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.

MASAYOSHI MARUYAMA

Japanese Distribution Channels

Structure and Strategy
The Japanese distribution sector is entering a period of significant change. This article will focus on intermediate distribution in Japan, examine the contributing factors in the distribution channel environment, identify the causes of structural change, and make projections about the future directions these changes will take. The structure of the distribution channels that link manufacturers and retailers is largely determined by the structure of the retail market, and is highly dependent 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. Using wholesalers to aggregate transactions between manufacturers and numerous retail stores can reduce transaction costs, and a multilayered structure can help counteract the limitation on wholesalers transaction management capabilities. Japanese retail companies adopt distribution strategies that rely on the inventory management and delivery functions of wholesalers, and have achieved short-term growth by concentrating their management resources in building stores. Manufacturers also have used wholesalers to efficiently distribute their products to numerous small-scale, widely scattered retailers. Typically, in the automobile, electrical appliances, and cosmetics sectors, manufacturers have established their own sales companies, selected retailers to exclusively sell their products, and organized sales channels for each company. In the processed foods and everyday goods sectors, manufacturers have adopted a distribution
Translation 2005 M.E. Sharpe, Inc., from the Japanese original. Translated by Stacey Jehlick. Masayoshi Maruyama is affiliated with the Graduate School of Business Administration, Kobe University.
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strategy based on a designated agent system (a system of limiting the number of wholesalers that handle their products in certain regions). In recent years, however, major changes in the retail structure have prompted some major changes in the wholesale structure. Retailers have been modifying their distribution strategies, which have conventionally depended upon wholesalers, by using new information technology (IT). Even manufacturers are reexamining their designated agent systems and are beginning to move toward direct transactions with large-scale retailers that bypass wholesalers entirely. Given this environment, the intermediate distribution sector is entering a period of significant change. The purpose of this article is to identify the changes that have begun to impact distribution channels in Japan from the perspective 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 establishments in Japan with 4 million employees and annual sales of 413.4 trillion. The number of wholesale establishments, employees, and annual sales have been on the decline since 1991, and in the five-year period from 1997 to 2002, the number of wholesalers fell by 3.0 percent, the number of employees by 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 other direct trade wholesalers) account for 43.5 percent of the total, down 19.0 percent from the previous period, while secondary wholesalers (which include intermediate wholesalers and final wholesalers) account for 24.6 percent, down 14.6 percent from the previous period. Other wholesalers (wholesalers selling to 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 total of retail and other direct trade wholesalers), which account for nearly 70 percent 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 the Census of Commerce attributes the decline in direct trade wholesalers, the shortest distribution channel, to changes in the composition ratio of wholesale sales due to such factors as business failures caused by stagnant consumption and the diversification of distribution channels. Other factors include the large

Table 1 Composition of Number of Establishments (and Annual Sales), Across Types of Wholesalers, 2002
Industrial users or overseas entities Other direct trade wholesalers 10.3 (21.9) Final wholesalers (2) 16.3 (7.3) Head offices or branches of their own company Other wholesalers (2)

Sellers/Buyers Producers or overseas entities

Wholesalers Source wholesalers 9.9 (12.4)

Retailers Retail direct wholesalers 10.0 (9.2)

Wholesalers

Intermediate wholesalers 14.2 (9.4)

Final wholesalers (1) 16.5 (7.9)

Wholesalers in the same company as the buyer 0.6 (2.3)

Head office Branches of their own company

Other wholesalers (1): Wholesalers in the same company as the seller 22.0 (29.6)
FALL 2004 29

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

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number of businesses whose wholesale classification has shifted from primary to secondary and the emergence of distribution channels that bypass wholesalers entirely. The increase in the number of intermediate wholesalers can likewise be attributed to several factors. These include changes in the composition of wholesale customers (due to the effects of the economic downturn in reducing sales to retailers or to industrial customers, changes in the status of companies from final wholesalers to intermediate wholesalers, changes in the status of suppliers from producers to wholesalers (sales companies) caused by corporate fragmentation, and the increasing diversity of distribution channels. Wholesaler Use Ratio There are two ways to shortcut the distribution level. The first is for producers and foreign companies to engage in direct transactions with retailers, bypassing wholesalers altogether. The second is to shortcut the wholesale level by reducing the role of intermediate wholesalers and increasing the role of retail direct 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 directly from manufacturers and/or foreign companies and products purchased through wholesalers. How is the fraction of products purchased through wholesalers (the wholesaler use ratio) changing? Is there really an increasing trend toward bypassing wholesalers? Let us examine these questions by focusing on consumer products wholesalers. We will examine wholesalers of six types of consumer products: apparel, apparel accessories and notions (Industrial Classification No. 502), agricultural, 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:
Wholesaler use ratio = (sales of retail direct trade wholesalers) + (sales of source wholesalers) total retail sales

It is important to note that the wholesaler use ratio defined this way is just an approximate estimation method. That is, when determining the wholesaler use ratio for products sold by retailers, the sales of other direct transaction wholesalers can be excluded because their goods are sold to industrial customers and foreign companies. However, some of the sales of source wholesalers will include sales of goods that are not ultimately destined for retailers, while the sales of other wholesalers will include some goods that are ultimately destined for retailers.

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According to the Census of Commerce (Statistics by Distribution Channel), the wholesaler use ratio as defined in this article shows a decline for consumer goods wholesalers. The wholesaler use ratio began to decline more sharply in the 1990s, and the trend toward bypassing wholesalers altogether has accelerated rapidly in recent years (see Figure 1). The statistics by industry indicate a notable decline in the wholesaler use ratio in drugs and toiletries, and also show that the decline in the same for food wholesalers (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 the ratio of annual sales of intermediate wholesalers to annual sales of retail direct trade wholesalers (the W/W ratio). The higher the sales of intermediate wholesalers and the lower the sales of retail direct transaction wholesalers, the more multilayered the distribution market. Thus, a higher W/W ratio indicates more 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 especially sharp drop in food and beverage wholesalers, from 39.0 percent to 22.4 percent (see Table 2). This points to the magnitude of distribution channel shortcutting that is now occurring. Factors Fostering Change in the Wholesale Structure The Nihon Keizai Shimbunsha (1999) attributes the decline in sales among secondary wholesalers indicated by the 1997 Census of Commerce to (1) the fact that many of the businesses that sell goods to small and medium-sized retail stores, which have reported declines in performance due to the ongoing recession and increasing competition, are secondary wholesalers, and (2) a growing trend among trading companies, which have conventionally served as secondary wholesalers, toward forming ties with producers to become primary wholesalers. More generally speaking, however, the changes taking place in the wholesale structure can be attributed to the following three factors: (1) changes in the 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 the distribution sector, and (3) the effects of new distribution strategies, such as supply chain management (SCM) efforts and other strategic alliances between manufacturers and distributors (through efficient consumer response (ECR)

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Figure 1. Wholesaler Use Ratio

1.15

1.05

0.95 Food wholesalers 0.85 Drugs/cosmetics wholesalers Consumer goods (total) wholesalers

0.75

0.65

0.55

0.45 1982 1985 1988 1991 1994 1997 2002

Table 2 Changes in the Intermediate Distribution Structure

1982 Consumer goods wholesalers Food and beverage 73.67 38.95 1985 69.93 35.15 1988 69.38 26.89 1991 35.50 25.34 1994 56.11 18.07 1997 62.50 22.40

or quick response (QR) systems), and also, logistics system reforms initiated by convenience stores, and the shift from speculative inventory management to postponement inventory management. The first factor will be examined below, while the second and third factors will 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 steadily declining ever since (see Figure 2). While the number of stores dropped sharply

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

1.0
55 Various goods

0.9
56 Fabrics, apparel and accessories 57 Food and beverages 58 Automobiles

0.8

0.7
59 Furnishings, fixtures, and household appliances

0.6

60 Other

0.5

0.4
FALL 2004

0.3 72 76 82 88 94 2002

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after the recession that resulted from massive yen appreciation in 1985, it declined only slightly between 1987 and 1991, the bubble period, a time when stores were sustained by high demand. After the collapse of the bubble in 1991, however, the pace of decline accelerated, leaving only about 1.3 million stores in 2002. This represents a 24.4 percent drop in the number of retail stores over a twenty-year period. In addition, the trends in the number of retail stores by industry show that the numbers of stores in all industries were increasing in the 1970s, with the number 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 of retail stores in the various commodities and automobile industries rose. By contrast, the number of food and beverage stores showed a consistent decline, while the number of furnishings, fixtures, and household appliances stores declined after peaking in 1982. The number of retail stores in the fabrics, apparel, and accessories industry followed a cyclical pattern, decreasing during the yen appreciation recession, but then increasing again under the favorable economic conditions of the bubble period. These trends show that, in general, mass retailers and large specialty superstores proliferated in the 1980s, buying behaviors requiring auto use became more commonplace, and consumers began to shift away from traditional industry-specific specialty retail stores. Instead, they began to shop for food at general 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, the number of retail stores in the various commodities and automobile industries actually rose. However, the number of retail stores continued to fall in the food and beverage industry, furnishings, fixtures, and household appliances industry, as well as in the fabrics, apparel, and accessories industry, marking a serious 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 type as reported in the Census of Commerce, Statistics by Business Classification (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 Business Classification divide retail businesses into nine categories (Commerce in Japan in 2000, compiled by the Research and Statistics Department, Ministry of International Trade and Industry, p. 137). The trends in the number of retail stores by business type show that the

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Table 3 Trends in Number of Retail Stores and in Their Annual Sales, 1991 = 1
1994 Department stores General merchandise stores Clothing superstores Food superstores Housewares superstores Convenience stores Specialty clothing stores Specialty food stores Specialty housewares stores 0.97 (0.94) 1.07 (1.10) 1.39 (1.13) 1.09 (1.17) 1.56 (1.54) 1.18 (1.29) 0.94 (0.92) 0.89 (0.93) 0.93 (0.90) 1997 0.99 (0.94) 1.12 (1.17) 2.03 (1.47) 1.19 (1.31) 2.62 (2.28) 1.54 (1.67) 0.81 (0.77) 0.77 (0.78) 0.87 (0.94) 2002 0.76 (0.74) 0.99 (1.00) 2.83 (2.01) 1.20 (1.41) 3.40 (3.10) 1.75 (2.15) 0.68 (0.55) 0.69 (0.66) 0.84 (0.85)

Source: Research and Statistics Department, Economic and Industrial Policy Bureau, Ministry of Economy, Trade and Industry, Statistics by Business Classification, in Census of Commerce 2002 (Tokyo, 2004). Note: Figures shown in parentheses represent the sales index.

number of specialty superstores and convenience stores increased in the 1990s. The increase was especially significant in the number of housewares superstores, including roadside home centers that sell home furnishings, mass appliances/furnishings retailers, bookstores, and drugstores that sell drugs and cosmetics. There was also significant growth among clothing superstores, which include specialty apparel chain stores. Changes in the number of retail stores between 1991 and 2002 show a 3.4-fold increase in the number of housewares superstores, 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 declined across the board, especially specialty clothing and food stores, which decreased 30 percent over this ten-year period. In the 1990s, specialty superstores and convenience stores enjoyed remarkable growth, while general merchandise stores and department stores stagnated, and specialty stores declined. This trend is mirrored in the sales figures (see Table 4). Specialty stores (the total number of specialty stores, semi-specialty stores, and other retail stores) accounted for nearly 70 percent of sales in 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 merchandise stores has remained level, the share held by specialty superstores,

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Table 4 Share of Sales by Retail Business Type

1991 Department stores General merchandise stores Specialty superstores Convenience stores Other superstores Specialty stores Semi-specialty stores Other retail 8.0 6.0 9.9 2.2 5.1 47.2 20.4 1.3 1994 7.4 6.5 12.0 2.8 5.8 42.6 22.7 0.2 1997 7.2 6.7 13.8 3.5 6.8 40.4 21.3 0.2 2002 6.2 6.3 17.5 5.0 6.7 38.8 19.4 0.1

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

convenience stores, and other superstores has increased from 17.2 percent to 29.2 percent. Thus, in recent years sales have become increasingly concentrated in the retailers organized by supermarkets and convenience stores, and these kinds of organized retailers are striving to develop national chains. Trends in Mergers and Alliance Among Wholesalers Large-scale retail companies are conducting more transactions with leading wholesalers. To do business with these retail companies, wholesalers have to have a wide reach (construct a nationwide network) and to stock the full line of products the retail companies carry. For this reason, the leading wholesalers are rapidly pursuing mergers and acquisitions with regional wholesalers, and this is prompting significant changes in the intermediate distribution structure. To achieve a wide reach, mergers were rapidly undertaken in the 1990s among everyday goods wholesalers, which had been comprised of regional wholesalers. This triggered the reorganization of the industry. Paltac, headquartered in Osaka, engaged in repeated mergers with fifteen regional wholesalers starting in the mid-1990s, transforming itself into the industrys first national wholesaler. In 2004, Daika (headquartered in Hokkaido), Itoi (headquartered in Nagoya), Sanbic (headquartered in Fukuoka), and Tokukura (headquartered in Tokushima) merged to form a new company, Arata, a national wholesaler whose coverage extends all over the country except Okinawa.

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To stock full lines of products, wholesalers in the processed food sector have also been pursuing mergers. In addition to specialty wholesalers like Kokubu and Meijiya, this sector is comprised of food wholesalers derived from trading companies. These include Ryoshoku, formed by a merger between four food trading companies in the Mitsubishi Group in 1979, Itochu Shokuhin, formed by a merger between two companies in the Itochu Group in 1996, and Sanyu Koami, a merger between Sanyu Shokuhin in the Mitsui Bussan Group and the alcoholic beverage wholesaler Koami in 2000. In this sector, a lot of attention has been paid, in recent years, to the expansion of the frozen and refrigerated foods industry. In 2004, Itochu Corporation merged with Yuki-jirushi Access, which itself was formed by a merger between five wholesalers affiliated with Snow Brand Milk Products. In 2003, a subsidiary of Ryoshoku, a Mitsubishi Group company, merged with Yukiwa (a refrigerated and frozen foods wholesale subsidiary of Nichirei), with the goal of allowing both to strengthen their low-temperature logistics and to supply products at all temperatures. In addition, the trend toward full-line wholesaling is remarkably evident in the integration of alcoholic beverage wholesalers. In recent years this market has seen an influx of organized retailers, such as convenience stores and mass retailers, resulting in intensive price competition and a decrease in the number of liquor stores. Statistics on alcoholic beverage sales, which show a breakdown of retail sales by business type, indicate that in 1991, liquor stores held a 70 percent share of the market. However, in 1996 that share was down to 30 percent, while mass retailers/discount stores had racked up a 40 percent share and convenience stores a 20 percent share. Liquor stores lost 40 percent of their market share during this time. The decrease in the sales reported by liquor stores has been further aggravated by liquor license deregulation. Many of the regional wholesalers that served liquor stores have gone out of business, and large wholesalers have been actively engaged in merger and acquisition activities with regional alcoholic beverage wholesalers. For example, the leading food wholesaler Kokubu integrated twenty regional alcoholic beverage wholesalers all over the country in 1998 and 1999 through business purchases, operational partnerships, and the absorption of companies as subsidiaries. Ryoshoku, which had not previously sold alcoholic beverages, has been expanding its alcoholic beverage division since 2000 through mergers and capital tie-ups with alcoholic beverage wholesalers. Changes in Distribution Channels A previous section provided statistical evidence of the shortcutting of distribution 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 structures of the distribution channels for processed foods and everyday goods. Processed foods include condiments, preserved foods such as canned goods and rehydratable noodles, and refrigerated and frozen foods, while everyday goods include toiletries such as soap and cleansers, cosmetics, and kitchen products such as paper products and plastic wrap. The processed foods and everyday goods distribution channels structure has shifted from traditional channels to new channels. Figure 3 illustrates the transformation from traditional channels to new ones. Traditional channels are the channels brought about by the rise of supermarkets in the 1960s. General merchandise stores stocked an assortment of products, offering consumers the convenience of one-stop shopping. However, the relationship between the manufacturer and the wholesaler remained organized as before, that is, one in which the wholesaler was a designated agent of the manufacturer. The new channels were initially developed by convenience stores, but later spread to the general merchandise stores as well. They are characterized by the consolidation of suppliers and joint distribution. That is, instead of delivering goods to retail stores using many different trucks of individual manufacturers or products, goods are sent to a joint distribution center designated by the retail company or to a primary warehouse for processing. At these facilities, the products, which had been sorted by category, are re-sorted based on their retail store destination, and then delivered in bulk to each outlet. In the processed food products sector, vendors are increasingly being narrowed down to only one or a few companies. The everyday goods sector still operates under the designation system (a system in which the retailers seller is designated by the manufacturer). Given the large number of product items, the trend toward joint distribution is growing. Thus, the responsibility for product assortment is shifting upstream to the wholesale level from the retail level, while the structure of distribution channels is shifting from the conventional structure separated by industry to a new structure separated by retail business type and company. Under the traditional system, transactions between manufacturers and wholesalers were conducted through selective channels whereby wholesalers acted as designated agents for a specific manufacturer. Transactions between wholesalers and retailers, however, were conducted through open channels whereby retailers placed orders with multiple wholesalers. Under this structure, the primary functions of the wholesaler were to serve as a sales agent for the manufacturer (product dispersal) and to aggregate demands at the retail level. On the other hand, under the new channel system, transactions between manufacturers and wholesalers are conducted through open channels based

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Figure 3. Changes in Marketing Channels

Manufacturers

Wholesalers

Retailers Consumers Traditional channel Modern channel

on transactions with joint distribution centers, primary warehouses, and fullline wholesalers. Transactions between wholesalers and retailers, meanwhile, are conducted through bulk order and bulk delivery-oriented selective channels, a result of the consolidation of vendors through primary warehouses, joint distribution centers, and retail company exclusive wholesalers. In this environment, 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 and distribution strategies from three angles: product diversification, logistics reforms, and innovations in IT. Product Diversification Common components of the channel environments in both Japan and the United States since the 1980s have been consumption maturation and the development of product diversification. This has included the development of private label products (products independently developed by distribution companies in conjunction with domestic and international manufacturers for their own stores) by retailers in response to the new level of market maturity. The household products of one Japanese manufacturer, for example, which included 100

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items in 1975, had ballooned to more than 300 items in 1980 and 500 items in 1985. In 1980, there were 600 items in the beer market (400 domestics and 200 imports), 400 shampoo/rinse items, 211 types of televisions, and 127 types of washing machines. In response, the number of products stocked by retailers also increased dramatically. Large urban department stores carried between 1.5 and 2.0 million product items, while general merchandise stores (GMS) carried between 300,000 and 400,000 items (Research Institute of Distribution 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 carried 7,800 items), that number rose rapidly to 7,330 (12,459 per store) by 1985 and to 13,244 (30,000 per store) by 1990 (Messinger and Narashimhan 1995). Product diversification has resulted in shorter product life cycles, increased uncertainty 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 enlargement in the size of retail stores. In the Japanese retail market, because of the limited availability of store space, the increase in the number of product items has increased retail inventory costs, as retailers have been forced to place highfrequency, 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 or three individual units of a particular product. As a result, delivery (distribution) frequency has increased from once a week to twice a week, and sometimes daily. This trend is especially pronounced among convenience stores, whose space is especially limited. To meet the needs for product freshness and consumer 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 retailers expenditures on behind-the-counter tasks such as receiving, inspection, and displaying. Thus, retail companies are promoting logistics system reforms so that products from various vendors are collected at a distribution center 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 periodic bulk deliveries. Ito-Yokados processed food logistics reforms are based on the primary warehouse system (madoguchi donya) established in 1985. Prominent warehouses 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 all processed 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 of company-owned regional distribution centers (RDC). The function and role of these RDCs is to achieve efficiency through bulk distribution tied to the stores operations. RDCs strive to improve the efficiency of behind-the-counter operations at retail stores by sorting products by store and sales department and inspecting the products. Movements among primary warehouses and distribution centers toward joint distribution, the consolidation of vendors and the upstream shift in product assortment responsibilities have prompted these kinds of logistics reforms, which in turn have led to changes in the distribution channels (the shift toward new channels). Information Technology Innovations and Shifts in Distribution Strategies Some of the most fundamental factors influencing the channel environment are innovations in information technology and their penetration into the marketplace. IT innovations have a significant impact on both distribution costs and the coordination of decision making within distribution channels, and have led to three important shifts in distribution strategies. From Speculation to Postponement First, item-by-item management of products (tanpin kanri) using a POS system is the technological basis for just-in-time inventory management. This has allowed retailers to shift from a speculative to postponement style of inventory management in response to the uncertainty created by product diversification. Speculative inventory management means forecasting demand and accumulating inventory before that demand has actually been generated. Postponement inventory management means postponing the accumulation of inventory 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 sales opportunities, supply chain management (SCM) efforts are being taken to construct systems for producing, delivering, and selling the appropriate quantity of goods at the appropriate time based on vertical coordination between suppliers and retailers.

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From Scale to Scope Second, as point-of-sale systems come into more widespread use at the retail level, information technology is being deployed in the placement and receiving of orders with vendors. According to a study conducted by the Fair Trade Commission (1998), most wholesalers accept online orders from retailers, and wholesalers are also increasingly placing online orders with manufacturers. More than 20 percent of manufacturers and retailers are also engaging in online orders with one another. It has been reported that about 10 percent of manufacturers, 30 percent to 40 percent of the leading wholesalers, and nearly 30 percent of the large-scale retailers have implemented EDI systems. The widespread deployment of POS and EDI systems facilitates the sharing of information about individual products, resulting in a shift in production systems from centralized production, which requires economies of scale, to decentralized production, which requires economies of scope. As a result, there has been a shift from distribution channels that accommodate aggregate demand to channels that accommodate individual demand. From Push Strategies to Pull Strategies Third, there has also been a shift in marketing strategies. Conventional marketing strategies are comprised of three components: (1) the pursuit of economies of scale through forecast-based production, (2) push strategies for selling speculative inventory through proprietary channels, and (3) an emphasis on sharing the risk of overstock through rebates and product returns. By contrast, recent marketing strategies (the 1990s model) have been characterized by (1) the pursuit of economies of relationship (saving transaction costs and information costs) through decentralized order receiving and production, (2) pull strategies through postponement of inventory investment until the realization of actual demand, and (3) an emphasis on sharing information related to the demand and supply. The Rise of Integrated Channels Changes in the distribution channel environment, such as product diversification, logistics reforms and information technologies, have led to shifts in distribution strategies from speculation to postponement, scale to scope and push to pull strategies. At the same time, these changes are fueling a shift from conventional to new channels of distribution. These trends can be viewed as a shift from speculation-scale-push strategies-traditional channels to postponement-scope-pull strategies-new channels.

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Categorizing production and sales systems along two axes, speculation versus postponement and traditional versus new channels, yields four types of business models: (Type 1) speculative inventory management based on traditional channels, (Type 2) speculative inventory management based on new channels, (Type 3) postponement inventory management based on traditional channels, and (Type 4) postponement inventory management based on new channels. There are also three types of integrated channels: (Type 5) vertical backward integration in which the wholesaler is owned by the retailer, (Type 6) vertical forward integration in which the wholesaler is owned by the manufacturer, and (Type 7) a contractual system based on a channel partnership between the wholesaler and the retailer, rather than vertical ownership integration. Figure 4 illustrates three types of vertical integration within marketing channels. Now I will propose a model comprised of two manufacturers that produce a product (substitute products) to meet the need for product differentiation, two wholesalers and two retailers. Suppose that demand depends not only on price but also on the particular demand parameters of the local market (local demand trends) as well as the macroeconomic parameters shared by all markets (general economic conditions), and that these parameters are independent and they follow the same probability distribution function. The retailers are familiar with the local market demand parameters, but not with the macroeconomic parameters. In a speculative inventory management, a price and sales plan are set to maximize expected profits. In a postponement inventory management, the holder of the demand information uses that information to set the price and sales plan. If we assume a three-tiered game comprised of the manufacturer, wholesaler, and retailer with regard to decisions about price and sales quantities under demand uncertainty, a game theoretic analysis yields the following results (Maruyama 2000a, 200b). 1. Type 3 (postponement/traditional channels) will result in higher expected profits for retailers than Type 4 (postponement/new channels). That is, new channels (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 inventory management based on integrated channels benefits both manufacturers and retailers. The results of this theoretical analysis suggest that information sharing between channel members (Type 4) is not in itself preferable to retailers, and

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Figure 4. Vertical Integration of Marketing Channels

THE JAPANESE ECONOMY

Manufacturer

Manufacturer

Wholesaler

Wholesaler

Retailer

Retailer

Type Type 5 5 Retailer Owned Wholesaler Vertical Backward Integration Retailer Owned Wholesaler Vertical Backward Integration

Type Type 6 6 Manufactures Sales Company Vertical Forward Integration Manufacturers Sales Company Vertical Forward Integration

Channel Partnership Contractual System

Type Type 77 Channel Partnership Contractual System

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that there are incentives to move from information sharing toward integrated channels like vertical ownership integration (Types 5 and 6) or partnerships based on continuous contractual relationships (Type 7). As forecasted by this theoretical analysis, there has indeed been a rise in integrated distribution channels 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 retailer can be seen in Seven-Elevens establishment of SVD. Seven-Eleven constructed a Type 4 joint-distribution system based on primary warehouses, but later developed it into a Type 5 channel. SVD, Seven-Elevens exclusive everyday goods wholesaler, was established by Seven-Eleven and sixteen everyday goods wholesalers in July 1997. It is a typical example of an integrated channel characterized by vertical backward integration of wholesalers owned by a retailer. Until that time, distribution channels in the everyday goods sector had been led by the manufacturers, and the designated store system was still deeply entrenched. Seven-Eleven found that it was difficult to develop an online structure for connecting it to its vendors and manufacturers, and was having difficulty in implementing team merchandising based on information sharing. Thus, SVD was established to provide direct access to information between manufacturers and Seven-Eleven, to eliminate lost sales opportunities due to shortages by communicating 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 a manufacturer. Since the 1970s, Kao had been directly delivering products to retail stores not through wholesalers like the other everyday goods manufacturers, but through an affiliated (keiretsu) sales company. This is a vertical forward integration model in which the wholesaler is owned by the manufacturer. Kao was attentive to the details of its own logistics because it recognized the importance of understanding sales information pertaining to its products at the retail level. Recently, however, logistics costs have become more burdensome. EDI networks have been constructed that allow retail sales information to be delivered to the Kao headquarters online and Kao has developed a system that allows it to collect the information it needs without making direct deliveries to its stores. Thus, it has transferred some of its delivery functions to the 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 ownership integration but by a channel partnership based on a continuous contractual relationship between a wholesaler and a retailer. This type is exemplified by wholesaler Ryoshokus efforts to engage in bulk distribution with Sotetsu Rosen. Ryoshokus bulk distribution of processed food products to Sotetsu Rosen began in 1993. Many wholesalers were involved in the distribution of processed foods, but Sotetsu Rosen had narrowed down its forty-four processed food vendors to Ryoshoku and four other companies. As much as 75 percent of its processed food was supplied by Ryoshoku. Because of the logistics rationalization made possible by bulk distribution, a relationship developed between the two in which Ryoshoku even went as far as providing support for retail category management. That is, Ryoshoku constructed a mutually beneficial relationship based on a channel partnership with a retailer by supporting the introduction of POS and electronic ordering systems in Sotetsu Rosens stores, devising product shelf-space allotment plans, analyzing floor productivity, and developing pricing plans based on the POS data at each store. Conclusion Census of Commerce statistics have confirmed the trend toward the shortcutting of distribution channels in recent years, and a change now recognized as the transformation of the distribution channel structure caused by innovations in IT. To reaffirm this point, this article focused on the distribution of processed foods and everyday goods to examine the changes in the vertical market structure seen in the relationships between manufacturers and wholesalers and between wholesalers and retailers from the perspective of the distribution channel environment and channel strategies. Underlying recent changes in the distribution structure are changes in the channel environment, such as product diversification, logistics reforms, and IT innovations, as well as shifts from speculation to postponement, scale to scope, and push to pull distribution strategies. That is, in response to product diversification, a development triggered by consumption maturation and the concomitant uncertainty in demand, there has been a shift from speculative to postponement inventory management. As a result, efforts to improve the overall efficiency of production and sales systems (the supply chain), including logistics reforms and inventory coordination, are prompting changes in distribution channels. These distribution reforms are leading the industry in the following direc-

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tions. First, the conventional style of vertically separated distribution, which has been supported by the system of designated agent wholesalers for different industries or manufacturers, is becoming obsolete. This is due to the shift in the concentration of retail sales from small-scale specialty stores, called industry-specific stores to mass retailers and the efforts by retailers to get wholesalers to engage in full-line wholesaling and bulk distribution. The consolidation of the horizontal level at the retail and wholesale levels is flattening out the conventional vertical distribution structures. Leading wholesalers are therefore more actively buying and merging with local wholesalers, resulting in the shortcutting of the vertical level reflected in the Census of Commerce Statistics by Distribution Channel. Second, the emphasis is shifting from production-driven distribution strategies and channels to consumer-driven distribution strategies and channels. This is evident in the shift from speculation to postponement and from push to pull distribution strategies. It is also evident in the fact that intermediate distributors such as wholesalers and distributors, are serving less as the sales agents of the manufacturers and more as the purchasing agents of consumers and retailers. Both of these developments are fostering the opening up of distribution channels. Third, distribution is being affected by the development of integrated channels using IT. In this context, integration refers to the integration of decision making between channel members, not the systematic integration in the narrow sense of vertical ownership integration. That is, the industry is moving away from the business optimization of individual players through decision making by those players (manufacturers, wholesalers, and retailers), toward the integrated coordination of decision making aimed at optimizing the entire production and distribution system. Information technology is propelling this kind of integrated coordination of decision making, and developments in the IT sector are changing the way business is conducted. IT is being incorporated into business-to-business transactions through the proliferation of electronic data interchange systems between companies. Efforts between P&G and Wal-Mart in the United States or between Kao and Jusco in Japan reflect movements by manufacturers and retailers to circumvent the wholesalers, share information, and integrate decision making. However, there are also some cases in which integrated channels are being promoted through the sharing of information between wholesalers and retailers, as was described above in the channel partnership between Ryoshoku and Sotetsu Rosen. Thus, there are a variety of ways to promote the integrated coordination of decision making through information sharing. It is important to point out, however, that the trend toward integrated channels 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 greater distribution efficiency achieved through the integrated coordination of decision making and strengthened business relationships. The blockage effects, by contrast, refer to the downsides of improved distribution efficiency, in that the construction of exclusive relationships through the absorption of business partners can limit competition at the distribution level. The competition policy must be directed to check these downsides to ensure that fair competition is maintained. References
Fair Trade Commission. 1998. Oroshiurigyousha nado no jigyou katsudou ni kansuru 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. In The 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 Grocery Channel? Marketing Science 14, no. 2: 189223. Nihon Keizai Shimbunsha. 1999. Ryutsu keizai no tebiki [Handbook of Distribution Economy]. 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 kankei to ryuutsu kouzou no henka ni kansuru chousa [Study of New Relationships in Distribution and Changes in the Distribution Structure]. Tokyo. Tamura, Masanori. 1989. Gendai no shijou senryaku [Modern Marketing Strategy]. Tokyo: Nihon keizai shimbunsha.

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