Japan's Wholesale Sector Gets a Facelift

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1 Japan's Wholesale Sector Gets a Facelift The Japanese wholesale market is being modernized to make way for new technologies, as well as new realities, such as increased supply from overseas sources. Wholesale products are gathered in terminal markets, which totaled 86 central markets and 1,351 local markets in Wholesalers operating in these markets sell to retailers and intermediate wholesalers, the latter by auction. But the markets and the commodities they handle have been declining in recent years. In 2001 they handled 79.4% of the vegetable, 54.1% of the fruit, 62.5% of the fisheries products, 79.6% of the flowering plants and 18.5% of the beef distributed in Japan, but these percentages have been falling each year since. The Wholesale Market Law was amended in June 2004 to revitalize the wholesale sector through measures such as allowing third-party and direct sales. In third-party sales, wholesalers sell goods directly to retailers without the involvement of intermediate wholesalers. Under the direct procurement system, intermediate wholesalers can purchase perishable goods directly from producers without the involvement of wholesalers, thereby saving time while preserving product quality. It is also possible to carry out sales through auction, bidding or separately between the seller and individual buyers. These types of transactions are only permitted, however, up to a fixed limit, namely, a percentage of the quantity expected to be handled by a market. The local government overseeing the market makes such determinations, generally on a product-by-product basis. Under the reforms, conventional market functions generally have been preserved to ensure the stability of supplies and prices. But the revised law has 1

2 paved the way for electronic wholesaling of certain kinds of items, such as relatively standardized products that do not necessarily need to be brought to market. This is in contrast to the past, when the law required the physical presence of goods to be sold. Another change is the deregulation of wholesale commissions, which will take place in April For example, producers traditionally pay wholesalers a fixed percentage of sales to intermediate wholesalers. Nationally unified commissions vary by category, such as 8.5% for vegetables, 7.0% for fruit, 5.5% for fisheries products, 9.5% for flowering plants and 3.5% for meat excluding chicken. But this system will be lifted to allow commission rates to be set in accordance with the specific functions and services of wholesalers in particular fields. Intermediate wholesalers will continue to be able to sell purchased products at discretionary prices. The dividing line between wholesalers and intermediate wholesalers will effectively vanish once third-party sales and direct procurement become common practice and commissions are liberalized. This will inevitably intensify competition. Takashi Okamura, head of planning for Vegetech, a leading greengrocery intermediate wholesaler, predicts: "Companies that are not on solid footing will be driven out of business and the industry will further reorganized." 2

3 Deregulation of the Wholesale Sector From intermediate to primary wholesale Vegetech, preparing itself for tougher competition, set up the Chiba Producer Support Center as an intermediate wholesale facility in Chiba Prefecture, which borders Tokyo, is a major supplier of vegetables to the nation's capital. Vegetech built the center to enable producers in Chiba to sell their vegetables directly to Vegetech, originally an intermediate wholesaler. Vegetech hopes to function as a primary wholesaler as well. At the moment, agricultural cooperatives play the main role in collecting products in centralized locations. But the new center makes it easier for producers take produce to market, because it handles processing and packing. In the case of cooperatives, farmers must handle packing and delivery. In addition, farmers conventionally do not know the price they will receive until they are confirmed at the wholesale market, but Vegetech's center contracts farmers to produce at agreed prices. The company is also distinguishing itself by 3

4 checking for fertilizers and residual chemicals and posting this information, as well as the names and addresses of producers, on the Internet. Vegetech is also getting into the business of final production with products such as the Nepuree series of pureed vegetables. It also sells raw ingredients used in breads and jellies. In addition, soups and salad dressings processed from the puree are sold under Vegetech brands. "Deregulation is intensifying the competition, so we are surviving by adapting to the market and consumer preferences," explains Okamura. Linking producers and consumers Distribution in Japan involves more layers than in Europe or the United States. This is particularly noticeable in the fisheries sector, where wholesale markets play a major role in the distribution process. Kazuko Iwanari, an associate professor of Tokyo University of Marine Science and Technology, explains: "Japanese people consume a great amount of seafood. Years ago, when our transport network was still underdeveloped, it took considerable time to get fish to the final consumer, so it was difficult to keep items fresh. But the passing of product from one intermediary to another assured that the fish was checked frequently, which helped to ensure safety." Today, however, truck transport is quick and cold-storage technology is dramatically improved. It is now easier to retain freshness, so the conventional multistage structure is no longer needed. Moreover, more fisheries products are being traded outside the wholesale and terminal markets, and in relatively small quantities, mainly because more marine products are being imported and the domestic production of cultured fish has also increased. As a consequence, the market has been reformed to reflect these new realities. 4

5 Iwanari also notes the potential for an information disconnect in the two-step transaction between primary and intermediate wholesalers. Primary wholesalers are closer to producers, while intermediate wholesalers are closer to retailers. So while the primary wholesalers are well versed in moving and storing fish, they are less familiar with the needs of retailers. On the other hand, intermediate wholesalers tend to be expert marketers rather than expert handlers of fresh fish. The result is an information gap separating producers and consumers. But the recent changes in the wholesale market have offered an excellent opportunity to correct this situation. "Wholesalers must change their thinking and provide truly useful functions to link producers and consumers," says Iwanari. The wholesale market still has a crucial role to fulfill in the Japanese food sector. Japanese consumers so adore fresh food that many households still only buy food to be consumed that day. Supermarkets essentially rely on wholesale markets to supply their bins with perishable stocks. Iwanari gives the following advice to overseas distributors who are thinking of launching a business in Japan: "They should study the Japanese market to fully understand the continuing importance of the wholesale market." The amendment to the Wholesale Market Law will stimulate competition and reform among primary and intermediate wholesalers without inhibiting the crucial function of the free-market auction. It will also streamline the circulation of domestic and imported fresh foods. Moreover, it will enable consumers and producers to make direct contact, which should facilitate the development of products that are closely aligned with consumer tastes and demands. 5