Bookselling in Japan
The following is a slightly modified version of a paper submitted by Siebert Neethling as
an assignment for a Master's Degree course in International Business in 2009. The paper
answered specific questions relating to a case study on the book industry in Japan and
information is relevant to the case study as presented.
Integrative Case Study
BOOKOFF, AMAZON JAPAN, AND THE JAPANESE RETAIL BOOKSELLING INDUSTRY
Siebert Neethling
On a per capita basis, the Japanese book industry is approximately as big as that of the
United Sates (Peng 2009, p. 387). It should be an attractive market for international
business, yet there are unique features to the Japanese market that hold particular
challenges for foreign companies.
1. The Profitability and Scale of large Japanese Retail Booksellers
The profitability of large Japanese retail booksellers is relatively poor, and their scale
relatively small. There are a number of contributing factors, covering the full length of
the value chain in the book trade.
There is very little competition in the area of book distribution, with two large
wholesalers controlling more than 80% of the wholesale market (Miyamoto & Whittaker
2005, p. 11). Wholesalers and retailers operate a consignment sale system (Itaku Hanbai
Seido). According to Altbach and Hoshino (1995, p. 493) new books are typically on
consignment for 105 days, but long-term consignments can last for six months or even a
year. This causes retailers to carry inefficiently-sized inventories, and is responsible for a
great deal of over-supply. Japan also has a Resale Price Maintenance System (Saihanbai
Kakaku Iji Seido). This price-fixing system prevents excess stock from being discounted.
The price maintenance system has the further, important impact of eliminating normal
price competition. Large retailers are not able to compete on price to help increase sales
and profitability through volume. This Saihan system has been successful in increasing
the number of new titles in Japan, but it has not translated into an overall increase in
book sales (Peng 1990, p. 390). It also contributes to costs because holding a larger but
lower volume product range adds to the holding costs and therefore the profitability of
Japanese retailers. And it also contributes to higher production costs for books as it is
less economical to publish and produce smaller quantities of more titles. The ‘current
flood of an average of 180 new titles a day [is] unsustainable’ (Ashby 2002).
Moreover, the retail book market in Japan is highly fragmented and hasn’t benefited
from the efficiencies associated with industry consolidation. Most booksellers are small,
with an average store size of 64m2 (Altbach & Hoshino 1995, p. 494). There was
‘overexpansion in … bookstores during the fat times’ and these small stores are also
facing increased competition from the growth of convenience stores as outlets for
books (ibid. p. 495).
There are also other, more universal factors at play: alternative forms of entertainment,
such as the internet, are responsible for declines in the total book market, and the
growth of e-book technology is impacting on conventional book sales. Since 2003 the
size of the Japanese e-book market has increased approximately 200% per annum and,
as a result, ‘the value of the market has increased to as much as 355 million US$’
(Impress R&D 2008).
Figure 1. Growth in the size of the Japanese E-book Industry.
Source: E-book industry report (Impress R&D 2008).
All the above factors contribute to relatively poor profitability in the bookselling
industry in Japan. They also explain, in part, the relatively small scale of most stores.
There is little leverage in volume procurement for retailers. The consignment system
reduces risk for retailers and protects small operators who might fail to be viable in
more competitive markets. The fixed price system also removes the possibility to grow a
large, high volume business through price competition.
As stated by Geocities.com, ‘condensing value into confined space is what the Japanese
are best at’ (Geocities.com 2008). So, without much incentive to grow, the
predisposition to small businesses will change slowly in this sector.
2. The benefits and the costs of the Saihan system
The Saihan system has managed to promote the publication of books by lesser known
authors, and the number of new Japanese titles has increased. If this translated into
more overall booksales it would have been positive for the book industry, but this has
not been the case. The cultural benefit has, therefore, come at an economic cost for the
trade.
In theory the Saihan system should have other advantages. Price fixing should create a
‘level playing field’ for small retailers, therefore making them more viable. However,
according to Peng (2009, p. 389), the wholesalers give preferential treatment to larger
retailers who return fewer books under the consignment system. The smaller
bookstores therefore don’t get supplied with the most lucrative bestsellers.
The main cost of this system is that it has obstructed the consolidation that would
normally occur in such a fragmented market. Book-titles remain undifferentiated
commodities (Ibid. p. 391), and in the absence of price competition there is no way for
larger retailers to manipulate a trade-off between increased volume and reduced
margins to increase their profitability. This also discourages new entrants who would
usually use discounting as a competitive strategy to enter the market.
All of this contributes to stagnation. It could be argued that a more openly competitive
market, at both wholesale and retail level, would breathe life into the market because
more people would read if books were cheaper. This has certainly been the argument of
the former Premier of New South Wales, Bob Carr, in his well-publicised campaign to
reduce the cost of books in Australia. ‘Lower prices mean more sales. More sales mean
more books in Australian homes.’ (Carr 2008).
3. Industry-, resource-, and institution-based views of the success of Bookoff and
Amazon Japan.
3.1. Industry-based view
From an industry-based view, booksellers in Japan experience a mix of high and low
threats in the “five forces”. Rivalry amongst competitors exists but is not expressed in
terms of price wars because of the price fixing system. There are, however, a large
number of evenly-sized firms offering the same products in a largely stagnant industry.
The threat of potential entry is high. There are little scale-based advantages, little nonscale based advantages such as unique technology, almost no product differentiation
and no government policy that discourages new entrants.
The wholesale suppliers determine price, and the two dominant suppliers have undue
influence on the industry, especially on the smaller operators. There is no indication that
they intend vertical integration, but their influence will remain substantial for as long as
the price fixing system is in place.
In terms of buyers they can obtain the standard, undifferentiated products from any
bookseller, so they have little influence. But there is a substantial threat from
substitutes. Printed material is under threat from other sources of information and
entertainment, and booksales are likely to further decline.
From an Industry-based perspective Bookoff and Amazon have managed to outperform
their industry peers and achieve above average returns despite some strong competitive
forces. Bookoff’s own book rehabilitation technology could be seen as a non-scalebased advantage in their sector of the market, and their ability to discount and thus
increase volume and profit, thus sidestepping the disadvantages hampering
competitors, means they out-compete their rivals. Amazon’s strategy also enables them
to minimise the existing threats of the “five forces”. Their product offerings are different
as they include more substitutes and complements, which also put them in the lead in
terms of meeting the changing needs of customers. Their e-commerce-based model is
more receptive to economies of scale. Because of their volumes they also have influence
with suppliers.
Even though, from an industry-based view, the Japanese market has a mix of strong
competitive forces and lack of competition, both Amazon and Bookoff have managed to
find ways to be cost leaders and competitive in areas where others have not. Both have
positioned themselves well so as to be less vulnerable than their competitors. Both are
‘savvy strategists’, who have ‘done well in a structurally unattractive industry.’ (Peng
2009, p.54)
3.2
Resources-based view
The fact that they stand out from their competitors suggests that Bookoff and Amazon
have firm-specific resources and capabilities that their competitors lack.
Amazon has both tangible and intangible resources and capabilities that add value. It is
a technology leader in internet-based sales, but it also has ‘built some of the largest
physical, brick-and-mortar book warehouses in key locations.’ (Ibid. p. 65). It is a
renowned innovator in the industry and has offered the Japanese market many
innovations such as safe payment methods and ‘look inside options’. (Ibid. p. 394).
Amazon has also developed a strong reputation in Japan – a very important intangible
resource.
These resources and capabilities are rare in the Japanese market, but they are not
inimitable. It is very unlikely, however, that competitors would have the financial
resources to overcome Amazon’s advantage.
As an organisation, Amazon continues to build on its success globally.
Across a series of functions—finance, international, product development,
merchandising, operations, technology, etc.—Amazon clearly has one of the
most talented and experienced management teams in the business. (Meeker &
Mahaney 2000.)
Publishing is fast becoming a high velocity industry, with new technology and innovation
in distribution challenging traditional business models. Amazon has the dynamic
capabilities to remain a leader in this changing industry.
Bookoff is also a very strong company from a resource-based view. It has resources and
capabilities that add value, most notably the new-used technology pioneered by Takashi
Sakamoto, Bookoff’s founder. It also has almost 900 stores (Peng 2009, p. 392) and is a
home-grown success story.
The technology is no longer rare, with many other second-hand bookstore chains
operating in Japan. The technology and the business model have been imitated
successfully.
Organisationally, Bookoff remains strong. Stores are all franchised and ‘owners and
employees are encouraged to act like entrepreneurs.’ (Ibid. p. 393).
3.3
Institution-based view
According to Yoshiaki (2004), ‘the system needs improvement, but established and rigid
conditions prevent radical reform and renewal.’ Strong formal and informal institutions
impact negatively on firms in the bookselling industry in Japan. The obvious formal
institutions are the consignment sale system and the resale price maintenance system.
Both are legislated, formal constraints.
But the bookselling industry is also influenced by norms and cultural constraints. A
strong ethical tradition to ‘contribute to society through books’ still prevails in sections
of the industry (Miyamoto & Whittaker 2005, p. 16). In addition, the Japanese ‘aversion
… to credit card use and fears of identity theft’ has hampered e-commerce. (Peng 2009,
p.390). The book industry is dominated by ‘bureaucracy-laden’ companies (Ibid. p. 393).
And according to Peng (2009) a culture change towards efficiency, inspired by economic
hardships, is influencing people’s views on recycled books.
One could argue that it is exactly the manipulation of informal institutions that has
made both Amazon and Bookoff succeed despite the formal institutions. Both have
found ways to either overcome constraints (Amazon’s use of alternative payment
options) or use constraints (Bookoff’s ‘smooth marketing move’ to develop ‘recycle
stores’) (Ibid. 2009, p. 393).
4. Consequences of the Saihan system dissolving
Dissolution of the Saihan system is likely to lead to rapid consolidation. Large retailers
are likely to use price competition to force smaller retailers out of the market. Mergers
and acquisitions are likely, and the large retailers with the best balance sheets and
access to capital are the most likely to become the dominant players. Amazon would
probably be a major winner. Their first-mover advantage, especially their established
brand, will help them to reap true benefits from cheap internet-based sales at a time
when internet acceptance continues to grow in Japan.
Another interesting dimension is what might happen to the wholesalers. The buying
power of large retailers in a consolidated market is likely to put pressure on wholesalers
to become more competitive. As this part of the value chain is already consolidated this
might lead to the formation of a monopoly, or it might allow for a new, modern and
efficient wholesaler to emerge.
5. Recommendations to potential new entrants such as Barnes & Noble and Borders
Caution is advised. Some view the publication/distribution system in Japan to be ‘on the
verge of collapse’ (Yoshiaki 2004), and even in stable industries the Japanese market is
notoriously difficult. Language is always a barrier, and Japanese consumers are also
notoriously parochial. Added to this is the very particular cultural barriers, both national
culture (Nihon no bunka), and corporate culture (kigyo bunka), which requires a
cautious approach to ensure acceptance and efficient operation (Neethling unpub.).
But Japan offers great opportunities for foreign companies. Ninety percent of Japan’s
economy is domestic.
When Japan’s $4.78 trillion dollar domestic market grows by a mere one-half
percent, it generates nearly $24 billion of new economic activity, greater than
the entire gross national product of many smaller nations … [Japan has]
sociopolitical stability, an easy-to-reach, affluent and highly educated
population; an ultra-reliable transportation and utility infrastructure, and a
political economy offering substantial freedom and ability to repatriate hard
currency earnings (Clark & Kay 2005, p.16).
While the Saihan system is in place I would not recommend entering the Japanese Book
market to open a series of stores. But I would consider the acquisition of two or more of
the existing major Japanese booksellers such as Kinokuniya, Maruzen, Bunkyodo,
Yurindo, Junkudo or Heiando. In a market as fragmented as this, and where
‘consolidation seems inevitable’ (Ashby 2002), the successful merger of some existing
players, combined with the efficiency expertise of a giant like Borders or Barnes &
Noble, could produce substantial up-side even before the price fixing system is
abolished.
Even after price fixing is abolished I would recommend an acquisition of existing top-tier
companies, rather than entering the market with new stores. As Japanese consumers
continue to adapt to online shopping, Amazon will continue to eat into the sales of
conventional booksellers. As an early entrant they have a well established brand and
considerable local knowledge. But both Barnes & Noble and Borders have wellestablished strategies for competing with Amazon in other countries. This expertise combined with access to capital, acquired local knowledge and the leases of existing
major stores - would create a formidable player able to absorb smaller booksellers and
leading the consolidation of the market. Neither Amazon nor Bookoff are able to do this
effectively. Amazon’s business model is e-commerce based, and Bookoff’s business
model, though successful, is unlikely to convert well to a large retailer of new books.
They are also probably too small to grow by acquisition as the major players are
approximately three times larger than they are (Peng 2009, p. 388).
I would also recommend a retail mix that would include e-books. This is a rapidly
growing market likely to become even more of a threat to traditional paper books in the
light of recent developments. The Globe and Mail (August 14, 2009) recently reported
that Japan’s electronics giant Sony – in a direct challenge to Amazon’s Kindle technology
– will ‘do away with the proprietary software in its electronic Sony Reader and convert
its e-book store to an industry standard format.’ This will allow its devices to use
multiple formats, and its content to be compatible with multiple devices.
It should be noted that not all are in favour of abandoning the current formal
constraints in the bookselling industry. Miyamoto and Whittaker (2005, p. 20) argue
that the industry structure ‘cannot simply be dismissed as anachronistic’. The price of
books is actually lower in Japan than in the US, Germany and the UK.