---
title: "The Evolution of Japanese Consumer Society: A Glimpse into China's Next 20 Years"
description: "Japan's consumer retail industry, which originated from the US and achieved global leadership in convenience stores, offers valuable lessons for China. By studying Japan's historical shifts, we can anticipate China's future retail opportunities, particularly in lower-tier markets and new retail models."
author: "Michael Fang"
publisher: "New Distribution"
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published: "2019-04-03"
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# The Evolution of Japanese Consumer Society: A Glimpse into China's Next 20 Years

> Japan's consumer retail industry, which originated from the US and achieved global leadership in convenience stores, offers valuable lessons for China. By studying Japan's historical shifts, we can anticipate China's future retail opportunities, particularly in lower-tier markets and new retail models.

Japan's consumer retail industry originated from the US. In the 1970s, it transplanted the American convenience store model domestically and eventually became the world's number one. By studying the US, we can see possibilities, but by studying Japan, we know how to turn those possibilities into reality.

This article is republished with authorization from the venture capital and startup media [42章经 (WeChat ID: myfortytwo)].

This article is based on excerpts from the offline sharing "The Evolution of Japanese Consumer Society" by **Michael Fang** from JD.com's investment department at the "42章经 Business School."

Michael Fang graduated from Waseda University in Japan with a degree in mathematics. He currently works in JD.com's investment department, focusing on the consumer sector (mainly retail) in China and Japan. He is a member of the Bridge Asia Foundation in Japan and has previously worked at J.P. Morgan and Nomura Research Institute in Japan.

When I look at retail companies in Japan, I feel like I'm seeing China's future. So today, I want to explore three things: why we should learn from Japan, what to learn from Japan, and how to learn from Japan.

In detail, by examining the patterns behind the macro-social and business format changes in Japan, we can identify what opportunities will exist in China's future retail industry. Then, starting from specific companies, we can look at the timing of structural changes in Japan's retail formats, map them to today's China, and see what insights we can gain.

**First, why do we choose to study Japan? There are four reasons:**

First, Japan has a small area and a homogeneous population, so the pace of change in its consumer society is relatively uniform. It is a good research sample, making it easy to sort out the context.

Second, the underlying elements of retail business models in China and Japan are more similar. The cultural commonalities need no elaboration. On a social level, China's first-tier and some second-tier cities are very close to Japan's Kanto and Kansai metropolitan areas in terms of population density and urbanization. Overall, in 20 years, China's population structure will be very similar to Japan's current one.

Third, as a latecomer, China should learn from Japan's successful transformation of advanced technologies and business models. I have a viewpoint: studying the US shows us possibilities, but studying Japan shows us how to turn those possibilities into reality. Japan's consumer retail industry originated from the US. In the 1970s, it transplanted the American convenience store model domestically and eventually became the world's number one.

Fourth, Masayoshi Son's time machine theory. This is also the logic behind his investment in Alibaba. When a business model that emerged in a developed economy is applied in an emerging economy, it's like taking a time machine back decades and following the original logic again. This is especially true for the consumer retail industries of China and Japan.

**The Evolution of Japan's Consumer Society**
**Can Be Mapped to the Consumption Status of Chinese Cities at Various Tiers**

Behind the changes in Japan's retail industry are the evolution and interaction of some basic business elements, such as population density, urbanization level, and per capita income. This "formula" is highly universal, and these variables have developed roughly linearly over time. Therefore, if there are no major technological innovations in the future, the logic of offline retail evolution in other regions will be relatively similar to Japan's.

But China is actually a country with complex geographical and class differentiation. So, the logic of Japan's horizontally evolving business formats will be vertically mapped to different cities in China.

I will use a secondary market analysis framework, the "Kondratiev Wave Theory," to explain the trends in Japan's consumption changes.

Figure 1: Kondratiev Wave Theory

As we know, the economy has cyclical changes, and within it, there are four nested small cycles. As shown in the figure above, the first is inventory investment, which is the enterprise inventory investment cycle, lasting about 5 years; next is the equipment investment cycle, about 10 years; then the real estate investment cycle, about 25 years; and the social infrastructure investment cycle, about 56 to 60 years.

These four small cycles can be idealized as four trigonometric functions with different wavelengths, moving forward over time. Eventually, these four vectors will overlap—where peaks overlap, you can understand that the economy is booming; where troughs overlap, the economy is relatively sluggish.

Overall, the economy has cyclical changes, and in turn, it cyclically affects consumer psychology. Through the "Kondratiev Wave Theory," we can sort out the entire macroeconomic development of Japan. Combined with consumer psychology and changes on the enterprise side, we can basically restore the entire Japanese consumer society.

Figure 2: Japan's First Consumption Era (click to enlarge)

For example, the figure above is a restoration of Japan's first consumption era using the "Kondratiev Wave Theory." The red area represents the rising phase of the cycle, and the gray area represents the recession phase. The overlap of the four cycles is the golden period of consumption development.

Let's first look at the characteristics and business formats of Japan's three major consumption eras. In this process, you can think about which tier of Chinese cities they correspond to.

**Japan's First Consumption Era (1954-1971)** The overall picture is that it absorbed the achievements of the first three waves of technological revolution, social and corporate equipment investment was unprecedentedly active, and consumers were striving for a moderately prosperous life. The population rose from 90 million to 100 million, the birth rate was 5%, per capita GDP rose from $400 to $4000, urbanization levels rose sharply, and land prices in Tokyo soared.

Around 1975, nearly 90% of Japanese society considered themselves middle class. This is Japan's "one hundred million total middle class" phenomenon. The whole society engaged in mass production and mass consumption. Homogenized demand led to homogenized consumption, and after homogenized consumption came homogenized lifestyles.

The representative consumer goods of this period were the "Three Sacred Treasures": television, refrigerator, and washing machine. The representative retail formats were department stores and GMS (General Merchandise Store), which is a chain + supermarket + discount store, mainly satisfying the consumption psychology of the "new middle class" for standard packages and one-stop shopping.

Figure 3: Japan's Second Consumption Era (click to enlarge)

**Now let's look at Japan's Second Consumption Era (1971-1991).** Before 1980, due to the two oil crises and the collapse of the Bretton Woods system, the entire Japanese economy was sluggish.

At the same time, after a period of rough expansion in the first consumption era, many companies realized that for resource-poor Japan, low-cost, low-consumption, and high-efficiency operations were crucial. So, they began to shift to refined operations, such as flexible manufacturing and engineering management, and some highly cost-effective business formats gradually emerged.

After 1980, we entered the well-known Japanese bubble economy period. There are some interesting markers here, such as luxury goods frenzy and real estate bubbles (for example, the land prices around Ginza at that time could buy the entire state of Texas in the US). During this period, the birth rate declined, and signs of aging began to appear.

We know that in the first consumption era, homogenized consumption was severe. But in the second consumption era, some class differentiation appeared. The consumption theme shifted from quantity to quality, and the entire Japanese market saw different user profiles:

1) Emphasis on label differentiation, leading to the birth of Japanese streetwear brands like Stussy;
2) Emphasis on personal preferences rather than others' opinions, with the emergence of "creative consumption" sprouts, like Tokyu Hands;
3) Focus on high cost-performance, with two representative companies: Don Quijote and Daiso (we will analyze them in detail later);
4) Emphasis on spiritual and cultural consumption, with culture and industry beginning to penetrate each other, such as the birth of many cultural research institutes.

At the same time, retail also changed: GMS (general merchandise stores) remained the market mainstay, but category killers began to rise, especially in clothing, home furnishings, and home appliances, where they had advantages over GMS in terms of product depth and cost-performance.

Additionally, formats with extreme low prices and extreme cost-performance, such as 100-yen shops and SPA (Specialty store Private label Apparel) models (a business model where companies participate in the entire industrial chain from product design, production, logistics, to sales), began to appear. After 1985, the convenience store format rose strongly. Because the theme of differentiated consumption had already emerged, convenience stores focused on high-frequency, rigid demand, and their sell-through was particularly fast.

Figure 4: Japan's Third Consumption Era (click to enlarge)

Then, after the bubble economy burst, Japan's real estate cycle began to rise, and Japan experienced another Golden Cycle.

During this period, Japan had already seen a trend of population decline, with the birth rate dropping to 0.8%, the elderly population accounting for 30%, low per capita GDP growth, and rising urbanization levels (mainly because the elderly living in suburbs found it inconvenient).

**The consumption characteristics at that time were:**

1) Brandless. Coming from the era of differentiation, when the bubble burst, people began to tear off labels and hide labels. MUJI was born in this period;
2) Emphasis on high cost-performance. Because incomes were tightening, people no longer paid for high brand premiums and high distribution costs, allowing companies like Uniqlo to rise;
3) Emphasis on emotional attachment and connection, leading to the rise of the pet economy;
4) Japan began to enter a super-aged society, and new economies such as elderly care real estate and the return of elderly labor to support the workforce began to emerge;
5) Japan began to enter a single-person society, with single people accounting for 35% of the population, and the phenomenon of lonely deaths appeared. Some life support services and convenience-oriented consumption were favored.

**Let's look at the changes in Japan's consumer retail formats from 1990 to 2008:**

In the first stage, people didn't have much money, and the department store industry, which represented major consumption upgrades, quickly fell into depression;

In the second stage, the convenience store format grew very fast, and shifted from convenience in time, distance, and goods to further providing psychological convenience to consumers;

In the third stage, extreme low-price formats rose rapidly, with Daiso, Seria, and other Japanese 100-yen shops seeing rapid revenue growth.

**From 2008 to 2016, there were some smaller changes:**

1) Retail companies began to engage in M&A and format integration. Aeon and 7&i (parent company of 7-Eleven) began to dominate the industry's top positions for a long time;
2) Discount stores like Don Quijote had business models that were highly anti-cyclical, with good cash flow. During economic downturns, they acquired poorly managed but asset-rich companies, leading to rapid performance growth;
3) Convenience store formats began to actively explore Omni channels, integrating online and offline;
4) Under the influence of population decline, an aging society, increasing foreign tourists, and stagnant national income, Japanese drugstore companies began to rise, becoming the fastest-growing retail format in Japan.

Figure 5: Distribution of Retail Formats in the Japanese Retail Market

The figure above is a map of the current retail market formats in Japan. Based on this and the time machine theory, the figure below is my prediction for the development of China's retail market.

Figure 6: Prediction of Future Development of China's Retail Market (click to enlarge)

From the figure, we can see that department stores, supermarkets, convenience stores, and category killers (including those that have adopted the SPA model) have already entered the market and hold stable positions. However, in third- and fourth-tier cities (corresponding to a time ten years earlier), where offline retail infrastructure is not particularly developed, convenience stores may not have emerged; in fifth- and sixth-tier cities (ten years earlier), only department stores and supermarkets exist, and in rural areas, only mom-and-pop shops.

It is worth noting that there is a neglected part of the entire Chinese market—the lower-tier market. Currently, online there is Pinduoduo, but offline there are only some small-scale chain low-price formats and some mom-and-pop shops.

**Solution One for China's Lower-Tier Market:**
**Pinduoduo's Endgame Might Be the Value Investment Institution That Best Understands Retail**

For solutions to China's lower-tier market, I will first talk about two companies. The first is Japan's discount store Don Quijote, which I call the "offline version of Pinduoduo"; the second is Japan's 100-yen shop Daiso Industries, which I call the "lower-tier version of Miniso."

In fact, the emergence of Pinduoduo has already verified the demand for low-priced goods in the lower-tier market, but the offline version of Pinduoduo and the chain 5-yuan store format are still absent. So, let's see if Don Quijote could be one of the solutions for China's lower-tier market.

I believe that the price advantage of clearance goods is naturally suitable for quickly entering China's lower-tier market, but there are two core points: first, how to maximize the potential value of clearance goods; second, how to manage the extremely complex clearance goods and supply chain. Chinese retail companies currently lack such capabilities, and Don Quijote is a good reference.

Let's first look at what kind of existence Don Quijote is. In 2018, its sales exceeded 50 billion RMB, with over 400 stores, average sales per store of over 100 million RMB, SKUs over 100,000, and annual customer traffic of 300 million people.

Figure 7: Don Quijote's Revenue Trend (click to enlarge)

Let's also look at Don Quijote's revenue trend. In the figure above, the gray line is Japan's economic growth rate, and the yellow line is Don Quijote's revenue growth rate. It can be seen that starting from 2008, it has a very obvious counter-cyclical characteristic.

Don Quijote's founder is Takao Yasuda. During the oil crisis, he had an idea: since many companies were going bankrupt and clearing out inventory, and the whole society was consuming downgraded, but the market only had department stores, GMS, category killers, and other formats, and these formats couldn't offer very cheap prices, could I collect clearance goods and sell them at extremely low prices? That was the origin of Don Quijote.

He has three marketing strategies that have been used to this day, which were also the magic weapons for Don Quijote's early success:

The first is called "POP flood." When getting clearance goods, use hand-drawn posters to highlight all the selling points of the goods;

The second is compressed display. It looks messy and contradicts the principles of easy to find, easy to buy, and easy to take, but it gives you a feeling of treasure hunting, very similar to Pinduoduo's entertainment-style consumption experience;

The third is late-night operation. Nighttime consumption accounts for 50% of Japan's total consumption, and the market is blank.

After the single-store model is proven, the next step is how to scale and replicate it, establishing competitive barriers during the growth phase. **Yasuda did two things at this stage:**

First, expand the scale of the upstream supply chain. It happened that after the bubble economy, many companies went bankrupt, so he had more clearance goods to collect;

Second, enrich the product matrix. Clearance goods have high gross margins and account for 40% of products. General goods and bestsellers account for 60%, but he sells them at 10% off market prices. These two points together maximize gross profit and customer traffic, ultimately achieving overall profitability.

In addition, he delegated management authority, setting up a "personal store manager" system. From purchasing, procurement marketing, to inventory management, including the entire PDCA process, all are decided by frontline store staff themselves. At the same time, he introduced a "store staff battle" system to motivate frontline employees.

This gave Don Quijote an extremely flexible combat model. Even with heavy assets, it could achieve scaled replication of stores. Then, through existing supply chain capabilities, it created cross-over formats through both self-building and acquisitions, achieving horizontal expansion of formats.

We know that all retail companies make private labels, and Don Quijote is no exception. It first established an approval committee, mainly responsible for collecting customer needs from stores, then giving them to the product development department. Chinese OEM factories and brand owners are responsible for production, and finally, goods are delivered to stores through its own logistics.

Don Quijote's private label matrix mainly has three: the first is "Jounetsu Kakaku" (Passionate Price), which is its lowest-positioned private label; the second is PLUS, which is below market price but with superior quality; and finally, Premium, which more comprehensively considers price, quality, and design. From the data, private labels contribute 11% of revenue and 16% of gross profit, so this strategy is very correct.

In 2007, Don Quijote acquired a local GMS company on the verge of bankruptcy—Nagasakiya. Due to deepening aging, Nagasakiya, which was deeply rooted in Japan's second- and third-tier cities, saw a severe decline in performance. After acquiring Nagasakiya, Don Quijote carried out drastic reforms and created a fusion format called "Mega Donki," successfully turning Nagasakiya around.

Now let's draw the "evolution" process of Don Quijote. You can see that its core capability is "turning waste into treasure"—selling clearance goods, acquiring poorly operated commercial real estate, acquiring bankrupt companies, and finally turning them into treasures.

This is the ultimate form of a company selling clearance goods—a retail company increasingly resembles a PE institution that plays value investing.

Figure 8: Don Quijote's "Evolution" Process

So, will this also be Pinduoduo's endgame?

I believe that the business model of extreme low prices is naturally anti-cyclical. When the economy is booming, it may survive relatively ordinarily; when the economy is sluggish, it can thrive.

Therefore, in Pinduoduo's future expansion, if it cultivates the ability to turn goods and companies into treasures from selling clearance goods, its ultimate form will increasingly resemble a value investment institution that best understands retail.

**Solution Two for China's Lower-Tier Market:**
**A Daiso-like 5-Yuan Store Might Be the Next Breakthrough Point for China's County Economy**

The second solution for China's lower-tier market requires learning from Japan's 100-yen shop pioneer, Daiso Industries, which I call the "lower-tier version of Miniso."

Here, I need to first talk about Miniso and see what part of the Chinese market it has failed to satisfy.

Miniso is positioned lower than MUJI but higher than Daiso, which we will discuss next. If you go to Southeast Asia, you'll find that Miniso's prices are twice those of Daiso, which is actually the same positioning as MUJI when it first entered China in 2005. So, it can succeed in first- and second-tier cities by leveraging "Japanese design + Chinese manufacturing," riding the wave of consumption upgrades, but the problem is that it's hard to go down-market.

We know that per capita income in China's first- and second-tier cities is 2-3 times that of third- and fourth-tier cities. Miniso's 15-yuan price band is hard to accept in third- and fourth-tier cities. But Pinduoduo's positioning is too low, leaving a price vacuum zone of 5-10 yuan in between.

I think China's current market can be approached with the logic of consumption downgrade as seen in Japan. A 5-yuan store similar to Daiso (the so-called Japanese 100-yen shop, which is about 6 RMB) could be the next breakthrough point for China's county economy.

Let's look at the evolution of Japanese 100-yen shops.

Daiso is the pioneer of Japanese 100-yen shops. The initial logic of 100-yen shops was similar to Don Quijote. During the oil crisis, people didn't have much money and began to pursue cost-performance, so Daiso was born. But when Japan gradually recovered from the oil crisis, Daiso became lukewarm. It wasn't until the 1991 bubble economy downturn that Daiso experienced rapid growth, and other 100-yen shop companies also appeared in the market.

Around 2000, because the upstream supply channels of Japanese 100-yen shops were mostly overseas, the depreciation of the yen increased raw material costs. Since 100-yen shops operate on a thin-profit, high-volume logic, a large number of small 100-yen shop companies died at that time, leading to an industry reshuffle. Now, the market structure of Japan's 100-yen shops is: Daiso, Seria, Cando, and Watts. Among them, Daiso holds about 60% market share, making it dominant.

Figure 9: Daiso Industries Sales and Store Trends (click to enlarge)

Let's also look at Daiso's sales and store trends. From the figure above, Daiso experienced rapid growth from 1990 to 2003, benefiting from the economic crisis. But why did growth slow down in 2003?

The reason is that Japan's 100-yen shops were saturated, so Daiso has been expanding overseas since then, but its overseas expansion has not been smooth, much worse than Miniso, also due to incorrect overseas positioning.

**The evolution of Daiso's business model also has several stages. The first stage is characterized by:**

1) Daiso purchased low-priced goods (such as clearance goods) from upstream wholesalers and used trucks for mobile sales, essentially a mobile street stall. Moreover, all goods were sold for a limited period, keeping consumers fresh, which has been integrated into Daiso's DNA. When you visit Daiso in Japan now, you won't find two identical stores.

2) All items for 100 yen. The benefits are: first, easy counting; second, shortened consumer decision-making process, making impulse purchases easier. Regardless of the cost of goods, Daiso's core is to ensure product quality, so some items are sold at a profit, and some at a loss.

3) Opening stores in high-traffic areas near supermarket entrances, and sourcing goods from Yiwu, China's small commodity wholesale market, with product prices around 0.5-3 RMB, which can be sold in Japan for 6-7 yuan.

**In the second stage, it sought a large number of domestic and overseas OEM factories.** Now, Daiso has over 1,400 factories, with about 70,000 SKUs, and launches 800 new SKUs per month.

Here, I'll give two examples of Daiso's OEM operations. The first case is contracting the entire annual production capacity of a Thai OEM factory to produce washi (a type of Japanese paper product). Thailand has many forests, is close to raw material sources, and has sufficient raw materials, so prices are relatively low. Papermaking is a traditional local industry with low technical difficulty, and going down to Southeast Asian villages and towns, labor costs are also low. Daiso contracts the entire factory's annual capacity to minimize unit costs, and after excluding tariffs and store costs, the gross margin can reach 95.4%.

The second example is how Daiso produces 100-yen new magazines. Producing a book involves paper costs, printing and plate-making costs, copyright fees, etc. The highest cost is printing and plate-making, accounting for about 50%. Daiso invested in printing companies to reduce printing and plate-making costs by 10%. It also placed printing and plate-making companies in the same building, saving logistics and management costs at various stages.

Additionally, it uses the logic of general merchandise to do books and magazines. When a new magazine is released, if it enters a bookstore, it has to pay a new release fee. But by treating it as general merchandise, it can save this fee. Pinduoduo follows the same logic: 9.9 yuan free shipping forces many Chinese manufacturers to maximize their potential.

Daiso has very few franchise stores in Japan; 80% are directly operated, and there are various store types, such as in-station stores, street-side stores, etc., each different. In store management, it's worth mentioning that Daiso uses a one-person store manager system, with the rest being part-time. It also places main promotional items at the ends of shelves because that's where consumers' attention lingers the longest. And if products are not selling well, Daiso adjusts their placement.

Figure 10: Overview of Japan's 100-Yen Shop Industry

Here, I compared the data characteristics of several Japanese 100-yen shops. It can be seen that Daiso's gross margin is around 30-35% (estimated, as Daiso is not listed), and there is no second place in the 6-10 yuan price band. Seria, which targets middle-to-high-end female consumers, has a gross margin of about 45% and a net profit margin as high as 7%. In terms of operational efficiency, all 100-yen shops are similar, with labor costs and rent each accounting for about 10%.

So here's a question: why hasn't a company like Daiso emerged in China?

I believe that a 5-yuan store requires extremely strong supply chain scale effects as a barrier. Daiso has over 70,000 SKUs, while the others have only about 20,000, which places very high demands on supply chain integration and management capabilities.

In fact, Daiso's supply chain is basically in China, meaning their Chinese factories were initially trained well and have strong supply chain capabilities. But the problem is that Chinese companies lack the ability to manage and integrate supply chains.

So, the second solution for China's lower-tier market depends on whether we can establish supply chain management and integration capabilities similar to Daiso's.

**Outlook for China's Future New Retail:**
**7-Eleven's Omni-Channel Model and Japan's Drugstore Model**

After discussing the two solutions for China's lower-tier market, next are my two outlooks for China's new retail models: one is 7-Eleven's omni-channel model, and the other is Japan's drugstore model.

Let's first look at 7-Eleven's omni-channel model.

Japanese convenience stores have roughly gone through three iteration stages: initially focusing on solving users' convenience in time and distance, then evolving to solve convenience in goods, and finally, convenience in user psychology. Today's 7-Eleven is already a life service center, while China's convenience stores are currently between convenience in goods and psychology.

7-Eleven's omni-channel model is designed to meet users' psychological needs and convenience. Unlike pure online-offline integration, to achieve an ideal omni-channel, it is first necessary to ensure that both online and offline have sufficiently rich and dense goods and spaces, and then, based on that, form touchpoint connections with a large number of customers.

If such a description is too abstract, let's see how 7-Eleven specifically builds its omni-channel:

Since 2005, 7-Eleven has been integrating various formats and establishing its own holding subsidiaries. In addition to convenience stores, it has multiple formats: such as Seibu Department Store, Loft specialty stores, supermarkets, and financial services. As shown in the figure below, after format integration, 7-Eleven has formed a large strategic closed loop.

Figure 11: 7-Eleven's Format Integration and Strategic Closed Loop

In contrast, although China's new retail has developed rapidly in recent years, and the integration of online and offline channels has become a normal model, there is still a big gap from 7-Eleven's omni-channel model.

Figure 12: Comparison of New Retail in China and Japan

Japanese convenience stores are more like the following format: when consumers need to make a purchase decision, they go through stages such as information awareness, research, purchase, and pickup. Japanese convenience stores build enough offline spaces and goods based on these consumer needs, and then combine these channels.

In terms of space density, 7-Eleven Japan has over 20,000 stores, which can achieve full coverage of the last mile physically. In terms of product richness, 7&i has Seibu Department Store, Ito Yokado, Loft, etc., supplying it with products across all categories and price points. On this basis, 7-Eleven can form touchpoints with 25 million users daily. Combined with its mature logistics and financial services, it is getting closer to the idealized omni-channel.

When Chinese internet companies expand offline in new retail, they still stand from the seller's perspective, pushing many cool products to consumers, showcasing the uniqueness of the model. The core is still traffic and conversion, lacking consideration of consumer pain points and needs hierarchy.

Some may ask, since Japan's offline retail is so developed, who will ultimately win between online and offline? I believe there is no online-offline competition in Japan. 7&i is not developing omni because of the rise of Rakuten in Japan; its core is still to solve society's "anxiety, inconvenience, and dissatisfaction."

So, Chinese companies must face the fact that there is still a huge gap between China and Japan in offline retail infrastructure. If China's future omni-channel is to develop, it cannot bypass this issue.

For 7&i, if the entire supply chain system and infrastructure become increasingly intelligent, covering Japan's currently high logistics and labor costs, then 7-Eleven could become one of the world's most advanced new retail models. Here, I have a view: China's Meituan might have the opportunity to benchmark against 7-Eleven.

Next, my second outlook for China's future retail model is Japan's drugstore format, which is currently the fastest-growing offline retail format in Japan.

The official Japanese definition of a drugstore is a retail format centered on the sale of pharmaceuticals, cosmetics, and health and beauty-related products.

Like China, selling pharmaceuticals has many regional and policy restrictions. In Japan, to sell drugs, you first need a pharmacist license. To obtain authorization for a directly operated store, you must work at a drugstore like Matsumoto Kiyoshi for two years after obtaining the license. Therefore, pharmacist resources are scarce, which leads to many Japanese drugstores being relatively dispersed. But also due to this scarcity, the gross margins for drugs and cosmetics are often higher, and compared to convenience stores, drugstores have more core competitiveness.

Matsumoto Kiyoshi is the most typical drugstore in the drugstore industry because its cosmetics and pharmaceuticals account for the largest proportion, up to 72%. From the beginning, it positioned itself as Japan's cheapest drugstore. Its founder was once the mayor of Chiba City, with a certain capital base and fame. In the early days, Matsumoto Kiyoshi mainly gained popularity through subsidies. When orders began to increase, procurement costs would correspondingly decrease, naturally achieving profitability.

In 1987, a revolutionary measure by Matsumoto Kiyoshi established its position in Japan's drugstore industry. At that time in Japan, if you weren't sick, you generally wouldn't go to a drugstore. But after Japan's policy of separating medicine and pharmacy was introduced, Matsumoto Kiyoshi chose to brighten the store lighting, significantly expand product categories and SKUs, and also increase the freedom of cosmetic testing. It was this disruptive innovation that gave rise to the current form of Japanese drugstores.

What attracts people most to Matsumoto Kiyoshi is actually its stores. Its positioning is to be a store that best understands young women and makes customers unable to resist. After Matsumoto Kiyoshi went public, it made many innovations and expanded in scale, actively exploring new store types and formats. For example, Beauty u is an offline store specifically for working women.

Special mention should be made of Matsumoto Kiyoshi's supply chain. In the past, if products in drugstores became unsellable, it was difficult to return them. But after joining Matsumoto Kiyoshi, the inventory of its directly operated stores and franchisees is connected. Even if a franchisee has a drug that can't be sold, it can be transferred with the directly operated stores. Matsumoto Kiyoshi currently connects with over 48 million users, nearly half of Japan's population, and by the end of 2018, its membership had exceeded 25 million.

Figure 13: Matsumoto Kiyoshi's CRM Based on Big Data (click to enlarge)

These members are essentially Matsumoto Kiyoshi's database. From the figure above, we can see the logic of Matsumoto Kiyoshi's CRM. They classify members by consumption level or region, and push targeted content or plan activity plans. For example, nearly 70% of Matsumoto Kiyoshi's sales from foreign tourists are contributed by Chinese people, so they hold special events for National Day, Spring Festival, etc.

Regarding drugstores, there is currently a consensus trend in Japan: "convenience store + drugstore" might become the ultimate winner in Japan's future retail market.

Against the backdrop of accelerating social aging, convenience stores and drugstores are becoming increasingly similar in positioning, and the two formats are beginning to gradually merge. For example, recently, Japan's FamilyMart acquired a 20% stake in Don Quijote and launched a joint format, increasing the proportion of drugstore products to counter Matsumoto Kiyoshi's cross-industry operations.

So here's a question for everyone to think about and discuss: will "convenience store + drugstore" also be the ultimate winner in China's future retail market?

**From Japan's Declining Birthrate and Aging Population, Look at China's Business Opportunities**

Finally, I want to look at China's social development trends over the next 20 years from the perspective of Japan's declining birthrate and aging economy.

Figure 14: Development of Japan's Aging Population (click to enlarge)

Let's first look at Japan's aging situation. Using 65 years old as the elderly population line, from the trend in the figure above, by 2020, the population aged 65 and above will account for 29%, and by 2065, this proportion will rise to 40%. Currently, China's elderly population accounts for 15%, equivalent to Japan in the 1990s.

At the same time, average life expectancy has been increasing over time. According to forecasts by Japan's government statistics bureau, future Japanese women's life expectancy will be around 90 years, while men's will be relatively lower, around 80 years. Another noteworthy data point is that since around 2010, the consumption capacity of Japanese elderly has been continuously growing.

For China, which is also facing an aging and declining birthrate background, Japan becomes a good reference. Let's look at what business opportunities and hot tracks have emerged in Japan's aging and declining birthrate markets since the 1990s.

Figure 15: Business Opportunities from Declining Birthrate and Aging Population (click to enlarge)

Figure 16: Hot Tracks in the Environment of Declining Birthrate and Aging Population

First, look at the results of "declining birthrate": the market for education and high-priced goods and services will grow, because at this time, it might become six people raising one child together, so the consumption space for that one child increases.

Then, segment the elderly market.

1) The 65-74 age group is the super-middle-aged group. Many of them are still working in society, so things like vocational training centers, physical supplement products, anti-aging products, health products, and some fitness clubs might be popular.

2) The 75-84 age group has basically retired and has a lot of leisure time. They are more concerned about how to activate their assets, so some elderly care real estate, including full-service tea shops and game centers, will rise.

3) For those over 85, their free time will increase significantly, but at this time, they will start to face their own life and death issues. So some services that improve quality of life, such as caregiver robots, including burial services, are good fields.

Here are two examples from Japan's aging market.

The first is called Muscle, a robotics company. There are two types of robots: industrial robots and caregiving robots. This company makes caregiving robots. It has two products: one is a assistive device to move the elderly from bed to wheelchair, and the other is an automatic excretion processing device. The market size of Japan's caregiving robots has been rising steadily over the years.

The second case is Aeon's elderly care real estate. It is a shopping area for consumers aged 55 and above—Aeon Mall. In this mall, not only do they play music that the elderly like, but they also have interesting product designs. For example, cups might be styles that were popular when these elderly were young, taking a nostalgic route.

It is worth mentioning that most of these companies were born in the 1990s, and China's current elderly population proportion is exactly equivalent to Japan in the 1990s. Therefore, based on the above research on Japan's aging, I believe that for China, the current time is an appropriate timing to develop the elderly economy.

Additionally, Japan's current aging market is still built around the rigid needs of the elderly for goods and services, and these rigid needs, I believe, also need to be met in China.

Some may certainly question that Japan has good social welfare, but Chinese elderly don't enjoy good social welfare after retirement. Will their consumption capacity be lacking? But in fact, transfer payments from young people to elderly consumption are common in China. In the consumption of rigid goods and services, Chinese elderly still have considerable consumption capacity.

Figure 17: Gap Between Chinese and Japanese Consumer Societies

Finally, use a figure to summarize the current gap between China and Japan. The main gaps are reflected in four parts: new retail formats, lower-tier market formats, lifestyle formats, and the aging market. The corresponding deficiencies are: business concepts and retail infrastructure, supply chain integration and management capabilities (as discussed with Daiso), proposal and design capabilities, and professional capabilities and infrastructure levels.

Only by understanding where the gaps are can we know what to see and learn from Japan.

**-END-**


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