Kohei Arai

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On December 15, 2015, Kohei Arai commented on Nitori: 28 years consecutive profit increase :

Hi Tariq, thank you very much for giving me deep insights on IKEA. It is very interesting to compare.

As for the net margin we may have to care about the difference in tax rate. Japan corporate tax rate is 39% while I am sure Ikea is subject to lower tax rate. If compare gross margin, Nitori is 52% LTM basis while IKEA is 44% (based on Cap IQ).

I am not 100% sure which is more efficient / profitable especially given the Ikea’s significant bargaining power as you mentioned, but Nitori has much efforts on costs cut every year. I think that the biggest contribution is that Nitori’s production facilities are all in Indonesia and Vietnam where labor costs are still low. My understanding is that IKEA uses OEM for its production in many countries around the world, so I assume their manufacturing costs are higher than Nitori. Nitori said that their manufacturing process are really efficient. For example, they use up 95% of a lumber while competitors typically use only 50-60%.

On December 15, 2015, Kohei Arai commented on Nitori: 28 years consecutive profit increase :

Thanks for your comments, Chris.

To your quations:
1) For (not all but) many products, Nitori delivers completed furniture (or assembles the parts for end-users at customers house) for free, and I can assume that additional material time are required for staff to assemble. This is negative impact but in other part of operating process, Nitori counters well. I think that the biggest contribution is the fact that Nitori’s production facilities are concentrated in Indonesia and Vietnam where labor costs are still low, while IKEA uses OEM for its production in many places around the world. The Nitori said that their manufacturing process are really efficient. For example, they use up 95% of a lumber while competitors typically use 50-60%.

2) In terms of product design, my sense is that Nitori has not spent much money on it as they did not use external designers. It was said that Nitori does not require much costs on designs because they mainly targets low-to-middle customers with simple design. In terms of product innovation, Nitori said they try to reflect customers’ demand/preference into products’ functionality, but I don’t feel that Nitori’s products are innovative as some of UNIQLO’s products do. This would be the next step for Nitori especially because it recently opened its stores in urban areas. Most recently the store was opend in Ginza (famous for expensive department stores)! (I hope you may know it.) They need to attract middle-high customers if they want to succeed in Ginza.

On December 15, 2015, Kohei Arai commented on Nitori: 28 years consecutive profit increase :

Francisco, thanks for the comments and questions!

To your questions,
(a) Although my post has focused on real stores, Nitori has strong presence in online business. It opened e-commerce site on 2004 and the e-commerce business’s revenue has grown to over 15.5bin JPY (over 129 mil USD) in FY2015/2. I agree that it has achieved higher margin by avoiding rental expenses.
(b) Our perception in Japan is that Nitori is cheaper but IKEA is more fashionable. Nitori’s products are easy to use but simpler than Nitori. In addition to cheaper materials costs, I understand that cheaper design costs maybe a reason although the business models are similar.

On December 15, 2015, Kohei Arai commented on Nitori: 28 years consecutive profit increase :

Jeff, thanks for your comments.
Nitori’s 26 years continuous operating profit increase is No.1 record in Japan at this moment!
To your question, although I did not think about it, I agree with your thought that it would be great opportunity if they sell their products from other retailers. As I wrote in the section “3. Store Opening Strategy” above, Nitori recently try to open smaller store focusing on interior goods. So why not selling interior goods via other retailers? Their products are simple and not many customer services are required in the selling places. My only concern is that they have stuck to vertical integrated operation and that the culture is not so aggressive. Therefore there will be some hurdle to change their mind. They want to control all the operating process.

On December 15, 2015, Kohei Arai commented on Nitori: 28 years consecutive profit increase :

Mike, thanks for giving me your thoughts on my post.

My thoughts to you questions:
(1) IKEA is also perceived “inexpensive / affordable” in Japan however the difference is that Nitori is cheaper than IKEA and IKEA is more fashionable than Nitori (which is simpler). I see the difference in their positioning in this sense. And IKEA has been expanding its market share, but I understand that at this moment Nitori has stronger market presence in Japan. In addition to lower price, Nitori’s advantage come from its store locations and services. In terms of stores, IKEA has only 8 large stores in Japan located in suburban area while Nitori has over 300 stores. Nitori also started its stores in suburban area but these days it has opened the stores in urban area as well. So it is obvious that Nitori’s stores are more easy to access, which is better for low-to-middle income population in Japan because unlike other countries, it is often the case that people does not own cars. Another thing is services. in last 5 to 10 years in Japan, young generation tends to live by themselves leaving parents house. For those, Nitori’s services to deliver completed furniture for free has been powerful. I think that definitely Nitori should expand its business abroad further. They did some in Asia, which likely fit their business. But probably US/Europe would be difficult market for them given the IKEA’s presence.

(2) Nitori’s delivery service is powerful as it deliver some completed products to some areas for free. I imagine that young female who live alone would appreciate that service as it is difficult for them to assemble if they just get parts of furniture (like DIY service). Nitori uses both in-house delivery services and third-party logistics for their products delivery to end users, but I could not find the percentage between them. Customers does not see price difference between in-house delivery services and third-party logistics as Nitori set same price for both. But having own logistics improved its level of service quality as the staff can assemble large furniture when delivered.

On December 14, 2015, Kohei Arai commented on Nitori: 28 years consecutive profit increase :

Qing, thank you very much for your comments.

I agree with your concern on the costs for designers but Nitori said that using internal designers are cheaper than using external designers. Their products are low-to-middle end so they do not require “elaborate” design. Their products are relatively simple. I agree that some training would be needed but I assume their costs for designers are not so different from other workers.

On the manufacturing side (please let me clarify that Nitori has its own manufacturing process (in Indonesia and Vietnam) and the one who outsource manufacturing process is IKEA in my understanding), I appreciated you sharing the difference between Alibaba and JD.com. I think Nitori has built sophisticated logistics system as they emphasized to improve the system from early on. One early example is that, in 1980, Nitori implemented automated warehouse to save labor and maintain storage.

On December 14, 2015, Kohei Arai commented on INDITEX: Lessons in “Fast Fashion” :

Hi, thank you for sharing great insight on Inditex! It was really interesting to know how 2-weeks delivery was made possible. And I could see that how its operating model supported its business model to provide consumers with the latest products speedily at affordable prices.

Most interesting to me was the Inditex’s inventory management. I learned that sending back all finished goods to its central facility regardless of where to be made is to assure the quality. But I assumed that there is a trade-off between speed and quality as they could deliver the products more quickly if they located quality inspection team on each facility where the apparels are produced. So, I may think that if Inditex can have skilled inspection team on each manufacturing facility and company-wide inventory management system, their distribution would be more faster, i.e. they don’t need to send the products back to a central distribution center. Do you think they would do so in the future? Or still it is better to use a central distribution center?

Kohei

On December 14, 2015, Kohei Arai commented on DIRECTV pre-paid: how to wake up a sleeping giant :

Hi Dino,

Thanks for sharing great example where I can see DIRECTV modified its operation to support new business strategy. I see the pre-paid solution has been successful as it made the trial easier for people with low and unstable income. And also it is interesting that DIRECTV provides a kit and expects a customer to set up with it. I can imagine this decreases the labor costs for the installation and so decrease the price. When I read this part, I was afraid if lots of customers need a support beyond an installation manual but my worry was cleared by “Customer support” part. Tutorial on youtube is inexpensive and easy-to-understand way!

My concern on this business is that as technology/infrastructure get more developed in Latin America, as you discussed we can assume that the providers on internet and/or on mobile such as Netflix will come into the markets. But I think it will take some time so DIRECTV will be able to be making a success for a while at least. And this business/operational model can be applied to other emerging markets as well so there are still lots of opportunity for DIRECTV if we look for globally. If they want to be successful in the long-run in Latin America, one way is probably that they should gather the rights for the locally popular TV programs and licensed them to other internet providers when they come.

Kohei

On December 14, 2015, Kohei Arai commented on Xiabu Xiabu – Unique Hot Pot Chain :

Qing, this is very interesting business. U-shaped bar reminds me of conveyor-belt sushi bar (http://www.hakodate-factory.com/sushi/news.htm) or beef-on-rice dish restaurant (http://guardian-jp.com/wp-content/uploads/2015/01/DSCN0740.jpg) in Japan, but I never seen U-shaped tables for the kind of foods that Xiabu Xiabu is offering. Combining it with the concept of do-it-yourself, I can imagine how efficient the store operations are, by reducing the labor costs and increasing the cycle time of customers.

Also, I was impressed by its supply chain management. Having the logistics capabilities from purchasing to storage and delivery of supplies and the ability to forecast inventory accurately, it sounds that Xiabu Xiabu manages the raw materials with shorter expiration date very well.

I have a two questions:
– Using selected suppliers for exercising bargaining power and securing the quality does make sense. But I imagine that there are some risks because the yields of vegetables depends on the weather in the year. I am afraid if Xiabu Xiabu can secure the enough volume of vegetables in the year with bad weather for vegetables. In that case, can Xiabu Xiabu find the other supplier easily?
– The operation with U-shaped bar and DIY concept is new to me. Xiabu Xiabu was the pioneer of this model? Or the other players had taken similar operation in China?

Thank you very much for sharing great post!

Kohei