With a population of 127 million, an extremely high per capita income and still one of the world’s largest economies, Japan has been an attractive overseas market for retailers since the 1990’s.

However, Walmart has now become the latest foreign retailer to retreat from Japan. Walmart Inc. is selling most of Japanese retailer Seiyu to KKR & Co. and Rakuten Inc. in a deal that values the supermarket chain at 172.5 billion yen ($1.6 billion), as the U.S. giant retreats from its two-decade attempt to crack Japan’s retail market.

Under the agreement, private equity fund KKR will become the majority owner with a 65% stake, while Japanese e-commerce giant Rakuten takes 20%, the companies said in a statement Monday. Walmart will retain a 15% minority interest. Rakuten and KKR will seek to shore up Seiyu’s digital operations as demand for online retail grows in Japan amid the COVUD-19 pandemic. The new owners are retaining a previously announced plan to re-list Seiyu in the future.

The Seiyu deal is the latest divestiture of underperforming assets by Walmart, following its recent its retreat from the UK, Argentina and Brazil, as it has struggled to compete with local rivals.

The world’s biggest retailer first entered the Japanese market in 2002 by buying a 6% stake in Seiyu, and gradually built up its stake before a full takeover in 2008. However, like so many other US and European retailers before, (including for example Boots, Tesco, Carrefour, IKEA and Tesco)  Walmart failed to really understand the consumer and retail environment in Japan and so instead of adapting their business operations to the Japanese culture, they essentially assumed the Japanese would readily adapt to Walmart’s.

There is a much larger need for local store customization across Japan, reflecting that consumer purchasing patterns and product selection varying greatly between regions. Despite being one of the most ethnically homogenous societies, Japanese consumer tastes are highly varied.

Japanese grocery shoppers also tend to buy smaller quantities in regular intervals rather than the more traditional US or European grocery shopper purchasing model of the “big shop” So, the concept of large retail stores ‘hypermarkets’ is not always understood in the Japanese market – in fact the retailers with the highest growth rate in Japan are often small specialty stores (and so the exact opposite of Walmart)

Japanese shoppers also tend to buy more fresh produce than pre-packaged goods and they  often equate high price with high quality. This means the packaging and appearance of consumer goods play a huge role in their purchasing decisions.

So a low cost strategy ‘Every Day Low Prices’ that has been so successful for Walmart in the US and other markets, such as Mexico, Canada and the UK, just did not have the same appeal to the Japanese consumer.

It wasn’t just a misunderstanding about Japanese consumer behaviours that has caused Walmart’s downfall. Walmart also underestimated the power that that suppliers have in the Japanese market.  Walmart is not used to this high level of supplier power and of course in most other markets their value comes from cutting costs with suppliers and passing on these savings to customers as well as the increased efficiency that come from supply chain synergies.

Finally, their choice of Seiyu as a partner for their expansion in Japan has been questioned, at least in hindsight, for some time. Although Seiyu was successful until the 1990’s when Japan experienced an economic recession, they had acquired a large amount of debt, in total around $7.46 billion, by the early part of the 21st century. Although some thought at the time the link up with Wal-Mart might save the Japanese retailer, these debt levels have proved to have been just too much to reverse. Walmart expects to recognize a non-cash loss of about $2 billion after taxes in the fiscal fourth quarter related to the deal.

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Clarence Choe