Meltdown of Department Stores as a Type of Business
Member of the Committee on the History of Japan's Trade and Industry Policy, RIETI
Department stores' race to increase selling space in Osaka
There is a tiny book entitled Osaka ni okeru Hyakkaten wa Hatashite Howa-Jotai ni Aruka [Is Osaka Really Saturated with Department Stores?] The ongoing competition among department stores in Osaka to increase selling space is what people would call to mind when they look at this title. Competition is particularly fierce in Umeda, a major commercial district around JR Osaka station. Currently, the Umeda district has three department stores: Hankyu, Hanshin, and Daimaru respectively with selling spaces of approximately 61,000 sq. meters, 54,000 sq. meters, and 40,000 sq. meters. They will be joined by Isetan Mitsukoshi when its new store, having a selling space of about 50,000 sq. meters, opens in 2011. As if countering this move, Hankyu and Daimaru will be increasing the selling spaces of their Umeda stores to 84,000 sq. meters and 64,000 sq. meters respectively. There has been some delay in the reconstruction of Hankyu's flagship store in Umeda. However, when all the projects are finally complete in 2012, the combined total selling space of department stores in Umeda will be increased by nearly 100,000 sq. meters from the current 155,000 sq. meters to 252,000 sq. meters.
Umeda is not the only battle ground. In the Namba-Shinsaibashi area, popularly referred to as Minami, Daimaru will be taking over Sogo's 40,000 sq. meter flagship store adjacent to its own store, having a selling space of 37,000 sq. meters, whereas Takashimaya will be boosting the selling space of its Osaka store from the current 56,000 sq. meters to 78,000 sq. meters. Meanwhile, in Abeno, Kintetsu plans to expand from the current 48,000 sq. meters to 100,000 sq. meters.
Traditionally, Umeda and its neighboring area have been home to a number of specialty shops and stores. In recent years, they have been joined by a series of large-scale shopping complexes, housing a myriad of specialty stores including well-known brand boutiques, which sometimes have outlets in the department stores as well. It is indeed no wonder people say that Osaka is saturated with department stores.
Same concerns voiced in prewar years
However, the tiny book mentioned above is a 15-page booklet written by Fukumatsu Muramoto, a professor of the prewar Osaka University of Commerce (Osaka Shoka Daigaku; currently Osaka City University), and published by Daido Shoin in August 1937. From the late Meiji Period (1868-1912) to the early Taisho Period (1912-1926), six department stores - Mitsukoshi, Daimaru, Takashimaya, Sogo, Matsuzakaya, and Shirokiya - opened stores in Osaka one after another (Shirokiya's Osaka store was closed in 1932). Then, in the early years of the Showa Period (1926-1989), four major railway companies - Hankyu, Kintetsu, Hanshin, and Keihan - followed suit, building department stores near or directly linked to their terminal stations. However, 1937 was a mammoth year in which Kintetsu opened its Abenobashi store, following the one in Uehommachi, which opened the previous year, while Hanshin launched its first terminal department store and the expansion work on Matsuzakaya's Osaka store was completed, making it the largest department store in Asia.
As provisional criteria for measuring the degree of saturation, Muramoto applied the general perception held by department store operators, that is, the selling space of 2,000 tsubo (6,600 sq. meters) per 100,000 in population would be reasonable. In 1935, the city of Osaka had a total population of about 3 million and the total selling space of department stores in the city stood at 66,275 tsubo (218,707 sq. meters). That is, the selling space per 100,000 in population was 2,200 tsubo (6,600 sq. meters), exceeding the "reasonable threshold" by 200 tsubo. But then, Muramoto moved on to emphasize the following points.
First, he focused on the population of the city's surrounding areas. Arguing that the market area (though he did not use the term) of department stores located within the city would reach well into the nearby cities, he counted half the resident population of these cities as their potential customers. Second, he took into consideration an expected population increase in the ensuing five years, thereby coming up with the conclusion that the city was left with room for an additional 28,000 tsubo (92,400 sq. meters) of selling space before becoming saturated with department stores. Furthermore, he divided the greater Osaka area - i.e., the city of Osaka and its nearby cities and towns that together constitute the market area - into the northern and southern parts from the viewpoint of transportation efficiency. Then, he calculated the population for each part of the market area, reaching the conclusion that the northern part of the greater Osaka area still had room to add 200,600 tsubo (67,980 sq. meters) of selling space on top of the existing stores of Hankyu, Mitsukoshi, and Keihan. From the way it is written, it appears that Muramoto wrote the booklet, with the notion of expanding Osaka Matsuzakaya into the largest emporium in Asia.
Muramoto went on to argue that the capacity of the northern part of Osaka would actually be greater than he had allowed for, noting that while the reasonableness criteria of 2,000 tsubo selling space per 100,000 population had been calculated on the basis of data on major cities in general, the purchasing power of the population of the northern part of Osaka should not be below - but rather above - the average. Meanwhile, it is generally presumed that approximately 20% would be the upper limit for department stores' share of overall retail sales. Muramoto pointed out that based on that criterion, the city of Osaka still had room for 6.2 percentage points.
Perhaps I have gone into too much detail in introducing Muramoto's booklet, however, I wanted to emphasize that we must not assume that there will be an oversupply of department stores simply because of their plans for a massive expansion of selling space. The point made by Muramoto more than six decades ago - i.e., that department stores would have room to expand or add new stores provided the market area increased, resulting in greater purchasing power - should hold true for the present situation in Osaka.
Deterioration of department store sales per unit area
Deterioration of department store sales per unit area However, sales of department stores in Osaka have been on the decrease for several years, although this is a nationwide trend. According to data released by the Japan Department Stores Association (JDSA), department store sales in Osaka, which just passed 1 trillion yen in 2004, fell below 1 trillion yen in 2005 and further decreased to 932.6 billion yen in 2008. Likewise, nationwide department store sales have gradually declined since peaking in 1991, except for a temporary rebound in 1997. That is, the declining trend began long before the Lehman shock hit in autumn 2008. Since 2004, Japan's department store sales have consistently fallen below the 1988 level, and continue to break the record low since the beginning of the Heisei Period (1989 - present). Throughout that period of time, the total selling space of Japanese department stores remained almost unchanged, meaning that the annual sales per unit area have decreased significantly. The table below shows a comparison of sales figures for the major cities of Tokyo (23 wards), Nagoya, Kyoto, Osaka, and Kobe.
Source: Japan Department Store Annual Statistics 2008
Sales per unit area have been perceived as the most important measurement of retail business performance. From the above table, we can see certain trends. For instance, sales per unit area, though significantly different in levels across cities, drastically decreased after 1990 in all of the cities. The year 1991 coincided with the period that saw the collapse of the Japanese asset price bubble, which turned out to have a long-lasting impact on department stores. After the turn of century, the pace of decline has somewhat eased but department store sales have continued on a downward trend. In 2008, the department sales per unit area fell to levels around 60% of those of 1991. It is against this backdrop that department stores are competing to expand their selling space, which makes it easy to understand why some describe this as "cut-throat competition."
Criteria for "cut-throat competition"
In his book, Ritchi Sozo: Inobeta Kodo to Shogyo Chushinchi no Kobo [Creative Locations: Innovators' behavior and the Rise and Fall of Commercial Centers] (Hakuto-Shobo Publishing Co. 2008), Masanori Tamura points out that whether or not a certain industry is facing cut-throat competition can be determined by applying the following two criteria (p4). The first criterion is that competitors in the industry offer substantially homogeneous products or services. The second criterion is that the number of competitors is too great for the size of market and not all businesses will survive. Then, Tamura reasoned that the competition in recent years, which satisfies the second criterion but not the first, is not cut-throat competition.
Giving high regard to the heterogeneous nature of competition among different types of businesses as well as competition in pursuit of new creative locations, Tamura perceives that what has been observed in recent years is the process of selection that clearly separates winners from losers, not cut-throat competition, which would force all competitors to decline equally (p5). Indeed, when we look at the whole spectrum of retail industries, we can still see the rise of new types of businesses and the creative selection of locations.
However, what about if we narrow down the scope to focus solely on department stores in urban areas? In another of his books, Gyotai no Seisui: Gendai Ryutsu no Gekiryu [Rise and Fall of Business Types: Great Tides in Today's Retail Business] (Chikura Publishing Co. 2008), Tamura noted that department stores, as a type of business, have entered into the declining stage of their life cycle (pp.18-19). He then pointed to the need to drastically reform the conventional business formats, for instance, by increasing the percentage of centralized purchasing by the headquarters, breaking with the traditional virtue of ensuring a comprehensive assortment of goods, and reducing personnel costs (pp.206-219). Among those measures, the personnel cost reduction would involve the replacement of sales clerks - predominantly, permanent employees - with contract workers. The prospect of department stores having to substitute their permanent sales clerks with contract workers is giving rise to a sense of crisis among the parties concerned. In its publication commemorating the 50th anniversary, JSDA noted, "Such a move would be tantamount to self-denying the practice of face-to-face consultative selling, the lifeline of department store business" (Hyakkaten no Ayumi, [Footsteps of Department Stores], JSDA 1998, p178). Nevertheless, department store operators need to attack this problem head on. Indeed, we should interpret the current situation as showing that the ongoing anguish of department store operators lies in the very fact that the drastic reform of the conventional business formats means changing the selling practice.
However, we cannot put all department stores in one bag as management policies differ from one to the next. Repeating innovation and emulation, department store operators would be exploring new management formats. Thus, from a long-term perspective, management formats have been consistently changing and what we see today is part of that process. Simply because they are all classified as department stores in terms of type of business, their competition is not necessarily homogeneous. Instead, they are engaged in heterogeneous competition in pursuit of new management formats. Based on that understanding, the ongoing competition for greater selling space can be taken as a process of natural selection, which is clearly different from cut-throat competition.
Meltdown of department stores as a type of business
Judgment of whether or not the situation has reached a state of cut-throat competition against Tamura's criteria hinges on how we judge the homogeneity and heterogeneity of the observed competition. I do not go into detail in this regard here but there is no denying that department store sales per unit area have been consistently in decline for many years. During the period between 1991 and 2008, sales per unit dropped by 30% for the entire retail sector but department stores suffered a much sharper decline of about 40%.
Concerning the Umeda district, an area embracing roughly half the selling space of existing department stores in Osaka, an increase of total selling space by nearly two thirds in the next few years would inevitably lead to a further decrease in the sales per unit area. The decrease would be offset to some extent by the accompanying expansion of the market area. However, when department stores in Osaka expand their market areas, they are bound to face direct competition from their counterparts in Kobe and Kyoto. Furthermore, there are already some major department stores in Nishinomiya, a city located between Osaka and Kobe. Even if Osaka department stores expand their reach beyond the conventional scope of their potential market area to include Tokushima, Takamatsu, and some cities in South Korea and China, they would not be able to attract sufficient customers or demand to support their huge selling space.
With their efforts to bring down personnel costs through labor-saving measures having nearly reached their limits, department stores cannot expect to improve their bottom line this way. Thus, as pointed out by Tamura, it would be necessary to develop new business formats, for instance, through private brand products and self-merchandizing efforts. However, a new business format cannot be expected to be developed and implemented easily. Thus, while working on the development of new business formats as a medium- to long-term goal, department stores must, at least for the time being, continue to rely on popular specialty tenants as a magnet attracting customers.
However, it has been pointed out that choices of such specialty tenants are limited as most of the established brands have already set up their outlets often through an exclusive arrangement with a specific department store operator. Meanwhile, many people have been voicing concern over the growing tendency to rely on specialty tenants, warning that such a move could result in a bunch of uniform and characterless department stores, instead of an assortment of unique and distinctive department stores. It is also questionable whether department stores will be able to maintain the current quality of merchandise without reducing the tenants' rents amid the intensifying competition for promising specialty stores. Indeed, against the backdrop of such growing concerns, the July 24, 2009, issue of the Nihon Keizai Shimbun reported Fast Retailing Co.'s plan to set up its popular UNIQLO shops in a series of department stores. The company has already reached agreements with Takashimaya and Seibu, while negotiations are underway with Daimaru, according to the report. Many people must have been shocked at this news because to include such low-price shops as a department store tenant would have been unthinkable five years ago.
Japanese department stores are surely trying to break away from their existing business formats. However, it seems that they are pushing it to the point of destroying their long-established identity as the reigning player of the retail industry. Department stores are coming to a critical turning point, described by some as the beginning of the end of department stores. It is fair to say that a fierce investment race for expansion, which is taking place amid such a growing sense of crisis, is driving department stores to discard their identity as a department store. Ryuta Ibaragi, president of Tenmaya Co., Ltd., an Okayama-based department store operator, was quoted as saying, "Despite the shrinking market, department stores have embarked on too many investment projects based on complacent judgment" (Shukan Diamond magazine, May 30, 2009, p51)
Who will be left standing?
The rise and fall of department stores hinge on whether or not managers can make good decisions. Department stores that succeed in transforming their business formats will survive and those that do not will be forced to exit the market. That is how things are supposed to be in a competitive society under the rules of a market economy and arguing the right or wrong of it will not change anything. Bluntly put, that's just how it is. But then, what will remain afterward, that is, once the stormy process of natural selection has run its course?
As the king of retailers, department stores have contributed to the build-up of excellent urban stock by constructing architecturally magnificent buildings. In this regard, department stores are definitely different from suburban shopping centers. However, excellent urban stock can only serve as such over a long period of time when it is well supported. Will department store buildings be able to remain excellent urban stocks even after their supporters, i.e., department stores, turn their back?
Japan's population is certain to decrease in the coming years. In the face of this predictable future, what legacies are we going to leave for the generation of our grandchildren? The ongoing investment race among department stores is not simply a survival game to determine the fate of individual companies but a process that could lead to the meltdown of department stores as a type of business. Furthermore, it is also prompting the rethinking of the roles and forms of urban cities. The government's policies toward retail industries under the conventional framework are basically incompetent to address these problems. It is thus necessary to change the policy framework itself.
September 15, 2009
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September 15, 2009［Column］