Although Japan’s e-commerce market is relatively young compared to its global peers, with many large global brands entering the market within the past five years, it’s poised on the edge of a significant growth spurt.
Even though current e-commerce penetration is just 6.6%, it will grow at a rate of 8.4% per year over the next three years, according to Fuji Economics Research Institute. And some categories are projected to grow significantly faster, including grocery and home. (See Exhibit 1.)
But not all brands will be equally ready to win customers and grow revenue in this hot market. As is the case in other more mature e-commerce markets, retailers in Japan will have to develop customer-centric capabilities and value propositions. Global and domestic brands each have their own challenges when it comes to delighting consumers and boosting sales.
To test this, we surveyed 97 brands—global and local, across all retail segments—and made online purchases from 55 of them, over 158 orders in total, before returning the vast majority of them, all to test pre-purchase, purchase and post-purchase customer experience, cost and speed across the Japanese retailer landscape.
Here’s what we learned—and what global and domestic brands need to do now to take advantage of a Japanese e-commerce market on the brink of significant growth.
LESSONS FOR GLOBAL BRANDS
Ship faster, cheaper. We found that global brands’ order levels to get free shipping are 87% higher than domestic brands’, and their overall shipping costs are 24% higher. Both make it challenging to compete with Japanese brands in the long run because Japanese consumers tend to be very price sensitive and less willing to accept high free-shipping thresholds, especially for non-luxury retailers.
Not only do global brands need to ship for less, they need to do it faster. While fast shipping is becoming increasingly important around the world, it’s especially critical in Japan, where geographic proximity and a strong carrier network combine to feasibly deliver most packages within zero to two days, especially in Tokyo.
But perhaps the biggest area needing improvement for global brands? Matching their local competitors when it comes to offering flexible delivery options, like being able to schedule a specific delivery window and offering alternative delivery locations like click and collect or picking up in konbini (Japanese convenience stores). In fact, 100% of the local brands we studied offered flexible delivery vs. just 57% of their global counterparts, as illustrated in Exhibit 2. And the usage of flexible delivery windows has grown by five times from 2005 to 2010, according to research by Yamato, Sagawa and JP.
Not only is this important to increasing consumer convenience and touchpoints, but in Japan’s hardworking, time-pressed society, roughly 20% of packages are redelivered, according to research by Yamato, Sagawa and JP, and flexible scheduling helps reduce shipping costs. Plus, as Kurt Salmon research shows, some female consumers feel uncomfortable having carriers knock on their doors to deliver packages, making in-store pickup options indispensable—while still other women appreciate konbini because they can order from home and have their husbands pick up their orders on the way home from work.
For example, Seven & i Holdings, which operates more than 18,000 konbini, department and grocery stores in Japan, started offering konbini pickup in its stores last year. Not only do they have a massive footprint, but most are open 24 hours a day. Seven & i lets consumers pick up items ordered from its own brands and also from dozens of partners, helping to increase store traffic and sales.
Develop a Japanese website. We found that some global brands don’t have websites in Japanese. While this may seem minor, it’s far from it—most Japanese consumers don’t trust websites in English, leading to lower traffic. According to a 2015 PayPal survey, Japanese consumers scored the lowest out of consumers in 29 countries when it came to trusting non-local e-commerce brands—and the highest when it came to distrust of non-Japanese websites and apps.
LESSONS FOR DOMESTIC BRANDS
Go mobile. Although mobile device usage is sky-high in Japan—77% of Japanese consumers had smartphones in 2015, up 29% from the year before, according to the Communications and Information Network Association of Japan—only 15% of local brands we surveyed had a mobile app vs. 22% of global brands. In our count, we included only apps that let consumers purchase directly from the app, although we saw a few retail apps that didn’t include this functionality.
Developing mobile apps is a great way for Japanese brands to differentiate themselves and develop stronger connections with consumers through yet another highly experiential, tightly controlled, omnichannel-connected touchpoint.
And among global brands with mobile apps, there’s still significant opportunity to be had by localizing them.
Muji is a leading domestic example when it comes to mobile apps. Their app helps the omnichannel experience come to life whenever and wherever the consumer wants. Integrating seamlessly with Muji’s website and offline store data, Muji offers over 2 million registered consumers personalized product recommendations on their mobile devices, helping to increase sales. These real-time consumer insights also enhance cross- and upselling opportunities. Similarly, Zara’s app tells consumers which stores closest to them have certain items in stock, helping to spur impulse purchases.
Make returns easier and cheaper. Most domestic brands view fulfillment as just a cost center when in fact it can be a competitive advantage. Case in point: Many domestic brands’ return policies fall far short of their global competitors’, jeopardizing their long-term growth.
Historically, cultural differences between Japanese and Western consumers led to the development of a different mindset around returns—some Japanese consumers feel a sense of “guilt” and are less likely to return items. But as e-commerce penetration continues to grow, especially in trial-heavy categories like apparel and footwear, the return rate will very likely increase, and it’s only a matter of time before Japanese consumers begin demanding better return policies.
We believe this will ultimately limit Japanese brands’ ability to attract new customers who are wary of buying online with the current hurdles to returning unfamiliar products. Instead, domestic retailers should recognize flexible, generous, free return policies as a differentiator and revenue driver that lowers barriers to purchase instead of being a cost center.
In our study, we found that only 71% of brands even offered returns and, of those, only 53% were free. The chasm between local and global retailers was significant, with just 29% of domestic retailers offering free returns vs. half of global retailers, as shown in Exhibit 3.
Furthermore, only 8% of brands allowed in-store returns, which both increases consumer convenience and, more importantly, gets consumers back into the store to potentially make another purchase and interact with the brand in a different experiential environment.
One such standout is Marui, which allows click and collect (thanks to store inventory visibility available online) and in-store returns, generating many opportunities for additional sales. Marui also offers free returns for shoes—its strategic category and one that consumers are most likely to want to try on and potentially return.
Gap was a global high performer: It included everything consumers needed to complete their return within the package and provided easy-to-understand instructions.
LESSONS FOR HARD LINES BRANDS
Our study also showed that some hard lines brands—like grocers, hardware and furniture stores, pharmacies, and cosmetics brands—have more work to do when it comes to delivering a winning cross-channel customer experience and leading a growing e-commerce market. This is often because of more operational complexity.
For instance, in our study, hard lines companies had fewer omnichannel capabilities overall—for example, they were 6% less likely to have a mobile-responsive website than their soft lines counterparts and 14% less likely to have a mobile app. Some hard lines retailers can learn from Bic Camera and other retailers who offer store and online inventory visibility on their mobile apps and websites.
Hard lines retailers are also behind on click and collect but are picking up steam when it comes to konbini and locker pickup. Many of these efforts are still in the trial phase but are showing early promise because they reduce high last-mile delivery costs.
When it came to returns, hard lines retailers, excluding grocers, were less likely to include return instructions inside the package and none of them had a return process easy enough to manage without calling or going online. They’re also much less likely to offer free returns or a preprinted return label.
Finally, it took them longer to issue refunds—an average of 8.1 days for grocers and 6.8 for CPG brands vs. the studywide average of 6.4.
The ultimate goal of all these recommendations is to ensure that retailers are ready to turn Japan’s coming e-commerce growth spurt into another way to stand out, connect with consumers and drive strong performance for years to come. Now is the time for retailers to make the moves that will allow them to lead in Japan’s coming e-commerce era.
25 April 2016