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Why Walmart’s might couldn’t crack Japan



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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Investors rethink China strategy after regulatory shocks




After four days of heavy selling in Chinese stocks, regulators in Beijing decided it was time to offer some reassurance to Wall Street. But some investors have still been left figuring out whether to double down or flee.

In a hastily arranged call on Wednesday evening, Chinese regulators told a dozen or so executives from global investors, heavy-hitting banks and Chinese financial groups not to fret about the shock overhaul of the country’s $100bn private tutoring industry. Investors should not worry about intervention to curtail profitmaking in other companies, they said. Rather, China remained committed to allowing companies to access capital markets. 

The message did not stick. Tech stocks in the country have wrapped up their worst month since the financial crisis of 2008. “Clearly there will be more [regulatory intervention] to come,” said one person briefed on the call. “That much was obvious to everyone.” 

Now, foreign investors in China have been left nursing huge losses, and anxious over where, after education, regulators might turn their attention next. They must decide whether the drop in stocks is an opportunity to double down on a fast-growing economy or a sign that unpredictable political risk outweighs potentially lucrative returns.

“The political risk factors of investing in China have grown exponentially in the past 18 months,” said Dominic Armstrong, chief executive of Horatius Capital, which runs a geopolitical investment fund. “People learned the hard way in Russia and they’re learning the hard way in China.” 

Line chart of Stock index performance year to date (%) showing China's tech crackdown hits foreign listings harder

Tough lesson

Following a leaked memo just over a week ago suggesting Beijing was planning to clamp down on education companies, the market sell-off was sharp.

It was led by a drop in education stocks that, according to one Gavekal analyst, made for “some of the most traumatic viewing since the charts of Lehman’s bonds”. TAL Education, Gaotu Techedu and New Oriental Education, which are listed in New York, all fell close to 60 per cent in the first hour of trading on July 23.

Further jitters came on Tuesday when Tencent, one of China’s biggest tech groups, announced its flagship WeChat social network had suspended user registrations as it upgraded security technology “to align with all relevant laws and regulations”. 

Nerves have pummelled Chinese tech groups listed in New York, taking the Nasdaq Golden Dragon China index down more than 20 per cent in July — the worst month since the global financial crisis. 

In Hong Kong, the Hang Seng Tech index fell almost 15 per cent, dragging the broader Hang Seng benchmark almost 9 per cent lower as Chinese internet giants Tencent and Alibaba fell 18 and 14 per cent, respectively. 

Big institutional investors have driven the selling, according to strategists at JPMorgan Chase. Meanwhile Ark Invest star manager Cathie Wood has also been slashing her China holdings. The $22.4bn Ark Innovation exchange-traded fund, which held an 8 per cent allocation to China shares in February, has now almost completely exited Chinese stocks, according to the company’s website.

But some have stepped in for a potential bargain. “We have been net buyers,” said a fund manager at a $15bn Asia-based asset manager. “It is unheard of to see these types of moves . . . You’ve got to buy them, unless you think the entire world is going to crash and burn.”

The new rules will ban companies that teach school curriculum subjects from accepting foreign investment © Costfoto/Barcroft Media via Getty

National objectives

The crackdown on education marks part of the Chinese Communist party’s attempts to address falling birth rates by removing some of the perceived financial obstacles to having children. The rules will ban companies that teach school curriculum subjects from making profits, raising capital or listing on stock exchanges worldwide, and from accepting foreign investment.

This sector is dominated by three large US-listed groups — TAL Education, New Oriental Education and Gaotu Techedu — which have enjoyed soaring valuations in recent years and drawn billions of dollars of backing from some of the world’s top investment firms such as BlackRock and Baillie Gifford.

Private rivals like Yuanfudao and Zuoyebang, which have held multibillion-dollar funding rounds in recent years, are backed by groups including Tencent, Sequoia, SoftBank’s Vision Fund and Jack Ma’s Yunfeng Capital.

The government intervention came shortly after anti-monopoly and data security measures against some of China’s largest tech companies. Last November the $37bn blockbuster initial public offering of Chinese payments group Ant was torpedoed by Beijing regulators, and its controlling shareholder — Alibaba founder Ma — disappeared from public view for several months.

In the past few months Beijing has also been expanding its influence in to the domestic online sector. In April it fined ecommerce group Alibaba $2.8bn for abusing its market dominance, and opened an antitrust investigation into Meituan, the takeaway delivery and lifestyle services platform. 

And earlier in July, Chinese regulators announced an investigation into possible data security breaches at Didi Chuxing, less than a month after the ride-hailing app raised more than $4bn in a New York listing. Its shares have dropped two-fifths since then.

Line chart of Performance of American depository receipts showing Once high-flying Chinese education stocks tumble back  to Earth

Baillie Gifford, the Edinburgh-based fund manager with £352bn in assets under management, is the second-largest shareholder in US-listed TAL and has made big bets on China’s tech sector.

“It’s not saying we like the geopolitics or the national politics or anything like that,” Baillie Gifford fund manager James Anderson told the Financial Times in June, referring to its decision to add exposure to China in recent years.

But potential gains are too compelling to ignore, he added, pointing to “the excitement we see around businesses, the ambition levels among Chinese entrepreneurs, and the relationships we can build with the individual companies”. 

Baillie Gifford declined to comment this week on the latest developments in China.

The new restrictions for private tutoring companies prohibit them from accepting foreign capital through “variable interest entity” structures — the model that many big Chinese tech firms have used to list abroad for two decades. The VIE structure, which allows global investors to get around controls on foreign ownership in some Chinese industries, has never been legally recognised in China, despite underpinning about $2tn of investments in companies like Alibaba and Pinduoduo on US markets. 

In response to Beijing’s restrictions on China-based companies raising capital offshore, on Friday the US Securities and Exchange Commission announced that China-based companies will have to disclose more about their structure and contacts with the Chinese government before listing in the US. 

“I worry that average investors may not realise that they hold stock in a shell company rather than a China-based operating company,” SEC chair Gary Gensler said in a statement.

Beijing has opened an antitrust investigation into Meituan, the takeaway delivery and lifestyle services platform © Yan Cong/Bloomberg

Widening crackdown?

The education crackdown sparked fears the VIE ban could be extended to other sectors.

Revoking the rights of Chinese companies to use VIEs is seen as China’s nuclear option. On Wednesday, Beijing regulators sought to reassure investors that it would not target VIEs more widely. But one Wall Street executive briefed on this week’s call with regulators said “it was more about what they didn’t say, there were questions about the VIE structure they didn’t address”.

The consequences of restricting VIEs in sectors outside of education would be so severe that some are confident Beijing would not eradicate them completely.

“The government will allow the VIE structure to survive, but one thing is clear: if a company wants to use the VIE structure to circumvent certain regulations then that is not going to work,” said Min Chen, head of China at $8bn emerging markets specialist Somerset Capital Management.

Rather than selling out of China altogether, some investors say they are focusing on trying to select stocks that are in line with the government’s strategic priorities. 

“Companies such as taxi-hailing groups or community group buying businesses, where their model is to use their competitive pricing advantage to squeeze out smaller players are likely to find themselves vulnerable to more regulation,” said Chen. “There is also the potential for winners in this environment, such as domestic leaders in the tech space and semiconductor producers . . . as well as companies that are exposed to mass consumption.” 

Alice Wang, a London-based fund manager at €2.7bn Quaero Capital, agreed that investors will need to switch to betting on sectors that are “important to China’s long-term economic future . . . areas like renewables and industrial automation companies that drive the ‘Made in China’ narrative.”

David Older, head of equities at €41bn asset manager Carmignac, echoed these sentiments and said he likes sectors such as semiconductors, software, renewable energy, healthcare and electric vehicles. He is overweight China and has been adding to his positions this week: “It’s a great buying signal when you see strategists saying that China is uninvestable.”

Trying to align yourself with the government’s strategic objectives “is the only way you can sleep at night”, said Horatius Capital’s Armstrong.

Chinese government intervention is about addressing its “demographic time bomb,” he said. “This is a Chinese problem and there will be a Chinese solution. You can come along and be a passenger if you want, but the ride is not going to be smooth.”

International asset managers rush to tap ‘huge’ China wealth opportunity

Some of the world’s biggest investors are pushing into China with wealth management joint ventures to create investment products for the country’s vast and growing pools of savers. A report from Boston Consulting Group and China Everbright Bank showed that China’s wider wealth market was worth Rmb121.6tn ($18.9tn) in 2020, up 10 per cent from a year earlier. 

While China’s wealth management sector is still dominated by banks, early overseas movers include Europe’s Amundi and Schroders, and BlackRock, JPMorgan Asset Management and Goldman Sachs Asset Management from the US, lured by the country’s liberalisation of its financial markets.

“There’s a fast-growing middle class in China that has huge [asset management] needs for savings and retirement,” said Valérie Baudson, chief executive of €1.8tn group Amundi, which recently launched a wealth management subsidiary with the Bank of China. This year the joint venture has launched over 50 funds to sell to the Chinese bank’s network of clients, and raised €3.4bn in assets. 

Executives downplayed the political risk of these initiatives, pointing to the importance of partnering with domestic Chinese institutions. “It’s not a risk that keeps me up at night. For us it’s about a long-term investment,” said Peter Harrison, chief executive of £700bn asset manager Schroders, which gained approval in February for a wealth management subsidiary with China’s Bank of Communications. Bringing Schroders’ long-term investment approach to China, “is very much for the benefit of long-term Chinese savers,” he added.

The value of Amundi has been updated since first publication.

Additional reporting by Eric Platt in New York

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Can plant-based milk beat conventional dairy?




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Plant-based milk brands are churning up the global dairy business, with a surge in sales, investment, and new products coming to market. The plant derived dairy trade is now worth an estimated $17bn worldwide.

Growing consumer demand has boosted investment. According to data firm Dealroom, venture capital funding across the plant-based dairy and egg sector has skyrocketed, from $64m in 2015 to $1.6bn in 2020.

The world’s biggest food company, Nestle, recently launched its first international plant-based dairy brand, a cow’s milk substitute made from yellow peas. Wonder will come in a variety of flavours, competing with established brands like Oatly oat-based milk. Founded in Sweden in the 1990s, that company is now valued at around $15bn. Demand for alternatives to soya, which once dominated the dairy free market, continues to escalate.

In the west, sales for other plant-based milks, including oat, cashew, coconut, hemp, and other seeds overtook soya back in 2014. Since then, they’ve raced ahead to be worth almost three times as much as soya products, with a combined projected value of more than $5bn in sales by 2022.

Advocates argue that plant-based production emits less greenhouse gas than cattle, making it the way forward to help feed the world and curb global warming. But dairy groups are fighting back with their own sustainability campaigns. And cow’s milk is hard to beat when it comes to naturally occurring nutrients, like protein, vitamins and minerals.

The average 100 millilitre glass of cow’s milk contains three grammes of protein, compared to 2.2 grammes in pea milk and just one gramme in oat-based substitutes.

Dairy producers have also won a legal bid, preventing vegan competitors in the EU from calling their products milk and yoghurt. Despite their growing popularity, plant-based brands are a long way from displacing conventional milk products. Their current $17bn turnover is still a drop in the pail, compared with the traditional cattle-based dairy trade, which is worth an estimated $650bn worldwide.

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'It’s more than sport – every day we are fighting for our rights to be equal’




French pro basketball player and podcaster Diandra Tchatchouang on her role beyond the court

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