urgency of New Business and Job Creation

As noted in Keidanren's Interim Recommendations of the Committee on New Industries/New Businesses titled "Proposals for the Creation of New Industries and New Enterprises" (July '95), given the maturation of Japan's leading industries, the most important priority for industrial policy is revitalizing the economy by creating new industries and businesses, which will in turn create new jobs.
Structural reform in the distribution industry has produced a variety of new forms of business, especially within the category of larger retailers. Examples include variety discounters and factory outlets. Foreign firms as well have entered this new arena as discounters and mail order retailers. These developments have steadily begun to generate new jobs, notwithstanding the occasional labor supply/demand imbalance linked to location, age of workforce and other factors.

Table 7: Increase in New Stores


	1991	1994	Increase
All Retailers	1,600,000	1,500,000	-6.6%
Large Retailers (50 employees and up)	8,000	10,000	23.0%
Medium-size Stores (5-49 employees)	320,000	350,000	9.7%
Small Stores (1-4 employees)	1,270,000	1,140,000	-10.9%


Source: Commerce Industry Statistics (Ministry of International Trade and Industry)

Table 8: Job Creation


	1991	1994	Increase
All Retailers	7,000,000	7,380,000	5.5%
General Supermarkets	230,000	270,000	17.4%
Specialty Supermarkets	260,000	370,000	38.4%
Convenience Stores	360,000	490,000	38.0%


Source: Commerce Industry Statistics (Ministry of International Trade and Industry)

Rising Imports of Finished Products

In order to address the continued appreciation of the yen and reduce economic friction with other nations -- particularly with the United States and Europe -- Japan must promote harmony and unity between its domestic and overseas markets and seek an "expanded equilibrium" in the trade imbalance, reducing it to an appropriate level.
The distribution industry is now attempting to procure finished goods in the international as well as the domestic market. Coupled with growing imports of intermediate goods by the manufacturing sector, this trend has served to boost the ratio of product imports, has opened- up the Japanese market to the international community and passed on the benefits of the strong yen to Japanese consumers.

Table 9: Rising Product Import Ratio


	1984	1987	1990	1993	1994	1995 (first half)
Product Import Ratio (%)	29.8	44.1	50.3	52.0	55.2	57.7


Note: Product Import Ratio = Product Imports/Total Imports (in US $)
Source: Product Import Trends (Japan External Trade Organization)