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That’s Watts Up

Interview - May 24, 2023

Watts, a 100 yen retail store brand in Japan, provides real-life miscellaneous goods worth 100 yen or more for 100 yen by minimizing store costs to secure profits.

FUMIO HIRAOKA, PRESIDENT & CEO OF WATTS CO., LTD
FUMIO HIRAOKA | PRESIDENT & CEO OF WATTS CO., LTD

The 100-yen shop business model has become a cornerstone of Japanese society for both domestic customers and inbound tourists who are very excited about the prospect of experiencing or seeing a variety of Japanese slice-of-life products at a very attractive price point. However, there lies a conflict in this business model. Japanese consumers have a high standard for quality, but expect these daily goods at a low price point. How do you reconcile the price and the quality? What role should the 100-yen shop play in Japanese society?

To explain the business background of the 100-yen shop, I have to first explain the industry's business standards. To provide high-quality products at a 100-yen price, we work together as an industry and purchase products in bulk to secure a discount for the mass production merit. About 80% of the products sold in 100-yen shops are products common in the industry. The biggest domestic Japanese retailer is Seven & I Holdings, which has a turnover of JPY 11 trillion, followed by Aeon Group with JPY 9 trillion. However, only 10% of that total are life commodities. It is quite low with few variations. Our 100-yen shops are competitive because we provide varied life commodity products that bigger retailers do not offer. It might seem that 100-yen shops carry their own private brands, but the products are the same throughout the industry. We do a mass order of 100,000 units per type of product from the suppliers.

 

Although most 100-yen shops have about 80% similar products, not all 100-yen shops are the same. In Canada, for example, people prefer Daiso over Dollarama. How can you stand out and differentiate your brand despite sharing similar products with other stores?

Daiso has a huge market and about 75% of its products are original. They have a JPY 500 billion turnover. Daiso and Seria have their own shops that customers can visit. Daiso carries about 70,000 SKUs (stock-keeping units), while Seria, Can Do and Watts carry about 20,000-25,000 SKUs. Rather than having our own independent shops, we have small spaces within supermarkets or drug stores. We are focused on life commodities needed by customers coming into the supermarkets or drugstores. This is our business model that makes us different.

The stores need to be attractive to catch customers' attention. In several shops, we included fashion brands like Buona Vita and Tokinone with our 100-yen products. This makes our product lineup more attractive.

 

Can we talk about different ways that you have improved your services and approach that make customers prefer the Watts experience over others? Despite not having products of your own, you label many products with the Watts Select Logo to indicate to the clients that a product is good or of superior quality. Can you tell us some of your initiatives and policies that can help your clients identify the best quality products and the best deals among a vast selection?

Watts's business model is using limited space to adequately provide for the locality's needs. We selected the best products to offer by providing the private label Watts Select. Usually, private label brands in 100-yen shops are low-cost, high-margin products. However,  we want our brand to have a higher quality and volume to provide the best customer experience and attract more customers. In the end, our private label products are high-quality with high costs and low margins. With the recent depreciation of the yen, our purchasing cost has increased drastically, so we now need to make changes to make our business more economically viable.

 

When you have a high-volume bulk-purchasing industry centered on plastic or disposable products, there is an important underlying question about how this kind of business model can coincide with a push for a more sustainable society. In your opinion, how can a 100-yen business model adapt or evolve to be in line with a more sustainable future?

Practically speaking, there is a limit to what we can do with a 100-yen tag price. Despite that, we are shifting some item materials from ordinary plastic to biodegradable plastic. In addition, the plastic bags in the stores are biodegradable to be more environmentally friendly. To be sustainable, it is important for us to shift to more eco-friendly materials and offer a higher price range for products. With the higher price range products, we can focus on the circular economy and provide environmentally friendly products. In society, 100-yen stores are more of the followers of social trends as opposed to being leaders.

 

Let us talk about how you have been navigating some of the various socio-economic challenges that Japan and the world have faced in the last few years, specifically the impact of the Coronavirus on your store's operations. On the one hand, there was a time when people did not want to go outside at all and limited their outside exposure. On the other hand, what you exactly sell in your store are daily necessities that people need. Towards the tail-end of COVID in May 2022, you unveiled a Watts smartphone application. It provided an e-commerce experience to prevent direct contact. Can you tell us more about the impact of the Coronavirus on the operation of your stores? What other kinds of solutions, such as the app, did you come up with to meet the needs of that challenge?

There was no negative impact of COVID on us because, during the emergency lockdown when the Japanese government strongly urged major shopping malls and restaurants to close down, supermarkets and drugstores were kept open. Many of our stores are within the supermarkets and drugstores so we were able to continue our business operations during COVID.

As a countermeasure for non-contact during COVID, we developed an e-commerce website where people can purchase 100-yen products. We started with about 1,000 100-yen products and later expanded to other brands at a higher price range, such as Tokinone and Buona Vita. It is now the e-commerce channel for Watts Group now totaling approximately 20,000 items. At first, it did not go well because we were not able to cover the courier fee for our customers by only selling 100-yen products. The customers have to pay the courier fee. However, we added new features such as the Watts app, and the customers can pick up the products from the store closest to them. Our e-commerce is expanding with these new measures, and we believe that this is a very important investment for our future expansion. Currently, we only have seven stores available where customers can do a pick-up, but we are adding more.



Japan's biggest social challenges are the aging population and the demographic decline in terms of urbanization, regional revitalization, and having fewer younger people. This has been an impetus for many companies and retailers, such as yourself, to shift their focus to overseas markets to compensate. Can you speak to us about the impact of Japan's declining demographic line on your business and how you will respond to the challenges that it presents?

We are gravely aware of the impact of the demographic shift in Japan and we are trying to dig in further within our domestic market and add more stores within our domestic realm. However, we can only do so much domestically, so we also have to consider going overseas as an option. Watts needs to increase its profitability in a smaller market. We need to reconsider our business operations in areas that have a declining population if we want to keep our stores open for the community.

Another business model we have are the consignment stores which help us secure the baseline profit. We want to increase the number of these kinds of stores. About 80% of our newly opened stores are consignment because the 100-yen industry is starting to replace the commodities and daily necessities section of supermarkets and drugstores. Miscellaneous items or daily necessities only make up 4% of supermarkets and drugstores, and it requires a lot of investment just to maintain them. They now prefer to change the whole area or section with the consignment 100-yen shops, so they can increase the variety of products they can offer with a lower investment. We are the top runner in the consignment business with supermarkets and drugstores.

 

You’ve managed to expand your presence in more than 20 countries around the world and counting, mostly under the Komonoya brand and through others as well. How were you able to do so successfully? Was it a matter of finding the right partner to work with or building a brand in the local community, as you have done in Japan?

Not all of our overseas businesses have been successful. We learned that it is important to have a business partner who knows the locality well and can adapt according to the needs of the area to be successful overseas.

If we can provide the products for JPY 100 in the overseas market, we will surely be able to expand. However, the challenge for us overseas is that it is not feasible for us to sell our products at JPY 100 even if we want to. Even Daiso cannot do it. Although they are successful in the US market, their price is from $1.75 which is about JPY 200. We can sell products for JPY 100 domestically because we purchase a hundred thousand pieces of the same product and get them delivered directly to Japan. Ordering in bulk allows us to sell our products for JPY 100. We cannot do the same overseas due to shipping and lower volume orders.

We started our overseas business because the Japanese market is limited. With the aging population and low birth rate, we can increase our stores domestically with the consignment business. However, there is a limitation to that and we would still need to expand overseas. We started our overseas expansion by planting seeds in Thailand in 2009. Domestically, we can tackle the mass daily necessity market with our 100-yen shops. When we bring our products overseas, the products become 200-yen. Even in the US, the prices are higher. In Thailand, our prices are higher than their mass-produced products. Unfortunately, we cannot meet this mass demand, so our focus would be on providing mid-priced high-quality products.

 

Which countries do you think have the most potential for your overseas business?

Branding is very important. We are very focused on Thailand because we felt that it was easier to brand ourselves there. We were able to partner with the Central Group which owns major department stores across Thailand. We have a small shop within their department stores, and we were able to start our branding.  In Japan, we were not affected by COVID because we operated in supermarkets. In Thailand, however, we were severely impacted because the department stores had to close down. After COVID, we had to shift our target to upper to middle-class customers. We want Watts to be like that Muji level in Thailand.

In Peru, we started our business targeting high-end customers, but with COVID, that has stagnated.  We are still gathering ourselves to restart again now that COVID is over.

We also want to target the mass market for daily needs and necessities overseas. Before we can do that, we first have to consolidate our foundation by providing a higher price range.

Southeast Asia is the most practical region for us to expand and elevate our brand the most. Our market has shrunk a little bit in Thailand with COVID, but we can still work on enlarging our market share. Singapore, the Philippines, and Hong Kong are other areas with high purchasing power that we can target.

The biggest market we want to target is North America, which has the highest income and highest purchasing power. However, there is a big challenge with the difference in our units of measurement. We use centimeters and grams, whereas they use inches and pounds.

Another potential market we are looking at is Africa. Last year in Tanzania, we had a partner who opened a store and will soon open a second one. Overall, the sales volume is not high, but since there are limited stores that sell daily necessities in Tanzania, the price range he provides is high, so there is high profitability. This business model could apply to other African countries. We see potential in the African market.

Our overseas business is unique. When a retail store opens overseas, we dispatch our staff to provide intensive training on customer service and how to order the products. At first, we would receive a lot of orders, but we have to maintain the orders to secure the profitability of our company. This is a challenge that we need to take into account. There have been many challenges that came with COVID, so we are expanding more overseas. As an example, we dispatched our people from Peru to conduct training in Mexico when a new store was opened there.

 

Your company is celebrating its 28th anniversary since its foundation. If we come back in two years and have this interview all over again, what is your dream for this company, and what goals would you like to have accomplished by then?

We are trying to create another big pillar of business that can assist in the growth and expansion of Watts. We are hoping to expand overseas, so we are now trying to add new values to our overseas business to enlarge our share internationally. Maybe not in two years, but in the future, we want our business distribution to be 50% Japanese and 50% overseas.

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