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Why Walmart’s might couldn’t crack Japan

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In 2005, after several years of failing to win the hearts of the world’s most exacting shoppers, French hypermarket Carrefour quit Japan. The experience, according to the then chief executive José Luis Duran, had been a “short, expensive adventure”.

On Monday, after an often gruelling 18 years, Walmart became the latest foreign titan to retreat. The US chain’s sale of its majority stake in supermarket group Seiyu is a tacit admission of its frustration with a market that, with the exceptions of Amazon and Costco, no foreign retailer of fast-moving consumer goods (FMCG) has properly cracked. 

In 2002, Walmart’s decision to enter the market through an existing domestic supermarket brand was seen as savvy even if some had hesitations over the choice of Seiyu.

It was no surprise that Japan stirred Walmart’s ambitions — just as it had the likes of Tesco and Boots from the UK and Sweden’s Ikea. The country’s retail market remains one of the world’s most valuable and vibrant — an environment that, on the face of it, seems supported by a critical mass of experimental, comfortably-off consumers with a nose for both quality and value. For retailers that get it right, it is highly profitable.

The problem faced, in particular, by the foreign FMCG giants, said Michael Causton, head of the Tokyo-based research group JapanConsuming, is that they have universally underestimated the lock that suppliers have in the Japanese market.

“These retailers hit a brick wall on distribution when they come to Japan. In other markets, the big retailers have wrested power from wholesale. In Japan that is still not the case . . . it means that they just cannot manoeuvre as they would wish on discounting and other strategies. Even local Japanese retailers have tried to take on suppliers and lost,” said Mr Causton.

One of the main reasons for suppliers’ continued grip over pricing is that Japan’s food retail scene is extremely fragmented: historically, even the biggest domestic participants have not had the clout to establish an upper hand. 

To some extent, Walmart was able to use its firepower after it first acquired a minority stake in Seiyu in 2002, and immediately attempted to export an “everyday low price” strategy first developed in Arkansas. What it found, however, was that price alone was not enough to draw local consumers seeking the freshest food in addition to quality service. Competition was fierce in a market where a tiny local supermarket posed as big a challenge as national brands such as Aeon and Seven & I’s Ito-Yokado stores. 

Despite being one of the most ethnically homogenous societies, Japanese consumer tastes are also highly varied. Preferences for everything from soy sauce, vegetables and beef vary from region to region, making smaller, regional participants more competitive in pricing for local products.

“It often turns into local battles, and national chains and mega-players like Walmart cannot leverage their bargaining power,” said Taketo Yamate, a former retail analyst at UBS who now works at consulting firm Frontier Management.

For Walmart, Seiyu also posed its own challenge. When the US group struck the initial tie-up, Seiyu had suffered years of under-investment. By the time Walmart assumed control, the global financial crisis struck. 

Traditionally, Seiyu’s growth was driven by the location of its stores near railway stations, making accessibility a selling point. But that also made it difficult for Seiyu to open stores outside of big cities in suburban areas, which became a new battleground for other retail groups. “At the very beginning, Walmart chose the wrong company to invest in,” said Akihito Nakai, an independent retail analyst. 

Not every foreign retailer has failed: Costco, which opened its first warehouse in Fukuoka in 1999, is a notable exception. Analysts put the US group’s success down to the strength of its private brands as well as its exotic store experience in suburban areas — such as large portions and gigantic store space.

“Whether it’s Tesco or Walmart, ultimately they failed to set themselves apart from highly competitive Japanese retailers,” said Credit Suisse analyst Takahiro Kazahaya. “The few that succeeded won consumers over by offering value that was not provided by Japanese companies.” 

After trialling various strategies under Walmart, Seiyu is now generating an operating profit and cash flow, with an estimated annual revenue of $6.7bn, according to analysts and a person familiar with the matter.

But Walmart struggled to find a buyer, according to people familiar with the matter. In the end after almost a year of negotiations, it struck a deal with US private equity firm KKR and the Japanese ecommerce group Rakuten for a $1.6bn sale. How that valuation breaks down between debt and equity has not been disclosed. Walmart declined to comment.

Seiyu’s new owners have one tailwind that Walmart had mostly missed: a nascent but fast-growing $17bn online grocery market

“It’s true that the retail industry as a whole may be struggling,” said Eiji Yatagawa, a Tokyo-based partner at KKR. “But with Rakuten as a partner, there is also an unprecedented investment opportunity to become a pioneer in a space that has so far lagged in ecommerce.”

Japan recently passed a critical threshold as online sales of goods rose to more than ¥10tn ($96bn) for the first time, according to the Ministry of Trade, Economy and Industry (METI). Even after that rise, however, Japan’s ratio of ecommerce penetration, at 6.2 per cent, is lower than in the US or UK.

Yet many believe the coronavirus pandemic means ecommerce penetration of merchandise sales will break 10 per cent sooner than expected. Amazon, which began selling food about a year ago in Japan, is likely to be an important driver of that.

The world’s largest online retailer appears to have learnt some of the lessons of the unhappy experience of Walmart, the largest brick and mortar retailer, say analysts. It has partnered one of Japan’s largest supermarket chains, Life Corp, which is in turn largely owned by Mitsubishi Corp, the owner of the country’s largest food wholesaler. Online supermarket Ocado has also signed a deal with Aeon. 

Seiyu has a chance to crack into this ecommerce market with the two-year partnership between Rakuten and Walmart in online groceries that has largely been successful so far. Noriaki Komori, a Rakuten executive who heads the joint venture, says the business has room to grow with more effective marketing using online consumer data. 

“We can offer a new customer experience by integrating the online and offline stores. We can address where the industry is struggling now by really changing the marketing,” Mr Komori said.

Walmart is retaining a 15 per cent stake in Seiyu, which is probably destined for an initial public offering as soon as next year. The US giant can only hope there is a silver lining to its Japanese adventure.

Additional reporting by Alistair Gray



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Analysis

Iranian TV action thriller delivers warning to Zarif

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It is hardly surprising that Mohammad Javad Zarif, Iran’s foreign minister and nuclear negotiator, is not a fan of Gando, a popular television drama that depicts an incompetent minister who scuppers nuclear talks with world powers by hiring dual nationals who turn out to be spies for MI6.

The series — made by an institute believed to be affiliated to the elite and hardline Revolutionary Guards — “is a lie from the beginning to the end” that “damages foreign policy more than me” by fuelling public mistrust, Zarif said.

By focusing on the nuclear talks, the Guards’ motive goes beyond creating compelling drama, reformist analysts say. Iran is in discussion with western powers about reviving the nuclear deal, a key reformist achievement, and hardliners want to deter the popular foreign minister from declaring his interest in the presidency in what is a crucial election year.

“I’ll be grateful to Gando-makers to let us continue our current job,” Zarif said this month, and commented that he would not run for the presidency.

The possibility of nuclear talks with the US and other powers has complicated an already fraught Iranian political scene ahead of the June election. Many reformists are pinning their hopes on Iran’s top diplomat to reinvigorate the nuclear deal and boost support at the ballot box. Hardliners might prefer to negotiate the deal themselves after the election. The polls are also seen as particularly crucial in case supreme leader Ayatollah Ali Khamenei, 81, dies during the next president’s term.

Pendar Akbari, left, and Ashkan Delavari, right, in a scene from ‘Gando’
Pendar Akbari, left, and Ashkan Delavari, right, in a scene from an episode of ‘Gando’. The series title refers to an Iranian crocodile able to distinguish its friends from its enemies © Bahar Asgari/Shahid Avini Cultural and Artistic Institute via AP

The purpose of Gando, which refers to an Iranian crocodile able to distinguish its friends from its enemies, “is to tell Zarif that should he dare to announce his candidacy, he will be destroyed immediately,” said one reformist analyst. “When the intelligence service of the Guards truly believes in the Gando plot lines, it means even if Zarif decides to defy such warnings, he will not be allowed to run.”

Centrist president Hassan Rouhani is due to step down this year after two terms and it is not yet clear who the presidential candidates will be. Politicians register as late as May and then have to be vetted by the Guardian Council, the hardline constitutional watchdog, which can disqualify nominees. Potential hardline candidates include Mohammad Bagher Ghalibaf, the parliament speaker and a former guards commander; Ebrahim Raisi, the judiciary chief; and Ali Larijani, a former speaker of parliament. On the reformist side, speculation has centred on Es’haq Jahangiri, first vice-president, Hassan Khomeini, a grandson of the founder of the Islamic republic, and Zarif.

A US-educated career diplomat widely respected in the west for his pragmatism, Zarif was instrumental in the historic deal in 2015, under which Iran curbed its nuclear activity in exchange for the lifting of sanctions. But Donald Trump abandoned the accord in 2018, imposed sanctions, including on Zarif, and said he would pursue a new accord to contain Iran’s regional and military policies. The US move emboldened hardliners, confirming to them the untrustworthiness of the US.

Zarif’s background in the US both as a university student and as Iran’s head of mission at the UN — during which he met US politicians including then senator Joe Biden — has long made him a source of suspicion for hardliners.

This wariness of both Zarif and the west is evident to viewers of Gando, as is the heroism of the Revolutionary Guards. Mohammad, the action hero protagonist, warns that western negotiators may sabotage refineries as part of nuclear talks. Mohammad works out of elaborate facilities akin to those in a James Bond film. The fictional foreign minister is advised by a media adviser, the main culprit, “to enter into direct talks with the US and accept the conditions of the leader of the global village”.

Vahid Rahbani in a scene from an episode of ‘Gando’
Vahid Rahbani in a scene from an episode of ‘Gando’. State TV abruptly stopped broadcasting the series that was less than halfway through its 30-episode run © Hassan Hendi/Shahid Avini Cultural and Artistic Institute via AP

The dramatic scenes reflect, in part, the worldview of some of Zarif’s critics. “Reformists, Mr Zarif and his lobby group in Washington [Iranian dual nationals] should be wiped out from Iran’s politics,” said an aide to a senior hardline politician who is a potential presidential candidate. “We have to get rid of this cancerous tumour once for good.”

Gholamali Jafarzadeh, a former conservative member of parliament, said Zarif “is not a good statesman and should not run for president” while “reformists should know that their choices have no chance to be allowed to run”. 

This month, state TV abruptly stopped broadcasting the series that was less than halfway through its 30-episode run. Local media said broadcasts would resume when the presidential race was over. Iran’s centrist president Hassan Rouhani, whose signature achievement is the nuclear deal — alluded to the show on Wednesday and said “people’s money” should not be spent on “fabrication of the truth” and “distortion of facts”.

After three years of sanctions, many voters are disillusioned by the infighting and the prospect of real change, whatever the outcome of the election. “Whether Zarif or a figure more senior than him runs or not, I’m not going to vote,” said Hamid, a 40-year-old engineer. “Let the Guards win the election as they are the ones who are running the country anyway. Why shall I make a fool of myself?” 



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Rising inflation complicates Brazil’s Covid-19 crisis

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After seven months in lockdown, Michele Marques received some unwelcome news when she returned to work: while she was away the prices of almost all the products she uses as a hairdresser had soared.

“A box of gloves rose 200 per cent. Colouring products increased at least 100 per cent,” said the 37-year-old from São Paulo, underlining how costs were rising while her revenue had collapsed. “I had to raise the price of my services, too.”

It is a dynamic that is playing out across Brazil, adding an extra layer of complexity to the country’s coronavirus crisis, which has already claimed the lives of almost 350,000 individuals and pushed hospital services to the brink.

With much of Latin America’s largest economy being shuttered, inflation is surging to its highest level in years, fuelling a silent scourge of hunger among poorer citizens that has run in parallel to the Covid-19 pandemic.

“The high price of staple foods — rice and beans, for example — has led to the disappearance of these items from the table of millions of Brazilians,” said Ana Maria Segall, a researcher at the Brazilian Research Network on Food and Nutritional Sovereignty and Security. In the 12 months to the end of March, the price of rice increased 64 per cent and black beans 51 per cent.

“In Brazil currently food inflation has penalised the very poorest, preventing them from having adequate access to food and in many situations leading to hunger,” she said, adding that rising unemployment and the curtailment of social programmes were also contributing factors.

Volunteers hand out food in São Paulo © Alexandre Schneider/Getty Images

Less than half of Brazil’s population of 212m now has access to adequate food all the time, with 19m people, or 9 per cent of its inhabitants, facing hunger, according to a recent report by Segall’s group.

“I’m doing some odd jobs, but it’s not enough to keep us going,” said Jonathan, a 28-year-old who lost his job in the kitchen of a Chinese restaurant in São Paulo when the pandemic began. He said he now struggles to provide enough food for his three young children and pregnant wife.

On a 12-month basis, inflation in June is expected to surpass 8 per cent, far above earlier estimates. In the 12 months to March, food prices jumped 18.5 per cent, while the price of agricultural commodities in local currency surged 55 per cent and the cost of fuel increased almost 92 per cent.

Line chart of Percentage increase over past 12 months showing The price of rice in Brazil is soaring

The developments pose a fresh challenge to President Jair Bolsonaro, who is already under fire for his handling of the Covid-19 pandemic. Across Brazil’s biggest cities, graffiti has sprung up labelling the populist leader “Bolsocaro” — a portmanteau of his name and the Portuguese word for expensive.

The rising prices are also likely to provide useful ammunition to leftist former president Luiz Inácio Lula da Silva, who returned to the political fray last month and may challenge Bolsonaro in elections next year.

“Bolsonaro is to blame for the increase in food prices, he is to blame for everything. They have to remove this guy,” said Maria Izabel de Jesus, a retiree from São Paulo.

Armando Castelar, a researcher at the Brazilian Institute of Economics, said the government had underestimated inflation both in terms of the numbers and also “how much a concern it should be”.

He attributed the rising prices to the devaluation of the Brazilian currency, triggered in part by the stimulus packages passed by the US government — which helped to bolster the dollar and led to higher Treasury yields — and the brighter economic outlook outside Latin America.

“You have a situation where commodity prices are going up because the global economy is going to grow a lot this year. With the growth in the US, interest rates are going up and the dollar is strengthening. This puts a lot of pressure on the exchange rate in Brazil and emerging markets in general,” he said.

As the spectre of inflation loomed last month, the Brazilian central bank raised its key interest rate by 75 basis points, higher than the half-percentage point many economists had expected. A further rate rise is expected next month.

“The central bank acted correctly, but it cannot stop there. It is important not to be too lenient in dealing with this,” said Castelar.

Silvia Matos, a co-ordinator at the Brazilian Economy Institute, also pointed to Brazil’s weakening currency as a contributing factor to inflation. But she said the slide in the real was triggered by investor concerns over Brazil’s deteriorating public finances.

Following the creation of two separate stimulus packages to mitigate the impact of Covid-19, government debt has risen to about 90 per cent of gross domestic product, a high level for an emerging market economy.

The rollout of the second of these packages began this month, with 45m Brazilians set to receive $50 a month for four months.

Critics said, however, these stipends were not nearly enough to keep people both fed and at home in lockdown.

“It is essential that the emergency aid is of a greater value, so that people do not leave the house but no one also stays at home starving,” said Marcelo Freixo, a federal lawmaker with the leftwing PSOL party.

“We need to reduce the circulation of the disease. Brazil is already experiencing 4,000 deaths per day. We will reach 500,000 total deaths by the middle of the year.”

Matos says that inflation had hit poorer citizens much harder than middle-class and rich Brazilians because a larger portion of their income was dedicated to food, the price of which has increased substantially.

“The only thing that could help right now is to get out of this pandemic,” she said.

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Can CVC pull off a $20bn ‘deal of the century’ at Toshiba?

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Proposed management buyout looks like an improbable win for the Japanese conglomerate’s embattled CEO



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