You are on page 1of 21

Wal-Mart in Japan: Survival and Future of Its Japanese Business

Prospects of overseas ventures are not very bright for the shopping Mecca, Wal-Mart. International operations of Wal-Mart gain importance as sales slow down in the US and the shut down of its German and South Korean operations in 2006.1 Wal-Mart is also struggling to prove its presence in Japan since its entry in 2002. With five consecutive years of losses after investing $1.3 billion in its Japanese operations, WalMart expects a profitable 2007. For the first quarter ended March 31 st 2007, it has posted a net loss of 4.4 billion (as of March 31st 2007, $1=117.79), which is much less when compared with the net loss of 52.8 billions for the first quarter of the previous year.2 Japan is characterised by a slow economy, demanding consumers and high bargaining power of suppliers. But its 130 trillion3 retail market is the world's second-largest, after the US. If Wal-Mart makes a cautious move, Japan will be a tempting prize. As the competitors are well ahead in the race, Wal-Marts technological advancement and global network may come handy. The Japanese retail scenario has witnessed a wave of mergers and acquisitions as many players fight for a share of the pie. How Wal-Mart would plan its future moves in the highly competitive Japanese retail industry is to be seen.

Retail Scenario in Japan


The Japanese retail industry has evolved over the years. Various factors such as population, income, competition, technology and legal reforms have contributed to the emergence of various retail formats in Japan (Exhibit I). After the Meiji Restoration, 4 Japan promoted industrial production. This led to an increase in population and wages in the urban areas and the development of infrastructure at the beginning of the 20th century. These changes also led to the appearance of Department stores, which carried a large assortment of goods. During the 1950s, the average per-capita income of Japanese was rising steadily and General Merchandise Stores (GMS)5 supported the changes. The 1970s witnessed an increase in suburban population and a drop in income levels. The increasing competition between GMS, the decline in the small store and regulations on GMS by the Large Scale Store Law6 prompted the emergence of convenience stores.7 Convenience stores targeted small commercial zones.

Scheer Peter, Wal-Mart Cant Hack it in Japan, www.truthdig.com/eartotheground/item/20060823_wal_mart_cant_hack_ it_in_japan/ , August 23rd 2006 2 Seiyu First Quarter FY2007 Results, http://www.seiyu.co.jp/english/pdf/press/070425Engrelease_final_HP.pdf, April 27 th 2007 3 Ueno Kiyori, Seiyu's First Qtr Net Loss Narrows to 4.37 Bln Yen, http://www.bloomberg.com/apps/news?pid=conewsstory&refer=conews&tkr= WMT:US&sid=akMf.I1CLAhk, April 27th 2007 4 The Meiji Restoration was the catalyst toward industrialisation in Japan that led to the rise of the island nation as a military power by 1905, under the slogan of "Enrich the country, strengthen the military. 5 General Merchant Stores are the non-food item stores which include house wares, toys, greeting cards, and hardware. 6 According to Large Scale Store Law, new store openings, changes in operating hours and store expansions had to gain approval from the Ministry of International Trade and Industry (MITI) before they could occur. The Law was introduced to protect the interests of small and medium sized retailers. 7 Convenience Stores are shops that sell essential groceries, alcoholic drinks, drugs and newspapers outside the traditional shopping hours.

In the 1990s, deregulations such as the Large Scale Retail Store Location Law8, category killers9, and shopping malls in cities which had lost competitiveness, resulted in large suburban shopping centres called Regional Shopping Centres (RSC).10 Exhibit I Evolution of Various Retail Formats in Japan Factors and Changes Period Population Income/ Competition Technology Legal Retail Formats change Economy Forms 1900s - Centred - Increase in - Railways - Second - Department on Urban income of Department Stores areas urban people Store Law 1950s - Increase - Increase in - Cash - Second - General in salaried income of Register Department Merchandise workers salaried Store Law Stores - Increase workers in nuclear households families 1970s - Increase - Oil crisis - Excessive - Increase in - Large - Convenience in suburban competition automobile Scale Stores population - Decline in Retail Store small stores Law 1990s - Return to - Deflation - Decline of -Development - Large - Regional Urban centres in of Roadways Scale Shopping areas rural areas Retail Store Centres Location Law 2010s - Decline in -Concentration - Excess - IT - Three -Neighbourhood population of income stores Urban Shopping - Increase - Competition planning Centres in between laws retirement different stores
Source: Takei Hirokazu, et al., Adaptive Strategies for Japans Retail Industry facing a Turning point, www.nri.co.jp/english/opinion /papers/2006/pdf/np2006110.pdf, October 1st 2006

In 2002, there was an increase in the number of larger stores and Japanese consumers also showed an inclination to shop at large-scale shopping centres. Japan's retail property market had seen an increase in per store floor space, despite a corresponding decline in the overall number of retail establishments. Specialty stores, grocery stores and convenience stores had a strong growth while clothing super stores suffered (Annexures I (a), I (b) and I (c)). The Japanese shopping centres were developed based on the American models. These centres had GMS (general merchandise stores), department stores, 'category killer' segment, and high-end luxury goods stores. The shopping centres catered to the diverse needs of the Japanese consumers. For example, certain economy-oriented shopping centres, attracted customers with appealing prices since consumers are price sensitive with respect to necessities. However, at the other end of the retail spectrum a number of 'super or luxury brands are likely to perform well in Japan. According to
8

Large Scale Retail Store Location Law includes economic related regulations, such as floor space, store holidays and also environmental regulations concerning the environmental impacts of large stores with floor space greater than 1000 m 2. (> 1,000 m2) 9 Category killer is a term used in marketing and strategic management to describe a product, service, brand, or company that has such a distinct sustainable competitive advantage that competing firms find it almost impossible to operate profitably in that industry. 10 Regional Shopping Centres are a building or set of buildings that contain stores and have interconnecting walkways that make it easy for people to walk from store to store.

an HSBC study, 45% of luxury goods, sold worldwide are bought by Japanese consumers. 11 Japanese consumers are also passionate about foreign goods. 12 This is evident in the analysis of the reasons for the exit of Carrefour, the worlds second largest retailer. Carrefour was blamed for stocking too many Japanese products, rather than the high-end French foods that shoppers wanted.13 In the new millennium, Japan is confronted with an aging society, which forms the target for retailers. The Japanese government has implemented the Law for Buildings Accessible to and Usable by the Elderly and Physically Disabled Persons (known in Japan as the Heart Building Law), so that the infrastructure is accessible to all. The stores are designed to conform to the regulatory standards of local governments. Amendments to the City and Town Planning Law, the Law on Improvement and Vitalization of City Centres and the Large Scale Retail store Location Law are expected by 2007. These zoning laws are being amended with an intention to decelerate the development of large-scale commercial centres in suburban areas and preserve and promote the efficient use of urban infrastructure. However, it is predicted that sales at large-scale shopping centres as a percentage of total retail industry sales, will continue to grow.14 The decline in population and the increasing competition between different retail formats are also encouraging Neighbourhood Shopping Centres (NSC)15 and Mail-order/ online shopping. The Japanese retail market is characterised by its unique distribution channels (Exhibit II) and consumer behaviour. These factors are a major challenge to the foreign players operating in the Japanese market. The Japanese distribution channel consists of a strong local distribution network called keiretsu16. This is a long and complicated network dominated by middlemen. Both foreign and domestic retailers, who are not members of the distribution keiretsu system, are unable to compete with the keiretsu members due to the price differential that exists between them. The keiretsu tend to keep retail prices high for non-members through the retail price maintenance agreement between its members. Grounded in tradition, the mutual trust and loyalty created through the distribution keiretsu is highly valued in the Japanese culture. The members of the keiretsu are entitled to various benefits such as information sharing, financial support and constant supply of merchandise (Exhibit III). Japanese consumers are very choosy and like to have the best service possible. They usually expect services like free-of-charge delivery, less than six hours for delivery, delivery time designation, off-hour handling, aid in product selection, unlimited warranty, and post-sale follow-up transactions 17 from the retailers. The abundance of small-scale mom- and-pop stores, which provide such customer services, is an inevitable phenomenon in Japan.18 Because of traffic congestion and preference for fresh products, Japanese consumers usually purchase from stores closer to their homes. Also, their extended family structure requires them to keep a large assortment of goods at home. The local retailers stock a diverse product range to satisfy this local demand.

11 12

Webb Martin, French luxury lobby captain mulls Japan's brand fixation, http://www.japanconsuming.com/?m=200702, February 6 th 2007 Matus and Dawn, Making the sale: as more foreign brands set up shop in Japan, Hawaii's retailers may need to refine their pitch to Japanese consumers., http://www.allbusiness.com/marketing-advertising/channel-marketing/322809-1.html, November 2002 13 Fackler Martin, Wal-Mart, stalled in Japan, to try harder, http://www.iht.com/articles/2005/10/30/business/walmart.php, October 30 th 2005 14 Retail Sector Overview, http://www.jrf-reit.com/english/sector/index.html, January 2006 15 Neighbourhood Shopping Centres are centres that range in size between 80,000 and 125,000 square feet. They serve an area within three to five minutes driving time and generally have a supermarket as the anchor store. To support a centre with a supermarket anchor, a population of 10,000 or more is desirable. 16 Keiretsu refers to a large group of related companies that share common interests. Depending on their formation and principles, keiretsu are commonly divided into two types: horizontal and vertical. The horizontal keiretsu are usually organized around a bank. The vertical keiretsu are usually composed of a major industrial corporation and further subdivided into supply keiretsu and distribution keiretsu. Supply keiretsu are groups of companies integrated along a supply chain dominated by a major manufacturer. The distribution keiretsu develop the web of relationships with their downstream distributors and retail outlets. 17 Min Hokey, Distribution channels in Japan Challenges and opportunities for the Japanese market entry, http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename= Published/ EmeraldFullTextArticle/ Articles/0050261002.html, 1996 18 Ibid.

Besides the unique challenges posed by the Japanese retail market, foreign retailers confront further obstacles such as government regulations and ever changing consumer demands. But Japan, with the second highest GDP in the world will offer good returns if the retailers study the changing consumer lifestyle and align their strategies accordingly.19 For instance, Wal-Mart Stores, Inc., one of the foreign retail giants in Japan, has been implementing strategic plans to survive in the highly competitive Japanese retail industry ever since its entry in 2002. Exhibit II Marketing Flows of the Japanese Distribution Channel

Source: Min Hokey, Distribution channels in Japan Challenges and opportunities for the Japanese market entry, http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0050261002.html, 1996

Exhibit III Benefits for Members of Distribution Keiretsu Technology and information transfer A close-knit relationship is the major feature of distribution keiretsu. It is achieved by mutual information and technology sharing through open communication. For example, certain manufacturers supply recent technological developments in inventory management to other members. This proves effective while responding to new market opportunities among the members. Financial risk sharing The mutual share holding of the distribution keiretsu members avoids hostile takeovers and enables the firms to concentrate on their core activities. The manufacturers also provide financial assistance to the members during hard times. Stable supply of the needed merchandise Through exclusive dealings, the keiretsu manufacturer provides constant supply of needed merchandise. Because of the stability and security of the keiretsu system, the members enjoy a long-term partnership.
Source: Min Hokey, Distribution channels in Japan Challenges and opportunities for the Japanese market entry, http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0050261002.html,
19

Retailing in Japan Report, http://www.euromonitor.com/Retailing_in_Japan, October 2006

1996

Wal-Mart in Japan
Wal-Mart Stores, Inc., the world's largest retailer and the largest corporation in the US 20, entered Japan through the acquisition of a 6.1% stake in Seiyu, the then fifth largest retailer in Japan, in 2002. 21 Established in 1963, Seiyu was involved in various business segments such as retailing and real estate. During its initial years of operations, Seiyu remained a successful retailer with a variety of stores and increased sales. In the early 1980s, it remodelled the existing stores and opened new ones, while in the later half of the same decade, it expanded internationally. In the mid-1990s, economic difficulties, coupled with a slump in consumer spending, rising competition in the retail sector and decreasing trend in the property market led to Seiyu losing 18.7 billion in the year ending February 1995.22 Due to years of mismanagement, Seiyu remained a troubled firm even at the dawn of the 21 st century. For Wal-Mart, acquiring a stake in Seiyu in May 2002 was an inexpensive and low-risk way to enter Japan. With an initial investment of $46 million, Wal-Mart gained access to the second largest economy in the world. 23 Wal-Mart struck a uniquely structured deal, whereby it would gradually acquire control of Seiyu at a predetermined price over the next five years. As part of the deal, Wal-Mart acquired 34% of stake in Seiyu, by the end of 2002.24 Wal-Marts decision to enter Japan was questionable at that point of time because of the fragmented nature of retailing in Japan. Although there was a gradual shift towards the value-oriented stores, the profits were expected to take longer to realise, as Seiyu reported low-single-digit negative same-store sales for three consecutive years from 1999.25 According to an analyst with JP Morgan, Wal-Marts Japan operations were to be viewed in a long-term perspective, as it laid the foundation for future international growth. 26 As of April 2007, Wal-Mart had 2,750 stores in 13 countries worldwide.27(Annexure II). Before its entry, Wal-Mart observed the Japanese retail market and conducted focus groups to understand the retail trends in Japan. Meanwhile, the Japanese retailers sent their employees to visit Wal-Mart stores in the US, South Korea and China. They were able to counteract by mimicking Wal-Marts method quickly and aggressively, back home in Japan. The chief economist at Retail Forward, a retail consulting firm, predicted that the biggest threat for Wal-Mart will be from the domestic retailers. 28 It became true when the Japanese retailers outsmarted Wal-Mart by slashing prices, restructured stores, launched Made in Japan campaigns and started shrinking the supply chain. Although Wal-Mart wanted to enter by adopting its highly successful US model (Exhibit IV), it had trouble in implementing its Every Day Low Price (EDLP) - its USP, in Japan. Japanese consumers were used to the traditional chirashi offered by local retailers to attract the customers by weekly discounts on selected items through advertisements. The Japanese consumers are said to compare the discount rates of various retailers before they shop. On days other than the weekly discounts, the prices offered by these retailers were relatively high. Wal-Marts offering of EDLP and chirashi was in contrast to this traditional
20

Tkaczyk Christopher, Fortune 500- Annual Ranking of Americas Largest Corporations , http://money.cnn.com/magazines/fortune/fortune500 /2007/index.html, April 30th 2007 21 Troy Mike, Wal-Mart invests in Japan, buys 6% share of Seiyu, www.findarticles.com/p/articles/mi_m0FNP/is_6_41/ai _84183445, March 25th 2002 22 Addae-Dapaah Kwame, Yeo Cindy, Percentage lease agreement as a shopping center management tool: a panacea for Singapores retail industry woes?, http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/1130170102.html, November 1st 1999 23 Wal-Mart invests in Japan, buys 6% share of Seiyu, op.cit. 24 Millar Corinne, Top 30 Grocery Retailers Worldwide, 2002, http://www.siamfuture.com/RetailBusCenter/RetailIndus/topgrocer2002.asp 25 Same-Store Sales are sales in monetary terms generated only by those stores that have been open more than a year and have historical data to compare the current year's sales to the same time-frame of the previous year.
26
27

Wal-Mart invests in Japan, buys 6% share of Seiyu, op.cit. Wal-Mart International data sheet, http://www.wal-martchina.com/english/walmart/fastfact.htm, April 4th 2007 28 Rowley Ian, Can Wal-Mart Woo Japan?, www.businessweek.com/magazine/content/04_19/b3882063.htm - 61k -, May 10th 2004

method of weekly discounts. Its consistently low prices, made the Japanese consumers suspicious of the quality of products offered. In Japan, shoppers associate low prices with low quality and wondered how a retailer could offer a pair of jeans for $10. In the Japanese consumer mind, they're seen as selling cheap stuff at cheap prices- and that can be a problem 29, observed David Marra, a principal at management consultancy A.T. Kearney Inc., in Tokyo. Exhibit IV Wal-Marts Successful US Model We want everybody in town to succeed, and that's just the culture of Wal-Mart. -A Wal-Mart commercial on the air History Founder: Sam Walton First Store: Rogers in the state of Arkansas in 1962 Philosophy: Pile 'em high and then sell 'em cheap Secrets of Success The key success factors of Wal-Mart include the following: Distribution and Procurement Wal-Mart set up highly automated distribution centres, cutting down on delivery time and costs. What WalMart expects from the suppliers is that all suppliers must have: competitive prices, financial stability, proven success in the marketplace, and offer excellent products and/or services. In February 2002, Wal-Mart created the Global Procurement Services, an entity to manage the companys direct import business and direct purchasing from suppliers. It enables Wal-Mart to buy cheaply in bulk. The Global Procurement Team comprises of Supplier Alignment, Business Development, Global Transportation/Global Services, Trade Relations and Intelligence, Quality Assurance and Ethical Standards. Wal-Mart maintains a huge database having details of consumer preferences, shopping habits and consumer trends. Associates Wal-Mart is the biggest employer setting wage rates for all retailers. Workers are not plain employees but "associates", eligible for a share of the profits and stock options in the company. This has created a famously loyal and highly competitive workforce. The "associates" are encouraged to manage their own areas. Technology RFID system - In April 2004, Wal-Mart started to implement radio frequency identification to track items from manufacturers to distribution centres and then to the stores. Satellite network- Wal-Mart has the worlds largest private satellite network. It links all operating units of the company and General Office with 2-way voice, data and one-way video communication. Retail Link - Retail Link provides information and an array of products that allows a supplier to impact all aspects of their business. By using the information available in Retail Link, suppliers can plan, execute and analyze their businesses - thus providing better service to their common customers. Retail Link is a website that is accessible to any area within the suppliers company. SMART system - The SMART System is an integrated data management system for product receiving, sales, ordering, and inventory tracking. It helps boost the efficiency of store administration functions such as ordering and inventory control, by allowing instant information access at stores and the head office. Products and Prices Wal-Mart is the largest seller of toys, furniture, jewellery, dog food and scores of other consumer products
29

Rowley Ian, Japan Isn't Buying The Wal-Mart Idea, www.businessweek.com/magazine/content/05_09/b3922073.htm, February 28 th 2005

and the largest grocer in the United States. The world's largest retailer, Wal-Mart, prefers to sell a wide range of goods with varied worth at discount rates. Wal-Mart also sells Private Label products. The company has prospered by elevating one goal above all others: cutting prices relentlessly. The US economists say its tightfistedness has not only boosted its own bottom line, but also helped hold down the inflation rate for the entire country.
Source: Compiled by the author from Wal-Mart's Success Also Brings it Business Woes, http://www.voanews.com/english/archive/2005-07/2005-07-07-voa50.cfm?CFID=158872354&CFTOKEN=53137966, July 7th 2005 and Our Company, http://walmartstores.com/GlobalWMStoresWeb/navigate.do?catg=1

Direct sourcing, one of Wal-Marts major success factor also encountered a set back because of the age-old keiretsu distribution system of Japan which prevented direct purchase from suppliers. Coupled with expensive labour and land, Wal-Mart found it difficult to reduce costs and increase profitability. Also WalMarts Japanese employees lacked spontaneity while inquiring about customer needs and hence were unable to adapt to Wal-Marts 10 foot rule.30 These barriers seemed to get swabbed as there was a change in the Japanese retail scenario with the upcoming new discount stores even though the mom-and-pop stores constituted 58% of all the Japanese retailers in 2002. Japanese consumers, who paid highest prices in the world, were now gifted with lower prices and broader selection. Discount outlets such as the 100-yen shops flourished and the Japanese youth began spending more time shopping on weekends at malls or discount outlets rather than in small neighbourhood stores. Despite the change in consumer attitude, Wal-Mart faced further obstacles. The real estate prices were high and there was limited retail space that made it tough to construct new stores and Wal-Mart ended up with renovating the outdated Seiyu stores. Also, Japanese consumers are finicky and the worlds most difficult to please. 31 Psychoanalyst Ken Ohira commented about such behaviour as a psychological disorder of Japanese consumers with high purchasing power who demand top-quality and branded goods but are also frugal in their spending.32 In spite of these mixed reactions, Wal-Mart approached the market slowly to increase its yearly sales growth rate. In 2002, along with Seiyu, Wal-Mart launched a five-year plan called New Seiyu for the implementation of best practices from the Wal-Mart model. But the Japanese economy reeled under deflation. As a result of this the prices dropped leading to low capital investments, unemployment and increased non-performing loans, thereby reducing the consumer spending. During this period, Seiyu expanded its business across Japan but recorded a net loss of 90.8 billion for the year ended February 2003 (as of February 28 th 2003, $1=118.177).33 (Annexure III). When Seiyu lowered unit prices, it increased the number of consumers and the levels of spending per customer but the widely followed price reduction policy reduced its profit margin. In 2003, Seiyu used the Big 40th Anniversary Festival34 for sales promotion. As a part of the New Seiyu program, Wal-Mart stores information system called SMART System was gradually implemented from August 2003. In the same month, Wal-Mart increased its hold in Seiyu by 37.8%. In October 2003, Seiyu dropped the practice of chirashi but resumed it soon after, when a decrease in sales was observed. After a year-long revamp measure, Seiyu posted a net loss of 7.087 billion (as of December 31 st 2003, $1=107.11) for the year ended December 200335 with a decline in the sales of general merchandise and apparel.36 According to Seiyu, the main reason was the inflexibility in merchandise assortment and
30

When the associates who are the employees of Wal-Mart come within 10 foot of a customer, the associates have to look in the eye of the customer, have to greet and ask if any help is required. 31 Elustondo Maria, Japanese market Update, www.kamcity.com/library/articles/japan.htm, March 13 th 2002 32 Ibid. 33 Seiyu Annual Report 2003, http://www.seiyu.co.jp/english/pdf/annual/2003/all.pdf 34 Seiyu celebrated its 40th anniversary of establishment in a grand manner by organising promotional events. 35 Seiyu has changed the end of its accounting period from the last day of February to the last day of December. So the fiscal year 2003 was the 10month period from March 1st 2003 to December 31st 2003. 36 Seiyu Annual Reports-2004, http://www.seiyu.co.jp/english/pdf/annual/2004/all.pdf

marketing strategy due to unseasonable weather. In 2003, Japan witnessed an unusual weather with cool summer, hot autumn and then a mild winter disrupting sales of seasonal clothing and other goods. For Seiyu, 2004 was marked by extensive renovations. It started to implement Wal-Marts Retail Link whose effects were expected to be realised after at least two years. From 2004, Seiyu initiated customer satisfaction surveys called Store Trak,37 in all its stores to get feedback from customers and link them to rapid improvements. Due to the Japanese consumers preference, it began to concentrate on the food section and took utmost care of it. For example, larger space for food section with on-the-spot fresh preparations and maintenance of hygiene were given importance. In 2004, customer greeters at the store entrance were also introduced. To offset Japanese consumers perception that low prices are linked with low quality, it started to offer costly goods also. For example, it supplemented its $10 range of jeans with a $35 one for the less price-conscious customers. It also started offering 100% cotton dress shirts for as much as $28, in addition to the cotton/polyester blends costing as little as $8 it had specialized in so far. 38 Seiyu changed its product assortment by increasing the number of brands displayed, introducing new Wal-Mart brands, differentiating them and increasing the safety measures like displaying pictures of knives instead of real ones. Seiyu also extended its store timings with stores open for 24 hours in a day. A Supplier Hotline was established to address suppliers grievances. In March 2004, 25% of the full-time employees were pushed into voluntary retirement as a part of its cost cutting measure.39 Part-timers were encouraged. In May 2004, programs for sales floor training and imparting other management skills were launched. In June 2004, Seiyu divided its store network into six regions, to simplify and standardize store operations. In October 2004, it implemented a new personnel system to groom its employees towards career development. For the third consecutive year, Seiyus net loss widened with 12.3 billion (as of December 31st 2004, $1=102.73) for the year ended 2004.40 Seiyu accepted that it was unable to concentrate on sales because of the transition from old methods to new technology. Other factors were lack of proper promotional campaigns and unseasonable weather such as heat waves, typhoons and mild winter. By 2004, Wal-Mart held a 43% stake in Seiyu.41Thus, the two year Foundation-Building Phase of the five-year plan ended (Exhibit V).

37 38

Store Trak is a customer satisfaction survey conducted by Seiyu to get customer feedback about the stores and identify customer preferences. ,Japan Isn't Buying The Wal-Mart Idea, op.cit. 39 Can Wal-Mart Woo Japan?, http://www.businessweek.com/magazine/content/04_19/b3882063.htm, May 10 th 2004 40 Seiyu Annual Report 2005, http://www.seiyu.co.jp/english/pdf/annual/2005/all.pdf 41 Rowley Ian, Wal-Mart's Waiting Game in Japan, http://www.businessweek.com/bwdaily/dnflash/dec2005/nf20051221_7745_db039.htm? chan=gb , December 21st 2005

Exhibit V The New Seiyu Five-year Action Plan

Source: Seiyu Sustainability Report 2005, http://www.seiyu.co.jp/english/pdf/sustainability/2005/all.pdf

Seiyu considered the year 2005 as the Practical Application Phase with the effective use of the systems introduced by it. The hand held terminals for ordering, sales and inventory were introduced to minimise the out-of-stocks. Seiyu began to introduce the automatic replenishment system that predicts future demand based on analysis of past sales results and when the store inventory falls to a certain threshold, a product order is generated automatically and the product is delivered to the store. It implemented a traceability program by using Quick Response42 codes. Seiyu organised Grand Sales events to attract customers. Wal-Marts initial store revamping efforts were evident in its Seiyu supermarkets with its spotless floors and perfectly arranged displays typical of order-obsessed Japanese grocery stores. Seiyu had wider aisles compared to the usually cramped Japanese stores. It also stocked brand names unfamiliar in Japan, like Simply Basic and Sam's Club. Similar to the manner in which lower prices are announced at the American stores run by Wal-Mart, Seiyus stores had overhead signs with yellow smiley faces and the word Rollback displayed in English. Seiyu also promoted modular shelves to display the best sellers in the most visible location. In conformity with legal requirements, Seiyu started to adopt People Friendly Store Development Standards in 2005. The standards promoted store designs with accessibility for all, especially elderly and physically disabled persons. It reduced escalator speeds from 30 per minute to between 20 and 23 per minute to avoid tripping of customers while getting on and off escalators. During the same period, there was a boom in the Japanese economy. There was an expectation that the consumers purchasing power might increase due to rise in wages. Wal-Mart incurred a net loss of 17.7 billion (as of December 31st 2005 $1= 117.69) for the year ended 2005 as it wrote off losses from the disposal of slow-moving inventory which amounted to
42

Quick Response code is a new type of "two-dimensional" bar code used on products in Japan that can carry 100 times the information of conventional product bar codes.

10

2.094 billion.43 During 2005, Wal-Mart announced a plan that would cost hundreds of millions of dollars to overhaul half of Seiyus stores by 2010.44 Though, Seiyu expected to post its fifth consecutive annual loss in 2006, it was pressing forward with plans to continue revamping its aging stores. In 2006, Wal-Mart increased its stake in Seiyu to 53%. 45 The first move of Wal-Mart after holding direct control of Seiyu was the appointment of Edward Kolodzieski, the former COO of Wal-Mart International as the Chairman and the CEO of Seiyu. Also, Wal-Mart involved a restructured senior management team comprising executives from its US and other international operations to oversee the remodelling program of Seiyu. In 2006, it focused on three things satisfying customers needs, offering better services and providing quality products. 46 Seiyus competitors seemed to have scored over it in terms of quality, display and variety. This was revealed in a customer survey published in Nikkei Marketing Journal, a leading business publication in Japan (Exhibit VI). Exhibit VI Reasons cited for shopping at various retail stores in Japan (in %) Retailer Ito-Yokado JUSCO Aeon Shopping Centre Seiyu Daiei Quality 16.9% 12.1% 7.9% 5.4% 3.6% Display 12.6% 9.2% 3.9% 3.3% 3.0% Variety/ Inventory 36.1% 29.5% 34.4% 17.0% 14.3%

Source: AoyamaYuko, Why Foreign Retailers Fail in Japan: Carrefour vs. Wal-Mart, http://www.som.surrey.ac.uk/research/groups/globalizingretailseminar/Aoyama.pdf, July 17th 2006

Seiyu pledged to renovate stores that were opened just a year back and improve its displays to increase the number of customers. Seiyu reduced costs and opened new stores while closing under-performing stores. It remodelled 73 stores, improved floor layouts to cater to the local needs and closed 13 stores.47 (Exhibit VII).

Exhibit VII
43 44

Seiyu Annual Report2006,,http://www.seiyu.co.jp/english/pdf/annual/2006/all.pdf Fackler Martin, Wal-Mart, stalled in Japan, to try harder, www.iht.com/articles/2005/10/30/business/walmart.php, October 30 th 2005 45 Japan Fact Sheet, http://walmartstores.com/GlobalWMStoresWeb/navigate.do?catg=377 46 Seiyu 2006 Results and 2007 Forecast announced today, www.seiyu.co.jp/english/pdf/press/070216Engrelease_financial.pdf February 17 th 2007 47 Ibid.

11

Number of Wal-Mart stores in Japan


Feb-07 Feb-06 Feb-05 Feb-04 Feb-03 Feb-02 388 392

405 404 404

398

Wal-Marts Japan Operations as on February 2007


Seiyu Supermarkets Seiyu GMS (food & general Merchandise) Seiyu GM (general merchandise only) 293 97 2

Source: Seiyu Annual Report 2007, http://www.seiyu.co.jp/english/pdf/annual/2007/all.pdf

The stores were remodelled based on customer opinions to suit local community. According to Store Trak, customers had observed significant improvement in the aspects of assortment and accuracy as well as speed of checkout. In August 2006, a Distribution Centre handling apparel, food and general merchandise was established in Misato city to supply merchandise to the stores in the metropolitan area with the help of vendors. This centre was built based on expertise from Wal-Mart. The Misato City Distribution Centre is an advanced distribution centre with a modern infrastructure, handling a range of items in different temperature zones. Even though Seiyu forecasted a profitable year, the net loss for the year ended 2006 amounted to 55.792 billion (as of December 31st 2006, $1=119.155).48 (Exhibit VIII). Seiyu complained that the loss was mainly due to a change in Japanese accounting laws 49 that required it to lower the estimated value of its stores and land. According to Seiyu, the loss occurred as it wrote down the value of fixed assets.

Exhibit VIII Sales and Profit of Wal-Mart in Japan (2002-2006)


48 49

Seiyu 2006 Results and 2007 Forecast announced today, op.cit. In June 2006, Japanese Diet approved the Financial Instruments and Exchange Law (FIEL) to enhance investor protections and convenience, while promoting cost-efficient transactions and financial innovation. The Japanese Diet is Japan's legislature that consists of two houses: the House of Representatives and the House of Councillors.

12

Sales
1105.9 906.2 1091.5

Consolidated (billion yen)


997.1 960.8

2002* 2003**

2004

2005

2006

Profits
Operating Profit 16.5 8 10 2.9 -7 Ordinary Income 9.5 0.5 -12.9 12

Consolidated (billion yen)


Net Income 3.2 -2.6

-6.1 -17.7

-55.7 -90.8 2002* 2003** 2004 2005 2006

* For the year ended February 20 **For the year ended December 2003(10 months) Source: Seiyu Annual Report 2007, http://www.seiyu.co.jp/english/pdf/annual/2007/all.pdf

Wal-Mart The need for a localisation imperative


Japan is considered to be one of the world's most difficult markets to penetrate. 50 But success in Japan is important for Wal-Mart. Since entering Japan, it has moved cautiously to introduce its low-cost, high-volume retail strategy into Seiyu stores. Hit with the exit from Germany and South Korea in 2006, any hasty move in Japan may prove to be fatal for Wal-Mart. Despite an investment of $1 billion in Japan, Wal-Mart continues to struggle with Japans slow, anti-competitive distribution keiretsu system. Largely because of the demanding nature of Japanese consumers who prefer fresh products, Wal-Mart is forced to source most of its products locally. The farms and fisheries from where Wal-Mart sources its produce are small, family-run operations that frequently offer better deals on smaller orders, than on the larger ones. Moreover, Japan has a variety of consumer preferences that requires local customization. This hinders efficient logistics, thereby reducing profits. For instance, what sells well in Hokkaido, an island in the northern end of Japan is often not preferred in Kyushu, an island in the south-west end of Japan. Many Japanese consumers also prefer the traditional shotengai,51 which plays a significant role in local communities. For Wal-Mart, these factors have imposed difficulties to increase the economies of scale.
50 51

Wal-Mart, stalled in Japan, to try harder, op.cit. Shotengai is a Japanese word which means narrow shopping streets with specialty stores.

13

Wal-Mart is confronted with other drawbacks also. Its Japanese competitors are situated in better locations, operate specialty stores and offer financial services such as extending credit to their customers. These factors have given them an edge over Wal-Mart.52 According to the President of Atlantis Investment Research, Japan is not America and South Korea is not America. The global giants fail because of not localizing their businesses. 53 Wal-Mart has been launching American-style stores in some foreign markets with incompatible retail traditions and cultures. Wal-Mart had encountered set-backs and risings in the international operations since its entry into Mexico in 1991. When Wal-Mart entered Argentina in 1995 with wholly owned operations, initially it had a negative effect when it failed to take into account the cultural differences between Argentina and the US market. After its decade long operations from 1996 in China, Wal-Mart painstakingly discovered that China requires to be going native. Wal-Marts acquisition of Trust-Mart54 in China for $1 billion in 200655 had showed a way forward. Wal-Mart acquired Wertkauf, a chain of 21 super markets in Germany in 1997 to enter Germany and exit its German operations in 2006 with a loss of $1 billion.56 It was opined that Wal-Mart misjudged the consumer and business culture, under-estimated Germanys competitive market and miscalculated the market trends Wal-Mart entered South Korea in 1998, and sold its operations in 2006 as the warehouse style environment was unacceptable to Korean shoppers. Wal-Mart is very precariously poised in Japan. To look native, Wal-Mart has not re-branded Seiyu, allowing it to continue with the same name. When Wal-Mart closed its operations in Korea and Germany, many market players speculated that it might leave Japan because of Seiyus poor performance. But Wal-Mart said that it is committed to Japan and forecasts a profitable 2007 with its core supermarket operations starting to show recovery. Seiyu expected profit in six years, citing sales growth from 24-hour store openings and shop renovations in the year ended 2006. It expected a net profit of 0.8 billion for the year ending 2007.57 However, sales declined during the first quarter ended March 31 st 2007. A steady performance by food products and general merchandise failed to offset lacklustre growth in sales of seasonal winter merchandise. According to Seiyu, while comparing the results of the first quarter of 2006 and 2007, the net losses in the first quarter of 2007 declined by the improvements in the ratios of gross profit. 58 During the first quarter, consolidated net sales were 227.1 billion and the operating loss was 2.3 billion. The ordinary loss decreased from 4.3 billion in the first quarter of 2006 to 3.8 billion in the first quarter of 2007. As a result, net loss for the quarter ended March 2007 was 4.4 billion (as on March 31 st 2007, $1=117.79) which includes the impairment loss of 47.5 billion.59 (Exhibit IX). During the first quarter of 2007, it remodelled seven stores and began 24-hour operations in 11 more stores - expanding the 24-hour network to 273 out of 392 stores as of March 31st 2007.60 During the quarter, no new store was opened nor was any existing store closed. I am very pleased to see the efforts of our team to improve profitability, 61 the chief executive officer of Seiyu, Edward Kolodzieski commented. He added that the company will continue its endeavours to meet diverse customer needs through store remodelling and by expanding its network of 24-hour stores. Similar
52

Izumi Sachi and Maestri Nicole, Wal-Mart's Japan choice: Bulk up or pull out, money.netscape.com/story/2007/03/23/wal-marts-japan-choicebulk-up-or-pull-out , March 22nd 2007 53 Lost in the cultural translation, op.cit. 54 Trust Mart is a Taiwanese owned chain of retail centres in China. 55 Wal-Mart Acquires Trust-Mart For US$1 Billion, http://www.chinaretailnews.com/2006/10/19/364-wal-mart-acquires-trust-mart-for-us1-billion/, October 19th 2006 56 Wal-Mart incurred a loss of $1 billion in 2006 due to the sale of its business in Germany. 57 Seiyu 2006 Results and 2007 Forecast announced today, http://www.seiyu.co.jp/english/pdf/press/070216Engreleasefinancial.pdf, February 16 th 2007 58 Seiyu Announces First Quarter 2007 Results, op.cit 59 Ibid. 60 Ibid. 61 Ibid.

14

to the first quarter ended March 31st 2007, the company will continue to remodel larger stores in addition to smaller ones. It is expected to open four new stores by the end of fiscal year 2007. According to the chief executive of Seiyu, the company will look at global procurement opportunities, leverage technology and try to improve economies of scale. He added, We have customers who are willing to spend a lot more money with us if we do a better job than we are doing today.62 Exhibit IX: Consolidated results for the First Quarter 2007 (Billions of yen) First Quarter 2007 Net Sales Comparative Store sales Operating Loss Ordinary Loss Net Income 227.1 (0.7%) (2.3) (3.8) (4.4) Change on Preceding term (1.1%) -0.5 0.5 48.4 First Quarter 2006 229.6 +2.1% (2.8) (4.3) (52.8) Full year forecast 2007 992.1 +1.7% 10.6 4.0 0.8

Source: Seiyu Announces First Quarter 2007 Results, http://www.seiyu.co.jp/english/pdf/press/070425 Engrelease_final_HP.pdf, April 27th 2007

The Road Ahead


From 2006, Wal-Mart faced intense competition from domestic retailers through their merger and acquisition strategies. Aeon Co., Japans largest super market chain aims at becoming one of the worlds top ten retailers by 2010. As part of its growth strategy, it issued new shares and bonds in October 2006 to acquire smaller rival retailers and to open new stores. In March 2007, Aeon announced its take-over of 15% stake worth 46.2 billion (US $393.5 million) in Daiei.63 Daiei was a Japanese super market chain which collapsed in 2004 because of bad debt for which Wal-Mart was also in the race of bidding. This new alliance will prove to be yet another challenge for Wal-Mart while it aims to revive Seiyu. Meanwhile, other local competitors are gearing-up with new strategies (Exhibit X). Exhibit X Some plans announced by Wal-Marts Japanese Competitors Business Plan of Takashimaya Group In fiscal 2005, the Takashimaya Group established a new long-term business plan called Strategies for Growth, which covers the seven-year period from fiscal 2006 to fiscal 2012. The project involves various activities such as constructing new stores and store revamp. Uny tie-up with Itochu Shoji In January 2006, Uny, Japans fifth retailer announced a business cooperation tie-up with Itochu Shoji, the wholesale business chain. This move was to avoid take over bids by the larger retailers. Isetan, Tokyu form retail alliance Isetan and railway Tokyu Department Store, the two Tokyo-based department store chains will get involved
62 63

Pilling David, A tough nut to crack, www.ft.com/reports/investjapan2007, March 13 th 2007 Japanese retailers Aeon and Daiei announce capital tie-up, http://www.iht.com/articles/ap/2007/03/09/business/AS-FIN-COM-Japan-RetailAlliance.php, March 9th 2007

15

in the development of original products and integrate systems for sales management and customer data to induce profits. This was announced in March 2007. Isetans alliance with the department stores owned by railways is expected to improve its sales. Daimaru and Matsuzakaya to merge Daimaru, the fourth largest department store group in western Japan and Matsuzakaya, the seventh largest in central Japan would merge operations to form the biggest department store chain in Japan by September 2007. The new company is created to have greater buying power and strengthen clout with suppliers. It may also streamline distribution, reduce the cost of sales promotions, and improve profitability. Business Reengineering Plan of Ito-Yokado Group Ito-Yokado had undertaken a business reengineering plan initiative in order to respond to the changes in consumer trends. The objective of the plan is to improve profitability, productivity and customer service.
Source: Compiled by the author from (a) Takashimaya Company, Limited Annual Report 2006, www.takashimaya.co.jp/corp/english/annualreport/2006/annual.pdf (b) Itochu helps itself by helping Uny, http://www.japanconsuming.com/?m=200604 (c) Isetan, Tokyu form retail alliance, http://search.japantimes.co.jp/cgi-bin/nb20070328a9.html, March 28th 2007 (d) Daimaru and Matsuzakaya to merge in Japan department store deal, http://www.iht.com/articles/ap/2007/03/14/business/ASFIN-COM-Japan-Retail-Alliance.php, March 14th 2007 (e) Business Reengineering Plan of Ito-Yokado Group, http://www.itoyokado.co.jp/company/investors/release /pdf/20050222e _02.pdf, February 22nd 2005

According to Citigroup, Seiyu makes up 12% of Wal-Marts international sales. 64 To increase its business performance in Japan, Wal-Mart is anticipated to speed-up its improvement programs. For the year 2007, Seiyus three key initiatives for enhancing its sales are to strengthen merchandise portfolios to satisfy local customer needs, to provide better and more convenient services to customers by offering the best store hours and shopping environments and to provide value that goes beyond the price with more qualityguaranteed and fashion-conscious merchandise. According to Wal-Mart, it will operate with the commitment to put every effort to make Seiyu stores more attractive places to shop at. Seiyu is expected to increase the number of 24-hour stores and renovate outlets to attract customers and push up sales in the country's 130 trillion retail market. It also has plans to gain leverage on the global supply network of Wal-Mart Inc., which it believes will help enhance the value and quality of its merchandise. In 2007, the Misato Distribution Centre will begin full-fledged operations by increasing the number of stores covered.65 Seiyu plans to promote its employees with a global view through corporate culture apart from training of skills and techniques such as food processing and merchandise display. It will continue to reduce waste and power consumption as a costsaving initiative. Being a company with committees that separates managements decision-making and execution functions, it will continue with the improvement of internal control system also. Wal-Mart, which holds 53% in Seiyu, has an option to raise its stake to 66.7% by the end of 2007 to gain market share in the world's second-largest economy.66 During the first quarter of 2007, Wal-Mart International conducted a review code-named Project Red in the US. According to analysts, the review was
64 65

Wal-Mart's Japan choice: Bulk up or pull out, op.cit. Seiyu 2006 Results and 2007 Forecast announced today, op.cit. 66 Aoi Yasue, After 5 years of losses, Seiyu sees 2007 profitable, http://www.iht.com/articles/2007/02/18/bloomberg/sxseiyu.php, February 18 th 2007

16

conducted in the backdrop of Wal-Marts need to regain its status as a growth stock. One of the recommended action plans is to sell off the Japanese operations. Shigeki Makino, an investment analyst said, Japan in general is over-retailed and overstored. 67 (Exhibit XI). As of 2007, Seiyu is valued at about $1.16 billion and finding a buyer for turnaround will be difficult.68 Exhibit XI Retailer Density Country Outlets per Outlets per Million Million Inhabitants (NonInhabitants Food Retailers) (Food Retailers) 2,158.5 3,714.1 1,265.6 2,947.9 4,232.2 6,582.0 1,557.9 3,493.6 848.2 5,011.8

France Germany Japan United Kingdom United States

Source: Euromonitor International, 2005

Source: AoyamaYuko, Why Foreign Retailers Fail in Japan: Carrefour vs. Wal-Mart, http://www.som.surrey.ac.uk/research/groups/globalizingretailseminar/Aoyama.pdf, July 17th 2006

From May 1st 2007, Japans new Company Law which is a part of Financial Instruments and Exchange Law (FIEL) came into effect.69 The law allows triangle mergers foreign companies can use local subsidiaries to acquire Japanese firms through stock swaps instead of cash. In this scenario, Wal-Mart is expected to look out for buyout opportunities. A consultant at Bain & Co., said, They know they need greater market share to achieve their goals, and in terms of new stores, Wal-Mart will stay very open to opportunities for both acquisitions and organic growth.70 To expand its geographical spread, analysts said that Wal-Mart might acquire Uny, a strong regional general merchandise retail chain. Michael Wheatley, a retail analyst at HSBC in Tokyo commented, Clearly, Wal-Mart needs geographical range in Japan, and acquiring a regional supermarket such as Uny (based in Nagoya) would help balance its store formats. Seiyu's stores are mainly close to train stations and do not fit Wal-Mart's big-box model of having stores in rural and suburban areas.71 However, analysts believe that Uny is more likely to disagree unless it faces a crisis.72

Annexure I (a)

67 68

McWilliams Gary and Zimmerman Ann, How Wal-Mart Should Right Itself, http://www.narse.org/breaking.htm, April 20 th 2007 Ibid. 69 Japan Practice Corporate & Securities Mergers & Acquisitions, http://www.pillsburylaw.com/content/ portal/publications/2007/4 /200741919165703/Japan%20C&S%20M&A%20Vol%200400%20No%204001%2004-25-07.pdf, April 25 th 2007 70 Wal-Mart's Japan choice: Bulk up or pull out, op.cit. 71 Sanchanta Mariko, Wal-Mart unit in Japan suffers lacklustre sales, http://search.ft.com/ftArticle?queryText=Wal-Mart+to+acquire+Uny +in+Japan&aje=true&id=070131000745, January 31st 2007 72 Wal-Mart staying the course?, http://www.japanconsuming.com/index.php?paged=2, February 3 rd 2007

17

Number and Sales of Retail Stores by Business Type in Japan

Source: Reference: Number and sales of Retail Stores by Type of Business, http://www.gs1jp.org/10.htm

Annexure I (b) Sales by type of merchandise in department stores

Source: Reference: Sales by type of merchandise in department stores, http://www.gs1jp.org/10.htm

Annexure I (c)

18

Sales by type of merchandise in chain stores

Source: Reference: Sales by type of merchandise in chain stores:, http://www.gs1jp.org/10.htm

Annexure II Wal-Marts International Entry Strategies Wal-Mart International - 2,750 total units on April 2007 Country Mexico Puerto Rico Canada Argentina Brazil China United Kingdom Japan Costa Rica El Salvador Guatemala Honduras Nicaragua Mode of Entry Joint Venture Wholly owned subsidiary Acquisition Greenfield operations Joint Venture Joint Venture Acquisition Joint Venture Acquisition Date of Entry November 1991 August 1992 November 1994 November 1995 May 1995 August 1996 July 1999 March 2002 September 2005 September 2005 September 2005 September 2005 September 2005 Retail Units 889 54 289 14 299 77 336 392 139 63 133 41 40 JV Partner/ Company Acquired Cifra Wal-Mart Puerto Rico, Inc. Woolco Stores Lojas Americanas Shenzhen International Credit Investment Company ASDA Seiyu Ltd. Central American Retail Holding Company

Source: Wal-Mart International data sheet, http://www.wal-martchina.com/english/walmart/fastfact.htm, April 4 th 2007

19

Annexure III Financial Summary of Seiyu from Fiscal 2002-2006


Financial Summary of Seiyu (Billions of yen rounded off to the nearest value)

For the year ended Net Sales Cost of Sales Total Gross Profit Other Operating Revenue Operating Gross Profit Selling, general and administrative expenses: (i)Salaries and bonuses to employees (ii) Provision for accrued bonuses (iii) Retirement benefit expense (iv) Provision for accrued retirement benefits for directors (v) Rental expense (vi) Amortization of goodwill (vii) Other Total selling, general and administrative expenses Operating Income Non operating income: (i) Interest income (ii) Dividend income (iii) Accumulated interest income of marketable securities (iv) Equity in earnings of unconsolidated subsidiaries and affiliates (v) Gain on sale of marketable securities (vi) Foreign currency exchange gain (vii) Miscellaneous income Total non operating income Non operating expense: (i) Interest expense (ii) Interest expense on commercial paper (iii) Equity in loss of unconsolidated subsidiaries and affiliates (iv)Loss on sale of marketable securities (v) Exchange Loss (vi) Miscellaneous losses Total non operating expense Ordinary Income/(Loss)

December 2006 9,60,861 7,20,260 2,40,600 35,269 2,75,870

December 2005 9,97,103 751,896 245,206 37,483 282,689

December 2004 1,031,527 777,326 254,200 36,253 290,454

December 2003** 9,08,292 676,781 231,511 29,301 260,813

February 2003* 1,105,969 822,559 283,409 33,748 317,158

92,639 812 3,698 24 48,900 338 1,26,235 2,72,648

95,569 1,179 4,444 62 49,952 610 129,638 281,456

96,867 1,237 5,998 104 51,144 584 124,966 280,903

87,887 43,781 485 118,582 250,735

107,858 53,196 450 139,092 300596

3,222 638 89 17 1,143 1,888 7,100 201 423 7,725 (2,614)

1,233 661 113 2800 3,575 8,682 935 24 1326 10,970 (6,160)

9,550 592 177 204 235 1,486 2,696 9,457 922 1,366 11,746 501

10,077 895 185 589 1669 8,506 195 120 8821 2,925

16,563 1,105 243 381 1729 9,347 16 64 793 10220 8,072

20

For the year ended Special gains: (i) Prior period adjustments (ii) Gains on sales of fixed assets (iii) Gains on sales of investment securities (iv) Gains from early extinguishment of debt (v) Compensation received for store relocation (vi) Gain on cancellation of store contracts (vii) Gain on termination of substitutional portion of EPF (viii) Other Total Special Gains Special Losses: (i) Prior period adjustments (ii) Losses on sales of fixed assets (iii) Losses on disposal of fixed assets (iv) Provision for allowance for doubtful Accounts (v) Amortization of net retirement benefit obligation at transition (vi) Special retirement benefits (vii) Loss on write down of merchandise (viii) Loss on close down of stores (ix) Loss on write down of securities (x) Losses on restructuring (xi) Impairment loss (xii) Other Total Special Losses Gain/ (Loss) before income taxes Income taxes-current Income taxes-deferred Application to minority interests Net Gain/(Loss)

December 2006 2 49 1,100 198 1,351 61 814 514 49,289 2,967 53,647 (54,911) 1,650 (769) 0 (55,792)

December 2005 36 1,765 228 2,031 303 937 336 3,128 2,094 1,348 8,148 (12,278) 2,271 3,174 49 (17,774)

December 2004

December 2003**

February 2003* 173 11,303 11476 3,875 9,998 3,567 1,022 40,415 38,088 4,375 101340 (81,792) 2,561 (10,109) (3,617) (90,845)

366 3 5,746 561 200 6,879 427 120 1,450 624 3,129 4,078 1,329 11,160 (3,780) 2,231 6,239 66 (12,318)

3,123 580 3703 2,560 1,087 3,214 2,411 719 1,000 10991 (4,363) 1,369 (954) 401 (7,087)

*The fiscal year is calculated for 12 months from February 28th 2002 to February 28th 2003. ** The fiscal year is calculated for 10 months from March 1st 2003 to December 31st 2003. For the year ended February and December 2003, Other Net Non operating expenses are given under miscellaneous expenses. Source: Compiled by the author from (a) The Seiyu Ltd., Annual Report 2004, http://www.seiyu.co.jp/english/pdf/annual/2004/all.pdf (b) The Seiyu Ltd., Annual Report 2006, http://www.seiyu.co.jp/english/pdf/annual/2006/all.pdf (c) Release for the Consolidated Financial Statements for the year ending December 31, 2006, http://www.seiyu.co.jp/english/pdf/financial/2006_consolited_e.pdf, February 16th 2007

21