As featured in JapanConsuming.

Japan is perceived as being behind other markets like China and the US in terms of e-commerce penetration. Statistically this is true, and implementation of online services and online to offline marketing strategies vary greatly by company and sector. 2016 is a watershed year as online purchase frictions are smoothed out through better online services, product presentation, and, above all, improved fulfilment and returns. Surveys suggest, however, that both foreign and domestic brands and retailers can do a lot more to improve the online shopping experience.

There are quite a few estimates of just how big Japan’s online retail market already is, but the various figures are gradually coming together. In May 2015, METI put BtoC ecommerce (EC) at ¥12.8 trillion, up 14% in a year, with more than 50% accounted for by merchandise sales. Nomura Research estimates the 2015 figure was ¥13.8 trillion, rising 10%, and that the market will grow to ¥25.6 trillion by 2021, which would be about 18% of all retail sales.

Fuji Keizai, on the other hand, looks at merchandise sales alone and roughly agreed that for 2014, total merchandise sales online were ¥6.14 trillion. The consultancy notes that orders from desktop computers are falling rapidly, with mobile orders set to reach a third of the total by 2017. It puts online malls, Amazon, Rakuten, Yahoo, Lohaco and so on as having combined sales of ¥3.11 trillion, more than 50% of the total, and also notes that interest in online sales is helping maintain growth in other forms of non-store retailing, notably catalogue and TV shopping, which are expected to grow 12% in the coming year to ¥9.1 trillion combined.

The growth in online retailing is undisputed and its importance to many companies will gradually exceed most other channels.

A number of hurdles do remain. For traditional retailers, investment in developing the online channel needs to happen quickly if they are to catch up with pureplay EC businesses. At the same time, online investment has to happen without starving existing channels of resources. This tension has meant that many companies have moved slowly, and only a handful of traditional retailers have made any significant headway in development of online retailing and, mostly, only recently.

The second hurdle boils down to fulfilment. Online retail offers considerable flexibility and at least the potential of lower overall sales costs, but to get there chains must solve the problem of maintaining customer service, dealing with things like product returns and customer complaints, and keeping close watch on customer sentiments. All these things are part and parcel of operating any retail store, but they require entirely new systems and processes for the online market.

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ONLINE SERVICES AND FULFILMENT VARY WIDELY EVEN AMONG FOREIGN FIRMS

Kurt Salmon (www.kurtsalmon.com) recently completed a survey of just these issues across 97 brands in Japan, a third of them from overseas, and has kindly provided an advanced summary for JC readers. Kurt Salmon is a global retail consultancy headquartered in the US, with leading skills in operations consulting including supply chain and logistics, and has worked in Japan with both major domestic and international retailers for almost 20 years. The survey came up with some quite striking results when the online market here is compared with that in the US.

One factor is that online retailing remains relatively underdeveloped in Japan, A few companies, such as Yodobashi Camera, Seiyu and even Ito-Yokado first started selling online in the late 1990s or early 2000s, but the majority of retailers have moved online only in the past decade.

Having said that, Amazon has been here since November 2000, and its scale and experience continues to stand out.

Just as Seven Eleven leads best practice in the narrow field of convenience stores, Amazon’s initiatives continue to be a catalyst for investment and progress in Japan’s online retail industry. It achieved sales of ¥1 trillion last year, overtaking Walmart Seiyu and becoming the largest single overseas retailer in the country, and now wields a level of influence that is unprecedented, especially as many current and prospective online sellers are learning as they go. Amazon, in very many cases, sets precedent for what other companies attempt to do.

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ONLINE TO OFFLINE FUNCTIONS STILL PATCHY

Kurt Salmon’s survey collected details on all 97 brands by initiating purchases and returns on websites and testing out the sites’ functionality. It found that although 92% of sites were mobile responsive, only 20% of the brands had a mobile app. Customers everywhere are shifting from mobile browsers to dedicated apps, and apps provide much tighter control over marketing functions. Among international brands many have yet to develop Japanese targeted apps, if they have them at all.

Kurt Salmon also found that availability of ‘Find in-store stock’ and ‘Reserve in-store stock’ online services varied greatly between brands. Only 7% of luxury brands allowed online shoppers to look for store inventory online, compared to 13% of global brands and 32% of domestic brands. Of department stores surveyed, a quarter offered the service, but 38% of appliance and furniture retailers allowed both store inventory searches and provided an in-store reservation service.

There were also wide differences in retailers’ desire to collect customer information: a third of luxury brands and 71% of global brands expected shoppers to register at least an email address before checking out, which can increase abandonment rates. These figures were, however, lower than for department stores and lifestyle/fashion brands, where a full three quarters of those surveyed expected customers to register. The figure was also high for grocers.

Some companies, notably GILT and the Coop’s Pal-System demand registration even before the site can be accessed, whereas Zozotown, Yodobashi Camera and Matsumotokiyoshi allow shoppers to check out as guests. There are pros and cons of both systems, with registration increasing marketing follow-up opportunities, but equally non-registration allows faster checkout and higher conversions. An increasingly popular approach is to offer optional password registration after completing billing and shipping details since just a user name and password are required at this point.

DELIVERY OPTIONS AND FEES: MORE AND LESS, AND KNOWING WHAT CUSTOMERS EXPECT

Japan has some of the most diverse and flexible delivery options in the world, but there are considerable discrepancies between sites in terms of what is offered. Only 25% of brands offer store pick-up and just 6% of lifestyle and 13% of grocery, appliance and household retailers offer convenience store pick-up, with considerable overlap between the two. Locker pick-up is a still a new service in Japan, although Yamato’s new deal with French firm Neopost and Rakuten’s expanding locker network will see a rapid increase in usage going forward. Similarly the tie-ups between the big transport companies and convenience stores in the last year should mean much greater use of store deliveries going forward.

Given that the majority of retailers deliver through one of the large parcel delivery services, notably Yamato, Sagawa, Nittsu or Japan Post, customers now expect to be able to set delivery time and date for the majority of purchases. Too many international companies do not offer this option, perhaps because their systems do not recognise the possibility. This is a significant omission.

Similarly, the same global and luxury brands stood out for having conspicuously high free shipping thresholds, on average ¥9,663 and ¥28,077 respectively, compared to a survey average of just ¥6,874. The average shipping charge was ¥361, with global brands charging 40% more than local competitors.

Hidebound businesses are also much more reluctant to embrace the era of free shipping: all the major traditional apparel wholesaler groups like World, TSI Holdings, Sanyo Shokai and Itokin offer free shipping only when the purchase is over ¥10,000. The exception is Onward which now offers free shipping on all orders. Sports brands and retailers vary between free shipping on all orders but up to a minimum spend of ¥10,000 on other sites.

As with same day shipping, the leading online malls like Amazon are driving change and forcing other online retailers to match them. With most malls now offering free shipping for standard delivery on all purchases, or those above a low threshold of around ¥3,000, it is likely only a matter of time before all major brands and retailers follow suit.

DELIVERY SPEED IMPROVING FAST BUT COSTS RISING

Amazon now claims it offers same day delivery to just under 80% of the population – about 100 million people – and next day delivery to 95.1%. This is a remarkable achievement in a short space of time and testament to its relentless investment in new DCs and logistics systems. It has also pulled the ladder up behind it, forcing other major online stores to catch up and at great cost, leaving firms with smaller budgets behind.

But they are catching up. Yodobashi Camera, one of the most ambitious of all domestic retailers in pursuing e-commerce, also claims 75% coverage for same day delivery, and 99% coverage for next day – beating even Amazon on the second measure due to its store in Sapporo. Start Today, which has faced significant pressure from Amazon in the fashion space, says same day shipping is available to 70% of the regions where it has customers and will reach 90% shortly.

Despite same day delivery increasingly becoming standard, average total delivery time in Japan is still 3.5 days, although it is improving and is already almost twice as fast as in the US according to Kurt Salmon’s survey. Not surprisingly pureplay online businesses again beat all comers, with an average of 1.7 days for delivery, while the slowest to deliver are department stores and shopping centres. International brands average around 3.5 days. Omni7 is yet to provide average delivery times for the new service, but it has already given case study examples in hours rather than days, and says 80% of all Omni7 orders are delivered as self-pick-ups at Seven Eleven convenience stores – where, it says, it has got the processing time down to 60 seconds per package.

Delivery costs are rising in Japan due to the shortage of workers and rising wages to attract and retain them – and customers still expect low cost, rapid delivery, as set by Amazon’s precedent. Even Amazon, which ships around 65% of all packages through Yamato, is now looking to develop more in-house delivery facilities to avoid a stream of price increases by the leading transporter. Unlike the US, where re-delivery is charged to the customer and set delivery times are rare, in Japan free-delivery and free re-delivery is taken for granted. Already 20% of deliveries arrive to empty homes according to government figures, and the rate is rising, prompting Yamato to instigate new services such as using LINE to communicate with customers and drivers, installing lockers and tying with convenience stores – but the rising cost means Yamato is also putting up its fees to Amazon and other vendors.

This problem is one of the reasons behind Amazon’s decision to have delivery handled by its own staff for Amazon Now, its 1-hour delivery service launched in November. Similarly, both Yodobashi Camera and Askul’s Lohaco services also handle most of their own deliveries. While this brings in some savings, online retailers face the same labour shortage as Yamato and other transporters, making investment in DC robotics, other automated systems, and cracking the last mile problem essential. Indeed Japan’s particular labour issue, combined with its (growing) population densities, is likely to spur the country into creating the most efficient fulfilment industry in the world.

A good example is Nitori’s brand new automated DC unveiled last month in Kawasaki. It is the retailer’s first fully automated distribution centre and runs on a system of containers and palettes that can be manipulated by robots to automate all picking and delivery processing. Nitori says it expects mistakes to drop to close to zero and that the system is more efficient in its use of space. Productivity, it claims, will be 3.75 times higher while using 40% less space than at existing centres. The robotics system is provided by Jakob Hatteland Computer, a Norwegian company, through Okamura Seisakusho. As well as reducing fulfilment costs, Nitori expects growing online orders will allow it to cut expensive investment in new stores.

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RETURNS: YOU CAN, BUT WE WON’T ALWAYS TELL YOU HOW

The majority of brands and retailers offer returns for any reason given by the consumer.

However, despite easier and cheaper return services from major logistics firms like Yamato and Sagawa, 67% of brands do not offer free returns according to Kurt Salmon’s survey. In general lifestyle businesses do better, with most fashion, sports and apparel firms offering free returns with the exception of apparel groups like TSI and Sanyo Shokai. Among major department stores only Isetan- Mitsukoshi and Sogo Seibu offer free returns. Many foreign brands that still charge for return may find themselves at a disadvantage compared to competitors. Apparel and sports brands in particular would benefit from more customer friendly return policies.

In addition, almost all online stores require returns to be shipped back rather than taken into stores or through an alternative service such as a convenience store. Just 6% offer returns to store despite the obvious benefit that this service increases store visits and the potential for further purchases, or immediate product replacement. Only Seven & I is really proactive about in-store returns thanks to its ownership of Seven Eleven, although some retailers, such as Zara, Gap and Marui, also accept store returns.

Many brands and retailers are also opaque about the return process. While all luxury brands in the survey offered return instructions, 83% of appliance and furniture retailers didn’t. Overall half the firms surveyed did not offer a return label in the shipment.

Having said that refund turnaround times in Japan are way faster than the US – there it takes an average of two weeks to refund customers but in Japan just over four days.

JUST A MATTER OF TIME

Concerns of cannibalising brick and mortar sales, and the density and ease of access to physical stores, may have slowed the development of EC capabilities in Japan. However, as Kurt Salmon’s survey shows, changes are happening fast. Now, with smartphone penetration at over 50%, wifi costs decreasing and coverage increasing, and those infamously long commute (i.e. online browsing) times not looking to get shorter anytime soon, EC in Japan is set to boom.

In the past year alone both customer and commercial interest in EC has increased dramatically. Convenience store and EC integration, with the launch of SG Lawson and Omni7, advances by delivery companies, particularly Yamato, in serving the market, new fulfilment services, and, perhaps first and foremost, Amazon becoming the first overseas retailer to break ¥1 trillion in sales, are all factors that have driven this trend. New services and ideas are appearing every month.

AMAZON CONTINUES TO PIONEER E-COMMERCE EVEN IN JAPAN

Amazon has proved something of a pioneer, perhaps not surprisingly. As already mentioned, it is by far the biggest foreign retailer ever in Japan, and that is only including its direct sales of ¥1 trillion. Since close to 47% of sales are through its marketplace, where Amazon earns a commission, gross transaction values can be assumed to be around ¥1.8 trillion.

In addition to introducing a wide range of services first thought up in the USA, Amazon Japan has come up with quite a few of its own:

  • 2008: delivery through convenience stores
  • 2014: used-car sales
  • 2015: housing reform, new car sales, and even online ordering of religious services
  • 2016: an online sommelier service

The range is remarkable. For its religious services, Amazon currently offers bookings for monks to perform memorial services. Bookings must be made at least two weeks in advance, and funerals and worship at family temples are excluded, but the ¥35,000 basic fee includes travel costs. The service is offered through Amazon by Minrebi, a funeral service.

The sommelier service is similar. Using a smartphone app or a QR code, customers can book a call back from one of Amazon’s designated wine sellers, who will provide personalised recommendations for wine to go with any occasion.

Other services, including Amazon Prime, Amazon Pantry and even Amazon Air (the company’s experimental drone services) are all imported from the US, but with some adjustments. Pantry was introduced only last Autumn as a dry-goods only netsuper service, partly in response to expansion of Lohaco. It was quickly supplemented by Amazon Now in November, which does offer a variety of perishable foods such as milk and other beverages in its 1-hour delivery service.

Amazon Japan has 13 DCs as of January, including one of the biggest DCs in the world at its Odawara site in Kanagawa, and will soon open an even bigger centre, located just near to Rakuten’s main HQ. In the US, Prime Now is serviced by similar, large scale DCs, but in Japan the company has set up a dedicated distribution model, with small scale DCs servicing a local area – and, as mentioned above, with dedicated warehouse and delivery staff that excludes the need to use Yamato or other outside companies.

In the last three months alone, Amazon opened four Prime Now logistics centres, three in Kanto and one in Osaka. Although its main competitive target seems to be Omni7, Amazon claims it has been planning the service for years and now aims to have Prime Now available nationwide within just a couple of years.

This distribution and fulfilment capability is exactly what has made Amazon so successful in Japan. It now has 3,500 full-time employees, up 500 on mid-2015 alone, and its 2015 sales figure is double that of 2011. It has 60 million registered members – nearly half the population – offers 200 million SKUs, and ships 1 billion products a year in 400 million packages.

Amazon Marketplace is currently leading even Rakuten and Yahoo in terms of independent merchants working with the site. It has around 180,000 merchants at present and claims it is adding around 1,000 more a month. Yahoo, which doesn’t charge to open a store, has around 380,000 merchants although a lot of these are tiny with even tinier sales. The number on Rakuten peaked in 2013 and today has just 115,000, 60% of which are hotels.

Amazon Marketplace, that is sales by independent vendors on Amazon, continues to appeal to a wide variety of merchants. Amazon’s in-house logistics also allow it to offer its ‘Fulfilment by Amazon’ (FBA) service, whereby merchants simply send product to Amazon, with Amazon taking care of the rest of the process including returns and customer services. These infrastructure services are based on Amazon Web Services, an offshoot of the company which today only accounts for 7% of global sales, but 41% of all operating profit.

IT WILL BE WORTH THE EFFORT

Japan is set to be a mecca for online retailing. Amazon’s leadership in the industry only serves to underline just how important the market is, giving the global EC retailer the opportunity to introduce and adjust its very best ideas and to come up with new ones suited to Japan. It can do this largely because of the advanced nature of its fulfilment infrastructure, including its logistics.

Meanwhile, as Kurt Salmon’s survey attests, online retailing in Japan continues to advance at a rapid pace. By volume and, in some ways, practice, it lags behind some other markets, but in others, again notably efficiency of delivery and quality of service, it is perhaps even more advanced. There are holes, as the survey shows, such as patchy implementation by international brands that don’t fully understand the services available or cultural expectations in Japan, along with the intransigence of some domestic physical retailers, but these are both set to improve and even disappear in the short-term.

Lohaco, Lawson, Yamato, Seven & I and even department stores, are all helping to accelerate this trend. With the launch of Omni7 by Seven & I, squarely based, once again, on the fulfilment potential of its 19,000 Seven Eleven convenience stores, there may even be a company that has the physical presence to challenge the innovation of Amazon. Having only launched in November, it’s still early days for Omni7 and the company is not saying very much about the venture’s current performance.

It has, however, made note of one trend. Almost to its surprise, Seven & I says early adopters include a large section of customers who simply don’t want to shop, contradicting the long held view that shopping was a housewife’s favourite activity. It says that many early customers prefer to use Omni7 simply because it’s easy, taking the drudgery out of daily visits to the supermarket and avoiding having to lug heavy shopping around. Even in Japan, the shoppingloving housewife may soon become extinct – if she ever existed in the first place.

A wander round the shops, taken overall, might still be Japan’s favourite leisure activity, but certain types of shopping will soon be done almost exclusively online.

30 April 2016