Why the Japanese economy is not growing: Retail sector

By Bill Lewis, James Kondo, Makiko Shinoda, Naoko Shozuzawa, Yoshinori Yokoyama, Angelique Augereau, Ali Rowghani

In Japan, one person in ten works in the retail industry, but productivity is low. Several barriers prevent more efficient, large-scale retailers from boosting overall productivity. If these barriers were removed, the Japanese retail industry could more than triple its annual productivity growth rate.

In Japan, one person in ten works in the retail industry, but productivity is low. Several barriers prevent more efficient, large-scale retailers from boosting overall productivity. If these barriers were removed, the Japanese retail industry could more than triple its annual productivity growth rate.

Productivity performance

Overall retail productivity in Japan is 50 percent of that in the United States. The productivity level of large-scale formats (discounters/general merchandise stores and supermarkets) is 84 percent of the US retail average, whereas the level of traditionals (mom-and-pops) is only 19 percent.

Operational reasons for productivity gaps

Productivity in the Japanese retail sector is low, mainly because large-scale stores have not replaced the highly unproductive traditionals. Less-productive traditionals account for 55 percent of retail employment (versus 19 percent in the United States), while large-scale retailers account for 12 percent of employment (versus 35 percent in the United States). The shortage of large-scale retailers is particularly acute in food retailing. Large-scale formats are more productive than traditionals—particularly in food retailing—because they offer more choice for lower price and manage to serve many customers with relatively few personnel.

Industry dynamics

Particularly in food retailing, less-productive traditionals lose market share when confronted with competition from highly productive, large-scale retailers. However, most traditionals never face such competition, since large-scale retailers are comparatively rare in Japan. Large-scale foreign retailers have a negligible presence; furthermore, domestic retail conglomerates in Japan operate multiple competing formats and do not compete intensely due to internal (interformat) conflicts of interest. Market shares among top players are much more stable in Japan than in the United States.

Important external barriers to productivity growth

Entry barriers to large-scale retailers and exit barriers to traditionals are the most important external obstacles to productivity growth in the sector. The new Large-Scale Retail Location Law imposes social/environmental criteria to limit the entry of large-scale retailers. Local traditionals sit on the approval committee, and the prefectural government that handles appeals has little tax incentive to bring in large-scale retailers, since only 10 percent of prefectural revenues are derived from local businesses (the rest comes mainly from the central government).

Exit barriers hinder the exit of less-productive traditionals, who also form influential lobby groups supporting entry barriers for large-scale retailers. Low property tax, high capital gains tax, and inheritance-tax deductions discourage traditionals from exiting and selling off their land. Government loan guarantees and subsidies also make it easier for traditionals to remain in the sector.

Future outlook and recommendations

Once all barriers are removed, the retail industry has the potential to boost its productivity by 6.1 percent per year (verses 1.7 percent in the past 10 years). In addition, retail restructuring will pressure upstream industries (e.g., wholesalers, manufacturers, and raw material producers) to improve productivity.

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