Overseas potential for Japanese local convenience store model

Japan is going through an exciting time at the moment. In a period of global economic recession, it’s making the difficult choices to reorient its economy for a more globalized world with the economic paradigm, Abenomics. We’re interested in learning the private sector’s perspective in this transformation. What effect, would you say, has Abenomics had on the convenience store sector or, indeed, on Lawson specifically.

First of all, let me explain a little bit about the opportunities at Lawson. We are a company of neighborhood convenience stores. In Japan there are 55,000 convenience stores.

We operate 12,000 as Lawson. The top three players are 7-Eleven, Lawson and Family Mart, which have more than 75% of the market share.

That means that the market is very competitive between us three.

In Japan many people mention that there are so many companies, so many brands, so many stores. However, inside the convenience store market, it’s very competitive.

We do believe that this format of neighborhood convenience and food stores really has potential because Japan goes through winter for four months, and everybody talks about an ageing society, smaller families, and the heavier workload.

In my family, for example, my grandmother would go to the supermarket, buy everything, and cook for eight people. It’s rare that you see that now.

In this context, convenience stores or neighborhood stores have gotten positive customer feedback because they don’t have time to go to the big supermarket which is farther away.

Products are high quality, small portions, reliable and reasonably priced. Even vegetables are washed and packaged and they can be consumed immediately.

On the other hand, in Japan we had about 1.6 million total stores, let’s say, 30 years ago. These were fish shops, book stores, everything. Now, there are less than 1 million.

If you walk along Nishi-Azabu and Roppongi, that’s totally different, however if you go to Akita, many people say, “There was a supermarket there, but now it’s gone.”

Or, “There was a bookstore there, but now it’s gone,” because they’re unsustainable in this competitive market.

At Lawson we operate 12,000 stores, 200 manufacturing locations, logistic locations, and we are supporting all over Japan. So we have the infrastructure, we have the distribution channels.

So by utilizing this know-how for neighborhood stores we think we still have a lot of potential to meet. Let’s say there are 1 million total stores in Japan, we are still merely 5% of the number of stores.

Many people tell me, especially investors, that we’re already reaching saturation. That is not so – that depends on how much we can continuously change to meet the market needs.

You operate in one of the most competitive markets in Japan. In order to stay competitive and increase your market share, you diversified with Natural Lawson, Lawson Store 100, and you’ve added services such as the NTT Docomo World Loyalty Program. Now there are reports of partnering with UNIQLO for distribution. How important are adding these services to staying competitive in Japan and continuing to building your brand?

I think the most important things are the basics. People always buy coffee, rice bowls, bento boxes, sandwiches – those are our core products.

We have to keep improving quality and have good merchandising and our stores must always carry sufficient stock for the customers.

Those are the basics. Additionally, we always challenge ourselves to create new opportunities and new areas. Our Japanese community has been changing, and has new needs, and new opportunities.

Success is not achieved just by chasing opportunities, but collaborating, like you said, with Docomo and Sakawa, to establish the last one mile of infrastructure in all of Japan.

I think in this business you need two things: we have to continuously improve the basics, and the simple things, which is the foundation of the business, and then keep challenging ourselves and looking for innovation.

That’s the combination.
 
What are the biggest challenges then? This year, of course, marks your 40th anniversary, and you’ve set ambitious goals coming in a year ago for the next 40 years. This includes ¥100 billion operating profit and ROE of 20% by 2018. What are your biggest challenges to achieving this? What keeps you up at night?

As long as we can continuously change to adjust to the market, and by maintaining and improving our basics.

We don’t have any patents; what we have to do is make strawberry cream; we’re welcoming, and by 12 noon everyday we have rice balls in full stock in all stores – those are the basics, the simple stuff.

So, how can the players realize that with those basics at a high level of quality and service, that’s our goal. Execution is very important, and then the new challenges.
 
I think, arguably, one of the reasons Lawson is one of the market leaders in Japan is because of your corporate culture, which is guided by creating harmony and happiness in the communities you operate in.

How important is this corporate culture to the success of Lawson?

I am a strong believer in that there are no miracle solutions in business. We employ the Plan-Do-Check-Act procedure in our business.

The way it works is first to Plan: You make a hypothesis, based on what’s happening at the stores, what kind of opportunities there are in Hokkaido, what kind of opportunities there are in Hiroshima.

Then you Do: you take actions and then Check customer reactions, and then you strengthen your hypothesis based on the customer reactions, and you Act based on their feedback. It’s a continuous cycle.
 
So it’s a practical implementation of quality.

Of course, we have to enact a broad strategy for our procedures over the course of three to four years.

But the most important things that we think about are how we can create a very dynamic organization, an action-oriented organization.

Anyone can come up with hypotheses. Many companies have these plans generated by the chairman or the president. We think that hypotheses should be generated at field level.

Everybody has to be in on creating those challenges. Dynamic hypotheses come from the field, then we implement action locally, and if it works, we look at carrying it out in all of Japan.

That kind of agile, action-oriented process is how you break the gridlock of bureaucracy. Some organizations watch people do things critically, hoping they will fail.

But failure is very important, as it teaches us and helps us grow.
 
So it’s about being flexible and agile, not only in the market but also with your employees, which I think is the core of Abenomics, this corporate governance performance. Mr. Abe’s trying to get Japan’s economy to be more agile and flexible. Another important part of Abenomics is internationalization.

I think Abenomics is on the right track. I think Japan’s landscape has been changing a lot. The stock price doubles, the ends depreciated 50%.

ATN was around 220. All export-oriented companies now are getting to that level. Slowly, even small companies started raising wages slightly, because of employee shortages.

Consumption is very important, which is roughly 60% of GDP. So, as the retail sector, we do see it coming back.
 
As well, Abenomics has allowed for a cheap source of capital. A lot of companies such as LIXIL have used this to aggressively go international. You, sir, as well are interested in going international through M&As. You came on a year ago and planned international expansion. For the Hawaii stores you said that “the purpose of our expansion to Hawaii was to establish a beachhead in order to go into North America.” Can you maybe outline your international expansion policies and strategies and how M&A fits into that?

Sure. I think even in our first stage of expansion, the priorities were China and South East Asia. We have a presence in China, Thailand, Indonesia, and we recently opened a store in the Philippines.

So, because of geography and consumer similarity, those are the first priorities.

But I do have a very strong interest in North America, too. All countries need neighborhood stores with a well-designed, very strong IT infrastructure-backed concept, like convenience stores in Japan.

Operating small-format is a completely different concept than operating large scale, even in the same retail sector. It requires completely separate skills.

Let’s say big stores with 30,000 SKUs (stockkeeping units) in operation and our stores, which have 3,000…even Walmart is now shifting to the very small neighborhood format.

It’s small for them, but very big for us. Going all the way to Los Angeles to open up one Lawson store would not work so well for us.

However, if there’s a partner that’s interested in the small format, we’d be very interested.
 
What about internationalizing in your own country? Somehow, the perception that people have of Lawson when they go into a Lawson store is that they’re entering into an international consumer business model. There’s Coca-Cola, there’s sake, how are you working on this problem of what the international aura means for your business?

You mean, our headquarters, how can we internationalize?
 
Sure. For me, Lawson is a little piece of an international store in Japan. I do feel that way. I was wondering if this was something you do on purpose, or something that just comes naturally?

It comes naturally. But the challenge for businesses like ours is being in sync with people’s daily habits. Our business knows the difference between breakfast for foreigners and breakfast for Japanese people.

So, we need a lot of local adjustments. What we can bring in is the kind of know-how, IT infrastructure, distribution, logistics, and how you can really squeeze down the merchandizing – we bring in that kind of know-how, and then we combine our knowledge with local partners.

I am not American and therefore would need someone who understands the market, with our logistical know-how, and create our format of the neighborhood store.

The Japanese convenience store is so amazing, kind of crazy. We distribute to the stores three or four times a day with 2,500 trucks all over Japan.

Every time we bring fresh products, and the customer feels the quality. This is something. If we can bring this overseas, it would be very interesting.
 
At its core, Abenomics aspires to make Japan’s economy more international, and in many respects Lawson is the case study of success for a Japanese company that was deeply domestic and is now transforming into a global company. What advice would you give to other Japanese CEOs and chairman who would like the follow in Lawson’s footsteps and create global companies? What are the biggest challenges?

I think the most important thing is human capital, the leadership who can go to other countries and cultures to persuade other people to create from scratch the business model with local partners.

With education and know-how we can continuously develop those kinds of leaders and human capital.

Based on our previous successes and failures we can learn and continuously improve the current existing operations’ logistics and their way of educating staff, how to make appropriate merchandising with a limited number of stores.

Know-how accumulation and know-how development are the biggest challenges.
 
This is a very competitive market and you have two main competitors. How would you differentiate your brand, and what kind of attributes does Lawson present to the consumer that nobody else does?

I think that before talking about differentiation, as I said before, what’s important is foundation of the business – how we can reach a very high level of execution for each store with a low standard deviation.

What’s important is how to squeeze down the standard deviation between the good and the bad stores.

On top of that, at Lawson we are challenging ourselves, especially in the health and healthcare-related fields with the Natural Lawson program.

At hospitals, they develop low-carb baked goods, low-sodium rice balls, together with nurses and doctors.

We develop those kinds of meal solutions for health, because a healthy life for Japanese people it is very important as we cannot sustain healthcare costs, which are very serious, costing ¥30 trillion a year and they are going up to ¥50 trillion.

The most powerful solution is that Japanese people lead a healthier lifestyle.

Because of the new regulations, Lawson can only have 100 stores that carry over-the-counter drugs.

However, we are planning expand to 1,000 stores in a hybrid model; these stores will carry medicines, together with healthcare-related merchandising. They have very health-focused merchandising.

Our activity is growing and we now have 12,000 stores in collaboration with Sagawa. Now Japan is an aging society.

So many people are asking us, please bring heavy water to my home. So we have to establish home delivery services in a profitable way.

That’s why we came up with the joint venture with Sagawa, which is the largest distribution company.
 
So you’re adapting to this market?

Yes, sure.
 
Building trust and confidence is essential to the success of Abenomics and the continued growth of Japan. Indeed, it’s one of the main focuses of our report. Taking this opportunity to reach out with one of America’s most prestigious media outlets, as well as our custom publications to the most important politicians and businessmen around the world, what would you say to these potential investors and partners who would possibly be hesitant investing in Japan or partnering with a company such as Lawson? Why should they not be worried? Why is Japan turning a corner?

I think 2020 can be a very important milestone for Japan. We are expecting the Tokyo Olympics. 51 years ago we hosted the last Olympics in Tokyo.

Only a few months before the Olympics, Shinkansen was launched, and so many hotels came up, and growth took off. Today there is a multi-faceted approach the government is taking for deregulation.

They set up more special deregulated zones, especially in the Tokyo area. These deregulated zones occupy more than 50% GDP area.

Our private sector needs more innovation. Until 2020, let’s make Japan like that, with more innovative cities, more challenges.

We have the capital, we can force the private sector to have more corporate governance codes, more emphasis on the ROE, more emphasis on umbrella activities, more variable investment.

We are taking the lead in innovation and changing our way of educating people.

Young people are the next leaders, they are very important and we have to provide them with the opportunities for those innovations, like start-ups and new challenges.

I think more multi-faceted corporate government relations, together as Japan heads towards 2020, we can definitely achieve total change in Japan, and tax reform.
 
I think you just encapsulated our whole report.

I think we have a clear target for the next five years. If we fail to change in these five years, I think I’ll be very pessimistic about Japan’s future.

But I think we can do it. I think we’re on the right track, and that Japan has unique assets. Also, we have to open up to overseas people, through immigration and having people come to Japan for training purposes.

They can stay on for three years or five years, and if they want to stay more, we can give them green cards; we should open up to more people.