Head of one of Japan’s, and Southeast Asia’s, best-known department stores, Hiroshi Ohnishi, delves into Japan’s retail sector, the factors affecting it, where it is heading, and how the company is an ambassador for Japanese quality and culture.
What would you say has been the impact of Abenomics on the retail industry and indeed on Isetan Mitsukoshi Holdings specifically?
It’s been about three or more years since Abenomics was implemented, and the financial policy has had some positive effect survey including the increase in stock values. We are yet to see a major effect of the new three arrows we have, and so the economic environment that we are in at the moment is not a particularly positive one. The situation at the moment is that the devaluing of the yen has been accelerated since late 2014, which means that prices have gone up and consumer activity has been dampened because of this. The consumer activity by the middle-class sector has gone down. Although people say that the wages have gone up, this has not happened so much particularly in small and medium-class enterprises, and even with our company, our base-up was only 1,000 yen. With costs rising and wages not rising so much there are not really any factors that would lead to an increase in consumer activity. It may sound a bit backward but this is the fact.
The reason why our retail numbers are doing well, however, is because of the spending of the affluent classes. Stock values have gone up, so they have a little bit more money that they can spend. This is the reason for the numbers that we are seeing at the moment. Also, we are seeing quite an effect from inbound visitors, particularly in our Ginza and Shinjuku stores.
The spending of the middle class has decreased. With wages not rising so much and costs going up, consumer activity is not so positive, and the general financial environment is not as positive as the government is making it out to be.
I do not want to speak just about pessimistic matters on the other hand, so I can say that financial results, particularly in major corporations, have been positive, which means that we can expect a rise in capital expenditures in the future.
In our company, our wages are fairly low, but we are planning to increase special incentives and bonuses to employees who have particularly good performances and so we are looking to increase expenditure in human resources. As other companies do the same, we believe that this will give a boost to the entire economy.
What opportunities do you see with the imminent signing of the Trans-Pacific Partnership (TPP) for Isetan Mitsukoshi Holdings, considering your significant presence in China and Southeast Asia?
There are two elements to this. Firstly, our operations abroad are mainly focused in China and Southeast Asia, and we are partnering with the Cool Japan Initiative, which is going to open stores in Malaysia with exclusively Japanese products. Some of the costs should go down, which is a positive effect, like the lineup and the design of the stores in these regions.
Secondly, we are increasingly going to be able to stock more expensive items because the costs are going to go down thanks to the TPP, so we will be able to better meet the demands of the local people.
I believe that fundamentally competition is necessary and important in every sector, and that it will help raise the absolute values, which should have a positive overall effect on the economy.
You’ve said that the rising numbers of visitors to Japan have impacted your operations. Do you expect this trying to continue and if so, how are you working to position Isetan Mitsukoshi Group to really capitalize on this growth until the 2020 Olympics?
As you may know, we do not wish to emulate the model of a Parisian department store, for example. If our customer base becomes 60%-70% Chinese, we would have to cater to those people primarily. Of course, even within Japan, our Ginza store already has about 25% of our sales being Chinese and over 10% in our Isetan Shinjuku main store. Once you have a particular group of people taking up about 10%-15% of the customer total then you have to cater to those people and become conscious of their presence.
I would like our stores to primarily cater to the local needs and we do accept that the Japanese market is shrinking, but we still want to focus on being able to provide to the locals mainly. Actually, even if we do not count on the spending 2%-3% of the inbound tourists, we are still seeing an increase in sales.
As for the projection for the future, as long as the foreign exchange rate stays similar to what it is now, I believe that it will continue to grow. With about 17-18 million before last year, and last year about 20 million visitors, I believe that the forecast of 30 million for the Olympic year is going to be realistic. We will need to look at how we design our sales floor, and we opened Japan’s second airport-style Duty Free shop in Ginza this January.
Although all customers are equal, they have separate needs, so we are aiming to create distinct types of stores to cater to each demographic. I do expect that inbound visitors will increase, so we will cater to them but in this kind of style.
Isetan Mitsukoshi Holdings’ history goes back three centuries and is rooted in one of Japan’s most iconic images, being kimono merchants. Today you’re one of the leaders in Japanese fashion with a variety of stores but indeed, you also have diversified into finance, real estate, even logistics. Can you maybe outline this business model for us, and the unique competitive advantages they offer to Isetan Mitsukoshi Holdings?
Of the main categories of Japanese department stores, one type is the oldest variety, which started with kimono merchants because historically Japanese people’s clothing was kimonos. Then later on some of the department stores were begun by railway companies, and at the same time there were regional kimono merchants who also begun department stores.
As a department store we have always felt it was important for us to provide for our customers from multiple angles, and to support their lifestyles in various ways, and this will continue to be important. It is not just us providing products to our customers, but also becoming involved in their other needs within their lifestyles, for example, their financial needs, travel needs. And we can also propose new lifestyles for seniors, culture, music, hobbies, interests, for example.
Our main goal is to always provide to the customer in as multifaceted a fashion as possible in order to support their life, which has led to this current business model. At the moment, the sector with the highest demand is travel, out of the ones I mentioned earlier. Mitsukoshi has been dealing with travel for many years already, and recently that part of the business has spun off. It was already making profits, so we see a potential there.
We have also gotten into the wedding sector. Although you may think there are fewer people getting married these days, so the market may be shrinking, but actually we have so far only been involved in providing engagement rings, wedding rings and gifts during wedding services. Now we are looking to get involved in providing a whole package, the venue, and the event production, so we have created a subsidiary to focus on the wedding business.
We are always looking to find new businesses, always keeping in mind that we want to provide for the customer in every way possible to support their lifestyle. As long as there’s potential in any business we would like to take it up.
Speaking of the financial sector, we do have our credit card business, although it is not at the moment in operation, but that is something that we are looking into for the future if it has potential.
Can you outline to our US audience the Omotenashi spirit and why unparalleled service is key to the growth of the Isetan Mitsukoshi Group?
At the moment, the Japanese retail sector makes up 30% of Japanese GDP, which at the moment is 500 trillion yen, and so retail sales constitutes 130-140 trillion yen. About double that amount, so 300 trillion yen, is taken up by the consumer activity as a whole. This 130-140 trillion yen is not so affected by the economy and has remained stable. Within this 130 trillion yen of retail sales, we have department stores as well as convenience stores, specialty stores, supermarkets, GMS, and now we also have eCommerce, which is actually the only area that is growing within this retail sector.
The borders are becoming blurred within these different sectors, and so in order for department stores to survive, we need to find what makes us unique and what we can provide that nowhere else can provide to the customer. Of course, it is important to continue improving our products, and we are working very hard to raise the absolute value of our products. We also find it just as important to provide the spirit of Omotenashi and superior service that only department stores are able to provide.
At the moment, department stores are only 4% of the retail sector as a whole, whereas previously had been closer to 10% of the main retail sector. I believe that this proportion will continue to shrink unless we do something about it. Of course, it probably wouldn’t go away entirely, but we need to find out what only our company can uniquely provide the customer. One example of that is service with the Omotenashi spirit.
In this world where everything is changing so fast and trends come and go, how do you keep up? How do you reinvent yourself to meet new customer needs? What is the future in your mind of Isetan Mitsukoshi Group?
As you say the world is changing drastically, rapidly, and I suppose this is led by this speedy evolution of the IT sector, and we have been engaged for a long time in eCommerce as a department store. Two years ago we reorganized it and boosted it, which led to a 20%-30% increase in sales, but out of the whole sales of our business it is still a very low percentage.
American department stores on average take in the sales from eCommerce of about 20%-25% of their total sales, whereas in Japan only 1%-2% of the total sales of department stores come from eCommerce. This actually means that there’s a lot of potential for us. We are looking into how we can capitalize on ICT in order to create a new business model.
Also, two years ago, we started a media information communications subsidiary, which is designed to create revenue from handling charges. The company takes care of advertisements for other companies, and for next fiscal year it should start to be in the black.
Also, in the United States there is this concept of Decoded Fashion, which is an association formed by a former journalist in the US. This has been brought to Japan recently and is an amalgamation of digital and fashion, and a way of creating new products through the combination of the two. In addition to this, one aspect of a store event is for us to show it before somebody would invest in something through crowd funding. They can see the real product at our storefront and then they can decide whether or not they want to invest their crowd funding. This is combining the net world and the real world. This is also another business where the revenues would be generated through handling charges.
There are various options involving the digital and the ICT sector that we are considering. Also, there’s AI, which is evolving at a fast rate. And it’s not that robots are going to be better at everything, but we are definitely considering using AI for our customer service at our stores as well. In the future, the border between the real and the virtual/internet is becoming blurred.
Through creating new business models, from handling charges as well as sales, we’re looking to continue to grow, and we are working at the moment so that we can announce both internally and externally about our plans of how we plan to capitalize on these new movements for next fiscal year. Yes, the evolution of technology is the biggest factor at the moment.
The Isetan Shinjuku main store is the world’s premiere fashion museum and Mitsukoshi Nihombashi main store is the world’s premiere Omotenashi customer service center. Indeed, all these communication strategies really have inspiring creative even poetic image of Japan. Can you outline why these concepts and these communication strategies are important to Isetan Mitsukoshi Group?
Our company actually comes from the merger between Mitsukoshi and Isetan in 2008, but we retained the Mitsukoshi’s Ginza store, Mitsukoshi’s Nihombashi main store, and Isetan’s Shinjuku main store. The reason why we maintained the goodwill of these shops is because each company had a brand image and had a different set of customers. For the future of retail, I believe it is going to be even more important for each store to differentiate and make clear to the customer why they should shop at that particular store, because nowadays if you want to buy something you can even go to a convenience store, GMS or supermarket. For example, with a shirt, you can probably find a bigger selection of shirts if you go to various specialty stores.
We must communicate the strength of each particular store and design the floors to reflect that vision. When department stores in Japan started to become less successful, that was because they all became uniform and you could buy anything there, but they didn’t really have anything, so people started gravitating toward specialty stores.
For the young people these days, railway stations have shopping centers, like Lumine that collects specialty stores for young people. That is another group of stores that we would be competing with, so there’s no point doing the same thing as the rest. The condition for survival for department stores and for the company is to clarify and communicate why this particular store and our particular company is unique.
Can you outline the “this is japan.” campaign and how it feels to be an ambassador for Japanese quality and culture?
Let me explain the background to how we came to “this is japan.” Four and a half years ago, METI set up a Cool Japan office in order to promote cool Japanese products and anime, for example, overseas. And at that time we felt that even the Japanese people themselves were not quite aware of the excellence of their products and technology. We’ve conducted a supply chain reform under a marketing policy called Japan Senses, where we put together the excellent Japanese materials, technology, technicians and artisans together and promoted regional products to our customers.
Also, there’s the Cool Japan’s Malaysian store opening that I mentioned earlier. While Japan Senses started out as a marketing policy, we have now come to create “This is Japan,” which is more of a corporate message or a corporate embodiment over corporate culture, and this aims to introduce Japanese virtues and promote Japan overseas.
This initiative consists of two things. First, merchandising; with some foreign luxury brands, 70%-85% of their textiles or materials are Japanese. It seems that foreign people are better aware of what is excellent in Japan and so I believe it is important for Japanese people to understand that as well and to communicate that effectively.
Second, customer service; some of the things that we would like to communicate through “This is Japan” is the unique five senses of the Japanese people, the spirit of Omotenashi, hospitality, putting yourselves in other’s shoes. Based on this Omotenashi mindset, we are aiming to promote ourselves abroad and we continue to do so for the future.
What’s the new brand or image of Japan that the G7 leaders should have in their mind?
With the 2020 Olympics coming up, this is a time the world has its eyes on Japan as never before. So we must take advantage of this opportunity to accurately communicate Japanese virtues. I suppose it’s not really my place to give any kind of message to such leaders, but I believe that now is the opportunity that we must grasp because only a few years ago, we had 7-8 million visitors to Japan and now we’re nearing 20 million visitors.
It is certain that, at least up to the Olympics, the population of Tokyo is going to continue to increase. It’s already clear from the structure of the population. I believe we should focus on the regional areas, and that both the government and the private sector should work together to communicate the excellence of these regional areas. Foreign visitors should be encouraged to visit the many tourist spots that are in these regional areas. That is the message we should be sending out to the world.
I would just like to add that our complete exit from deflation is not quite factual, and that realistically, as I said earlier, fast food prices have gone back down.