Japan’s supermarkets are undergoing a digital transformation.
In November 2020, Rakuten, global investment firm KKR and Walmart announced the signing of definitive agreements under which KKR will purchase a majority stake and a new Rakuten subsidiary will purchase a minority stake in prominent Japanese supermarket chain Seiyu. Under the terms of the agreements, KKR will acquire a 65% stake in Seiyu, and Rakuten will acquire a 20% stake, through a newly created subsidiary focused on retailer digital transformation. Walmart will retain a 15% stake in Seiyu.
Rakuten and Walmart were already collaborating on the successful Rakuten Seiyu Netsuper online grocery shopping venture, as well as other projects outside of Japan. This new ownership structure enables Seiyu to take advantage of KKR, Rakuten and Walmart’s combined retail expertise and innovation as a standalone company and accelerate its digital transformation to further benefit both Seiyu’s customers and business partners.
“Rakuten started collaborating with Seiyu in 2018, and it has been going very well,” reveals Rakuten Seiyu Netsuper president Noriaki Komori. “We’ve been seeing Year-on-Year growth of +30% — even +50% for the month of October.”
The venture has been going so well, in fact, that the online supermarket is expanding its capacity with newer, larger, smarter automated distribution centers.
“There is huge demand for what we’re selling on Netsuper,” Komori says. “We’ve hit full capacity in our distribution centers much earlier than we forecast. Right now, it’s all about securing supply to meet customers’ needs.”
Seiyu supermarkets are beloved for their wide range of fresh produce as well as daily necessities, and each store stocks around 10 to 20 thousand different items. “We are looking to sell a larger variety of items with the addition of new distribution centers so that we can cover basically everything Seiyu sells.”
When asked about the direction for the industry as a whole, Komori’s enthusiasm is clear. “The grocery market in Japan, including fresh food, is actually huge. It’s around 60 trillion yen. But despite this, only 3% of it happens online. Compare this to other categories like books or electronics, for which e-commerce represents around 30% of the market, and this is a huge opportunity. There is a lot of potential for growth.”
Blurring the lines between online and offline
Komori believes that for the future of the supermarket industry, breaking down the barriers between online and offline business and merging the two experiences as much as possible is the key to growth.
“We’ve previously focused on the online venture only, but now we want to broaden our scope and contribute to the digital transformation of the entire business.”
Despite COVID-19 accelerating the growth of online grocery shopping, some consumers in Japan may still be hesitant to make the jump. “Particularly in the case with fresh food, Japanese consumers are very difficult to capture with a purely online experience. They want to check the products for themselves in a physical store,” Komori says. “Once they’ve tried a product, however, they’re extremely likely to make a repeat purchase.”
Before 2020, Rakuten Seiyu Netsuper users had mostly been busy workers or parents with little time to head out to the store, often buying refills or products in bulk. But since the pandemic, the service has seen a significant diversification in not only who is buying but what they are buying, as more customers want their regular groceries without navigating crowds at the supermarket. This is a sign that the merging of Rakuten and Seiyu’s strengths is working, Komori says.
“By combining Seiyu’s direct sourcing of fresh produce and the trust they have earned from customers with Rakuten’s online expertise, strong membership base and rapidly expanding logistics network, we are presenting an attractive case for customers.”
But Komori stresses that it’s not all about moving customers online. Rakuten is also looking to use its IT expertise to support shoppers at Seiyu’s physical stores.
“It’s really important that we merge these two sectors, and in doing so, a digital transformation is all but inevitable” Komori says. “This will allow us to utilize data in a much more meaningful way. Easy inventory control, demand forecasting using AI, automatic restocking — not to mention a more coherent experience for customers. Gone are the days when we just stuff pamphlets in every mailbox in the neighborhood — why waste paper when we can personalize the experience for each and every customer?”
Komori wants to stop thinking about the business in terms of its “offline to online ratio,” and allow the two to co-exist. “It’s not just straight ‘online shopping’ and ‘physical shopping’ anymore,” he asserts. “Shipping directly from physical stores, ordering online and picking up in-store, skipping the register to pay with your smartphone — through digitalization, all of these different shopping styles can co-exist.”
Transforming the industry with Rakuten DX Solution
To manage its stake in Seiyu, Rakuten will create a subsidiary company (provisionally) called Rakuten DX Solution in the first quarter of 2021. But Seiyu’s supermarkets aren’t the only target in Rakuten’s sights: The new company will be aiming to promote digitalization for brick-and-mortar stores all over the country.
“Rakuten’s mission is to empower people through innovation,” he explains. “Through this company, we’re looking to empower all sorts of different businesses.”
This philosophy is of fundamental importance to Rakuten, which found its footing in 1997 helping Japanese mom and pop stores navigate the then-untested new frontier known as the internet. Through Rakuten DX Solution, Komori wants to apply some of what they learn from their experience with Seiyu in supermarkets all around Japan. “Supermarkets in Japan are struggling with digital transformation because it is a very traditional industry — especially in regional Japan.”
Rakuten has already built key relationships in local communities across the country going back over a decade through cashless payment offerings like e-money service Rakuten Edy, loyalty program Rakuten Points and smartphone payment service Rakuten Pay.
“Through Rakuten DX Solution, we also want to support the digital transformation of these partners,” Komori says. “After all, we aren’t trying to do all this by ourselves — we want to walk together with all of our partners.”