26. japanese distribution channels

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The Japanese Economy, vol. 32, no. 3, Fall 2004, pp. 2748. 2005 M.E. Sharpe, Inc. All rights reserved.ISSN 1097203X / 2005 $9.50 + 0.00.

27

MASAYOSHI MARUYAMA

Japanese Distribution Channels

Structure and Strategy

Translation 2005 M.E. Sharpe, Inc., from the Japanese original. Translated byStacey Jehlick.

Masayoshi Maruyama is affiliated with the Graduate School of BusinessAdministration, Kobe University.

The Japanese distribution sector is entering a period of significant change.This article will focus on intermediate distribution in Japan, examine the con-tributing factors in the distribution channel environment, identify the causesof structural change, and make projections about the future directions thesechanges will take.

The structure of the distribution channels that link manufacturers and re-tailers is largely determined by the structure of the retail market, and is highlydependent on the distribution strategies that manufacturers and retailers employ.One of the reasons for the multilayered structure of the Japanese wholesale

market is the tendency of retailers to have numerous, small-scale stores. Usingwholesalers to aggregate transactions between manufacturers and numerousretail stores can reduce transaction costs, and a multilayered structure canhelp counteract the limitation on wholesalers transaction management capa-bilities. Japanese retail companies adopt distribution strategies that rely on theinventory management and delivery functions of wholesalers, and have achievedshort-term growth by concentrating their management resources in buildingstores. Manufacturers also have used wholesalers to efficiently distribute theirproducts to numerous small-scale, widely scattered retailers. Typically, in theautomobile, electrical appliances, and cosmetics sectors, manufacturers haveestablished their own sales companies, selected retailers to exclusively selltheir products, and organized sales channels for each company. In the processed

foods and everyday goods sectors, manufacturers have adopted a distribution


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28 THE JAPANESE ECONOMY

strategy based on a designated agent system (a system of limiting the num-ber of wholesalers that handle their products in certain regions).

In recent years, however, major changes in the retail structure have promptedsome major changes in the wholesale structure. Retailers have been modify-ing their distribution strategies, which have conventionally depended uponwholesalers, by using new information technology (IT). Even manufacturersare reexamining their designated agent systems and are beginning to movetoward direct transactions with large-scale retailers that bypass wholesalersentirely. Given this environment, the intermediate distribution sector is enter-

ing a period of significant change. The purpose of this article is to identify thechanges that have begun to impact distribution channels in Japan from theperspective of both distribution structures and strategies.

Changes in the Distribution Structure

Shortcutting Distribution Channels

According to the Census of Commerce 2002, there are 380,000 wholesale es-tablishments in Japan with 4 million employees and annual sales of 413.4trillion. The number of wholesale establishments, employees, and annual saleshave been on the decline since 1991, and in the five-year period from 1997 to2002, the number of wholesalers fell by 3.0 percent, the number of employeesby 3.9 percent, and annual sales by 13.9 percent.

Table 1 shows the annual sales by distribution level. Primary wholesalers

(which include source wholesalers, retail direct trade wholesalers, and otherdirect trade wholesalers) account for 43.5 percent of the total, down 19.0 per-

cent from the previous period, while secondary wholesalers (which includeintermediate wholesalers and final wholesalers) account for 24.6 percent, down14.6 percent from the previous period. Other wholesalers (wholesalers sellingto or buying from their own companies) account for 31.9 percent of the total,down 31.2 percent.

The number of direct trade wholesale establishments (the combined totalof retail and other direct trade wholesalers), which account for nearly 70 per-cent of the primary wholesalers, has declined by a significant 20.4 percent(with sales down 21.4 percent) from the previous period. On the other hand,secondary intermediate wholesalers saw sales decline 8.1 percent, despite a

5.8 percent increase in the number of their establishments. The report on theCensus of Commerce attributes the decline in direct trade wholesalers, the

shortest distribution channel, to changes in the composition ratio of wholesalesales due to such factors as business failures caused by stagnant consumptionand the diversification of distribution channels. Other factors include the large


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Table 1

Composition of Number of Establishments (and Annual Sales), Across Types of Wholesalers, 2002

Sellers/Buyers Wholesalers Retailers

Producers or Source wholesalers Retail direct wholesalers Other direct trade Other wholesoverseas entities 9.9 (12.4) 10.0 (9.2) wholesalers

10.3 (21.9)

Wholesalers Intermediate wholesalers Final wholesalers (1) Final wholesalers (2) Wholesalers 14.2 (9.4) 16.5 (7.9) 16.3 (7.3) same compan

the buyer 0.6

Head office Other wholesalers (1):

Branches of their Wholesalers in theown company same company as

the seller 22.0 (29.6)

Source: Research and Statistics Department, Economic and Industrial Policy Bureau, Ministry of Economy, Trade and IndusDistribution Channel, in Census of Commerce 2002 (Tokyo, 2004).

Industrial users oroverseas entities

Head officeof their ow


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salesretailtotal

s)wholesalersourceof(sales+s)wholesalertradedirectretailof(salesratiouseWholesaler =

number of businesses whose wholesale classification has shifted from pri-mary to secondary and the emergence of distribution channels that bypasswholesalers entirely. The increase in the number of intermediate wholesalerscan likewise be attributed to several factors. These include changes in the com-position of wholesale customers (due to the effects of the economic downturnin reducing sales to retailers or to industrial customers, changes in the status ofcompanies from final wholesalers to intermediate wholesalers, changes in thestatus of suppliers from producers to wholesalers (sales companies) caused bycorporate fragmentation, and the increasing diversity of distribution channels.

Wholesaler Use Ratio

There are two ways to shortcut the distribution level. The first is for producersand foreign companies to engage in direct transactions with retailers, bypass-ing wholesalers altogether. The second is to shortcut the wholesale level byreducing the role of intermediate wholesalers and increasing the role of retaildirect trade wholesalers. This section will examine the first of these shortcuts,while the next section will examine the second one.

The products sold by retailers generally consist of products purchased di-rectly from manufacturers and/or foreign companies and products purchasedthrough wholesalers. How is the fraction of products purchased through whole-salers (the wholesaler use ratio) changing? Is there really an increasing trendtoward bypassing wholesalers?

Let us examine these questions by focusing on consumer products wholesal-

ers. We will examine wholesalers of six types of consumer products: apparel,apparel accessories and notions (Industrial Classification No. 502), agricul-tural, animal, poultry farm and aquatic products (511), food and beverages(512), furniture, fixtures, and house furnishings (541), drugs and toiletries(542), and other products (549).

Thus, the wholesaler use ratio is defined as follows:

It is important to note that the wholesaler use ratio defined this way is justan approximate estimation method. That is, when determining the wholesaleruse ratio for products sold by retailers, the sales of other direct transaction

wholesalers can be excluded because their goods are sold to industrial cus-tomers and foreign companies. However, some of the sales of source whole-salers will include sales of goods that are notultimately destined for retailers,while the sales of other wholesalers will include some goods that are ulti-mately destined for retailers.


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According to the Census of Commerce (Statistics by Distribution Chan-nel), the wholesaler use ratio as defined in this article shows a decline forconsumer goods wholesalers. The wholesaler use ratio began to decline moresharply in the 1990s, and the trend toward bypassing wholesalers altogetherhas accelerated rapidly in recent years (see Figure 1).

The statistics by industry indicate a notable decline in the wholesaler useratio in drugs and toiletries, and also show that the decline in the same for foodwholesalers (the combined wholesalers of agricultural, animal and poultry farm,and aquatic products, and food and beverages) accelerated during the 1990s.

Trends in the W/W Ratio

Let us examine the trend towards shortcutting the wholesale level using theratio of annual sales of intermediate wholesalers to annual sales of retaildirect trade wholesalers (the W/W ratio). The higher the sales of intermediatewholesalers and the lower the sales of retail direct transaction wholesalers, themore multilayered the distribution market. Thus, a higher W/W ratio indicatesmore multilayered distribution. Between 1982 and 1997, the W/W ratio for all

consumer goods fell from 73.7 percent to 62.5 percent, with an especiallysharp drop in food and beverage wholesalers, from 39.0 percent to 22.4 per-cent (see Table 2). This points to the magnitude of distribution channelshortcutting that is now occurring.

Factors Fostering Change in the Wholesale Structure

The Nihon Keizai Shimbunsha (1999) attributes the decline in sales amongsecondary wholesalers indicated by the 1997 Census of Commerce to (1) the

fact that many of the businesses that sell goods to small and medium-sizedretail stores, which have reported declines in performance due to the ongoingrecession and increasing competition, are secondary wholesalers, and (2) agrowing trend among trading companies, which have conventionally servedas secondary wholesalers, toward forming ties with producers to become pri-mary wholesalers.

More generally speaking, however, the changes taking place in the whole-sale structure can be attributed to the following three factors: (1) changes inthe retail structure that are triggering changes in the wholesale structure, (2) the

penetration of information network technologies, such as point-of-sale (POS)data management) and electronic data interchange (EDI) systems into thedistribution sector, and (3) the effects of new distribution strategies, such as

supply chain management (SCM) efforts and other strategic alliances betweenmanufacturers and distributors (through efficient consumer response (ECR)


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or quick response (QR) systems), and also, logistics system reforms initiatedby convenience stores, and the shift from speculative inventory managementto postponement inventory management.

The first factor will be examined below, while the second and third factorswill be addressed in the section on changes in distribution channels.

Changes in the Retail Structure

The number of retail stores peaked at 1.72 million in 1982, and has been steadilydeclining ever since (see Figure 2). While the number of stores dropped sharply

Figure 1. Wholesaler Use Ratio

0.45

0.55

0.65

0.75

0.85

0.95

1.05

1.15

1982 1985 1988 1991 1994 1997 2002

Food wholesalers

Drugs/cosmeticswholesalers

Consumer goods (total)

wholesalers

Table 2

Changes in the Intermediate Distribution Structure

1982 1985 1988 1991 1994 1997

Consumer goods wholesalers 73.67 69.93 69.38 35.50 56.11 62.50

Food and beverage 38.95 35.15 26.89 25.34 18.07 22.40


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0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

72 76 82 88 94 2002

Figure 2. Trends in the Number of Retail Stores by Industry (Ratio Using the Peak Value as the Index)

55 Various goods

56 Fabrics, apparel and accessories

57 Food and beverages

58 Automobiles

59 Furnishings, fixtures, andhousehold appliances

60 Other


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after the recession that resulted from massive yen appreciation in 1985, itdeclined only slightly between 1987 and 1991, the bubble period, a time whenstores were sustained by high demand. After the collapse of the bubble in1991, however, the pace of decline accelerated, leaving only about 1.3 millionstores in 2002. This represents a 24.4 percent drop in the number of retailstores over a twenty-year period.

In addition, the trends in the number of retail stores by industry show thatthe numbers of stores in all industries were increasing in the 1970s, with thenumber for the food and beverage industry peaking in 1979. The number of

stores followed three patterns in the 1980s: increasing, decreasing, and cyclic.That is, following the yen appreciation recession (198586), the number ofretail stores in the various commodities and automobile industries rose. Bycontrast, the number of food and beverage stores showed a consistent decline,while the number of furnishings, fixtures, and household appliances storesdeclined after peaking in 1982. The number of retail stores in the fabrics,apparel, and accessories industry followed a cyclical pattern, decreasing dur-ing the yen appreciation recession, but then increasing again under the favor-able economic conditions of the bubble period.

These trends show that, in general, mass retailers and large specialtysuperstores proliferated in the 1980s, buying behaviors requiring auto use be-came more commonplace, and consumers began to shift away from traditional

industry-specific specialty retail stores. Instead, they began to shop for food atgeneral mass retailers and food superstores, and for housewares (furnishings,fixtures, household appliances) at mass appliances/furnishings retailers and

home centers.In the 1990s, amid the prolonged recession that followed the collapse of the

bubble economy and the continued decline in the number of retail stores, thenumber of retail stores in the various commodities and automobile industriesactually rose. However, the number of retail stores continued to fall in thefood and beverage industry, furnishings, fixtures, and household appliancesindustry, as well as in the fabrics, apparel, and accessories industry, marking aserious decline in the number of retail stores in all three essential sectors:food, clothing, and shelter.

The trends in the number of retail stores and sales figures by business typeas reported in the Census of Commerce, Statistics by Business Classifica-tion (Retail Trade) are useful in identifying the causes of the decline in the

number of retail stores in the 1990s (see Table 3). The Statistics by BusinessClassification divide retail businesses into nine categories (Commerce inJapan in 2000, compiled by the Research and Statistics Department, Ministryof International Trade and Industry, p. 137).

The trends in the number of retail stores by business type show that the


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number of specialty superstores and convenience stores increased in the 1990s.The increase was especially significant in the number of housewaressuperstores, including roadside home centers that sell home furnishings, massappliances/furnishings retailers, bookstores, and drugstores that sell drugs andcosmetics. There was also significant growth among clothing superstores, whichinclude specialty apparel chain stores. Changes in the number of retail storesbetween 1991 and 2002 show a 3.4-fold increase in the number of housewaressuperstores, a 2.8-fold increase in clothing superstores, and a 1.8-fold increase

in convenience stores.By contrast, the numbers of general merchandise stores and department

stores either remained stagnant or fell. The number of specialty stores de-clined across the board, especially specialty clothing and food stores, whichdecreased 30 percent over this ten-year period.

In the 1990s, specialty superstores and convenience stores enjoyed remark-able growth, while general merchandise stores and department stores stag-nated, and specialty stores declined. This trend is mirrored in the sales figures

(see Table 4). Specialty stores (the total number of specialty stores, semi-spe-cialty stores, and other retail stores) accounted for nearly 70 percent of salesin 1991, but their share has fallen to less than 60 percent over the past decade.While the share of sales accounted for by department stores and general mer-

chandise stores has remained level, the share held by specialty superstores,

Table 3

Trends in Number of Retail Stores and in Their Annual Sales, 1991 = 1

1994 1997 2002

Department stores 0.97 (0.94) 0.99 (0.94) 0.76 (0.74)

General merchandise stores 1.07 (1.10) 1.12 (1.17) 0.99 (1.00)

Clothing superstores 1.39 (1.13) 2.03 (1.47) 2.83 (2.01)

Food superstores 1.09 (1.17) 1.19 (1.31) 1.20 (1.41)

Housewares superstores 1.56 (1.54) 2.62 (2.28) 3.40 (3.10)

Convenience stores 1.18 (1.29) 1.54 (1.67) 1.75 (2.15)

Specialty clothing stores 0.94 (0.92) 0.81 (0.77) 0.68 (0.55)

Specialty food stores 0.89 (0.93) 0.77 (0.78) 0.69 (0.66)

Specialty housewares stores 0.93 (0.90) 0.87 (0.94) 0.84 (0.85)

Source: Research and Statistics Department, Economic and Industrial Policy Bureau, Min-istry of Economy, Trade and Industry, Statistics by Business Classification, in Census ofCommerce 2002 (Tokyo, 2004).

Note: Figures shown in parentheses represent the sales index.


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Table 4

Share of Sales by Retail Business Type

1991 1994 1997 2002

Department stores 8.0 7.4 7.2 6.2

General merchandise stores 6.0 6.5 6.7 6.3

Specialty superstores 9.9 12.0 13.8 17.5

Convenience stores 2.2 2.8 3.5 5.0

Other superstores 5.1 5.8 6.8 6.7

Specialty stores 47.2 42.6 40.4 38.8

Semi-specialty stores 20.4 22.7 21.3 19.4

Other retail 1.3 0.2 0.2 0.1

Source: Research and Statistics Department, Economic and Industrial Policy Bureau, Min-istry of Economy, Trade and Industry, Statistics by Business Classification, in Census ofCommerce 2002 (Tokyo, 2004).

convenience stores, and other superstores has increased from 17.2 percent to29.2 percent.

Thus, in recent years sales have become increasingly concentrated in the

retailers organized by supermarkets and convenience stores, and these kindsof organized retailers are striving to develop national chains.

Trends in Mergers and Alliance Among Wholesalers

Large-scale retail companies are conducting more transactions with leadingwholesalers. To do business with these retail companies, wholesalers have tohave a wide reach (construct a nationwide network) and to stock the full line ofproducts the retail companies carry. For this reason, the leading wholesalers are

rapidly pursuing mergers and acquisitions with regional wholesalers, and this isprompting significant changes in the intermediate distribution structure.

To achieve a wide reach, mergers were rapidly undertaken in the 1990samong everyday goods wholesalers, which had been comprised of regionalwholesalers. This triggered the reorganization of the industry. Paltac, head-quartered in Osaka, engaged in repeated mergers with fifteen regional whole-

salers starting in the mid-1990s, transforming itself into the industrys firstnational wholesaler. In 2004, Daika (headquartered in Hokkaido), Itoi (head-quartered in Nagoya), Sanbic (headquartered in Fukuoka), and Tokukura (head-quartered in Tokushima) merged to form a new company, Arata, a nationalwholesaler whose coverage extends all over the country except Okinawa.


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To stock full lines of products, wholesalers in the processed food sectorhave also been pursuing mergers. In addition to specialty wholesalers likeKokubu and Meijiya, this sector is comprised of food wholesalers derivedfrom trading companies. These include Ryoshoku, formed by a merger be-tween four food trading companies in the Mitsubishi Group in 1979, ItochuShokuhin, formed by a merger between two companies in the Itochu Group in1996, and Sanyu Koami, a merger between Sanyu Shokuhin in the MitsuiBussan Group and the alcoholic beverage wholesaler Koami in 2000.

In this sector, a lot of attention has been paid, in recent years, to the expan-

sion of the frozen and refrigerated foods industry. In 2004, Itochu Corporationmerged with Yuki-jirushi Access, which itself was formed by a merger be-tween five wholesalers affiliated with Snow Brand Milk Products. In 2003, asubsidiary of Ryoshoku, a Mitsubishi Group company, merged with Yukiwa(a refrigerated and frozen foods wholesale subsidiary of Nichirei), with thegoal of allowing both to strengthen their low-temperature logistics and to sup-ply products at all temperatures.

In addition, the trend toward full-line wholesaling is remarkably evident inthe integration of alcoholic beverage wholesalers. In recent years this markethas seen an influx of organized retailers, such as convenience stores and massretailers, resulting in intensive price competition and a decrease in the numberof liquor stores. Statistics on alcoholic beverage sales, which show a break-

down of retail sales by business type, indicate that in 1991, liquor stores helda 70 percent share of the market. However, in 1996 that share was down to 30percent, while mass retailers/discount stores had racked up a 40 percent share

and convenience stores a 20 percent share. Liquor stores lost 40 percent oftheir market share during this time. The decrease in the sales reported by li-quor stores has been further aggravated by liquor license deregulation.

Many of the regional wholesalers that served liquor stores have gone out ofbusiness, and large wholesalers have been actively engaged in merger andacquisition activities with regional alcoholic beverage wholesalers. For ex-ample, the leading food wholesaler Kokubu integrated twenty regional alco-holic beverage wholesalers all over the country in 1998 and 1999 throughbusiness purchases, operational partnerships, and the absorption of compa-

nies as subsidiaries. Ryoshoku, which had not previously sold alcoholic bev-erages, has been expanding its alcoholic beverage division since 2000 throughmergers and capital tie-ups with alcoholic beverage wholesalers.

Changes in Distribution Channels

A previous section provided statistical evidence of the shortcutting of distri-bution channels in Japan, but this section will address the changes that have


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taken place in the distribution channels structure by focusing on the structuresof the distribution channels for processed foods and everyday goods. Pro-cessed foods include condiments, preserved foods such as canned goods andrehydratable noodles, and refrigerated and frozen foods, while everyday goodsinclude toiletries such as soap and cleansers, cosmetics, and kitchen productssuch as paper products and plastic wrap. The processed foods and everydaygoods distribution channels structure has shifted from traditional channelsto new channels. Figure 3 illustrates the transformation from traditional chan-nels to new ones.

Traditional channels are the channels brought about by the rise of super-markets in the 1960s. General merchandise stores stocked an assortment ofproducts, offering consumers the convenience of one-stop shopping. How-ever, the relationship between the manufacturer and the wholesaler remainedorganized as before, that is, one in which the wholesaler was a designatedagent of the manufacturer.

The new channels were initially developed by convenience stores, butlater spread to the general merchandise stores as well. They are characterizedby the consolidation of suppliers and joint distribution. That is, instead ofdelivering goods to retail stores using many different trucks of individualmanufacturers or products, goods are sent to a joint distribution center desig-nated by the retail company or to a primary warehouse for processing. At

these facilities, the products, which had been sorted by category, are re-sortedbased on their retail store destination, and then delivered in bulk to each out-let. In the processed food products sector, vendors are increasingly being nar-

rowed down to only one or a few companies. The everyday goods sector stilloperates under the designation system (a system in which the retailers selleris designated by the manufacturer). Given the large number of product items,the trend toward joint distribution is growing. Thus, the responsibility for prod-uct assortment is shifting upstream to the wholesale level from the retail level,while the structure of distribution channels is shifting from the conventionalstructure separated by industry to a new structure separated by retail businesstype and company.

Under the traditional system, transactions between manufacturers and whole-

salers were conducted through selective channels whereby wholesalers actedas designated agents for a specific manufacturer. Transactions between whole-salers and retailers, however, were conducted through open channels whereby

retailers placed orders with multiple wholesalers. Under this structure, theprimary functions of the wholesaler were to serve as a sales agent for themanufacturer (product dispersal) and to aggregate demands at the retail level.

On the other hand, under the new channel system, transactions betweenmanufacturers and wholesalers are conducted through open channels based


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on transactions with joint distribution centers, primary warehouses, and full-line wholesalers. Transactions between wholesalers and retailers, meanwhile,are conducted through bulk order and bulk delivery-oriented selective chan-nels, a result of the consolidation of vendors through primary warehouses,

joint distribution centers, and retail company exclusive wholesalers. In thisenvironment, the primary function of the wholesaler is to act as the buying

agent for the retailer (product delivery) and to communicate store-specific

demand-related information.

Shifts in the Channel Environment and Strategies

Now let us look at the underlying changes in the channel environment anddistribution strategies from three angles: product diversification, logistics re-forms, and innovations in IT.

Product Diversification

Common components of the channel environments in both Japan and the UnitedStates since the 1980s have been consumption maturation and the develop-

ment of product diversification. This has included the development of privatelabel products (products independently developed by distribution companiesin conjunction with domestic and international manufacturers for their ownstores) by retailers in response to the new level of market maturity. The house-hold products of one Japanese manufacturer, for example, which included 100

Figure 3. Changes in Marketing Channels

Consumers

Retailers

Manufacturers

Wholesalers

Traditional channel Modern channel


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items in 1975, had ballooned to more than 300 items in 1980 and 500 items in1985. In 1980, there were 600 items in the beer market (400 domestics and200 imports), 400 shampoo/rinse items, 211 types of televisions, and 127 typesof washing machines. In response, the number of products stocked by retailersalso increased dramatically. Large urban department stores carried between1.5 and 2.0 million product items, while general merchandise stores (GMS)carried between 300,000 and 400,000 items (Research Institute of Distribu-tion Industry 1995).

The same trend occurred in the United States. While the number of new

product items of foods in 1970 was 1,365 (a single store typically carried7,800 items), that number rose rapidly to 7,330 (12,459 per store) by 1985 andto 13,244 (30,000 per store) by 1990 (Messinger and Narashimhan 1995).Product diversification has resulted in shorter product life cycles, increaseduncertainty in demand projections, and increased retail inventory costs.

Logistics System Reforms

The expansion in the number of product items has propelled the emergence of

massive retail stores in the United States, leading to an incredible enlargementin the size of retail stores. In the Japanese retail market, because of the limitedavailability of store space, the increase in the number of product items hasincreased retail inventory costs, as retailers have been forced to place high-frequency, small-quantity orders for a diverse array of products.

Products have been ordered in increasingly smaller units since the 1980s,

from the conventional case or dozen to the half-case and even down to two orthree individual units of a particular product. As a result, delivery (distribu-tion) frequency has increased from once a week to twice a week, and some-times daily. This trend is especially pronounced among convenience stores,whose space is especially limited. To meet the needs for product freshness andconsumer diversification, these stores require two daily deliveries of bread

and milk and three daily deliveries of various types of prepared meals.However, high-frequency, small-quantity orders also increase the retail-

ers expenditures on behind-the-counter tasks such as receiving, inspection,and displaying. Thus, retail companies are promoting logistics system re-forms so that products from various vendors are collected at a distributioncenter or primary warehouse, processed to simplify the work that has to be

done in the store, and sorted by store and category for delivery in periodicbulk deliveries.

Ito-Yokados processed food logistics reforms are based on the primarywarehouse system (madoguchi donya) established in 1985. Prominent ware-houses in each area are designated as primary warehouses. Products stocked


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at other warehouses are sent to the primary warehouses, which then collect allprocessed foods regardless of the manufacturer or product, sort it by store,and deliver it directly to Ito-Yokado stores.

By contrast, Daieis processed food logistics system is based on a system ofcompany-owned regional distribution centers (RDC). The function and role ofthese RDCs is to achieve efficiency through bulk distribution tied to the storesoperations. RDCs strive to improve the efficiency of behind-the-counter op-erations at retail stores by sorting products by store and sales department andinspecting the products.

Movements among primary warehouses and distribution centers toward jointdistribution, the consolidation of vendors and the upstream shift in productassortment responsibilities have prompted these kinds of logistics reforms,which in turn have led to changes in the distribution channels (the shift towardnew channels).

Information Technology Innovations and Shifts in

Distribution Strategies

Some of the most fundamental factors influencing the channel environmentare innovations in information technology and their penetration into the mar-ketplace. IT innovations have a significant impact on both distribution costsand the coordination of decision making within distribution channels, and haveled to three important shifts in distribution strategies.

From Speculation to Postponement

First, item-by-item management of products (tanpin kanri) using a POS sys-tem is the technological basis for just-in-time inventory management. Thishas allowed retailers to shift from a speculative to postponement style ofinventory management in response to the uncertainty created by product di-versification. Speculative inventory management means forecasting demandand accumulating inventory before that demand has actually been generated.Postponement inventory management means postponing the accumulation ofinventory until just before or at the moment that demand is generated.

However, when a retail company shifts from speculation to postponement,there will be an increase in lost sales opportunities if the supply side cannot

deliver goods promptly. Thus, to reduce the risks of overstock and lost salesopportunities, supply chain management (SCM) efforts are being taken to con-struct systems for producing, delivering, and selling the appropriate quantityof goods at the appropriate time based on vertical coordination between sup-pliers and retailers.


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From Scale to Scope

Second, as point-of-sale systems come into more widespread use at the retaillevel, information technology is being deployed in the placement and receivingof orders with vendors. According to a study conducted by the Fair Trade Com-

mission (1998), most wholesalers accept online orders from retailers, and whole-salers are also increasingly placing online orders with manufacturers. Morethan 20 percent of manufacturers and retailers are also engaging in onlineorders with one another. It has been reported that about 10 percent of manu-facturers, 30 percent to 40 percent of the leading wholesalers, and nearly 30percent of the large-scale retailers have implemented EDI systems.

The widespread deployment of POS and EDI systems facilitates the shar-ing of information about individual products, resulting in a shift in productionsystems from centralized production, which requires economies of scale, todecentralized production, which requires economies of scope. As a result, therehas been a shift from distribution channels that accommodate aggregate de-mand to channels that accommodate individual demand.

From Push Strategies to Pull Strategies

Third, there has also been a shift in marketing strategies. Conventional mar-keting strategies are comprised of three components: (1) the pursuit of econo-mies of scale through forecast-based production, (2) push strategies for sell-ing speculative inventory through proprietary channels, and (3) an emphasis

on sharing the risk of overstock through rebates and product returns. By con-trast, recent marketing strategies (the 1990s model) have been characterized

by (1) the pursuit of economies of relationship (saving transaction costs andinformation costs) through decentralized order receiving and production, (2)pull strategies through postponement of inventory investment until the real-ization of actual demand, and (3) an emphasis on sharing information relatedto the demand and supply.

The Rise of Integrated Channels

Changes in the distribution channel environment, such as product diversifica-

tion, logistics reforms and information technologies, have led to shifts in dis-

tribution strategies from speculation to postponement, scale to scope and pushto pull strategies. At the same time, these changes are fueling a shift fromconventional to new channels of distribution. These trends can be viewed as ashift from speculation-scale-push strategies-traditional channels to post-ponement-scope-pull strategies-new channels.


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Categorizing production and sales systems along two axes, speculation ver-sus postponement and traditional versus new channels, yields four types ofbusiness models: (Type 1) speculative inventory management based on tradi-tional channels, (Type 2) speculative inventory management based on newchannels, (Type 3) postponement inventory management based on traditionalchannels, and (Type 4) postponement inventory management based on newchannels.

There are also three types of integrated channels: (Type 5) vertical back-ward integration in which the wholesaler is owned by the retailer, (Type 6)

vertical forward integration in which the wholesaler is owned by the manu-facturer, and (Type 7) a contractual system based on a channel partnershipbetween the wholesaler and the retailer, rather than vertical ownership inte-gration. Figure 4 illustrates three types of vertical integration within market-ing channels.

Now I will propose a model comprised of two manufacturers that producea product (substitute products) to meet the need for product differentiation,two wholesalers and two retailers. Suppose that demand depends not only onprice but also on the particular demand parameters of the local market (localdemand trends) as well as the macroeconomic parameters shared by all mar-kets (general economic conditions), and that these parameters are indepen-dent and they follow the same probability distribution function. The retailers

are familiar with the local market demand parameters, but not with the macro-economic parameters. In a speculative inventory management, a price andsales plan are set to maximize expected profits. In a postponement inventory

management, the holder of the demand information uses that information toset the price and sales plan. If we assume a three-tiered game comprised of themanufacturer, wholesaler, and retailer with regard to decisions about priceand sales quantities under demand uncertainty, a game theoretic analysis yieldsthe following results (Maruyama 2000a, 200b).

1. Type 3 (postponement/traditional channels) will result in higher expectedprofits for retailers than Type 4 (postponement/new channels). That is, newchannels (Type 4) benefit the retailer from the perspective of logistics reforms,but are not beneficial if transactions are based on postponement inventory

management.2. Now let us compare Type 3 with Type 5 (or Types 6 and 7). In this case,

the expected profits for both the manufacturers and the retailers are higher in

Type 5 (and Types 6 and 7) than in Type 3. That is, postponement inventorymanagement based on integrated channels benefits both manufacturers andretailers.

The results of this theoretical analysis suggest that information sharing be-tween channel members (Type 4) is not in itself preferable to retailers, and


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Figure 4. Vertical Integration of Marketing Channels

Manufacturer Manufacturer

Wholesaler Wholesaler

Retailer Retailer

Type 5 Type 6 T

Retailer Owned Wholesaler

Vertical Backward Integration

Manufacturers Sales Company

Vertical Forward Integration

Channel Partn

Contractual Sy

TyChannel Contract

Type 6Manufactures Sales Company

Vertical Forward Integration

Type 5Retailer Owned Wholesaler

Vertical Backward Integration


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FALL 2004 45

that there are incentives to move from information sharing toward integratedchannels like vertical ownership integration (Types 5 and 6) or partnershipsbased on continuous contractual relationships (Type 7). As forecasted by thistheoretical analysis, there has indeed been a rise in integrated distribution chan-nels in recent years.

Example of an Integrated Channel

SVD, Seven-Elevens Exclusive Wholesaler (Type 5)

An example of Type 5 vertical integration between the wholesaler and retailercan be seen in Seven-Elevens establishment of SVD. Seven-Eleven constructed

a Type 4 joint-distribution system based on primary warehouses, but later devel-oped it into a Type 5 channel. SVD, Seven-Elevens exclusive everyday goods

wholesaler, was established by Seven-Eleven and sixteen everyday goods whole-salers in July 1997. It is a typical example of an integrated channel characterizedby vertical backward integration of wholesalers owned by a retailer. Until thattime, distribution channels in the everyday goods sector had been led by themanufacturers, and the designated store system was still deeply entrenched.Seven-Eleven found that it was difficult to develop an online structure for con-necting it to its vendors and manufacturers, and was having difficulty in imple-menting team merchandising based on information sharing. Thus, SVD wasestablished to provide direct access to information between manufacturers andSeven-Eleven, to eliminate lost sales opportunities due to shortages by commu-

nicating retail store information to manufacturers, and to reduce logistics costs.

Kao (Type 6)

Kao presents an example of Type 6 vertical integration of wholesalers by amanufacturer. Since the 1970s, Kao had been directly delivering products toretail stores not through wholesalers like the other everyday goods manufac-turers, but through an affiliated (keiretsu) sales company. This is a verticalforward integration model in which the wholesaler is owned by the manufac-turer. Kao was attentive to the details of its own logistics because it recognizedthe importance of understanding sales information pertaining to its products

at the retail level. Recently, however, logistics costs have become more bur-

densome. EDI networks have been constructed that allow retail sales informa-tion to be delivered to the Kao headquarters online and Kao has developed asystem that allows it to collect the information it needs without making directdeliveries to its stores. Thus, it has transferred some of its delivery functions tothe distribution centers of the major retail chains with which it does business.


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Ryoshoku (Type 7)

The integrated channel of Type 7 is characterized not by vertical ownershipintegration but by a channel partnership based on a continuous contractualrelationship between a wholesaler and a retailer. This type is exemplified by

wholesaler Ryoshokus efforts to engage in bulk distribution with SotetsuRosen. Ryoshokus bulk distribution of processed food products to SotetsuRosen began in 1993. Many wholesalers were involved in the distribution ofprocessed foods, but Sotetsu Rosen had narrowed down its forty-four pro-cessed food vendors to Ryoshoku and four other companies. As much as 75percent of its processed food was supplied by Ryoshoku. Because of the logis-tics rationalization made possible by bulk distribution, a relationship devel-oped between the two in which Ryoshoku even went as far as providingsupport for retail category management. That is, Ryoshoku constructed amutually beneficial relationship based on a channel partnership with a retailerby supporting the introduction of POS and electronic ordering systems inSotetsu Rosens stores, devising product shelf-space allotment plans, analyz-

ing floor productivity, and developing pricing plans based on the POS data ateach store.

Conclusion

Census of Commerce statistics have confirmed the trend toward the shortcuttingof distribution channels in recent years, and a change now recognized as the

transformation of the distribution channel structure caused by innovations inIT. To reaffirm this point, this article focused on the distribution of processed

foods and everyday goods to examine the changes in the vertical market struc-ture seen in the relationships between manufacturers and wholesalers and be-tween wholesalers and retailers from the perspective of the distribution channelenvironment and channel strategies.

Underlying recent changes in the distribution structure are changes in thechannel environment, such as product diversification, logistics reforms, andIT innovations, as well as shifts from speculation to postponement, scale toscope, and push to pull distribution strategies. That is, in response to productdiversification, a development triggered by consumption maturation and theconcomitant uncertainty in demand, there has been a shift from speculative to

postponement inventory management. As a result, efforts to improve the over-all efficiency of production and sales systems (the supply chain), including

logistics reforms and inventory coordination, are prompting changes in distri-bution channels.

These distribution reforms are leading the industry in the following direc-


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FALL 2004 47

tions. First, the conventional style of vertically separated distribution, whichhas been supported by the system of designated agent wholesalers for differ-ent industries or manufacturers, is becoming obsolete. This is due to the shiftin the concentration of retail sales from small-scale specialty stores, calledindustry-specific stores to mass retailers and the efforts by retailers to getwholesalers to engage in full-line wholesaling and bulk distribution. The con-solidation of the horizontal level at the retail and wholesale levels is flatten-ing out the conventional vertical distribution structures. Leading wholesalersare therefore more actively buying and merging with local wholesalers, result-

ing in the shortcutting of the vertical level reflected in the Census of Com-merce Statistics by Distribution Channel.

Second, the emphasis is shifting from production-driven distribution strat-egies and channels to consumer-driven distribution strategies and channels.This is evident in the shift from speculation to postponement and from push topull distribution strategies. It is also evident in the fact that intermediate dis-tributors such as wholesalers and distributors, are serving less as the salesagents of the manufacturers and more as the purchasing agents of consumersand retailers. Both of these developments are fostering the opening up ofdistribution channels.

Third, distribution is being affected by the development of integrated chan-nels using IT. In this context, integration refers to the integration of decision

making between channel members, not the systematic integration in the nar-row sense of vertical ownership integration. That is, the industry is movingaway from the business optimization of individual players through decision

making by those players (manufacturers, wholesalers, and retailers), towardthe integrated coordination of decision making aimed at optimizing the entireproduction and distribution system.

Information technology is propelling this kind of integrated coordinationof decision making, and developments in the IT sector are changing the waybusiness is conducted. IT is being incorporated into business-to-businesstransactions through the proliferation of electronic data interchange systemsbetween companies. Efforts between P&G and Wal-Mart in the United Statesor between Kao and Jusco in Japan reflect movements by manufacturers and

retailers to circumvent the wholesalers, share information, and integrate deci-sion making. However, there are also some cases in which integrated channelsare being promoted through the sharing of information between wholesalers

and retailers, as was described above in the channel partnership betweenRyoshoku and Sotetsu Rosen. Thus, there are a variety of ways to promote theintegrated coordination of decision making through information sharing.

It is important to point out, however, that the trend toward integrated chan-nels has two sides: the linkage effects and the blockage effects. The linkage


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effects of an integrated channel refer to the upsides of integration, such as greaterdistribution efficiency achieved through the integrated coordination of decisionmaking and strengthened business relationships. The blockage effects, by con-trast, refer to the downsides of improved distribution efficiency, in that the con-struction of exclusive relationships through the absorption of business partnerscan limit competition at the distribution level. The competition policy must bedirected to check these downsides to ensure that fair competition is maintained.

References

Fair Trade Commission. 1998. Oroshiurigyousha nado no jigyou katsudou nikansuru jittai chousa houkokuso [Report on the Study of the Business Activities

of Wholesalers]. Tokyo.Maruyama, Masayoshi. 2000a. Japanese Wholesale Distribution: Its Features and

Future. Paper presented at American Marketing Association Conference, 1998. InThe Japanese Distribution Strategy, ed. M.R. Czinkota, and M. Kotabe, 1932.London: Business Press.

. 2000b. Nihon no ryuutsuu: Henkaku no houkousei [Japanese Distribution:Direction of Change]. Ministry of Finance, Policy Research Institute. Tokyo.

Messinger, P.R., and C. Narashimhan. 1995. Has Power Shifted in the GroceryChannel?Marketing Science 14, no. 2: 189223.

Nihon Keizai Shimbunsha. 1999.Ryutsu keizai no tebiki [Handbook of DistributionEconomy]. Tokyo.

Research and Statistics Department, Economic and Industrial Policy Bureau,Ministry of Economy, Trade and Industry. 2004. Census of Commerce 2002.Tokyo.

Research Institute of Distribution Industry. 1995.Ryuutsu ni okeru atarashii kankeito ryuutsu kouzou no henka ni kansuru chousa [Study of New Relationships inDistribution and Changes in the Distribution Structure]. Tokyo.

Tamura, Masanori. 1989. Gendai no shijou senryaku [Modern Marketing Strategy].Tokyo:Nihon keizai shimbunsha.

To order reprints, call 1-800-352-2210; outside the United States, call 717-632-3535.


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26. japanese distribution channels

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