DECEMBER 13, 1999 VOL. 154 NO. 23

Shops for Fun
Japan's recession has spawned a new retail strategy--mixing business with pleasure
By SACHIKO SAKAMAKI Tokyo

It's well past 11 p.m., but you wouldn't know it from the scene at the Don Quijote discount store in northern Tokyo. Despite the late hour, the place is wall-to-wall people. Young couples examine badminton sets, toothbrushes, TVs, Christmas decorations, Dior lipsticks and rice crackers, all stacked along narrow corridors. Kenji Sone, 22, emerges from the brightly illuminated, canary-yellow building carrying an electronic keyboard and a few candy bars. He comes here every other week with his buddies and spends a couple of hours, sometimes just to look around. "This shop is fun," says Sone, his hair dyed gray, the color of the moment among hip young Japanese. "No other shops are open at this time selling so many things at such low prices."

Something revolutionary is happening in the stodgy world of Japanese retailing. Order is out; chaos is in. Stores offering a combination of low prices and fun are now among the hottest shopping destinations. And it couldn't be happening at a better time. With the economy still on the mend and another large company announcing layoffs every week, traditional retailers are struggling. The operator of the country's largest supermarket chain, Daiei, for instance, is saddled with debts that nearly equal its annual sales of $30 billion. But a new breed of stores--along with foreign intruders like The Gap and Boots, the British pharmacy chain--are fighting a guerrilla war against the dominant Japanese retailers. Says Don Quijote president Takao Yasuda: "The Japanese retail industry is in a state of civil war."

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The surprise victors are upstarts, like his company, that are willing to challenge the status quo. While most shops in Japan close by 9 p.m., Yasuda's messy, no-frills stores welcome insomniac shoppers into the wee hours--most Don Quijote stores are open until at least 2 a.m. Chains of shops that sell every product at 100 yen (about $1) are rapidly filling malls, supermarkets and even some corners of ritzy department stores. All of these upstarts are offering what traditional shops don't: cheap goods and fun, the thrill of unearthing a gem from a junk heap. And how do the stores manage to survive with such low prices? Mainly by taking advantage of Japan's idle factories with backlogs of inventory. Like their customers, the retailers themselves go bargain-hunting at manufacturers and wholesalers.

Daiso Industries, for example, gets a cheaper price by negotiating directly with manufacturers rather than using middlemen. Daiso, a Hiroshima-based chain of 100-yen shops, was Japan's fastest-growing retailer last year. Sales shot up 69%--at a time when the industry as a whole saw just a 1.3% rise, according to a survey by the business daily Nihon Keizai Shimbun. The company is expecting another huge increase this year, from $818 million to $1.4 billion, by opening nearly two new stores every day. President Hirotake Yano says the secret to Daiso's success lies not in the products themselves but in the wide variety offered. "Shopping here is like playing a game," he says. "The shoppers have fun, and whatever they buy is a bonus."

His stores carry about 40,000 items, everything from plastic trash cans to nail polish, underpants, pliers, reading glasses, wine goblets and ceramic pots. At regular stores, these items could cost up to 15 times more. Kazue Takasu, a Tokyo housewife, came out of Daiso's shop in Tokyo's trendy Shibuya ward carrying a white plastic bag and wearing a big smile. She bought sandals, a cosmetic pouch and other items that together cost just $8. "It's so much fun," says Takasu. "This is like a treasure hunt."

The drugstore chain Matsumotokiyoshi recently became the first company ever to move directly from the over-the-counter market to the Tokyo Stock Exchange's top tier, where blue-chip companies are listed. President Kazuna Matsumoto wants to make his shops as accessible as possible, even at the cost of attracting shoplifters. Customers are free to test new lipsticks, eye shadows and other cosmetics. As a result, the shops have become a favorite hangout for teenage girls. Like Don Quijote, Matsumotokiyoshi is a popular dating spot for young couples. Matsumoto says many high-school girls come to his shops and give themselves complete makeovers using free samples. And some even shoplift--losses from theft amount to a relatively high 2% of the chain's sales. But he doesn't seem to mind. "We're giving them the thrill of stealing," he laughs.

That doesn't sound like a viable business philosophy, however, and many wonder how long stores like Matsumoto's can maintain such a strategy. Japanese consumers are capricious, says Masahiro Matsuoka, a retail analyst at Warburg Dillon Read in Tokyo, and previous stabs at discount retailing have fizzled after early success. "It's too soon to judge whether they're just a temporary fad or not," says Matsuoka. "But I don't think they can keep expanding as they are." Aoyama Trading, a discount chain selling men's suits, was successful in the early 1990s, but lately the retailer has closed six of its shops in Tokyo. And Daiso's 100-yen shops have moved into the space.

Don Quijote, meanwhile, has become so successful it's getting attention it doesn't want: people living near its stores have been complaining about the late-night racket. Billboards in Tokyo's middle-class Suginami ward warn: "Don Quijote, don't open a store here!" But at the very least, these shops succeed where the Japanese government, through pump-priming and coupon giveaways, has failed: they've gotten consumers to open their wallets.