Why distribution in Japan is so complicated? Answer: There are many small-scale retailers

Distribution in Japan is said to be very complex. This is due to the structure of the society rather than mere business practices. The proportion of small-sized wholesalers and retailers with less than 10 employees is high in Japan. Approximately 99.7% of Japan’s 4 million companies are SMEs. This proportion is not particularly special; the same figure in the US, the UK and Germany is 99.7%, 99.9% and 99.5% respectively. Yet Japan stands out in terms of the proportion of very small companies (with less than 10 employees). In the wholesale and retail sector, such companies consist of 80%, while the same figure in the US remains to be around 50%.  

Wholesalers, or intermediaries, is an integral part of Japanese distribution system. Those who have visited Japan may know that in a city of certain size there are a number of shopping streets (商店街 or Shotengai). Urban areas in Japan are developed around train stations, so visiting shopping streets nearby station are more convenient for daily spending than going to a large supermarket in the outskirt. There are also supermarkets around a train station, but their store format in such places is very compact. And, in any store format, a shop displays many different types of items in a small package. This offering of an immense variety items can only be possible by the layer of wholesale operators. 

The knowledge to navigate your way through the complex layers of wholesalers (there are primary wholesalers, secondary wholesalers and sometimes even tertiary wholesalers) is the key to deliver products to the consumers. One of the confusions for foreign manufacturers and exporters starting business in Japan is that it is sometimes very difficult to have contract directly with retailers. This is true not only at negotiations with small-scale retailers; chain stores also tend to avoid signing a new Sales & Purchase contract.  

Retailers of any size prefer to receive the merchandise through wholesalers instead. Small retailers would suggest you set up a distribution channel through the secondary wholesales, which purchase the merchandise from the primary wholesalers. Large retailers, or chain stores, are usually working with the primary wholesalers, and you would be asked if you have already got a contract with one of the primary wholesalers they work with. In the food and beverage sector, restaurants, bars and hotels are usually working with the secondary wholesalers that offer a delivery service in a small lot. 

The secondary wholesalers are important, because the vast majority of retailers are small-sized and conduct their purchasing activities in small lots. The Distribution Economics Institute of Japan reported in 2011 on the market share concentration of food & beverage sector among selected countries. According to the report, in the US, the UK, Germany and France, the largest 10 retailers occupy 60-70% of the total market share. Because of their scale, large retailers are able to purchase in large lots, often directly from manufacturers and importers. In contrast, the market share of the largest 10 retailers is only less than 20% in Japan. In such a market, the primary wholesalers alone cannot cover the entire supply chain system; the secondary and the tertiary wholesalers are in charge of handling the merchandise in a small lot. 

The shopping streets (商店街 or Shotengai) in Japan.

A large number of small-scale manufacturers also around 

It is not only small-sized retailers that are plentiful in Japan. There are also a great number of small manufacturers, regardless of industry. Besides, there is a clear tendency that each manufacturer, including small ones, produces a larger variety of items comparing with its counterpart in other countries.   

Visitors to Japan are often surprised to find a tremendous variety of offerings on the shelves at any kind of stores. At the food section, numerous ingredients and products are expected to appear on the shelves in accordance with the four seasons, and such items are produced by many different, often small, manufacturers. You will see the same situation at the tools and equipment section; a great diversity of items of the same category are offered for slightly different purposes. All such abundance has made Japan one of the favourite destinations for foreign visitors. 

This level of diversity must be the result having an excessive number of manufacturers. Small-sized manufactures must show the edge over competitors in order to keep their position on the shelf. Yet as their R&D or marketing budget is limited, they end up offering rather similar but slightly different products, adding another layer of diversity to the store. 

There have been many studies comparing the number of manufacturers in operation in the US and European countries. In these countries, the number of manufacturers in any given industry is usually smaller than in Japan as well as the number of items offered by a single manufacturer. In the other words, there are many relatively small-scale manufacturers competing each other in almost every industry in Japan. For example, in Japan there are 14 manufacturers producing cars domestically. 

With so many retailers and so many producers, having intermediaries at each layer of supply chain is essential to handle the trade between them. Otherwise, the consumers cannot enjoy many different types of products offered by different manufacturers. 

Not only small-sized retailers that are plentiful in Japan, there are also a great number of small manufacturers.

Tonya wholesalers are the key player in supply chain 

In Japan, wholesalers are called Tonya (問屋). This is not necessarily a technical term, and Japanese people rather prefer to use this word to ‘wholesale operator’. Tonya wholesalers often appear in historical novels featuring townspeople in the late Edo period, from the 18th century to the early 19th century. Lumber wholesalers, sake wholesalers, and other such occupations invariably appear when describing people's daily lives. They are usually portrayed as wealthy merchants who are in charge of distribution. They are also cultural icons of a sort. 

In the 21st century, the position of intermediaries is becoming increasingly uncertain anywhere in the world due to the ever-developing information technologies. Even in Japan, where wholesalers are deeply rooted in society, the argument is regularly raised that the direct trade between manufacturers and retailers or consumers makes the wholesalers obsolete. The argument is very convincing when you focus on the technological point of view, and it is actually happening both in the B2B and B2C spheres. 

Yet, being involved in trade and distribution for many years, I do not see any signs of wholesalers going away. As long as there are many small retailers, many small manufacturers and consumers who want a wide variety of products, this distribution structure in Japan will be maintained in the foreseeable future. What is often overlooked in this kind of argument is the fact that both retailers and manufacturers outsource the functions of re-packing, settlement and market research to wholesalers. In other words, they depend a significant part of their workflow on wholesalers. 

The warehouse of one of the major wholesalers in Japan.

Only wholesalers can deliver a wide variety of products in small lots. 

Let us look at the re-packing function from the retailers’ point of view. It is true that wholesalers take a middle margin; it is less expensive if you buy directly from manufacturers. However, Japanese retailers tend to have a small sales floor area. Even chain stores such as supermarkets cannot have a large space at their outlets in the urban areas. Besides, since Japanese consumers always expect a lot of varieties in stock, retailers have an incentive to purchase a lot of items, each in a small lot. 

Wholesalers can offer the crucial function in such a situation by first purchasing goods in large batches from manufacturers and then repacking them into smaller lots before delivering to each store. If you have ever been to Japan, you may have observed at a convenience store that shopkeepers are shelving products from the stacks of green plastic cases. They usually come from a distribution centre that belongs to a large wholesaler. Inside the green plastic cases, there are many items from many different manufacturers and each quantity is always small. 

Wholesalers are also important for settlement. Even if a retailer buys items produced by many different manufacturers, it only gets a single invoice issued by the wholesaler in charge of delivery. The workload related to documentation and payment is not insignificant for small retailers. Imagine a retailer operating three shops: the wholesaler only leaves a delivery note to each of the three shops, and then, separately, it sends the retailer’s head office an invoice that summarises all the transaction. This scheme may help the retailer to keep its headcount lower. 

Manufactures or importers, on the other hand, also benefit from the settlement function of wholesaler. If you want to do business with numerous small retailers, the overall task of credit management can be very complex. Wholesalers, not only taking the task of repacking, takes charge of money collection. They do not have to worry about late payments from small retailers.  

Wholesalers as an information hub 

Wholesalers is also considered as a hub of information and knowledge. They have a large database of their own industry. As explained above, much of Japanese retailers are small-scale so are manufacturers, and the number of items that are produced for ever-demanding consumers remains very high. It is simply difficult for small businesses to update their knowledge of all products, even in their own industry. Wholesalers, who are always in close contact with suppliers, are someone they can rely on to obtain the latest information. Retailers effectively rely a part of marketing activities on their wholesalers. 

Wholesalers are a third party who are offering the logistics functions at the supply chain. They basically work in a reactive manner. They work on behalf of all the manufacturers and do not particularly promote the items from a limited number of suppliers. Wholesalers are a provider of unbiased information. They may suggest new product categories or inform about the latest trend in Tokyo, but the purchase decision is always made by a retailer.