Aeon vs. the trend of Japanese and world retailers: an insider's look at ERP and how it will help the Japanese retailers fight back.

WITH WAL-MART ON ITS way to owning a controlling share of Seiyu Ltd., big changes are on the horizon for Japan's retail industry. Still, one company is preparing itself to do battle on equal terms and that company is Aeon Co. This major retailer operator has set itself a goal of becoming one of the world's top 10 retailers by 2010. The company is already Japan's No. 1 in its industry with unconsolidated operating revenue in fiscal 2002 surpassing that of Daiei Inc.

For a revealing and candid look at the chances of competing with Wal-Mart and the other global powerhouses in retail, and an insider's look at Japan's retail industry in general, we spoke to JDA Software Japan president, Rod Talbot. He is well qualified in the topic of Japanese retail systems, with more than 10 years in Japanese IT, and four years specifically in retail software.

JI: Can you tell us something about JDA Software?

Talbot: JDA Software was originally formed as an IBM Midrange software provider in Canada in the 1970s by Jim Armstrong. Now, over 25 years later, we're a global leader in delivering integrated software and professional services for the retail demand chain, with 1,200 employees and 4,800 customers worldwide. We started here in Japan in September 1999, the same year in which we concluded an agreement with Aeon for our core merchandising system. Our software runs in most of Aeon's merchandise categories except home electronic devices and perishables. We call the product that Aeon uses the "Portfolio Merchandise Management [TM]" system--essentially a host transaction systems for retailers, handling everything from Master Data Management, Inventory Management, Cost and Price Management, PO Management, Automated Replenishment, Analysis and Alerts, etc.

JI: Who are your main competitors?

Talbot: With our vast product line, we have several competitors that may focus on a particular point solution or vertical. In our core merchandise management area are major competitor is Retek, a public company based in Minneapolis, USA. However, we are the only vendor supporting the global market with such an extensive and proven product line.

JI: Aeon is obviously a key client for you. How are they doing?

Talbot: Aeon is actually a phenomenon here in Japan, as they are almost the only retailer talking to Western consultants. They are working with Kurt Salomon Associates (KSA) on how to reengineer their business. Indeed for doing this, the Nikkei Information Strategy magazine called them "Japan's Wal-Mart." So, Aeon is almost alone in taking a stand against the expected onslaught of global retail powerhouses from the US and Europe. Retailers need to cut their cost structure, both in terms of labor costs and store operations, and reducing inventories--which unfortunately Japanese retailers have way too much of.

JI: How big is the worry over Wal-Mart and how real is the threat?

Talbot: Let's first take a step back and look at what has been happening recently. The smaller supermarket chains around the country are slowly being acquired. Larger retailers are consolidating and expanding their territories. A good example is how Aeon is taking their supermarket chain MaxValu to Hokkaido. At the moment Hokkaido is run by a small number of chains including one, ARCs, formed last November as the result of a merger between Rarusu and Fukuhara. The sales of the top 10 supermarkets in Hokkaido account for 60 percent of the total market in that region.

Wal-Mart's controlling share of Seiyu gives them an instant stores network and instant infrastructure, which they now have to improve. They are bringing information systems from the USA and will implement them in Japan.

According to the August 2003 edition of Nikkei Information Strategy, Wal-Mart will probably have to use a large Japanese wholesaler, particularly one that works closely with Seiyu. These wholesalers are still necessary to carry foods products, which contribute to the costs of doing business.

JI: How do you see today's internal systems of Japanese retailers?

Talbot: Typically large Japanese retailers are still running large mainframe systems. These systems are usually written by the major SI companies, particularly Fujitsu, NEC and IBM. Just about every system out there produced by the SI'ers is a customized job. So if a retailer really wants to restructure and improve, it not only needs to downsize, but it also needs to change the way it does business. This generally calls for implementing a packaged system, such as JDA's, that will support the new business processes. If they don't do this, they will be stuck in the same rut with the SI companies customizing solutions that are risky, costly, and results in the total cost of system ownership being a lot more.

JI: There are many foreign retailers looking anew at the Japanese market, belatedly--Britain's Tesco and others. If they take over a Japanese chain, can they expect quick gains from improving the incumbent's systems?

Talbot: Well, if they're in retailing and following a US or European-style Best Practice retail model, then they could implement our system as it is. The question is how the company, be it foreign or Japanese, leverages their IT resources. Far too many Japanese companies think of their IT division as a cost center, not as a strategic part of their business. They're very budget conscious rather than benefits focused. For an M&A such as Tesco's acquisition of C-Two Network, the IT people back in the UK have to be working closely with the local people to ensure that they have the resources required to do a complete overhaul of the systems.

JI: Getting back to Aeon. What makes this company different?

Talbot: The president, Motoya Okada, studied in the US and has a goal that Aeon will become one of the world's top 10 retailers by 2010. One of the key ways in which he intends to compete with large foreign retailers in his own backyard is to improve his business systems.

A lot of this success came from inventory control--a traditionally weak area for Japanese retailers. Many do not know how much inventory is on the retail floor, out the back, damaged or stolen. Cost of inventory is a major burden for retailers, and according to Aeon's 2002 Annual Report, it reduced inventories in apparel and other areas in existing stores by 11.9 percent. For a $20 billion plus operation, this is an enormous cost saving.

JI: Business reengineering in Japanese companies is typically hard. What do you think the problem is?

Talbot: Certainly in all companies worldwide, Change Management is very important as an ingredient for success--because you can't just implement new systems and new processes without counseling and education. But in Aeon's case, I think that the fact they have a very clear goal is playing a key role in the implementation of new systems and processes. Also, Aeon has a precise mission, a precise timeframe and sets a strict timetable. I see the above as an essential element for a new system and process implementation.

JI: Can you share with us what costs you were able to wring out of the system at Aeon?

Talbot: Aeon piloted our system in Menswear, apparel. According to Aeon's 2003 Annual Report, improvements in the accuracy of inventory management brought on by JDA's merchandise management system allowed Aeon to reduce inventories in directly operated stores by [yen] 4.1 billion compared with fiscal 2002, as sales increased by [yen] 23.6 billion. The report also states that Aeon is seeking further inventory reductions in the year to February 20, 2004 (fiscal 2004) through further extension of JDA's system to other product categories, such as processed foodstuffs, and to other business segments.

They were able to achieve this because the software lets them manage their merchandise and optimize their control of inventory. When you get down to this level, you're asking very fundamental and important questions, such as: "What should I have displayed on the floor." "Where should I put it," and "How much do I need to put there." This kind of analysis is something that Japanese retailers haven't been able to do adequately before.

JI: Where do you see the inevitable battle between Wal-Mart, the world's biggest company, and Aeon going?

Talbot: As I mentioned, Aeon have been called "Japan's Wal-Mart" by Nikkei and has been pursuing a Best Practice model faithfully. I don't expect foreign retailers to simply come into Japan and try to conduct business in the same manner that they do in the USA. These retailers will have to work with the suppliers to get more direct sourcing, renegotiating prices, implement localized systems, etc. There is the big question of how even the very large foreign retailers will deal with the big wholesalers, which control 80 percent of commercial sales in Japan. Indeed, sometimes using a middleman to store small volumes of goods may in fact be more efficient than direct sourcing.

JI: What's your prediction for the retail landscape five years from now?

Talbot: I predict that there will be far fewer players and much more consolidation through mergers and acquisitions, some of which won't be the traditional friendly takeovers. Japan has half the population of the US but they have more stores--so clearly there are too many. Some people say that the service levels are what is more important, and I would guess that "100 percent service level" here means having massive assortments of colors and sizes. One of the tricks to efficient retailing is to control the inventories while not making people feel that they're missing out on variety. This of course is the skill of each merchandiser and the main point of differentiation.

This article is abridged; read the full article online at www.japaninc.com.