CHAPTER 5

Expansion and Distribution Channel Management

The Late 1960s

I was fortunate enough to experience mostly advantages during the first 14 years of my business career and personal life. I had a wife and healthy twin boys, and Takihyo was growing at a tremendous pace. The side projects of licensing for Steelcase, the construction of the Takihyo headquarters in Nagoya, Takihyo’s licensing of Bobbie Brooks’s Stacy Ames brand, and our carpeting wholesaling division were more lucrative than I initially imagined they could be. With the introduction of these new lifestyle-marketed items, women’s Western clothing, and household goods, Takihyo embarked on changing from the old into the new. However, as the company evolved, so did the consumer—requiring us to adapt to a much more sophisticated consumer with new methods of distribution and marketing.

Takihyo needed a new distribution hub to expand and accommodate new demand. Although it is common practice today, Japanese businesses did not at that time have separate distribution centers. It was not until I’d traveled to the United States that I noticed how essential a distribution center would be for Takihyo. These centers allowed more room in the office to be devoted to desks and showrooms, rather than having to store boxes upon boxes of samples and products. On-site storage took away from our productivity in the office, because we were forced to spend too much time contracting messengers to ship samples and products rather than focusing on running the business. In other words, we were getting bogged down managing operational logistics when we should have been managing task delegation.

A new distribution center would also reduce costs as the company developed. As Nagoya grew, real estate values rose. I realized that by using a large portion of my headquarters as storage, I was ignoring the increase in the per-square-meter price of real estate. If the distribution hub were located somewhere else—specifically, somewhere with lower real estate values—the high price per meter would be suited better for people than for materials or products.

So I started a new company—a distribution center to manage incoming and outgoing inventory. I wanted those closest to the products to manage them. Initially, buyers in Japan were skeptical about the idea. When it came to fashion, they wanted to be able to see and touch everything on-site instead of making deals without seeing a significant percentage of the samples. In time, however, the new company—which I named Chu-Bu Distribution Center—streamlined Takihyo’s distribution management.

But our growth and development could not stop there. Not only was business changing, so too were our customers in every arena. The nation’s pulse grew faster and stronger—and consumers were yearning for distinct ways to express their individuality.

The distribution center had to provide Takihyo with a means to bring the right products to the right places. Typically, we were selling goods to department stores and various wholesalers, but this was before individuality determined the flow of our products. Our new clientele had differing tastes, and some held an allegiance to one store over the other. The vision behind the Chu-Bu Distribution Center focused on how to supply the right marketplaces with the right goods. The new chain-store concept spread like wildfire in Japan in the late 1960s. Previously, there had been only department stores, specialty stores, and mom-and-pop boutiques—all of which were destination locations. Each offered a particular brand of merchandise that could only be found there. Department stores even went out of their way to offer amenities to shoppers to keep them there longer and hopefully acquire a few more sales in the process. Some of these amenities were expensive for department stores to offer, but revenues from garment sales would tip the scales positively. Specialty stores always served a niche market; they would continue to do so as long as their products did not become so commonly used that everyone wanted what they had to offer and a bigger player steped in to provide it. (Mom-and-pop stores, though, did not fare as well; they could not compete as well against chain stores, and many disappeared.) Since chain stores were one of our customers, we needed to find a way to help them as well as ourselves in this new, challenging environment.

Chain stores differed from department stores in their relative convenience and the types of goods they sold. Chain stores would open a large number of locations, all selling the same goods to the masses, whereas many department stores would have only one or two locations. Chain stores also grew more aware of how branding could persuade their consumers to buy one product over another. It had previously been only the department stores that worried about how lighting could affect a sale; now, newer chain stores were more interested in merchandising their product properly. Takihyo even played a key role in forming one chain store company, called Jusco. However, before I describe how Jusco came about, I should provide some context about the competitive environment at the time.

I saw massive holes in how chain stores were operating in those years. There were two major players in Japan: Daiei and Seiyu. Daiei developed from a drugstore chain into a general merchandise, full-scale chain store and sold all kinds of goods including foodstuffs. Seiyu was more like a convenience store or kiosk and had been established by Seibu Railroad Company as a general merchandise chain store, initially as a way to generate extra revenues along the rail routes.

Stores like Seiyu and Daiei took a very simple approach: they bought merchandise, displayed it on the shelves, and sold it in bulk. They tried to keep overhead low so that they could offer merchandise to the consumer at a lower price. Although this business model worked well for Seiyu and Daiei, there were no general merchandise chain stores at the time that sold clothing—and it was only a matter of time before the chain-store trend would hit fashion for the masses. I felt that it was only natural at this point to start a conversation with Mr. Okada, a chain-store executive from Osaka. After numerous dinners and talks, I convinced Mr. Okada to merge, with Takihyo’s help, three up-and-coming chain stores in Japan: Okadaiya, Futagi, and Shiro.1 Okadaiya and Futagi had been chain stores based in other cities.

Daiei and Seiyu were doing quite well. So from an outside standpoint—looking solely at financial statements—these companies owned the chain store niche. However, the concept of the Jusco chain store fit somewhat outside of what those mega–chain stores were already offering. Stores like Daiei and Seiyu never dealt with fashion, nor did they understand how to market in that industry. Layouts were not important to them; they did nothing to create added value for their products. Items were merely stacked on shelves or tables, and consumers were expected to search through the items to find what they wanted. There was little to no organization; the idea was just too simple, I thought, for the new Japanese shopping public. Their approach was too rough around the edges. I knew that Jusco could bridge the gap between department stores and what people had come to think of as the chain store.

Modern concepts of design separated the new Jusco stores from the other chain stores. Jusco offered food, clothing, and the same convenience store items in one place like some of the others; but because we had some background knowledge in retail and merchandising, Jusco’s stores were easier to navigate and much more consumer-friendly to clothing shoppers. By organizing the clothes by type and brand, we managed to establish an atmosphere that strengthened the core of the business. We wanted to highlight certain items while making others accessible in the same market. Jusco would therefore offer a number of options; however, management would make clear, conscious decisions about what pieces would be merchandised best to show variety for the consumer in a fashion-conscious way.

Although building a new distribution channel for Takihyo’s goods was our main goal, our efforts had additional results. The birth of the chain store had given rise to a whole new set of problems. Department stores were less interested in buying goods from large wholesalers because their profit margins shrank with each hand in the deal; therefore, department stores wanted direct access to manufacturers. This movement threatened some of our business, so I strove to find a solution—not only to keep relationships with department stores alive but also to grow new ones, such as with the Jusco chain stores. The new distribution company played an integral role in this process as I had to force Takihyo to adopt a new distribution channel management system.

More specifically, the chain stores would allow us to wholesale or manufacture certain kinds of garments; another set of garments would be directed to specialty stores; and a third type would go to department stores. Each type would sell different goods at different price points: we wanted to sell our goods at all of them. Geography would also dictate what we would sell where. Some mom-and-pop stores would receive the same items a chain store would, but on the other side of the country and vice versa. Although I knew that the chain stores could provide Takihyo with a strong source of revenue, we wanted to keep business with the department stores as well; therefore, we formed new relationships with manufacturers across Japan. Our goal had always been to become a kind of one-stop wholesale shop with total manufacturing capabilities. Department stores would receive the kinds of products their consumers wanted, whereas chain stores and smaller boutiques would get entirely different sets. Demands and demographics also differed greatly depending on the type of store, so I pushed Takihyo’s manufacturing and wholesaling capabilities to meet these demands. There was no other way to grow in this kind of environment without outside thinking and help.

One reason for these divisions arose from the ways in which department stores marketed themselves as compared with chain stores or boutiques. A consumer’s trip across the city simply to visit the department store could be justified by the fact that the specific product the consumer was looking for could be found only at that store. The product’s specialness was therefore what became important; the kinds of items we could sell to department stores needed to adapt to a dynamic consumer base. Chain stores tended to sell basics; therefore, customers tended to be a bit more static in their needs. Department stores, on the other hand, were geared more to selling fashion and merchandising the products so they looked sexy.

The items sold at chain stores are more often than not tonnage or high-volume merchandise. If a chain store had many locations in a small area, all of the stores would sell more or less the same merchandise, thereby offering the consumer geographical convenience and a static base of product offerings. This allowed chain stores’ margins to remain low and let them be less brand conscious than department stores. For a fuller view, consider the key concept that was budding in my mind at the time: emotional value.

My favorite example of a piece of clothing with emotional value is the necktie. Neckties serve no purpose other than hanging on your neck. They’re made from very little fabric, and labor costs are proportionately low. However, some ties sell for as much as an inexpensive suit or dress. Their color, pattern, fabric, and brand can dictate what prices the consumers will pay. A well-respected or widely known brand may sell a T-shirt and a tie for the same price. A company such as BVD or Limited Brands’ Victoria’s Secret may sell a product that’s similar to that of a high-end designer company’s, perhaps even made from the same materials in the same factory.

However, the price point and gross margin may diverge significantly due to the way consumers—and entire markets—view Victoria’s Secret versus the way they perceive a high-end design house. The BVDs and Victoria’s Secrets of the world sell in volume with small gross margins and thus pay little mind to the enhanced value a couture brand name may offer—thereby adding little emotional value to a product. Then again, companies such as BVD and Victoria’s Secret sell items that people need—not something that they want. A brand-name necktie may also justify its price based on the fact that neckties are a bigger risk for the brand and the manufacturers than underwear. Regardless of pricing and margins, a product’s emotional value is influenced by a whole slew of factors ranging from celebrity sponsorship and enticing advertisements to lighting in a store or placement of a garment on a mannequin.

Moreover, emotional value stems from any added layer of creativity, regardless of the source. If designer A makes a cashmere dress that has a fantastic design and designer B makes a dress from the same fabric but that is a bit less interesting, then designer A’s dresses are sure to sell out long before designer B’s—if both dresses are selling at the same price. Absent any other mitigating factors, better or trendier design will always be more popular—and thus more successful. However, creativity in fashion design doesn’t always take the cake when it comes to emotional value; sometimes slapping on a name brand works just as well.

In any case, design exists in everything everywhere. There is nothing in this world that is created that doesn’t have some kind of aesthetic inclination or reference to the potential of the human hand.

Another example of a way to enhance the emotional value of a particular store—and the brands within it—is through merchandising. Although it’s a very different approach than enhancing emotional value, a creative and consumer-friendly merchandising method can change what does and does not sell.

The tactics used in merchandising can create significant emotional connections in any retail setting. One particular area that has had a particular effect on consumers is lighting; it plays an incredibly important role in selling. If a consumer is able to select a product more effectively because of enhanced visibility, then the chances of making the sale are that much greater. Consumers do not want to have to search for something; they want it right at the moment that they want it. If searching costs the consumer an extra 10 minutes, frustration may set in—which could possibly result in shoppers leaving dissatisfied and without having bought anything. For this reason, I wanted to design the Jusco stores with a bit of an edge over other chain stores—and even over department stores, which offered the same products as chain stores but their products were easier to find and arranged more attractively.

In any business, particularly in retail, the consumer should remain the focal point from the beginning to the end of the distribution chain: starting with those selling raw materials and finishing with those retailing the finished product. Changing the way in which you light a product and bringing food into the shopping experience offer two very different approaches to working with the consumer’s viewpoint.

Lighting has the potential to change an item’s desirability. Because it can recreate dimensionality, changes in lighting are a simple way to make a huge difference in how consumers see products. As already stated, consumers don’t want to work to find something—which makes floor layout and organization a primary concern for stores. However, retailers don’t always have an eye for this kind of setup; they often need additional help. For example, a garment on a hanger is a two-dimensional image—regardless of the quality, fit, color, size, shape—and is less appealing than a three-dimensional image, which can be simulated by broadly lighting dressed mannequins and placing them strategically to catch the eyes of wandering consumers.

Creating a scene in which mannequins wear the garments provides consumers with a more objective perspective as to how the clothing will look on them. Showing clothing in this way offers retailers and wholesalers a proverbial layup to selling a product: if they showcase the most beautiful pieces in this way, they will surely gain the attention deserved. Meanwhile, similar designs from the same line will be given more consumer credibility. A clean layout will offer a sense of comfort to the shopping experience while allowing retailers and merchandisers to have some control over the consumer’s physical movement and visual space.

Another way in which I added emotional value to the chain-store concept at Jusco was with food. Not until the last 30 years or so have stores sold food and offered a place where consumers could rest and relax before either heading home or continuing their errands. Most of the time, a consumer’s only option if he or she became hungry—or tired from walking—was to return home. However, linking eating with shopping gives consumers more time to peruse—which then increases the potential for another sale and another satisfied customer. I was able to implement this idea after pushing it with the Jusco executives—and the positive effects showed on the profit and loss statements.

Altering the way in which a consumer shops and experiences shopping by making it far more convenient and comfortable had been my underlying goal in helping to establish Jusco. Takihyo needed to form some new connections, and a fresh look at the chain-store concept gave us a push to take further control over one area of Japan’s new set of distribution chains. I felt that we needed more control over all aspects of the shopping experience in order to move forward and keep pace with an emerging consciousness of the individual that was affecting areas ranging from politics to fashion in Japan during the late 1960s. I wanted Takihyo to be ahead of the curve—finding methods of retailing and merchandising that had never before existed in Japan.

By taking some American ideas from what I’d noticed overseas and incorporating them with some of my own, I learned that the increasing complexity of the garment business meant one thing: I would have to change too. More important, the then-200-year-old Takihyo would have to alter its processes and approaches to succeed in this much more demanding market. Our ability to manage shoppers’ various needs and demands (by properly lighting and placing products, for example, and offering food and a place to rest) not only enhanced their shopping experience but also improved customers’ lifestyles by promoting their convenience and comfort while at the same time padding our profit margins.

A trained eye will always be able to see the emotional value that’s added to the material value of a product that’s well merchandised. The material value of the product—costs—is different from the emotional value. The difference is evident in how design houses add emotional value to their products. Adding emotional value to a store’s space, however, is quite different. Both chain stores and department stores have to attract consumers. How they sell the goods and amenities they offer represents different modes of convenience. Chain stores tend to position themselves for the shopper’s convenience, whereas department and specialty stores tend to be a destination shopping location. The difference between entering a CVS drugstore and entering a Saks Fifth Avenue department store is quite stark and represents customers’ shifting priorities. Coming to grips with these ideas helped Takihyo thrive in the late 1960s.

1 Shiro is a supermarket chain based in Osaka.