Understand OK Supermarket in one article: How did Japan's most profitable discount supermarket become so successful without its own brands and with profits that surpass Walmart?

In Japan, OK Supermarket, with its unique discount business model, has successfully achieved low-price sales in a high-cost environment, and its profit margin even exceeds that of retail giant Wal-Mart. This article deeply analyzes OK Supermarket's business philosophy and strategy, revealing how it maintains its leading position in the fierce market competition and achieves continuous growth and profitability.

It is said that food prices in Japan are expensive, but if you go to OK supermarkets in Japan, you will feel that the prices are similar to those in China, and some are even cheaper than those in China. In OK supermarkets in Shinjuku, Tokyo, Japan, a box of tofu costs 4 yuan, a box of 1L organic soy milk costs 10 yuan, a box of 1L milk is also 10 yuan, a bag of toast bread costs 8 yuan, 2L coffee is only 10 yuan, 2L tea is only 7 yuan, a large piece of black hair wagyu is only 60 yuan, and sushi in OK supermarkets costs more than 20 yuan, and you can eat very well. If we were not staying in a hotel and could not cook for ourselves, we would have wanted to buy some vegetables in this supermarket and go back to cook for ourselves because it was too cheap.

If we hadn't been staying in a hotel and couldn't cook for ourselves, we would have wanted to buy some vegetables in this supermarket and cook for ourselves when we got home because they were so cheap.

How is it that OK Supermarket can achieve prices almost as low as those in China in Japan, where labor costs, rents, etc. are higher than in China?

In fact, Yonghui Supermarket’s transformation into the Pangdonglai model is essentially learning from Japan’s Ok Supermarket.

China's supermarket industry is experiencing a wave of transformation towards discounting. For example, the transformation of Pangdonglai into Yonghui is a self-help move on the surface, but in essence it is a transformation towards discounting with the help of external forces. By optimizing product structure, supply chain, and retail service model, costs can be reduced and product cost performance can be improved.

In fact, it is not only Yonghui and Bubugao that are exploring the transformation into discounting. Retail brands such as HEMA, Dingdong, Wumart, and Jiajiayue are also exploring discounting. International discount giants such as Costco, Walmart, Aldi and other discount companies have also begun to increase their layout in the Chinese market. Behind this is the inevitable trend of discounting in traditional Chinese retail.

In this period of discounting, can China's traditional retail industry successfully transform into a discounting industry? What are the key factors for success in the transformation to discounting? When the discounting wave sweeps across the entire retail industry, how should China's traditional retail industry respond?

There is nothing new under the sun. What we are experiencing now has already happened in other countries. In the late 1980s, Japan also experienced a wave of discounts in the retail industry, but surprisingly, countless traditional retailers almost died in this wave of transformation. Even the traditional retail giants at that time, Ito-Yokado and Seiyu, failed in this transformation. Only a few companies have successfully transformed, and the most dazzling one is OK Supermarket.

Why did these retail giants fail? Why did Ok Supermarket succeed? What lessons can they leave for the Chinese retail industry?

Today, we will continue the series of "Crossing the River by Feeling in Japan". From Japan, which had a similar retail environment to China at that time, we will take you to understand the discount transformation of OK Supermarket and find some reference points from its development history.

Let’s first go back to Japan in 1958.

In 1958, a young man named Iida Quan read an article titled "American Supermarkets Are Prospering" in the Reader's Digest magazine, so he borrowed 5 million yen from his father and opened a large comprehensive supermarket called OK Supermarket in Itabashi, Higashikami Prefecture, Japan. With few competitors, clean decoration environment, and rich product categories, it gradually became an important place for daily shopping for surrounding residents. During this period, Japan's economy, driven by government policies, began to rise rapidly, residents' income increased, and their willingness to consume increased. The large shopping supermarket industry ushered in development. OK Supermarket also took advantage of this bonus and successfully expanded to 20 branches in the next 15 years. However, compared with large comprehensive supermarkets of the same type such as Daiei, Seiyu, and Ito-Yokado, OK Supermarket during this period can be said to be unknown.

What really made OK Supermarket stand out in the retail industry was its transformation from a large comprehensive supermarket to a discount supermarket in 1986.

In 1986, Japan's economy went from high-speed development to the eve of an economic bubble. With income slowing down and pessimism about future employment, Japan began to enter a state of consumption downgrade. Consumers' price sensitivity increased significantly, and they began to prefer more cost-effective channels in their consumption. The once prosperous large-scale comprehensive supermarkets began to decline. According to statistics, in 1986, the annual sales of 6 of the 8 large-scale comprehensive supermarkets in Japan declined. Even Daiei, which had the highest sales and Ito-Yokado, which had the highest net profit, could not escape the fate of losses.

At this critical moment of life and death, Japan's large-scale comprehensive supermarkets began to explore new business models to achieve breakthroughs.

At that time, Walmart had achieved great success in the European and American markets with its "Everyday Low Price" strategy, and Carrefour's "hypermarket + low price" model was also very popular in Europe. Seeing this, traditional Japanese retailers all formed groups to visit European and American countries to learn from them. After in-depth and meticulous research, they firmly believed that discounting would be the future development direction of Japanese retail. Therefore, large Japanese comprehensive supermarkets represented by Seiyu, Daiei, and Ito-Yokado successively transformed into discount supermarkets.

This background is extremely similar to the current status of traditional retail in China. Traditional supermarkets such as Yonghui and BBK, which have undergone major changes under the auspices of Pangdonglai, have been undergoing a transformation towards discounting in the past two years.

However, it is not easy to transform from a large comprehensive supermarket to a discount store. At that time, most Japanese retailers failed during the transformation. For example, Japan's largest comprehensive retailer "Daiei". Hypermart was established to compete with Walmart, Kou's was established to compete with Costco, and BIG-A was established to compete with Aldi. However, all the above discount formats failed one after another, which became the main reason for the loss of Daiei Group.

Seiyu Supermarket, one of the three largest retailers, was acquired by Wal-Mart and transformed into a discount supermarket. Despite years of efforts, its growth was not significant. Other small and medium-sized comprehensive supermarkets went bankrupt during this transformation.

Why did Japan’s comprehensive supermarkets fail in their transformation towards discount supermarkets?

From the root cause, there are three main points:

First, the retail industry is highly competitive and channels are severely diverted.

By the end of 1980, the convenience store industry in Japan had already developed quite maturely. Brands such as 711 and Lawson had thousands of stores across Japan. With the convenience of being close to residential areas, office buildings, and transportation hubs, and relying on 24-hour intimate services, they accurately met consumers' immediate consumption needs and attracted a large number of customers who might have originally flowed to discount supermarkets. On the other hand, soft discount channels such as Don Quijote and Daiso, which handle tail goods, also sprang up like mushrooms after rain. They sold goods at ultra-low prices, forming a strong diversion impact on traditional supermarkets. In such a fierce and cruel competitive environment, it is not easy for discount supermarkets to stand out.

Second, high rent and labor costs squeeze companies’ profit margins.

In 1989, land prices in Japan began to soar wildly, especially in the Ginza area of ​​Tokyo, where commercial real estate prices increased sixfold within a year, reaching nearly $1 million per square meter at the most expensive point. The high land prices discouraged companies that had just embarked on the road of discount transformation, and they were simply unable to afford such huge rent expenses. In early 1990, the average monthly salary of Japanese retail employees was about 10,000 yuan, and the high labor costs made the already meager profits of discount supermarkets even worse, making it difficult to make a profit.

Third, the business models are different, making transformation difficult

The business logic of traditional supermarkets is more like that of "sub-landlords". After renting a large area of ​​space, they simply place shelves and rent out each location to suppliers. In their eyes, as long as the supplier can pay the rent, the goods are eligible to be put on the shelves. As for whether the product quality is good enough, whether the price-performance ratio is high enough, and whether it meets consumer needs, these key issues are often ignored. The business logic of hard discounts is completely different. It is to compete head-on with comprehensive supermarkets at lower prices through streamlined SKUs and large-scale procurement, and then achieve profitability through a high-turnover operation model. This format is characterized by low gross profit and high turnover. Its core lies in the extreme improvement of operating efficiency, striving to allow consumers to buy more products at one time, or increase the purchase quantity when purchasing a certain product.

To make it easier for everyone to understand, I will explain to you what low gross profit and high turnover are. Concepts like sku and hard discount have been discussed in the previous analysis of Don Quixote, so I will not repeat them here.

Low gross profit is actually synonymous with low price

The gross profit margin of traditional supermarkets is about 20-30%, while that of discount supermarkets is 10-15%. For example, a bottle of Coca-Cola may cost 3 yuan in a traditional supermarket, but only 2.5 yuan or even less in a discount supermarket.

High turnover means that consumers buy more products at a time, which is synonymous with efficiency. In the past, you might only buy a bottle of Coke at a time in an ordinary supermarket, but in a discount supermarket, you might buy a can at a time because of the price. The venue and shelf resources are limited, which requires that the goods sold in discount supermarkets must accurately meet the needs of consumers, and each item must be carefully selected. Only in this way will consumers be willing to buy a large number of products at one time. This is impossible to achieve in the traditional supermarket model.

If traditional supermarkets want to transform into discount supermarkets, it is basically equivalent to starting over from scratch with their operating system. Therefore, Japan's comprehensive supermarkets at that time suffered many setbacks in the process of transforming into discount supermarkets.

So why was Ok Supermarket able to successfully transform?

In fact, OK Supermarket's transformation was not too early. 1986 was the year when discount channels in Japan flourished. On the one hand, a large number of traditional supermarkets transformed into discount stores. On the other hand, new discount channels such as Don Quijote and 100-yen stores began to emerge, all of which focused on low prices to attract customers. A large number of retail giants had already entered the market first, and OK Supermarket was a latecomer. How did it become a latecomer and a head start?

A key action is to seize the consumers’ minds of “low price” and take the lead in occupying the positioning of “lowest price in the region”.

OK found that as large companies entered the market, the retail industry quickly fell into the quagmire of low prices and homogeneous competition; they realized that they would not be able to compete with large companies in homogeneous competition and would only have one way to go, and they had to stand out from the many competitors and let consumers remember their advantages at a glance.

At that time, Japan had just experienced its second oil crisis, and consumers' price sensitivity increased significantly. Consumers were more willing to buy the same products through lower-priced channels. Some users were even willing to go 5 kilometers away to shop in order to buy cheaper goods.

Therefore, OK Supermarket simply established the "regional lowest price" as its differentiated competitive strategy based on low prices. How did OK do it based on the low-price strategy?

OK Supermarket first put up a very large poster in its store, which roughly meant: If we are more expensive than other supermarkets for the same product, please tell us and we will lower the price immediately.

For example, if you find a bottle of Coke sold at 2.5 yuan in OK Supermarket and 2 yuan in some other supermarkets nearby, you can report it to OK Supermarket, and OK will immediately lower the price of the product and compensate you for the difference. This seemingly "disadvantaged" approach is actually to convey its price advantage to consumers.

Secondly, OK Supermarket has also carefully built a set of effective operating mechanisms.

Every day they send store staff to conduct on-site inspections of prices at nearby competitors. Once they find that prices are higher than those of competitors, OK Supermarket will reduce the prices of related products and post promotional posters stating "price reduction to counter competing stores."

This move allowed OK Supermarket to establish its brand image as the lowest-price supermarket in the region in the minds of consumers in a very short period of time, and also made OK Supermarket the favorite supermarket of Japanese consumers for 13 consecutive years. OK has been doing this simple move for 13 years. It is easy for a company to use low prices as a strategy, but the ability and determination to execute this simple move to the end for 13 years is the key to success. Marketing methods are effective weapons for companies, but if companies really want to win, they need to practice their internal skills and improve their hard power . How does OK Supermarket improve its "hard power" around the lowest price in the region?

Since OK Supermarket was not large in its early days and had no advantages in the upstream supply chain, it was difficult to reduce costs in the upstream supply chain. Therefore, OK Supermarket focused on store operations, labor and product structure transformation:

The first thing is to reduce the operating costs of stores.

Traditional large supermarkets actually have relatively high costs in store operation. For example, the decoration costs of large supermarkets that were common in Japan at that time could reach about 1,000 yuan per square meter. Large supermarkets are generally over 1,000 square meters. The decoration costs of a store alone can be hundreds of thousands or millions. The electricity bill for a store is about 60,000 to 100,000 yuan a month. In addition, traditional supermarkets have a large number of service staff, and labor costs are also relatively high.

At that time, OK Supermarket's boss Iida Quan thought, if I save money on these places, or even don't spend money, then my costs will be reduced, and I can achieve low prices, right? So Iida Quan held a company meeting and said: In the future, we will do everything possible to save money in all aspects of the store. If we can't save money, then "spend one dollar as two dollars", in short, we must reduce the store's operating costs.

To what extent did OK Supermarket go to save money? In order to save electricity, OK Supermarket replaced all the lights in the store with energy-saving lamps, which consume about half the power of the previous lamps, saving 30,000 to 50,000 yen in electricity bills per store each month. Electric appliances such as air conditioners and refrigerators were not installed if they could be avoided, and even if they were installed, they were not turned on if they could be turned off. It is said that OK Supermarket did not even provide refrigerated drinks in the summer to save electricity. The company even issued a policy to strive to achieve a total electricity bill of each store of more than 25%.

In terms of store decoration, luxurious decoration is abandoned, and only simple treatment such as laying floors and painting walls is done. The posters, price tags and even the packaging of some products in the store are made of the cheapest materials.

OK Supermarket also spares no effort in reducing labor costs.

Given that labor costs are one of the main reasons why many traditional supermarkets have failed to transform, OK Supermarket has made bold innovations, changing all its stores to a self-service shopping model, retaining only cashier positions, canceling all display clerks and shopping guides, displaying goods in their original boxes, and introducing products through posters, with no additional manual services provided.

In order to minimize labor costs, compared with other supermarkets that continue to increase late-night and 24-hour stores, OK Supermarket does the opposite, opening only after 8:30 a.m. and closing before 9:30 p.m. The shortened business hours directly lead to a reduction in the number of store employees and working hours. This greatly reduces the store's labor costs. At the same time, OK Supermarket has also introduced advanced system automatic ordering and daily delivery systems in the food department, further reducing labor requirements.

Finally, the product structure is transformed

Traditional supermarkets pursue large and comprehensive products with rich categories, but not all products can be sold well, so OK Supermarket began to streamline SKUs and cut off products with low sales and slow turnover. For example, the same brand of beverages may have three or four different flavors and specifications. OK Supermarket only puts the best-selling one on the shelves. Only the best-selling items of the same category are selected, thereby improving operating efficiency and achieving cost reduction and efficiency improvement.

In addition to streamlining SKUs, OK Supermarket has also added a large number of high-frequency and urgently needed fresh and prepared food categories to its stores.

In terms of demand, fresh food and meat are high-frequency consumer products with rigid demand, and household purchase expenditure accounts for a large proportion. Mastering the fresh food and meat sectors is equivalent to holding the "faucet" of customer traffic, which can continuously attract consumers to the store. Moreover, users are more sensitive to prices for this type of product than other categories.

From the perspective of competition, although fresh meat is generally available in most supermarkets, most supermarkets have not explored it in depth. OK Supermarket keenly captured this opportunity and began to enrich fresh food, meat and other products to create a differentiated competitive advantage for the brand.

According to media reports, the proportion of fresh food and cooked food in OK Supermarket was 15%-30% higher than that in other supermarkets at that time. The price of fresh food of the same quality was also much lower than that in other supermarkets, which quickly attracted surrounding users and stabilized the basic customer flow of the supermarket.

Through a series of product structure optimization, OK Supermarket has successfully established a low-profit and high-turnover operation model. Currently, the number of product types in OK Supermarket is only 60% of that in general supermarkets. However, its sales per square meter is far higher than that of general supermarkets. Statistics show that the sales per square meter of general supermarkets in Japan is generally around 1.2 million yen, while the annual sales of a single OK Supermarket store is about 4 billion yen, with a sales per square meter of more than 2 million yen.

These actions enabled OK Supermarket to successfully transform from a traditional supermarket to a discount supermarket and initially break out of the competition.

However, in Japan, where competition is fierce, if OK Supermarket wants to fully establish the competitive barrier of "regional lowest price", it is far from enough to just reduce its own operating costs. For example, the discount supermarket Lopia, which was emerging at the time, could make meat products at a lower price than OK Supermarket.

This made OK Supermarket realize that in order to achieve low prices in a long-term and stable manner, it must build a sustainable and stable low-price supply chain system and continuously improve its competitive barriers.

How did he do it?

01 Direct sourcing from the source to reduce procurement costs

Traditional supermarkets usually have close cooperation with suppliers in purchasing. Most of the goods come from distribution channels. Supermarkets choose suitable goods from the goods provided by suppliers. OK supermarkets adopt the model of direct purchase from manufacturers to reduce intermediate links and reduce costs .

In addition, OK Supermarket adopts the form of single product, single supplier, large-scale procurement, and single supplier multi-product procurement. This innovative procurement form gives them an absolute advantage at the negotiation table, ensuring that each single product can be purchased at the lowest price, providing consumers with lower prices than competitors. For example, OK Supermarket cooperates with a tofu supplier. I only choose this supplier for tofu. After the cooperation is very good, I also purchase soy milk from this supplier. If the cooperation is better, natto and bean sprouts are also purchased from this supplier. This achieves a win-win situation for OK Supermarket and suppliers. OK Supermarket deeply binds suppliers through a large-scale supply chain, and procurement costs continue to decrease . Suppliers have also successfully achieved scale growth through OK Supermarket. Through scale growth, they continue to reduce costs, thereby achieving a win-win situation for both OK Supermarket and suppliers.

Currently, OK Supermarket has a total of 300 cooperative suppliers, of which the top 20 suppliers supply 60% of the goods in OK Supermarket.

02 Self-built logistics to reduce costs and increase efficiency

Traditional supermarkets rely entirely on suppliers for supply, and they just have to wait for suppliers to come to their door. Beverages and biscuits are different categories, and are delivered by two suppliers respectively. When the store is out of stock, the beverage and biscuit suppliers will drive two separate vehicles to deliver the goods. Generally speaking, there is no problem, but if biscuits and beverages are delivered on the same vehicle, the cost may be lower.

Therefore, OK Supermarket began to choose to build its own logistics center, from the original independent supply of each module supplier to the final realization of unified distribution from OK warehouse. After the implementation of this system, OK's logistics costs were reduced by 3%. At present, OK has successfully established three normal temperature logistics centers, providing reliable logistics support for OK to achieve "everyday low prices".

03 Buy stores at low prices, fully explore the region, and expand moderately

Different from other supermarkets' strategy of expanding their stores all over the country, OK Supermarket has always concentrated its stores along and within the National Highway 16 in Japan. Route 16 is a circular road centered on Tokyo. The consumer population within this area is the most densely populated and has the strongest spending power in Japan, which provides the basis for OK Supermarket's efficiency per square meter.

Secondly, OK Supermarket does not adopt the leasing model like other supermarkets, but directly purchases land and establishes its own properties to maximize benefits by extending the asset use period, thereby reducing the operating costs of stores. Iida advised: "If the property quality is good and the land price can be recovered within the store lease period of 20 to 30 years, then the total cost rate after the loan repayment will decrease. Not long after this strategy was implemented, Japanese housing prices began to collapse. In 1993, the Japanese real estate crisis broke out and a large number of supermarkets closed. OK Supermarket quickly purchased a large number of stores during this period, which also made the store opening cost of OK Supermarket much lower than that of other supermarkets. According to data, the store operating cost of OK Supermarket is only 14.9%, which is much lower than AEON's 28.9%, Ito Yokado's 25.8%, and Life Supermarket's 25.7%.

In addition, OK Supermarket also adheres to an unwritten rule: "Once opened, never close the store." This prudent business strategy is completely different from the "quick store opening, quick trial and error" popular in the retail industry. As of 2023, among OK Supermarket's 144 stores, only one store was closed due to aging of the building, and there has never been a store closed due to poor performance, effectively avoiding the high cost losses caused by frequent trial and error.

Finally, when it comes to discount supermarkets, private products are an inevitable core topic. Through private products, the industry can gain cost advantages, maintain low prices, and increase gross profit margins. Private products are the ultimate path of almost all discount brands . Walmart has 29,000 private products, Costco's private products reach 30%, and Aldi's private brands account for as much as 90%. However, OK Supermarket does the opposite, does not set up private brands, and its profits have been maintained at 5% all year round, which is twice that of Walmart.

So how does it do this?

In addition to the cost reduction measures mentioned above, there is another key action, which is to introduce high-gross-profit "frozen seafood" products. Compared with other meat products, frozen seafood has the characteristics of low purchase price and low loss, but high price anchor point, which has greater profit margins. Currently, seafood products account for 5% of OK supermarkets, becoming the most important profit category of OK supermarkets.

Summarize:

Through this series of actions, OK Supermarket has successfully created a profitable business model with the lowest price in the region. In 2023, OK Supermarket surpassed LOPIA, Don Quijote and TRIAL to become the cheapest supermarket in the Kanto region of Japan. And with a net profit that is 1 times higher than similar supermarkets, it has become the most profitable food supermarket in Japan.

China's current discount industry has reached a stage of rapid development. Many traditional supermarkets are facing the dilemma of transformation. The successful path of OK Supermarket's transformation from a traditional supermarket to a discount supermarket has provided China's traditional supermarkets with a set of practical transformation manuals that can be used as a reference.

Secondly, in the development wave of discount retail, not all discount stores have the ability to cultivate high-selling self-operated products. Against this background, OK Supermarket, which has achieved high income, high growth and high sales without its own brand, may provide useful reference and inspiration for domestic discount store companies.

Author: Zhang Chao, planning director of Dayu

WeChat public account: Dayu Planning Zhang Chao (ID: 1099416)