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Sunday, June 6, 2010

No. 10: Consumption trends change faster than foreseen

Domestic demand in Japan is not growing fast despite the government shouty announcement, “Expand domestic demand.” The retail industry prompted M&A to materialize economies of scale under the assumption that domestic demand will expand given the government’s dramatic drive. However, the fact is that demand is not expanding fast enough, and the M&A strategy is not working well. Management integration of leading department stores attracted public attention, none of them are reported to have improved their results dramatically. Consumers rush to department stores to buy low-priced products offered by the tenant retailers. This is not what an M&A is intended for. After management integration, two leading department stores introduced the central buying system by headquarters, but this system is not working well because demand varies with region considerably.

You may say that retailers are not successful in M&A because they took the government’s Ptolemaic policy based on the assumption that Japan is Tokyo-centered at face value. No companies can achieve an M&A easily only by pursuing economies of scale, even though they are in the same industry. As the negotiations between Kirin Brewery and Suntory showed, the bigger the two companies are, the more difficult an M&A is. Consumption trends change with lots of factors. The factors are getting more diverse and changing at an accelerating pace. Even though an M&A successfully increases management efficiency, it will not be as effective as originally planned if it fails to cope with changes of consumption trends.

2 comments:

  1. Consolidation of purchasing functions can result in lower price using higher demand but as you point out if demand varies significantly across retail sectors then the demand is not sufficient to cause suppliers to offer products at lower prices. What we have seen here in the US are firms familiar with retail regions consolidating like firms through M&A as they understand those markets and the other dynamics of their markets such as rural vs. metropolitan.

    Government enforced or legislated M&A will not be sensitive to local economic factors and will often result in the wrong outcome. Market driven M&A is the best alternative and even then it is problematic successfully merging one or more companies into a successful organization.

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  2. Thank you for your comment, Mike. I learned a lot from your comment.

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