How to manage Japanese distributors
Some years ago, a national Japanese TV evening news business report covered US flat-panel TV vendors who were then flocking to sell their TVs in Japan because the average Tokyo discounted price was 2x the price US consumers were paying! Unfortunately for foreign electronics and PC vendors, though fortunately for Japanese consumers, decades of deflation eroded the price differential on many consumer goods and it is often possible to find electronic goods at similar prices, or less in the case of some photographic equipment, in Japan to those you might pay in the US or elsewhere. Prices might be similar, but the base package such as memory, hard drive and operating-system supplied as standard with a PC, are often much less valuable in Japan. In the fashion, designer brands and cosmetics industries, prices in Japan are still higher than elsewhere. Even Ikea Japan charges more for its products in Japan than in the US. Our point is that even now, the value of your product in Japan might be higher than in other markets you deal in.
Understanding the value of your company’s products and services in the Japanese market, before appointing the first distributor, is key to success. In more than two decades doing business in Japan, I have noticed a common problem suffered by many foreign companies some 12 to 18 months after entering the Japanese market using an agent or distributor. The problem is the sudden realization that despite what initially seemed a good contract negotiation, they are receiving a far less than expected percentage of the selling price of their products in the Japanese market. This can occur for a variety of reasons; some, such as distributor non-performance, channel conflict etc., are not specific to Japan and occur in every international market. What is a unique characteristic of the Japanese market though, is consumer expectation of quality and originality and the willingness, albeit less often, to pay unusual premiums for it. Even though increased competition from a variety of lower-cost competitors, including online merchants such as Amazon Japan and Rakuten Ichiba, has reduced price markups in the Japanese market dramatically when compared to levels of 10 – 15 years ago, there still exist some surprising differences in Japanese and US or European prices for some identical products and services.
When starting business in Japan and starting distributor contract negotiation, many foreign executives are probably unaware of the potential value of their products in Japan, but you can guarantee that the Japanese distributors on the other side of the negotiation will have a very good idea of that value. Many foreign companies in those first distributor contract negotiations agree to a transfer price (the percentage of the selling price paid by the Japanese distributor to the foreign company) calculated as a percentage of their home market list price, sometimes with a small, such as 10% – 15%, allowance for Japanese market markup built-in. Later the foreign company realizes the true value of its product in the Japanese market and finds that the distributor is selling at 50%, 100%, possibly 200% more than the home market list price and of course the foreign company is only benefiting by cents on the dollar. Tensions are often further heightened because the foreign company has probably made large investments in product changes and enhancements specifically for Japanese customers, most likely at the request of the Japanese distributor. The result is frustration, maybe even litigation, as the foreign company becomes convinced it is unfairly subsidizing the distributor’s very healthy margins.
While high price markups are most obvious in the luxury designer and high-brand goods and gifts markets, automobiles, even those made in Japan, are similarly more expensive here than in the US and Europe, as are many automotive components, clothes, consumer goods, electronics, sports equipment, food and furniture. Neither is markup isolated to the consumer sector: in the corporate sales arena, Japanese companies often pay higher prices for the products and services they buy than do their foreign counterparts.
While there are undoubtedly good Japanese distributors with great win-win partnerships with foreign companies, in more than two decades of Japanese business, I have yet to meet any foreign company executive who says that his or her distributor is amazing, that they are creating massive value and that there is no way they can improve their performance. In fact many of the executives I meet, and whom Venture Japan assists, feel their distributor blindsided and misled them when they negotiated their distribution agreements; almost all feel that the percentage of actual revenue their company receives is unreasonably low compared to other markets they deal in and that their distributor does not aggressively promote their products.
So, how can a foreign firm most successfully partner with a Japanese distributor?