Distribution channels in Japan have undergone substantial consolidation over the past two decades. Channels vary significantly between consumer goods and industrial products.
Due to limited space and dense urban populations, small retail stores have been and remain predominant points of consumer sales. Consequently, retailers often stock only limited stock, and wholesalers are required to deliver small amounts of a product more frequently.
The Japanese cultural preference for doing business face-to-face, and loyalty or sense of obligation in relationships, maintains this system, but the costs of this less efficient distribution system are passed on to the consumer in the final price of the product. The growth of suburban “big box” retailers and eCommerce are challenging this model.
Japan’s existing distribution and sales system still bear the traces of the ‘keiretsu’ (related supplier) system. These larger, integrated business groups center around banks and trading companies and were culturally ingrained in Japanese commercial dealings. Although the keiretsu system has weakened substantially, these corporations have business offerings along all facets of a particular industry, from production to distribution. Their advantages due to economies of scale, existing relationships, and consumer loyalty make them either very convenient and effective for those they serve or an elephantine competitor for smaller firms. The distribution channels these companies’ control can be a limiting factor for new exporters to Japan.
Japan’s main logistics and distribution point centers are in the countries’ major ports in Tokyo, Yokohama, Kobe, Osaka, and Fukuoka.
For detailed information on distribution channels for specific products and sectors, please contact the U.S. Embassy Commercial Section.
Using an Agent or Distributor
For many companies, establishing a direct presence in Japan is the best way to enter the Japanese market. However, a more realistic first step for many small or medium-sized U.S. firms is the use of distributors or agents. Selecting a representative and negotiating the terms of its agreement requires careful attention.
U.S. firms should not try to use contact lists for “cold calls” on prospective Japanese agents. Most Japanese businesspeople prefer to do business with someone to whom they have been properly introduced and have met face-to-face, often by a trusted intermediary party. Appropriate third parties for such introductions can include other Japanese firms, U.S. companies that have successfully done business in Japan, banks, trade associations, chambers of commerce, the Japanese External Trade Organization (JETRO), U.S. state representative offices in Japan, and the U.S. Commercial Service in Japan (CS Japan).
As in any country, U.S. companies should conduct comprehensive due diligence before selecting a partner. The common issues of negotiation include assuring sufficient attention is paid to selling and supporting the U.S. product versus others, competing directly with established Japanese products, and developing new accounts and market awareness.
Distributors in Japan usually cover a specific territory or industry. Importers are often appointed as sole agents for the entire country. Sometimes granting exclusivity may be necessary to ensure a strong commitment by the Japanese agent towards expanding sales. However, under no circumstances should a U.S. company be pressured into granting exclusivity if there is doubt as to the ability or willingness of the Japanese agent to develop the relevant market.
Under an agency contract, the supplier normally invoices the agent for the same amount that the agent will sell to the customer (“back-to-back”). The supplier then pays a sales commission to the agent at the percentage provided for in the agency contract or agreement. Under a distribution contract, the supplier sells the product to the distributor, who is then free to add to the purchase price whatever markup it chooses in determining the sales price to the customer. Commission rates vary according to the product and contract terms. Generally speaking, sales commissions range from 10 to 20 percent for “spot” (one-time or irregular) transactions, and from 5 to 10 percent for regular, ongoing business transactions. In the case of bulk materials (e.g., iron ore or coal), however, commission rates are much lower, around 1-3 percent. In the case of medical, laboratory, and scientific analytical instruments, commission rates typically are much higher, around 20 percent or above, due to the complexity of the products.
Once an agent or distributor agreement is signed and the U.S. company’s products gain a foothold in the Japanese market, the U.S. company may want to consider establishing a representative office in Japan to support the distributor’s sales and marketing efforts and to facilitate communications with U.S. company headquarters. For businesses offering technical goods and services, a technical engineer or appropriate tech support on site is an important expectation of customers.
Establishing an Office
Establishing an office is relatively straightforward. According to the World Bank’s Business Enabling Environment, incorporation takes about 11 days and costs 0.7 percent of paid-in-capital (or JPY 60,000, whichever is higher) in addition to a company seal charge and registration fee. Other options include a branch office or a representative office, both of which are simple and inexpensive to establish but come with restrictions on the types of activities the local operations can carry out. Companies offering ‘co-working’ spaces (i.e., private, or semi-private office space plus secretarial or IT staff) are also becoming an option for companies in major Japanese cities.
Before setting up an office in Japan, U.S. companies may wish to examine Japan’s Ministry of Economy, Trade & Industry (METI) programs for promoting foreign investment into Japan, such as for entrepreneurs. These programs include loans available through the Japan Bank for International Cooperation and the Development Bank of Japan. Entry-level business support programs are provided by the Japan External Trade Organization (JETRO) as well as by some municipal and prefectural governments.
For the latest Investment Climate Statement (ICS) which includes information on investment and business environments in foreign economies pertinent to establishing and operating an office and to hiring employees, visit the U.S. Department of Department of State’s Investment Climate Statements website.
Franchising
U.S. franchising has heavily influenced the development of Japan’s franchise industry since the early 1970s. Although Japanese consumers are generally receptive to U.S. franchise concepts, products and services generally must be adjusted to local tastes and expectations in Japan to ensure success. U.S. franchising businesses have several ways to enter the Japanese market, such as entering into an agreement with a master franchisee, establishing a wholly owned subsidiary as a master franchisee with a flagship store or stores, or seeking a joint venture partner to develop the market in Japan.
Identifying the right business partner in Japan requires time and effort, and it can be difficult to find companies that are willing to invest in master franchise rights or to invest in business concepts that do not have a clear market or strong growth potential in Japan. Therefore, thorough market research and a long-term commitment are necessary for U.S. companies that are considering launching a franchise-based business in Japan.
More information is available at the Japan Franchise Association and at the U.S. Commercial Service.
Direct Marketing
Direct marketing in Japan includes mail order, telemarketing, direct response television and internet sales. According to the World Federation of Direct Selling Associations (WFDSA), Japan is the 5th largest direct selling market in the world, at $15.6 billion in 2019, behind the United States, China, Korea and Germany. The largest categories are cosmetics and personal care (39 percent), wellness (24 percent), and household goods and home durables (19 percent). While direct selling sales in Japan have dropped slightly since 2016, the sector still counts almost 2.9 million independent representatives, more than 87 percent women. See WFDSA’s Fact Sheet and global market statistics. Amway, Herbalife, and NuSkin are among the U.S. companies active in Japan.
According to the Japan Direct Marketing Association, the most popular way of gathering product information was the internet via a computer, followed by the internet via mobile devices, and hard copy catalogs. Young people are particularly adept at gathering product information via mobile devices. Japanese direct marketers use websites optimized for both PC and mobile devices to reach consumers. U.S. exporters wishing to sell products targeting young Japanese will need to optimize their platforms for mobile access.
Although eCommerce is growing rapidly, catalog shopping is also still popular in Japan. Major Japanese catalog shopping brands, which also operate online shopping sites, include Belluna, Senshukai-Belle Maison, Dinos-Cecile, Nissen, Scroll and Cataloghouse-Tsuhan Seikatsu.
Joint Ventures/Licensing
U.S. companies often consider joint ventures or licensing agreements when looking to enter the Japanese market. For the latest information on regulations and procedures for establishing an operation in Japan, please visit the JETRO website and consult with experienced and reputable legal and tax counsel. Licensing Agreements can cover issues such as Copyright, Know-how, Patent, Service mark, Trade secrets, and Trademarks. Business practices such as franchising, technology transfer, publication and character merchandising entirely depends on the licensing of intellectual property.
Another licensing issue for U.S. commercial exports to Japan is export license: The export of technical data from the United States can be subject to U.S. export control laws. In such cases, a thorough review of the U.S. Department of Commerce’s Export Administration Regulations (EAR) should precede the signing of any licensing agreement. See the Bureau of Industry and Security regulations, here.
Express Delivery
In Japan, there are multiple options for express delivery for domestic and international shipping. Both U.S. firms FedEx and UPS operate within Japan and offer overnight shipping between Japan and the United States. Cost and delivery time will depend on the type and size of the package as well as the delivery location. Amazon Prime Japan members receive domestic overnight shipping services; however, international shipping rates can vary.
The Japanese postal system has approximately 24,000 post offices nationally, and consistently ranks among the world’s finest for service and reliability. Due to Japan’s compact size, most domestic packages tend to arrive using standard shipping within 1-2 days. Same-day special express delivery service starts at roughly $5.50 (¥800) and is available within each of the 5 major cities in Japan. Postage fees of international shipments using Japan Postal Service are set based on size, weight, and destination and starts at roughly $10 (¥1400).
Due Diligence
Although Japanese companies generally have a well-earned reputation for fair dealing, as in any market there are inevitably some companies who are less than 100 percent scrupulous or may have legitimate but concerning business or financial problems. Customers, importers, wholesalers, and distributors, regardless of size, may find it difficult to obtain trade financing or other credit for a wide range of reasons.
Although U.S. companies, whether resident in Japan or not, are not legally required to use a Japanese attorney for filings, registrations, contracts, or other legal documents – these can be prepared by in-house staff – retaining a competent Japanese attorney (bengoshi), patent practitioner (benrishi), or other legal professional is a practical necessity. Projects and sales in Japan, as in the United States if not more, require constant attention.
U.S. companies are advised to establish due diligence procedures and check the bona fides of their Japanese agents, distributors and/or customers. To assist with due diligence, the U.S. Commercial Service in Japan provides the International Company Profile (ICP) service designed to help U.S. companies evaluate potential business partners by conducting company background checks.
Please note the ICP is not intended to be a substitute for a comprehensive due diligence review to meet obligations under the Foreign Corrupt Practices Act of 1977.