Removing a Blockade to Imports

JAPAN'S DISTRIBUTION SYSTEM

ON a rainy afternoon, the housewives browse slowly through the aisles of the vast Daiei store in this outer district of Tokyo. Over in the meats section of the supermarket, a red neon sign advertizes bargain-priced ``American Beef.'' Housewares, appliances, clothing, toys, cosmetics, records, even fashion boutiques fill six more floors of the two adjoining buildings. Not far away, on a local shopping arcade, fish sellers and vegetable stores are tightly wedged in between shoe shops and appliance dealers. The two shelves ringing an electronics store carry a display of dusty televisions.

These are two ends of the maze that makes up Japan's distribution system. Japan has the highest number of retailers of any major industrial nation, most of them small shops. A manufacturer has to go through the most dense layer of wholesalers anywhere, with goods often passing through three or four hands before getting to the shelves.

The system is perpetuated by government policies that protect small shopkeepers and by business organizations that enjoy the benefits of controlled access. Huge companies have their own wholesalers and sometimes even retail outlets - electronics giant Matsushita has some 27,000 such stores.

The distribution system has become a major issue between Japan and the United States. Economic officials from both countries met this week to discuss structural barriers to reducing Japan's massive $50 billion trade surplus. The distribution system, Americans charge, acts to keep out imports, making it difficult for foreign goods to reach the Japanese consumer at affordable prices.

The reform of the distribution system is not, however, principally a US-Japan issue. The main force for change comes from within Japan - from large-scale retailers such as the Daiei group, from discount stores and all-night convenience chains such as 7-Eleven.

It comes from newcomers in the Japanese economy who, like foreign companies, are also locked out of the system.

And it gathers strength from Japan's oppressed consumers who are slowly waking up to the fact that they are paying the highest prices of any industrial nation.

Daiei, which aspires to be ``the Sears of Japan,'' is the leader of the rebels, symbolized by its feisty founder Isao Nakauchi. The Osaka-based company, started in 1957, was the first to develop nationwide chain stores, building up a network of 185 stores. It also controls affiliated chains of convenience stores, supermarkets, and discount outlets.

The company proudly says it sold $1.1 billion in imported goods in fiscal year 1988.

Daiei's greatest obstacle is the Large-Scale Retail Store Law, which is administered by the powerful Ministry of International Trade and Industry (MITI). The law was passed in 1974 as a reform measure, supposedly replacing a license system with a simple procedure of notifying MITI of a company's plans for a new store.

In practice, however, the large retailer has to obtain the approval of its plans from the associations of shotengai, or shopping arcades, in the immediate area of a store. MITI enforces this ``consultation'' with ``administrative guidance,'' advising the store to make changes to meet shopkeepers' demands.

Daiei negotiator Junji Kondo says this typically means bargaining with eight or nine shotengai associations simultaneously, offering to reduce hours of operation, floor space, or even the kinds of products sold, to get approval. Often the worst-managed stores, and those where there is no next generation prepared to take over, resist the most, says Mr. Kondo. The entire process now takes an average of six to seven years and in some cases as long as 10 years.

The 1.6 million small stores have a powerful ally in the ruling conservative party that depends heavily on the voter base and funding that they represent. In Japan, says Kondo, ``opening stores is not regarded as an economic issue - it is seen as a social and political issue.''

In the battle for change, companies such as Daiei are happy to have support from America.

``We would appreciate it if consumers would have more voice,'' says Daiei official Ryokichi Morishita. But lacking that, he adds, ``it's faster to have foreign pressure.''

The large retailers, US companies agree, have greater will, as well as the display space, to carry imported products and to deal directly with foreign manufacturers.

``The issue is access and the ability to access is greater with large stores,'' notes Bill Best, who headed a recent study of the distribution system by the American Chamber of Commerce in Japan. It found an overwhelming frustration among foreign companies with the barriers to entry.

Still, many foreign companies have had success. Some, emulating late entry Japanese companies, have gone around the maze by setting up their own direct sales networks. West Germany's BMW and Master Foods Mars candy division are the most recent examples of such success stories.

Others, like Procter & Gamble, have done well by persevering to become part of the existing system. Ironically, the chamber study found many of those well-established Western companies are as reluctant as Japanese companies to have change.

Last week a MITI advisory panel issued a report on the future of the distribution system, the first major response to calls for reform. The system, the report asserts, is in a ``process of dynamic change,'' with the emergence of new structures of distribution, including those that will accommodate more imports. It acknowledges the existence of a ``price gap'' caused by a lack of competitiveness.

Mr. Nakauchi of Daiei is skeptical of the impact of the report, but he credits MITI with making one step forward in finally accepting ``that the number of retailers will decrease.'' Economic and social forces, including the refusal of the next generation to enter the business, are reducing the number of stores athough they still number 132 per 10,000 people, compared to 65 in the US and 87 in France.

MITI's most concrete step is a revision of the administration of the large store law that will set time limits for consultation, shortening it to about two years.

``That is not a drastic reform,'' retorts Nakauchi. Since MITI will retain its administrative power and has a vested interest in preserving that role, he says, ``the core of the problem is untouched.''

The Japanese system ``is moving in a more open direction,'' says Mr. Best, the American businessman. But, he quickly adds, ``the key issue is pace.''

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