The Japanese economy is mired in deflation, the population is shrinking rapidly, and retail sales are projected to fall by 1 percent annually in the next five years. But there is one specific area that is bucking the trend: online shopping. In a recent report, the Japanese government said the country’s online B2C (business-to-consumer) sector grew by 17 percent to over $45 billion in 2008 on a year-on-year basis. The future looks ripe for brisk business, too. Consulting firm McKinsey expects e-commerce in Japan to expand by 10 percent a year, until at least 2015. Nomura Research even expects the market to balloon to $135 billion in fiscal 2014.
While consumers in the U.S. and Europe mainly visit Amazon or eBay to shop online, the “800-pound gorilla” in Japan’s e-commerce market is Rakuten. Established in 1997, the eponymous company behind the service has evolved into the country’s biggest online shopping mall operator. Over 33,000 merchants opened shop at Rakuten Ichiba, the company’s B2B2C market place, so far, serving a staggering 60 million registered members. The company has 6,000 employees, generated over $3 billion in revenue last year and boasts a $10 billion market capitalization. Amazon doesn’t break down country-specific financials, but industry experts believe its Japan branch doesn’t even come close to Rakuten’s numbers.
Illustration by Phil Couzens
But how exactly did Rakuten manage to keep the American retail juggernaut, one of the world’s iconic web companies, at arm’s length for so long? The main reason for its success can be found in the strong entrepreneurial spirit of Rakuten’s founder, Hiroshi Mikitani. It was he who first saw a business opportunity in supporting Japanese brick and mortar stores by setting up customized storefronts on the web. Toward the end of the 1990s, building and maintaining websites was costly and usually needed to be outsourced to specialized IT vendors. Mikitani disrupted Japan’s e-commerce sector by undercutting fees of existing vendors by up to 80 percent, hiring an aggressive sales force, and providing every merchant who opened a Rakuten store with individual service (i.e. phone support, seminars etc.). In return, retailers had to pay their virtual real estate fees upfront, which not only helped the startup reduce risk, but also maintain cash flow. This basic charge model still applies today, with Rakuten also pocketing around 3 percent of the revenue each retailer generates as commission fees. Today the site offers everything from groceries, fashion items, electronics, books, software to automobiles—around 60 million different items in total. Rakuten established itself a quasi-monopolist in Japan’s e-commerce space, even though Amazon entered the country as early as 2000.
However, the early success wasn’t enough for Mikitani, a Harvard graduate and offspring of a wealthy family from Kobe. Rakuten’s next goal was massive horizontal diversification, and that endeavor worked well, too. The company is now active in fields as diverse as credit, online payments, travel, securities, auction services, TV and even professional sports. In most of these sectors, Rakuten holds a leadership position.
Amazon Japan, on the other hand, is still mainly positioned as a B2C platform. But even without the synergy effects Rakuten has thanks to its wide ranging business segments, Amazon’s operations in Japan are said to be profitable. In fact, the company has been continuously expanding its business in this country in recent months. For example, the company has begun building additional distribution centers and offering “cloud computing” services to local IT firms. The Americans should be warned, however, as Mikitani is ready to shift gears yet again. Rakuten currently plans to set up its own distribution centers and offer same-day shipping, putting itself in direct competition with Amazon. The first such center, to be opened in Chiba this fall, is expected to ship up to 100,000 products (offered by Rakuten itself) per day. Rakuten will set up at least five more centers of this size by 2013. Simultaneously, the company is rapidly deploying its globalization strategy, more so than any other Japanese Internet firm in the past.
Mikitani never made a secret of his plan to eventually challenge Amazon even outside Japan, and recent developments have shown there can be no doubt he means it. In May, Rakuten acquired California-based shopping portal Buy.com for $250 million and paid the same sum for France’s leading e-commerce platform PriceMinister just one month later. The company has built up subsidiaries in Taiwan, Korea, Thailand and other markets, too. At present, however, just 8 percent of online transactions come from overseas. Rakuten aims at raising the rate to 70 percent by expanding into 27 different countries in the next few years. Mikitani also showed how serious he is about transforming his company into a global player by making it the first large Japanese company to ordain English as the official in-house language, even among local staff. Industry observers will be watching closely for clues as to how Rakuten will transplant its know-how to countries steeped in very different cultures.
Dr. Serkan Toto is a Tokyo-based web industry consultant and writer for American online media network TechCrunch.
