Japanese Apparel Distribution

Inter-fire Contracting and Intra-firm Organization

IIM-C EPGM-21
Strategic Management – 19-Oct-2019

Questions of interest:
1. Why did vertical integration work only in some segments and not in most of the
apparel distribution sector?
2. Why were US & japan fighting over apparel business practices? What would
happen if Japan accepts US demands?
Q1. Why did vertical integration work only in some segments and
not in most of the apparel distribution sector?
• Japan apparel industry worked on a cost based model
• Primarily the industry is divided into three segments
1. Apparel maker
2. Wholesaler
3. Retailer

Their operation were classified based on the extend of work they would do.
1. Apparel Maker
 Design in-house or out source the design to designer
 Necessarily manufacture in-house
 Keep no raw material stock. Import major raw material based on orders

2. Wholesaler
 Focus on economies of scope that in-turn generated economies of scale for capitalizing gains
 Study the market and provide inputs of research to upstream manufacturers
 Generate a full product line based on its marketing expertise and leverage retailers to focus on right target audience for the product.

3. Retailer
 Department stores
 Convenience stores (selling socks, under garments)
 Sell products to the customers directly based on the needs and also monitor the trend
Q1. Why did vertical integration work only in some segments and
not in most of the apparel distribution sector? (Contd…)
• Key products that influenced market:
1. Business suits
2. Young chics
3. Cheap chic casual
Influence of these products:
1. Business Suits
• Shift from tailor-made to ready-made suits.
• Reduced retailers hold from these shift  basic business suits have long shelf life.
• New market players  Aayoma shoji and Aoki international  exploited economies of scale.
• Necessity of accurate information about consumer preferences and plan production in advance accordingly.
2. Young Chics
• Traditional Department store avoided this segment
• Target consumers: Rising consumer income, trend conscious consumers
• San’ei and Five Foxes emergence in Harajuku
• Trade secret: control market based on 1) Repeat purchases and 2) Response time
• Quick Response systems
• Integration limited to wholesale in system.
• Economies of scope and scale played a major role in controlling the
3. Cheap chic casual extent of integration for each segments.
• Fast retailing  Uni-Qlo stores
• Volatility in market added additional constraints in responding to the
• Non-age uni-sex casual wear
changes thus making vertical integration a challenge in distribution
• Intergrated wholesale and retail to cut response time.
sector
Q2. Why were US & japan fighting over apparel business practices?
What would happen if Japan accepts US demands?
Part 1: Based on the beholders view (US/Japan), the business model was either side of the below three points.

1. Exclusivity:
• Massive quantity of goods imported.
• High correlation of exchange rates and import of goods.
• Retailers compete with each other  high competition.
2. Efficiency:
• Highly competitive and volatile market.
• Low distribution margins
3. Transparency:
• Cost based price mechanisms.
• Economics logic suggested Japanese distribution followed a predictable path

Part 2: US on contrary argues for bringing in more transparency and efficiency in distributional channels.
• The debate grows on the Wholesale to retail ratio (W/R) which showcases the level of vertical integration for the
distribution channel.
• Implications if Japan accepts US demands:
1. Lose on the competitive advantage of local products as the margins are comparably similar and only exchange rates would then provide
the leverage to the Japanese apparel when import cost would be high.
2. Consumer would lose on return policy
3. Manufacturer’s employees will have to deal in to retail which is not their core expertise