Watch out! Costco Japan snaps at the heels of industry giants Aeon and Ito Yokado

How times have changed! 

Early in my Japan career I remember when Costco’s arrival into the retail market was sneered at, even dismissed by the cognoscenti. “It will fail,” they said, “Japanese don’t buy bulk, their homes are too small.” 

Costco Amagasaki, Japan

Well in 2019, twenty years after its first arrival, Costco Japan has sales over JPY500b (US$4.4b) and is poised to enter the top 10 ranking.

Anyone who has been to their stores over the weekend knows a long queue awaits at the car park. Some of their bigger turnover outlets average a million shopping carts a week; Costco has become a destination shopping venue. 

It runs a laser focused operation: 3,500 SKUs per store (an Aeon or IY GMS average 4-5x more); pallet only displays; and negligible POS. Staff numbers are far lower not to mention rents. Costco Japan has 26 stores, all located in low cost suburbs.

Costco Japan, fresh food & meats

There is over US$200m revenue from membership fees, members number over 6m households, a massive 80% renew. 

When Costco Japan started, direct trading was almost unheard of. The cross shareholding links between retailers, trading houses and large wholesalers were a closed shop. Costco started bringing in well known brands from overseas which forced suppliers to review trading arrangements. Costco likes exclusive packs and many big brands produce exclusive SKUs, further driving traffic.

Toblerone: Costco Japan exclusive SKU (it was massive!)

Whether Costco is the best way to expose a new brand to the Japanese shopper is debatable. The retailer’s supply chain focus is so acute that popular items can be out of stock and slower sellers are never invited back. The company also strongly encourages suppliers to use its “Club demonstration services” – which is a separate business unit, and reportedly expensive.

Costco Demonstration Services

Most of the publicity about Japan’s changing retail landscape has focused on Amazon which is over 3x bigger. However, in food and household products where Amazon Japan is struggling to build scale, Costco has been much more successful.

Interested to grow your business globally? Check out Export and Expand

Too far too fast? Do the returns on Shake Shack’s international business warrant the pain?

This week I visited a recently opened Shake Shack burger outlet in Umeda, Osaka. It was on the ground floor of the newly renovated Hanshin Department store, on the popular Midosuji street.

It’s the first time I’ve seen a fast food restaurant inside an upmarket retailer selling quality branded apparel.

Shake Shack, Osaka, Midosuji street

Shake Shack now has 72 stores internationally of which 19 are in Japan, making it one of their biggest markets. There are plans to open an additional 15 outlets here by 2024.

Shake Shack has signed an exclusive franchise partnership with Sazaby League, a privately owned company that owns the rights to over 30 international brands, mostly in fashion. 

Sazaby was the original JV partner for Starbucks when it opened in Japan in 1995 and their relationship lasted until 2014 when Starbucks paid US$914m to take full ownership. Sazaby has entrenched relationships with high end retailers and property management companies meaning it has access to key locations, a prerequisite for any retailer.

Losing Starbucks was undoubtedly a shock Sazaby’s pride, let alone revenues, so the emergence of Shake Shack was prescient.


Shake Shack interior, Osaka

My lunch in Shake Shack was expensive. The burger, fries and shake came to JPY2300 (US$21), over twice the price of a MacDonald’s and roughly 40% more than a coffee and food in Starbucks.

JPY2300 lunch at Shake Shack Osaka

The restaurant was full of diners, but there was no queue and in the 30 minutes or so I was there I hardly noticed any new customers. I found the burger greasy and the bun especially was very soft and poor quality.

Whilst I don’t have access to the contract, I estimate Shake Shack makes roughly US$160,000 per franchise store/year, about 15% less than Starbucks. I suspect Starbucks have much higher outlet turnover as patrons visit more frequently. 

Licensing revenue is around 3% of Shake Shack’s turnover currently. In addition it mandates franchises to buy ‘proprietary ingredients’ including meat and buns, so its franchisees’ store traffic and spend are important. 

Since Shake Shack was IPO-ed at $21 its stock reached an all-time high of $92 in 2015. Yesterday it closed at $54.

I wonder whether Shake Shack have paid sufficient attention to consumer tastes and the value for money proposition to drive repeat store traffic?

Whilst Shake Shack is premium, it’s not Coach or Louis Vuitton.

Herbal candy Ryukakusan’s exports accelerate dramatically, only to face the danger of fakes

The exponential growth in tourists to Japan, now over 31 million/y, has been manna from heaven for many, especially drug stores.

In bound tourists spend on average $50/person on Japanese medicines which has resulted in the creation of new markets when visitors return home.

150 year old Ryukakusan, a maker of Rx and OTC products, as well as a popular line of throat candies, has seen its overseas sales jump 6 fold in the last 4 years thanks to distribution tie ups in Hong Kong, Taiwan, Korea and America.

Ryukakusan advert: “Your throat’s body guard”

The Ryukakusan brand has a strong ‘Kampo’ image, medicines made from a concoction of plants. Kampo originated from China and is holistic in ethos. There are over 140 Kampo Rx products in Japan and over 90% of Japanese doctors have at some point prescribed them. Most drug stores devote shelf space to Kampo products in addition to traditional western OTC products.

Ryukakusan’s packaging is premium, distinctive and its handwritten kanji logo make it unmistakably Japanese. According to Japanese drug store trade reports, Ryukakusan has consistently been one of the most popular products purchased by tourists.

Fake on the left, genuine product on the right

However can you tell the difference between these two designs? It’s very hard. Only someone who reads Japanese might notice the middle character on the LHS pack has changed.

Where these fakes have come from has not been stated, though doubtless Ryukakusan have their suspicions.

Safe guarding your brand’s intellectual property is key for long term export success. Looking at the Ryukakusan packs it seems they haven’t paid due diligence to IP protection. I suspect that Ryukakusan have naively assumed that no one would deliberately copy their work.

Now they have their work cut out chasing down fakes, instead of brand building.

The 5 secrets of trademark protection are laid out in Export and Expand.

Marketing chocolate the Aussie way: say G’day to TimTam

Created over 50 years ago, and with domestic sales around US$100m, TimTam biscuits are an Australian icon.

I’ve recently started seeing lots of them here in Japan, especially in Hokkaido, where they’re a hit with hungry skiers and locals alike.

Inspired by the UK’s Penguin brand, TimTam’s creator jazzed up the product creating a wider range of indulgent and chewier fillings, plus came up with a catchier brand name.

It’s not just Japan. TimTam has become popular in Indonesia, where it’s even been on promotion with MacDonalds, a great way to grow brand awareness and penetration, and been launched into the US, along with 40 plus other countries.

What further plans Arnotts/Campbells has for the brand, I’m not privy to, but they may want to think about some high traffic locations like popular department stores and other sites popular with tourists.

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Will Hokkaido’s Kinotoya be Japan’s next export hotcake?

I was in Hokkaido last week (great snowboarding!) and on the way back passed through Shin-Chitose airport.

The airport is one of my favourites for its superb collection of eateries and delicatessens. One of these is the Kinotoya bakery.

Kinotoya is Sapporo born and bred and is famous for its cheese tarts.

Another Hokkaido confectionery success has been Royce who have gone global with shops as far away as the Middle East.

Is it Kinotoya’s turn next? Check out more here