Stop-start: Open and shut case of a global e-biz firm

Rakuten and its charismatic CEO, Hiroshi Mikitani, are often-cited examples of progressive Japanese companies and their forward-thinking leaders. The Internet retailer is among a handful of domestic titans recognized as a global player, and consistently ranks among Forbes Magazine’s annual list of “Top 20 Most Innovative Companies.” Often, it has been the only Japanese company listed.

Until 2016, Rakuten had been aggressively securing new overseas assets, with acquisitions having totaled about $4 billion through 2015. Thus, the company’s announcement in February that it would shutter operations in four Asian nations—Singapore, Malaysia, Indonesia, and Thailand—after proclaiming its focus in 2014 on the important Southeast Asian market, shocked many tech insiders. Further questions surfaced on the heels of a decision, in June, to exit three of Rakuten’s five European markets: Austria, the UK, and Spain.

The closures are in line with Rakuten’s 2020 Vision, also announced by Mikitani in February. Addressing the press, he said the vision is based on three main principles: “strong, smart, and speed.” Removing dead-weight operations with minimal growth potential is just part of the long-term strategy. Mikitani hailed the disruptive potential of mobile technologies such as messaging app Viber, video platform Viki, and shopping site Ebates, all companies acquired by Rakuten in the past three years.

Still, the company’s disparate acquisitions and abrupt shifts in regional focus have left many investors and analysts wondering if it can effectively compete with international rivals.

“Rakuten’s major weakness could be its initial scattergun approach to investment, such as its $100 million investment in Pinterest in 2012. While it is creative and exciting to invest in businesses like Pinterest, unless Rakuten actually links purchasing or endorsement to visual pinning, then its past strategy feels more acquisition-based rather than truly leveraging potential,” Nicole Fall tells The Journal. Fall is the founder of innovation and trend forecasting consultancy Asian Consumer Intelligence.

When asked about Rakuten’s global prospects versus e-retail giants such as Amazon and Alibaba, Fall says: “The bottom line is many Japanese companies do not know how to market effectively outside of Japan. There appears to be a real problem effectively communicating brand values to consumers. One of the core tenets of being a Japanese company is quality. In this digital marketing age, that is no longer enough.”

NICHE MARKETS

Rakuten claims a 27% share of Japan’s mature e-commerce market, with 44,453 sellers, 110 million members, and total sales of $17 billion. Almost 90 percent of Internet users in the country are registered on Rakuten.

However, the company, which declined requests by The Journal for comment, is struggling to retain market dominance, with new entrants such as Yahoo! Japan and other competitors more adeptly responding to changing consumer preferences. Rakuten’s profit in domestic e-commerce operations plunged 25 percent to ¥17.5 billion in the second quarter of 2016, even as revenue rose 7 percent to ¥72.5 billion.

With a baseball team, travel agency, financial services arm, and even an online beauty salon booking portal, the company’s domestic reach is boundless. The current challenge is transplanting the Rakuten Ecosystem into new markets, as Japan’s e-commerce reaches saturation point.

Since its first foray into international waters in 2008, with Rakuten Taiwan, the company has learned many lessons. The Taiwan site and business model were initially modeled on its Japanese parent, but management soon recognized the need for localization. Rakuten Taiwan is still thriving, in large part due to the company’s dominance of a niche market: online sales of gourmet foods. The company says Taiwan continues to be a priority market for its global strategy, especially in the hotly contested Asian region.

SOUTHEAST ASIA: THE NEXT FRONTIER

E-commerce is still ripe for development in Southeast Asia, but competition is fierce, with China’s Alibaba and Germany’s Rocket Internet taking the lion’s share. Rocket Internet, which operates the Lazada shopping site, has funneled more than $1 billion into its two largest Southeast Asia players in recent years.

The rapid adoption of mobile platforms in the region is a promising avenue for business development. “This is very different from a winner-take-all environment,” Mikitani told Bloomberg in a recent interview. “Consumer behavior tells us there is room for several players on the screens of smartphones.”

In its February announcement, Rakuten indicated a new consumer-to-consumer business model in Southeast Asia, which replaces its traditional business-to-business-to-consumer (B2B2C) approach. The company has placed its bets on Rakuma, a flea-market-style app, where users can sell unwanted goods. In 2016, the app has grown 20 percent month-on-month in Japan.

ESTABLISHED MARKETS

While Rakuten may have some time to experiment in Asia’s emerging markets, maintaining a presence in developed markets will be more challenging. Amazon has been heavily investing in its global distribution network. Rakuten, meanwhile, has little brand recognition outside Asia, as we see in the 2013 Fortune article “Rakuten: The biggest e-commerce site you haven’t heard of.”

The structure of Rakuten’s site differs largely from that of Amazon. Rakuten operates a virtual mall, where each vendor pays the company to set up its own online shop, with a unique page design, shipping policies, and customer service. It is focused on providing a rich and personalized shopping experience. Amazon buys directly from vendors and centralizes customer service and inventory under its brand name and in its warehouses, focusing more on efficiency and convenience.

In the Fortune article, Mikitani describes the company’s approach to e-commerce as characterized by traditional Japanese hospitality, "omotenashi."

“In Japan, if you go to a local coffee shop, grocer, or any local business, you will find a very high level of personal service; the Internet should be that way as well.”

Rakuten’s practice of providing rankings for its vendors also makes it quite popular with sellers. “We are really an incubator, people trust our curation,” Mikitani adds. “We see our role as amplifying the characters of the shop.”

For Hokkaido Omiyage Tankentai, Rakuten has been a winning partner since the purveyor of the nation’s best-selling edible souvenirs joined the site in 2000. Although it also has a presence on Amazon.jp and Yahoo! Japan, the company says 70 percent of online sales come from Rakuten.

Like all Rakuten vendors, Hokkaido Omiyage Tankentai was assigned an e-commerce consultant (ECC), who acts as an advocate for the merchant. Because of a commission structure, there is a shared interest in the success of each store. Every week or two, the ECC calls their merchant accountant to review site analytics and which products are selling best.

“The ECC is a vital part for our shop to approach our target,” a representative from Hokkaido Omiyage Tankentai told The Journal.

Rakuten’s approach to customer service could be crucial to survival in new markets. Linda Locke, former marketing director of luxury fashion retailer Club 21 eCommerce, says, “Going forward, more players will look to exceptional customer service and omni-channel presence, as well as omni media, to remain top-of-mind and be seen as exciting. “A unique and differentiated product is still a must have, and is far too underestimated. There also need to be clever tie-ups to stimulate traffic and desire,” she adds.

INTEGRATING ASSETS

For now, Mikitani says he is focused on linking his recent investments, which could provide more synergy and the kind of specialized tie-ups that bring success in the e-retail sphere. He wants to turn Viber into a mini-app store, selling games, e-books (through Rakuten-owned Kobo reading devices), music, and videos, and hopes to use Lyft drivers to deliver Rakuten purchases. Lyft is a user-driven taxi service competing with Uber, and was acquired by Rakuten in 2015.

“You need to always have several alternatives,” Mikitani says.

Viber, which boasts more than 600 million users, seems key to the company’s future. Talmon Marco, the app’s founder, says, “Viber makes Rakuten instantly global.” Initially, Marco explains, he met with Mikitani in early 2014 to discuss an investment, but the Japanese billionaire persuaded him to sell.

Furthermore, the app opens doors to social commerce. Neeraj Gulati, managing director of ingenuity at IPG Mediabrands, says, “The new face of e-commerce is not just taking offline products and selling them online, but using data from the online space and customizing products and services for the user to make them relevant to that moment. It will become ‘data-commerce.’”

Gulati views Rakuten’s moves as simply “the next revolution in the e-retail space, where shopping will take a more contextual face.” He predicts that in the near future, data from chat apps such as Viber and Whatsapp will blend seamlessly into services and products for sale. If this holds true, Rakuten’s Viber acquisition positions the company well for the future.

In a video released earlier this year, Mikitani explains how his new acquisitions fit into the Rakuten Ecosystem.

“I built the original model for B2B2C, but now I think e-commerce is going to the next stage. We need to be more open, to become more like a cloud service, rather than an integrated marketplace. For the time being, Viber is a strong brand, and our e-reader Kobo is number one in Canada, the Netherlands, France, Italy, and Spain. Ebates is very popular among high net-worth individuals.

“The concept is, build a very strong membership program and maybe we can monetize it through our e-commerce service, media business, or fintech [financial technology] service,” he concludes.

Analyst Fall also views Rakuten’s scaling back as “part of a wider global business trend, reflecting a more cautious approach to what is effectively a post-recessionary world.”

“Rakuten is one of the few to make money in e-com, so I view its chances of continuing that success over the medium term as fairly high.”

Custom Media publishes The Journal for the American Chamber of Commerce in Japan.

© Japan Today