The Japanese distribution system

Business America, May 17, 1993 by Eric Michael Kennedy

Distribution channels in Japan are very different from our own; they are as inefficient as they are complex. The system is characterized by multiple layers of wholesalers who have developed close, personal relationships with other wholesalers, manufacturers, importers, and retailers. Moreover, these intimate relationships often serve as an informal barrier to U.S. companies wishing to sell directly to end-users or retailers.

Many American exporters find retailers/end-users unwilling to disrupt their longstanding, personal relationships with Japanese suppliers even when the U.S. company can offer a product of superior or equal quality at a cheaper price. Many Japanese retailers/end-users are unwilling to make the switch to an "unreliable" foreign supplier. They fear a lack of commitment on the part of the foreign supplier will lead to problems. They also fear breakdowns in communication. This state of affairs has led many U.S. new-to-market exporters to complain of the complexity and lack of transparency of the Japanese system.

This system, while inefficient, does offer some important advantages for the participants. First, these close business relationships make it far easier for retailers/distributors to suggest product modifications and improvements. In the manufacturing arena, engineers/designers of supplying parts companies tend to have very good working relationships with the engineers/designers of the final assembler. This helps prevent friction and waste in the design stage and leads to quicker product innovation. Second, this system encourages the sharing of information on product trends, innovations, competition, and overall market opportunities. Because Japanese wholesalers handle products from a variety of sources, they can serve as objective sources of information and provide valuable insights. Third, the business loyalty demonstrated by the parties involved helps reduce uncertainty and tension while contributing to a more cooperative business relationship. In other words, all parties involved tend to work harder for each other rather than to be at odds.

The number of retail outlets in Japan is nearly the same as in the United States, despite the fact that the population of Japan is roughly half that of the United States and Japan is slightly smaller in geographic size than California. Moreover, many of these stores are small-scale operations--"mom and pop" stores--which usually cannot secure credit by themselves or maintain large inventories. They often have financial, ownership, or exclusive arrangements with major Japanese manufacturers, industrial groups, or trading companies. The strength of the multiple layer is in the ability of the Japanese wholesalers, in their capacity as middlemen, to provide appropriate and timely market information as well as financial support to smaller manufacturers and retailers with limited resources. Also, retailers want to avoid maintaining large inventories because of limited space and high storage costs, so they delegate this function to the wholesaler. Thus, it is obvious that the role of the wholesaler in commercial transactions in Japan is very important.

In many product sectors, it is virtually impossible for the manufacturer to sell in volume directly to the retailer or end-user. If the market is one in which there is a large number of smaller end-users located throughout the country, it may be necessary to rely on a network of wholesalers. Where the buyer universe is relatively concentrated among a limited number of large firms, marketing may be direct or through a single intermediary. Distribution channels in Japan vary considerably from industry to industry and product to product with particular differences between consumer and industrial goods. A key consideration is to answer the question, "Who has control over the channels of distribution which provide access to my market?" Your firm must understand existing distribution channels in order to utilize them or develop an innovative approach. To reach your potential customers, you may have to rely on a wholesaler or trading company which controls related distribution channels for your product.

Another factor to consider when exporting is that Japanese retailers and end-users rarely have import experts and must depend upon trading companies or importers with good English language capability, extensive knowledge of import procedures, and overseas financing capabilities. For this reason, even large prestigious department stores are inclined to rely on outside sources for importing.

Direct sales are more common for expensive, high-tech equipment (but only when the company has made arrangements for after-sales service). In some capital goods sectors, Japan has a number of small firms which function as subcontractors for larger manufacturers. Small- and medium-sized firms supply the majority of manufacturing industries with most of their products. To sell to these firms, it is often necessary to follow a multi-layered distribution system and develop relationships with product engineers and designers. In retail, the market is in the process of change. Significant alterations in Japan's Large Scale Retail Store Law have eased restrictions on opening of new large retail stores (supermarkets, chain stores, etc). The original law protected the smaller "mom and pop" operations. There has been a substantial increase in the number of applications to open new retail stores since the reforms have been announced, despite the fact that the smaller operations still represent very powerful local lobbies in Japan which try to impede the establishment of new large-scale stores.