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Amazon’s scale in Japan challenges rivals and regulators

The Financial Times logo The Financial Times 6/24/2018 Kana Inagaki in Tokyo

Two decades ago, Jeff Bezos knew little about how the Japanese market operated when he launched Amazon in the country in 2000.

But the founder of Amazon, who is a fan of Toyota’s manufacturing processes, recognised the country’s love of technology and high standards for efficiency. Those traits proved essential as Japan expanded to become the US e-commerce group’s second largest international market by revenues after Germany. Sales in the country have increased 44 per cent in the past three years to $12bn, triggering explosive growth in e-commerce.

Amazon’s growing clout in the country — which has been notoriously challenging for Silicon Valley start-ups such as Uber and Airbnb — is now the subject of an investigation by Japan’s anti-monopoly watchdog.

The Japan Fair Trade Commission is looking into whether the company forced suppliers to shoulder costs when it offers discounts in its online marketplace. Amazon has said it is co-operating with the authorities.

“Negotiations for cost cuts with suppliers occur in other sectors like autos but in Amazon’s case, its presence and influence is just too big,” said Michiaki Tanaka, a professor at Rikkyo University, who has written a book on Amazon’s business strategy.

In the wake of Amazon’s rise, Rakuten, its largest Japanese rival, which operates the country’s biggest online marketplace, has expanded aggressively into financial technology, mobile phones and home-sharing.

“We are very, very different from Amazon,” Hiroshi Mikitani, Rakuten’s chief executive, said at the Mobile World Congress in February.

Still, to compete better against Amazon, the company is aiming to create its own logistics and delivery network within two years. Unlike its US rival, it had left warehouse and inventory management to the retailers that use its marketplace rather than building its own proprietary systems.

Amazon entered the Japanese market by selling books online but has since become the go-to-destination for basic necessities and consumer electronics.

The US company held a 23 per cent share in Japan’s internet retail market compared with Rakuten’s 18.5 per cent share last year, after overtaking its Japanese rival in 2016, according to Euromonitor. Other industry data shows the two rivals in a tight race.

“There is still a lot of growth potential here,” Jasper Cheung, president of Amazon Japan, said in an interview. “No matter how you look at it, it’s just a very attractive country for us.”

The competition is set to intensify as Amazon, which acquired upmarket grocer Whole Foods Market for $13.7bn last year, makes a big push into fresh produce in Japan. To counter the move, Rakuten has partnered with US retail group Walmart in the delivery of online groceries.

Fresh food provides a rare channel for traditional retailers to partner with Amazon. Last year, Isetan Mitsukoshi Holdings decided to offer groceries on Prime Now, Amazon’s subscription and high-speed delivery service, to reach a new generation of consumers who tend to not shop at stores.

Amazon also recently opened its largest fashion studio in Tokyo to increase sales of clothing, an area where it has yet to make a breakthrough after years of trying.

Euromonitor data shows that Amazon’s share in Japan’s $11bn online retail market for shoes and apparel stood at 15.5 per cent last year, trailing Rakuten’s 23 per cent and online fashion retailer Start Today’s 19.4 per cent.

The heavy investment in Japan is part of a global push to expand its position in clothes, underscored by the hiring of former Victoria’s Secret executive Christine Beauchamp as president of fashion last year. Nomura estimates apparel could be a $45bn-$85bn business for Amazon by 2020, compared with an estimated $18bn-$36bn business in 2016.

The company is trying to make browsing for clothes easier on its site, including using videos to show the movement of fabric to help customers get the better sense of a material. It is also armed with a massive trove of data to improve its selection of brands and offer greater personalisation.

“More people start their product search on Amazon in Japan than anywhere else,” said James Peters, the Amazon executive in charge of Japan’s fashion business. “In doing that, they’re giving us great data on what they want.”

Amazon added more than 1,000 brands in 2017 alone — but not all labels want to be on the site, including Uniqlo, the popular casual clothing chain.

Tadashi Yanai, chief executive of Uniqlo owner Fast Retailing, has said it does not want the US rival to get hold of its customer data.

Amazon, however, is confident that the hold outs will eventually be won over.

“If you truly are a consumer company that is absolutely in love with your customer, then you’re not going to care where your customer buys your products,” said Mr Peters.

Former executives, however, are more forthright on why rivals such as Rakuten are unlikely to match Amazon in their warehouse and logistics capability.

“There is no way rivals can compete against Amazon. They invest in the best-in-class technology with little regard for profits so that they can create a sophisticated logistics operation,” said Shinichiro Nishino, a former Amazon executive who was hired by Mr Bezos to launch the business in Japan.

The Japanese market, which already had an efficient logistics network, fits well with Amazon’s strategy. It was one of the first markets in which the company launched a mobile site and introduced automation to its warehouses. In 2007, it was also the first after the US to introduce the Prime subscription service.

Mr Cheung is counting on technological innovation to help ease pressures on vendors and address the logistics challenge posed by Japan’s chronic labour shortage.

Analysts expect Amazon to acquire grocery or convenience stores to strengthen its distribution, but even then, the cultural hurdle will be challenging.

“Japanese expectation for food quality is high and apparel also involves unique Japanese fashion sense. These are both areas Amazon has struggled with so it’s a big unknown whether they will succeed this time,” said Hirokazu Osawa, director at the Japan Consumer Marketing Research Institute. 

Amazon in Japan — the early days

In the spring of 1997, Jeff Bezos, the founder of Amazon, received an email from a complete stranger at Japanese telecom giant NTT.

Following a presentation in Seattle, Shinichiro Nishino, the NTT employee, was hired by Mr Bezos to launch Amazon in the country three years later.

“By the time I emailed Jeff, he was already interested in the Japanese market and had done a thorough analysis. Japan, with the world’s second-largest market for books, was a natural destination for Amazon to go global,” recalled Mr Nishino, who is now chief executive of Fujisan Magazine Service, an online bookstore for magazines. 

A month after its Japan launch, Mr Nishino hired Jasper Cheung, who has served as the president of Amazon Japan since 2001.

Michiaki Tanaka, professor at Rikkyo University, who wrote a book on Amazon’s business strategy, said building local management was critical. 

“The secret to their success was their ability to customise their service to fit the Japanese market,” said Prof Tanaka. 

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