Wal-Mart not budging from Japan

Ed Kolodziezski, COO Wal-Mart International, says Wal-Mart is not considering a market exit from Japan. Wal-Mart owns a 53.6 majority share of Seiyu, which expects to post an annual loss for the sixth time in a row. Wal-Mart has spent more than US$1 billion in Japan, but its Seiyu stores are struggling to overcome consumer apathy and employee distrust.

Even before it took full control, Wal-Mart persuaded Seiyu's management in 2004 to dismiss 25% of headquarters staff, including 1,500 employees and managers. That kind of mass firing happens rarely in Japan, and when the firing is done by foreigners, it takes on added negative connotations.

Partly as a result, the fired employees and current ones as well have created a climate of resistance. They are frequently quoted in Japanese media complaining about Wal-Mart's efforts to instill an American operating model in Japan. The company says it is being flexible, but the complaints persist: it is making life difficult for managers by mandating that stores remain open for 24 hours; it is introducing products from China and elsewhere that don't meet Japanese tastes or standards of quality.

"Seiyu became a completely different store after it came under Wal-Mart management," the magazine Nikkei Business quoted one store manager as saying. "National-brand food product prices have definitely come down, but high-quality merchandise has disappeared from the shelves, and customers have left."

One basic question is whether Wal-Mart has the right management in place. Most US companies that have succeeded in Japan, such as McDonald's, have installed senior Japanese executives to head up operations and allowed them a measure of autonomy. In contrast, Wal-Mart is relying on a team of outsiders, including Brits and Canadians. Kolodzieski doesn't speak Japanese. He started his career at Kash n' Karry Food Stores in Florida, working his way up from store manager to senior vice president of operations. As part of an environmental project, he met with Seiyu executives and visited Japan; but there is little in his background to suggest Japanese savvy.

Wal-Mart has been pouring resources into Seiyu on a large scale. Seiyu operates 392 stores and has a sales level of US$8.1 billion (2006 net sales, down 3.6%, from 2005). The company built a US-style distribution centre in Misato, which opened last August with about five miles of automated conveyors that can handle all products at all temperatures.

However, the company's systems have not meshed well with Seiyu's, resulting in many products not being ordered in time and suppliers not being paid on time. Kolodzieski would not comment on technology snafus, but he acknowledges that Wal-Mart is only in the early stages of getting Seiyu connected with the company's global procurement powers. The retailer's systems are set up to scour the world for the cheapest, best-quality source for a product. That may not work in Japan, where consumers have strong preferences for Japanese-made products, particularly food-related ones.

Retail experts will be watching sales and profit numbers as well as a decision Wal-Mart must make by the end of the year, when it has an option to acquire more Seiyu shares. If Wal-Mart declines to increase its stake, that will be interpreted as a sign of tepid interest. If it ups the ante, the retailer will be sending a signal that it intends to stay the course.