The Daiei, Inc. History

Address:

4-1-1, Minatojima Nakamachi
Chuo-ku, Kobe 650-0046
Japan

Telephone: (81) 78 302-5001
Fax: (81) 78 302-5572

Public Company
Incorporated:1957
Employees: 13,776
Sales: $25.8 billion (2000)
Stock Exchanges: Tokyo Osaka NASDAQ Brussels American
Ticker Symbol: DAIEY
NAIC: 45211 Department Stores; 45299 All Other General Merchandise Stores; 44512 Convenience Stores; 42241 General Line Grocery Wholesalers; 42231 Piece Goods, Notions, and Other Dry Goods Wholesalers; 42199 Other Miscellaneous Durable Goods Wholesalers

Company Perspectives:

'For our Customers--Good Products at Lower Prices for a More Bountiful Society.' With this as our motto, we will continue to implement sound measures to realize our goal of Everyday Low Prices. Key Dates:

Key Dates:

1957:: Isao Nakauchi establishes Daiei as a pharmacy called Housewives' Store Daiei.
1970:: The company expands its focus and adopts its present name.
1972:: By now, the firm operates 75 superstores and subsidiary Daiei U.S.A. is formed.
1974:: The company becomes Japan's largest retailer.
1976:: Daiei partners with J.C. Penney to open stores in Japan under the Penney name.
1980:: The Holiday Mart chain is acquired in Honolulu, Hawaii.
1981:: Company reorganizes its food retail operations.
1984:: The firm records losses due to expenses related to its aggressive expansion.
1987:: Profitability is restored and a plan to install an electronic information network within its branches, offices, and stores is developed.
1992:: Nakauchi creates Japan's first wholesale membership club.
1995:: Daiei enters the Chinese market; an earthquake demolishes eight superstores in the Kobe area.
1997:: The company begins to falter as economic conditions worsen in Asia.
1998:: The firm begins to restructure itself and sells off unprofitable assets.
2000:: Daiei loses its top retailing position in Japan to Seven-Eleven Japan Co.

Company History:

The Daiei, Inc. operates as one of Japan's largest retailers and was ranked 20th among the world's leading retailers at the end of the 20th century. Daiei founder and former chairman and CEO--Isao Nakauchi--once boasted that his company sells 'everything except ladies and opium.' Indeed, the group operates many outlets, from supermarkets to department stores to warehouse clubs and convenience stores. Not limited to retailing, Daiei also owns and operates the Fukuoka Dome and Fukuoka Daiei Hawks--a major league baseball team&mdash well as Western-style fast food restaurants, a financial services network, and other real estate ventures. The Asian economic crisis of the late 1990s, however, forced Daiei to restructure its operations, close some stores, sell off other subsidiaries, and sell a portion of its interest in Lawson convenience stores.

1950s Origins

Isao Nakauchi founded Daiei in his hometown of Osaka in 1957; the company's name is a complicated play on words that means both prosperity of Osaka and big prosperity. A pharmacist's son, Nakauchi had made a small fortune in the years after World War II by participating in a venture that sold penicillin at above the legal price. His brother and some associates were arrested for their roles in the scheme, but the experience taught Nakauchi that risk taking and making money were inseparable.

His first Daiei store was a pharmacy called Housewives' Store Daiei. He gave its parent company the name Daiei Pharmaceutical Company. Japan's post-Korean War depression was then reaching its lowest point, and Osaka shoppers appreciated Daiei's discount pricing policy. Its initial success soon inspired him to open more stores in the Osaka area.

The poor economic conditions of the time also proved fortuitous for Daiei at the wholesale level. Manufacturers were grateful for the fact that Nakauchi always paid cash for their goods. He also bought whatever surpluses overextended manufacturers may have accumulated, and passed on the savings to consumers. Thus, Daiei quickly ceased to be merely a drug store chain; as Nakauchi would recall years later, 'We soon moved from drugs into candies and other foods and from cosmetics and toiletries into hard goods.' In 1970, the company dropped the focus on specialized retailing and shortened its name to its current form.

Daiei Achieves National Dominance in 1970s

Daiei soon expanded to become a nationwide chain in Japan. By the time it celebrated its fifteenth anniversary in 1972, the company was operating 75 superstores and had become Japan's largest supermarket operator and second largest retailer. It had achieved this rapid and overwhelming success by breaking many of Japanese retailing's time-honored rules. In a nation where small shops often banded together in cartels to keep prices artificially high, Daiei was a high-volume, low-price retailer. 'Even our barbers and laundries have self-protective cartels,' Nakauchi once complained. Nakauchi, an unlikely but open admirer of Mao Tse-tung's strategic wisdom, cast Daiei in such a mold to draw on the strength of 'the masses,' offering quality goods at the lowest possible prices.

In 1970, when outraged consumers realized that Japanese television sets were being sold for less in the United States than at home, Daiei leapt into the breach, signing a marketing deal with Crown Radio and selling Crown sets under their own name for less than half the going rate. Daiei was a pioneer in introducing the concept of house brands to Japanese consumers, who were used to paying higher prices for recognized brand names. In 1971, Daiei actually acquired Crown and added more electronics goods and household appliances to the Daiei name. Nakauchi kept his overhead low by opening stores in the suburbs, rather than the densely populated, high-rent urban areas favored by Japanese department stores. For his iconoclasm in a consensus-oriented society, he was reviled by ex-friends, threatened by irate competitors, and ostracized by the business establishment. This treatment, however, did not deter him from his vision of revolutionizing Japanese retailing, an arduous process he once compared to Mao's travails.

In the 1970s, the company began to internationalize, diversifying its range of goods and services even further. In 1972, it created Daiei U.S.A. as a wholly owned subsidiary and opened a branch in a Honolulu shopping center. Taking advantage of the liberalization of Japanese laws regarding the presence of foreign retailers, Daiei entered into joint ventures to open branches of U.S. department store Joseph Magnin and Swift & Company's Dipper Dan Ice Cream Shoppe chain in Japan.

In 1974, Daiei surpassed the sales of department store giant Mitsukoshi to become Japan's largest retailer. Once again, though, Nakauchi's ambitions were scarcely satisfied. In the spring of that year, Daiei began selling J.C. Penney merchandise as part of an arrangement with the U.S. retailer to test its popularity in Japan. The venture proved successful, and several months later, Daiei and J.C. Penney entered into a joint venture to open stores in Japan under the Penney name, beginning in 1976. Under the agreement, Daiei and Penney each owned 47.5 percent, with the remaining 5 percent going to trading company C. Itoh.

In 1978, Daiei continued to capitalize on the popularity of Western goods in Japan when it became the sole Japanese agent for British department store Marks and Spencer. Daiei chose Marks and Spencer merchandise because of its reputation for price competitiveness, especially in food and clothing. For its part, Marks and Spencer, which already had a substantial presence in Hong Kong, saw Japan as its largest remaining potential export market.

Diversification into Fast Food in the 1980s

In 1979, Daiei joined with Wendy's International to open Wendy's fast-food restaurants and Victoria Station steak houses in Japan. Wendy's Japanese rollout did not progress as quickly as had been hoped, however, because of the inflexibility of the American parent organization. Portions and stores, for example, were too big for Japanese tastes. And although the chain expanded too fast early on, it had fewer than 30 restaurants by 1988, when the operation still had yet to earn a profit.

Other cross-cultural ventures undertaken during the decade were more successful. In 1980, Daiei made its first serious incursion into the U.S. market when it acquired in its entirety Holiday Mart, a three-store discount chain in Honolulu, Hawaii. It also opened its first U.S. purchasing office. Not least of all, it joined with Au Printemps to open branches of that venerable French department store in Japan; the first Au Printemps Japan opened in Kobe in 1981, followed by stores in Sapporo in 1982, and in Tokyo the year after that.

Meanwhile, Daiei's supermarket operations continued to flourish. At the outset of the 1980s, Daiei controlled one-fifth of the entire Japanese food retail market. In 1981, it reorganized that side of its business somewhat when it merged its Sanko affiliate with food store chain Maruetsu. Daiei and Maruetsu each owned 50 percent of the new company, which immediately became the nation's ninth largest retailer, boasting 140 branches. Also in 1981, Daiei acquired a 10.5 percent stake in Takashimaya, another department store chain, making it that company's principal shareholder.

In 1984, Daiei's sales reached ¥1.4 trillion, and its chain of superstores had grown to 160. Daiei continued to expand at a breakneck pace, opening a branch in Tokyo's expensive Ginza district during this same period. Nakauchi financed this continuous augmentation with heavy borrowing, and the cost of financing this debt forced the company to post a ¥11.9 billion loss in 1984, despite its massive sales. The next year, Daiei lost ¥8.8 billion, spurring speculation among some analysts that Daiei's 60-something year-old founder and CEO had lost his Midas touch.

Nakauchi insisted all along that these deficits were part of his plan and that continued expansion would pay off in the long run. Daiei had cleverly spread its borrowing among four different banks--contrary to the usual Japanese corporate practice of borrowing from one bank, which then allowed that bank to become the company's principal stockholder. This wise move enabled Daiei to preserve its independence. In 1986, the company returned to profitability, earning ¥1.1 billion, and by 1987, it was healthy enough to acquire bankrupt sewing machine manufacturer Riccar at the request of the Ministry of International Trade and Industry. In that same year, it announced a five-year plan to install an electronic information network to link all of its branches, offices, and affiliates, starting with an ¥11 billion point-of-sale (POS) system for its superstores. POS systems give retailers quick and accurate information on sales and inventories--information that can be used to improve inventory control.

Retail Powerhouse Rolls on in the 1990s

Although some Japanese retailers began to follow Isao Nakauchi's price-slashing lead in the 1990s, none could keep up with his pace. He created Japan's first wholesale membership club in 1992. Like Sam Walton's groundbreaking 'Wal-Mart' and 'Sam's Club' stores, the new chain operated under the name Kuo's, an alternate pronunciation of Nakauchi's given name. In 1992, he brought 'everyday low pricing' to the country, even abbreviating the concept as 'EDLP' in Roman letters for advertisements. Meanwhile, Daiei's Big-A Co. box stores hoped to mimic ALDI's international success with limited lines of nonperishable staples in bare-bones stores. But even this was not enough for Nakauchi; in 1995, he announced his goal to slash consumer goods prices in half by 2010. This strategy continued to enjoy success: in the mid-1990s, Daiei accounted for 13 percent of Japan's grocery sales.

Nakauchi formed a Chinese joint venture and opened his first supermarket there in 1995. He also continued to invest in his Hawaiian operations, acquiring a supermarket in 1994, and expanding his shopping center there two years later. In 1993, the company opened the first phase of its Fukuoka Dome in Japan, home of the Fukuoka Daiei Hawks baseball team. By 1998, this twin-domed retail and entertainment complex was expected to also incorporate a 1,000-room hotel, amusement rides, and shopping.

Daiei's revenues increased to more than ¥3 trillion in fiscal 1995, but its net income had slid dramatically, from ¥10 billion in 1992 to ¥5.4 billion in 1994. Nature conspired to inflict a ¥50.7 billion loss on the group in 1995, when a January earthquake demolished eight superstores in the Kobe area. Daiei experienced a partial rebound in fiscal 1996, though, when it recorded a ¥5 billion profit.

The Daiei's erratic fiscal performance in the mid-1990s again raised a question about its future leadership. Although septuagenarian founder and CEO Isao Nakauchi appeared unmotivated to relinquish control of the company, he had been preparing for that eventuality by grooming son Jun Nakauchi as the company's executive vice-president.

Daiei Falters Along with the Asian Economy in the Late 1990s

In 1997, Japan lifted its long-standing ban on the formation of holding companies and Daiei formed K.K. Daiei Holding Corporation to control its non-retail business interests. Its expansion efforts were put on hold, however, as sales and net income fell once again due to the economic crisis sweeping through Asia in late 1997. The unstable economy caused consumer spending to fall and spelled disaster for the firm as most of its sales stemmed from domestic operations.

As the crisis continued into 1998, Daiei began to sell its real estate assets, restructure its operations, and sell off its unprofitable stores. Sales continued to fall and it was not Nakauchi's son, but instead Tadasu Toba, who took over the presidency of the ailing firm. Working along with chairman Nakauchi, Toba initiated a major restructuring effort in 1999, which included the sale of Recruit Co. and the Ala Moana Center shopping mall in Hawaii. Sales climbed slightly over the previous year, but net income still fell dramatically.

A Rocky Entrance Into the New Millennium

Daiei entered the 21st century battered and bruised from a continued lack of consumer spending. The firm initiated an IPO of its subsidiary Lawson Inc., but failed to raise the funds it had anticipated from the public offering. At the same time, tension between Toba and Nakauchi began to grow as the founder disagreed with the new president's plan to sell off more of the company's assets. At the same time, the Daiei's long-standing position as Japan's leading retailer--held since 1972--was suddenly taken over by convenience store operator 7-Eleven Japan Co. in 2000.

In October of that year, an insider trading scandal related to the purchase of consumer finance unit Daiei OMC Inc.'s stock became public. As a result, Toba relinquished the presidency, remaining a director of the firm. Nakauchi also resigned, but remained an advisor to the firm. Kunio Takagi, a Daiei executive, assumed the presidency.

The following month, Takagi outlined a restructuring plan designed to restore the company to its former glory. Included in the plan was the consolidation of the non-profitable assets of the Daiei Holding Corp. and the issuance of ¥120 billion in new shares. It also called for the closure of 32 outlets and 4,000 job cuts over a three-year period, and the sale of most of its interest in Lawson.

The company continued to focus on relieving its debt load in 2001 by selling off many of its subsidiaries. Under the leadership of Takagi, management aimed to reduce the number of its business units to 112 by February 2002. The firm's rocky past and the country's uncertain economic future, however, were sure to be major factors in determining whether or not Takagi would succeed in pulling Daiei out of financial straits.

Principal Operating Units: Beijing Liaison Office (China); Seoul Liaison Office (Korea); Shanghai Liaison Office (China); Taipei Liaison Office (Taiwan, R.O.C.); Hong Kong Liaison Office; Bangkok Liaison Office (Thailand); Hi-Daiei Trading Co., Ltd. (Philippines); Jakarta Liaison Office (Indonesia); Sydney Liaison Office (Australia); D International, Inc. (U.S.); Los Angeles Liaison Office (U.S.); New York Liaison Office (U.S.); Amsterdam Liaison Office (Netherlands); Milano Liaison Office (Italy); Printemps Ginza S.A., Paris Office (France); London Liaison Office (U.K.); Kaheka Office (U.S.).

Principal Competitors: Ito-Yokado Co. Ltd.; JUSCO Co. Ltd.; Mycal Corporation.

The Daiei, Inc. History

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Key Dates:

Company History:

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