Kunio Takagi, president and CEO of the troubled Japanese retailer Daiei, is a man with a difficult mission. It's his task to instigate the three-year 'Phoenix Plan,' which aims to see the company rise triumphant from the ashes. But with Daiei's huge debts, not to mention its heavily criticised past, how does Takagi plan to ensure that this rebirth becomes a reality?
Elsevier Food International, Vol. 4, Number 3, September 2001
Detlev van Heest

Daiei is still in a troubled position. Its two main problems are a huge debt (2.56 trillion yen, or US$ 21.8 billion) and an underperforming core retail business. A large part of the debt is due to the company's purchase of real estate. Daiei was only saved from falling into negative net worth by its main banks, which last year agreed to buy 120 bn yen -worth of new, preferred shares and to provide it with a 500 bn yen credit line. It's Kunio Takagi's task to radically restructure the company.

Kunio TAKAGI graduated in economics from Wakayama University in 1966. Later that year he joined Daiei, where he rose to become general managing director of the group in March 1991. He then joined Recruit Inc for a period of nine years, returning to Daiei in October 2000. He became the company's president and CEO in January 2001.

Daiei has enormous debts, a proportion of which could perhaps be cleared by the sale of some of its assets. Will all non-core businesses be sold?
"Daiei has been diversifying over the years. Our investment in stores has been huge. But Daiei has many different formats and these, too, have been expanding constantly. Our group services, for instance, include hotels and other businesses that are far removed from retailing. Our initial investment in all these businesses was enormous. After the Japanese bubble burst about ten years ago, the value of our assets declined dramatically. The decline of Japanese real estate might have bottomed out, but nobody really knows whether or not that's the case. To reduce our debts we'll have to liquidate a combination of stockholdings and real estate. In addition to this, cash flow from our core business should lessen the burden of the debt. We need to find a balance between these three components. We'll have to decide which elements within our group activities are connected firmly to our core business. If we do decide to part with a number of subsidiaries, we have several options, including a management buy-out, IPO, or simply selling them."

Too many stores are in the red - why? Has Daiei paid insufficient attention to keeping its store base up to date? Has it lost contact with its customers?
"There are two main reasons why so many stores are in the red. Firstly, our management focused too heavily on the selling side, the company side. We were only thinking "how can we force our products onto the buyers?" We stopped asking ourselves, "what does the customer really want?" In the past, the Japanese retail game was quite rigid: the general merchandise store with every product under one roof was the standard format, and for a long time this matched the lifestyle of our consumers. But slowly the tastes and needs of customers changed, and we failed to see that. The second reason why so many of our stores are making losses is closely connected to the first. We should have changed our assortment. However, we chose to spend our money on searching for different retailing formats like hypermarkets and convenience stores. Though we did try to anticipate the customer's wants, these remodelling changes failed to meet their needs. Look at our productivity per square metre of sales floor: it declined by forty per cent in ten years!"

How will Daiei's 'Phoenix Plan' - aimed at restructuring the business over a three-year period - work?
"The former Daiei management worked on a plan for financial and operational reorganisation that would reduce debts, and this meant selling some assets - like the Ala Moana Shopping Center in Hawaii, for instance, which we sold two years ago. Such moves have been well-appreciated by both our shareholders and the banks. However, the outside world couldn't see what was going on with the operational side of the business. The emphasis had shifted too much onto one-off sale benefits.
Operational restructuring is very important - it's the only way we can improve profitability. To gain productivity we need a totally new approach and that's why we've called our restructuring the Phoenix Plan - we want to rise from the ashes. The changes will be drastic in three particular areas: stores, products and people. If we close non-profitable stores, we should do so conclusively. We will also change our products. Last February we made a start by selling unwanted stocks at just ten per cent of the normal price. This was, of course, a one-time loss that couldn't be avoided.
Regrettably, we've also had to streamline our personnel structure. Not only does this mean losing human resources, initially it means losing money too, because of the necessary redundancy payments.
A second part of our plan involves the establishment of a new accounting system, which will operate in line with European and American standards. In doing so, we'll try to show the reality of what is going on within the Daiei group, and we'll all benefit from that. Because everybody can see our profit and loss structure, it will become much easier to focus on profitability. Things won't be done behind closed doors anymore. I was faced with the challenge of having to devise our restructuring plan and of gaining the support of financial institutions. We deal with mainly four banks: the Tokai Bank, Sanwa Bank, Sumitomo Bank, and Fuji Bank. We asked them to accept preferred stocks and to provide the capital that we need to fund the new plan. In addition, we're also using 500 billion yen (US$4.1 billion) from our own cash flow to finance restructuring measures. We will also allow third parties to operate within our stores, because this will generate rent revenue. We're aiming for a much flatter, more transparent organisation with fewer layers of staff, all of which should help cut costs. Our company's labour union is strong, and it fights for our employees, but it's co-operating with the restructuring. The union has accepted the Phoenix Plan, because it realises that there is no other way that this company's going to survive.
While all this is going on, we're still trying to find our way back to our number one priority: retailing. I've explained the situation to our banks, our investors and to our employees. I've been able to get the support we need for this fundamental overhaul, but of course we're going to have to make some extremely painful changes. In many ways, we'll feel as if we're chopping off limbs."

Both you and Daiei's new chairman, Jiro Amagai, will have to make some very tough decisions. Some of your staff will doubt your wisdom and experience, given that you've both come from non-retailing backgrounds. How do you deal with this criticism?
"Mr Amagai and I come from very different backgrounds. Mr Amagai is a former bureaucrat. In his capacity as chairman, though, he won't have direct contact with our employees. I, on the other hand, started my career with Daiei. I've worked here as a buyer in retailing, and in both the product planning and financial departments. I know the key personnel very well. But the younger generation aren't so aware of my Daiei background - they think I'm a man with no retailing experience! Although I left Daiei nine years ago, a major part of my experience lies with this company.
In the 1980s I was in charge of restructuring some underperforming subsidiaries. And when I worked for Recruit I had to restructure fringe business that had experienced losses, so my background's very much that of a troubleshooter. I never expected to return to Daiei but, when 1 did, 1 found a totally different company. Now I have a very tough job - but the only way now is the tough way. I've explained this to our management people but of course •it's very difficult for our staff. Many will have to leave us, but this is the only way that Daiei can regain its health."

Is it possible to be a tough, unifying leader in a country that has such a notorious reputation for decision-making by consensus?
"My approach is to delegate. I surround myself with very able professionals who are entrusted with great responsibility to carry out their tasks. Thus work is shared, even at the highest level, and they participate in the decision-making process. Strong leadership is vital, but I also aim to share all the information, break down our internal barriers, and ensure that everyone understands the decisions before they're actually implemented. That's how I conduct business."

Will the idea of 'a job for life', the traditional backbone of the Japanese economy, survive in your company? If not, aren't you afraid that the Daiei staff will work in a climate of insecurity that might be counter-productive to your aims?
"Times have changed in Japan. At Daiei, we have a limited number of jobs available and we look for a match between jobs and skills. Sometimes that means that employees have to move on. Selecting the most suitable people for a job opening has to be done by our management, but of course we must also bear in mind the ambitions of our staff."

Selling assets is one way of reducing the debt burden. Another possibility lies in increasing profitability. In the past, Daiei was keen on boosting market share and sales. In your view, is focusing on profitability a different game?
"In the past we bought and sold in volume. Now we will focus on individual marketing, store by store. We will study the stores in their local markets. Who are our competitors there? Who are our customers in that particular locality? What should our local marketing strategy be? On a higher level we need to figure out how to combine this marketing information. From now on, Daiei will be able to diversify. Better market research will guarantee that."

It's not only internal but external reasons that account for the troubles Daiei's had to deal with - the economic downturn and low consumer spending in Japan, for instance. What effect is the current business climate having on Daiei's plans for recovery? 
"The consumer's reluctance to spend certainly isn't good news for us. In this kind of unfavourable climate, it's even more vital that we aim to meet customers' needs."

You certainly don't sound optimistic about the Japanese economy and the future of retailing. You don't anticipate some sort of business boom that might give Daiei a boost?
"In the short term, Japan's current situation is very difficult. However, should the Japanese economy recover, Daiei, too, might experience a recovery, but a superficial one. That's why we have to think long-term: Daiei must undergo a major restructuring operation no matter what."

How do you see Daiei's future? When will its figures be in the black again, and how will the company look?
"When it comes to the future, I think in terms of one year, three years and ten years. In the past fiscal year we had a small net profit from a non-consolidated basis of two billion yen. For the current fiscal year we're expecting to be in the black, but our profit will be at a very low level -20 billion yen from a non-consolidated base. Within three years' time our new merchandising strategy - built on the proper market evaluation -should start to bear fruit. In a longer time span of three to ten years we'll have to solve the debt problem. All in all, it should take that long before we start to see results."

Is a joint venture an option?
"In Japan, the general merchandise store has had its day. Category retailers are growing. All I'll say it that we're looking for the best ways forward, and the best formats. Foreign retailers should be aware that we're still a major player in the game."

How about the competition from foreign retailers in Japan? Carrefour is establishing itself firmly here; Metro AG will enter the market in 2002 in co-operation with Marubeni; Tesco and Wal-Mart will also venture into this market. Will foreign competition on your home-ground make a recovery even more difficult?
"When foreign retailers enter Japan, they are faced with three problems: real estate costs, operational costs, and typical Japanese logistics. Foreign retailers face tremendous hurdles because of the uniqueness of this market.
Big foreign retailers can do as they like, but they're not in direct competition with us. We're stronger in certain fields."

Daiei has been forced to sell shares of well-performing subsidiaries to boost the balance sheet. Could you imagine selling more well-performing units? "
"If we don't have to sell, we won't sell. But, while we prefer to keep our profitable subsidiaries under our wing, we always have to ask ourselves whether the subsidiary in question is related to our core retail business. If one unit is too remote, well, we might consider selling it, even if it is profitable."

Might an example of that remoteness be your highly successful Japanese baseball team, the Daiei Hawks, based in Fukuoka?
"Yes, the Hawks are part of a business that's far-removed from our core, but our other group companies are energised by the Hawks' success. We haven't yet decided how we are going to deal with the Hawks. The cash flow that they generate is very good, so for now we don't have to sell. And the positive image of the team reflects on the company as a whole."

Daiei's founder, Isao Nakauchi, has long been credited for the growth of Daiei. In the 1990s, though, criticism of Mr Nakauchi and his son grew. Some critics now think that Daiei should have been reorganised much earlier. Would you agree that a market leader like Daiei shouldn't have been run like a family business?
"Mr Nakauchi, our founder, was a pioneer and a highly esteemed retail man. But over the last ten years he made some misjudged management decisions. Times changed, but he didn't. He had people who worked with him, and in his style. I changed that style - and I didn't keep those people."

Is Daiei streamlining its operations through Electronic Data Interchange and the Internet?
"Japan is way behind the US and Europe when it comes to this area. We simply lack some of the infrastructure and supporting systems. And in Japan we have the specific problem of price structure, which is very complex. Japan hasn't yet found the solution to fundamental E-business questions. Japanese E-business is not transparent and any new system should be simple. Daiei wants to move into E-commerce, but we need more time - it isn't something you can just rush into."

Daiei has been considered a very closed company, but you seem keen to shed light on company dealings.
"The thing I'm really aiming for is openness. I have to change the mindset of our employees. That is my biggest challenge. We can't continue to dig ourselves in; we have to deal openly with our shareholders, our banks and our customers. We're going to turn ourselves into a forward-looking, outgoing company. I want to change our image in as positive a way as possible."