United Mates General Accounting Office Report to Congressional Requesters ’ ., GAO j .March1990 INTERNATIONAL TRADE Competition for. Japan’s High Value Agricultural Market ‘5 x>~ :.‘A. r :,;I i ..‘ t * GAO/NSlAMO-134 I. United States General Accounting Office Washington, D.C. 20548 National Security and International Affairs Division B-226269 March 30,199O The Honorable Patrick Leahy, Chairman Committee on Agriculture, Nutrition, and Forestry U.S. Senate The Honorable E (Kika) de la Garza, Chairman Committee on Agriculture House of Representatives In response to your requests, we have reviewed market development activities of the U.S.’ major competitors in Japan’s high value agricul- tural market. You were interested in learning how other countries are trying to gain a larger share of this lucrative market. This report summarizes high value agricultural product market develop- ment activities of the nine foreign competitor countries that spend the most resources on such activities in Japan. These competitors include New Zealand, Australia, Canada, France, West Germany, the United Kingdom, the Netherlands, Italy, and Denmark. Agricultural imports from these nine countries plus the United States represented about 63 percent of all agricultural imports to Japan in 1988. To succeed in the Japanese market, marketing organizations must be prepared to spend considerable time and money to learn the intricacies of the marketplace and to develop the necessary relationships with importers, wholesalers, and distributors. In addition, their products must meet Japanese consumers’ demanding standards for uniqueness, convenience, ingredients, and packaging. Of the many market develop- ment activities conducted by foreign marketing organizations in Japan, trade and consumer education are considered particularly useful in developing demand. Alternative importation methods to bypass the expensive and restrictive Japanese distribution system lowers costs and, thus, have proven to be attractive options for some organizations to gain access to the Japanese market. High value agricultural products include three groups: high value unprocessed foods such as eggs, fresh fruits, and nuts; semiprocessed products such as flour, oilseed products, and meats; and highly processed products such as prepared meats, dairy products, and soups. Trade of these products now accounts for about two-thirds of world Page I GAO/NSIAD-90-134 International Trade 5226269 cultivate. One Danish marketing representative indicated his organiza- tion spent 7 years in Japan developing relationships before selling any products. His organization established a network of importers, wholesal- ers, and distributors who were willing to handle its imports. It also developed ties with political and cultural groups, and it educated Japa- nese consumers about Denmark through the promotion of tourism and cultural events. Moreover, new products must meet *Japanese requirements regarding uniqueness, convenience, ingredients, and packaging. For example, con- venience products, such as microwavable dinners, are becoming more popular because the numbers of working women and people living alone in Japan are increasing. Packaging must be attractive and of good qual- ity-many products in Japanese stores are wrapped more thoroughly or arranged more carefully in their packages than comparable products available in the United States. Packages should also be sized to Japanese consumer specifications because the average Japanese consumer shops daily. According to officials we interviewed, Danish and New Zealand producers are very willing to adapt package size for the Japanese mar- ket; this result may be due, in part, to their economies’ dependence on exports. Foreign marketing organizations provide a broad range of trade and Foreign Marketing technical assistance to producers in Japan. For example, they conduct Organizations’ Efforts market research; match importers with exporters; serve as liaisons to Gain Market Share between producers and Japan’s regulators; participate in trade exhibi- tions; conduct in-store promotions as well as restaurant promotions; fund trade missions for Japanese importers and journalists; and evalu- ate the effectiveness of their market development activities. Representatives of foreign marketing organizations often cited trade and consumer education as particularly worthwhile and effective. In their view, knowledgeable retailers are more likely to stock products, and informed consumers are more likely to buy products. For example, in the relatively undeveloped Japanese wine market, Wine Australia is educating beverage wholesalers and retailers about wine to obtain shelf space for Australian wine. Once the wine is available in stores, the organization plans to target promotions at consumers. The Australian Meat and Live-Stock Corporation sponsors seminars directed at both the trade and consumers. For example, it features lamb dishes and instruc- tions on preparing lamb in family restaurants, and it has invested in a nationwide television advertising campaign. Page 3 GAO/NSIADW-134 International Trade B-226269 from an American consulting firm that conducts market research and promotion activities in Japan, the U.S. Meat Export Federation’s” Japan/ Korea Director, and the US. Export Development Office’s Japan Director. Our scope was limited somewhat in that some foreign competitors’ nongovernment marketing organizations in Japan would not meet with us. Also, some of the representatives we spoke with would not provide us with data on funds for promotions. However, we have no reason to believe that the omitted information would have significantly altered our findings. We conducted our work from October 1988 to March 1990, in accordance with generally accepted government auditing standards. As requested, we did not obtain agency comments on this report. We will release this report to other interested parties on the same date it is released to you. Staff members who made major contributions to the report are listed in appendix IV. If you have any questions regarding this report, I can be reached at (202) 275-4812. Allan I. Mendelowitz, Director Trade, Energy, and Finance Issues ‘The U.S. Meat Export Federation is a nongovemment marketing organization that promotes U.S. meat products. Page 5 GAO,‘NSIAD96-124 International Trade Page 7 GAO/NSIAD90.134 International Trade Appendix I High Value A@-icdturd Products and the Japan Market Table 1.1:Agricultural Imports and Export Promotion Expenditures in Japan for 10 Dollars in millions Countries in 1988 Export promotion Countrv lmD0t-h into JaDan’ expenditure@ United States $9,&8.00 $42.7 Australia z733.00 70 Canada 1,462.OO -2.1 Denmark 753.00 0.7 New Zealand 741 .oo 5.0 France 531 .oo 17 United Kingdom 401 .oo 12 West Germany 337 00 1.3 Netherlands 290.00 0.9 ltalv 107.00 0.9 ?Source Japanese MInIstry of Finance. as reported by Japan External Trade Organization. Data are for calendar year 1988 “Source: U S Department of Agriculture estimates U.S expenditure IS for fwal year 1988: other expen- diture data are for calendar year 1988 In 1987, seafood accounted for 3 1 percent of Japan’s total agricultural imports, followed by meat (14 percent); maize, wheat, and other grams (12 percent); processed foods (12 percent); other foods (11 percent); vegetable oils, fats, and oilseeds (11 percent); and fruits and vegetables (9 percent). Changing lifestyles and dietary patterns in Japan are also creating opportunities for increased HVP sales. The numbers of working women and people living alone in Japan are expanding demand for convenience foods, and Japanese consumers are acquiring tastes for Western-style foods. Japan’s tradition of lavish expense account entertaining contin- ues to support demand for upscale foods and wines, and the large gift market also offers potential for expanding sales of upscale food products. Japan’s HVP market is considered a difficult market for foreign compa- Japan-A Difficult nies to enter. Several factors contribute to this difficulty, including Export Market (1) the highly competitive nature of the HVP market itself and the resul- tant battle among new products for shelf space in supermarkets, (2) the complexity of Japan’s product distribution system and the personal con- tacts needed to use it effectively, (3) quotas and tariffs that either restrict product trade or make products more expensive and therefore less competitive, and (4) the need to adapt product size, packaging, or Page 9 GAO,‘NSIANJ@134 International Trade Appendix I H&h Value Agricultural Products and the Japan Market that his organization spent 7 years developing those relationships before making any sales. In addition to developing a network of importers, wholesalers, and distributors willing to carry Danish products, the Dan- ish organization also developed ties with political and cultural groups in Japan. The marketing organization also promoted Denmark’s image to Japanese consumers by promoting tourism to Denmark and participat- ing in cultural events. According to one marketing consultant, large com- panies should expect to spend between $2.0 million and $2.5 million for the first 1 or 2 years to develop the market for their product(s) and about $1 .O million for follow-up surveys, additional market research, and evaluation. Trade-Limiting Quotas and Trade barriers, such as quotas and tariffs, also make Japan a difficult Tariffs market to enter. Although the Japanese government has agreed to end or reduce tariff barriers on nine processed food categories and to end imported beef quotas by April 1991 under the 1J.SJapan Beef and Cit- rus Agreement, it nevertheless maintains quotas and tariffs on many food items. For example, according to a French marketing organization report, two-thirds of the cost of French wine in Japan is accounted for by taxes and duties. In addition, several foreign officials noted that the government strictly enforces rules on food ingredients and inspection. As a result, producers may have to alter their usual production lines in order to enter the Japanese market. This factor increases producers’ costs and may discourage exporting. Importance of Product Numerous officials told us that appearance, packaging, and sizing are Packaging extremely important for product success in the Japanese marketplace. The average Japanese consumer’s standards for product freshness, appearance, and quality tend to be high. For example, many consumers check the production dates of everything they buy-even canned goods-making older products difficult to sell. Displays, packaging, and arrangements in Japanese supermarkets appear to receive more empha- sis than they do in 17,s. supermarkets. Also, Japanese consumers tend to prefer smaller-sized packages because they value freshness and have limited kitchen storage space for leftovers. Page 11 GAO/NSIAD90134 International Trade Appendix II -~ Foreign Marketing Organizations’ Efforts to Gti Market Share Foreign marketing organizations use a variety of resources and market- ing activities to gain market share in the Japanese market. Budgets and staff vary, reflecting the different marketing objectives of the foreign marketing organizations in our review. The marketing activities con- ducted include market research, trade and technical assistance, and sev- eral kinds of promotions. The foreign marketing organizations in Japan maintain staffs that vary widely in size and are generally composed of both home-country and Japanese personnel. Promotional budgets also vary widely among mar- keting organizations, due to the types of market promotion activities employed and the availability of resources. Marketing organization staffs vary in size from 2 to 52 people, and they always include some Japanese personnel-generally more Japanese than home-country personnel. For example, the New Zealand Dairy Board employs 2 New Zealand managers and 50 Japanese staff. Simi- larly, the Australian Trade Commission has 9 Australian and 27 Japa- nese staff. At the other extreme, the Flower Council of Holland and the International Flowerbulb Centre Holland each employ one Dutch mana- ger and share one Japanese staff member. Promotional budgets for marketing organizations vary widely. Of the organizations that provided data on their funds for promotional activi- ties, the International Flowerbulb Centre Holland and the Australian Trade Commission spent the least. The International Flowerbulb Centre Holland spent about $20,000 in 1988, and the 1989 budget for the Aus- tralian Trade Commission was approximately $140,000. The Flowerbulb Centre’s Area Manager said that his organization’s market promotion budget is relatively small because the flowerbulb importing community in Japan is small; therefore, his promotional efforts have consisted of visiting flower shops rather than employing more costly mass media campaigns aimed directly at consumers. Similarly, the Australian Trade Commission’s market promotion activities are limited in scope. The Commission’s budget does not include funds for promotion of beef, an important Australian export, and the Commission does not fund any mass media advertising. According to the Trade Commissioner, the majority of the market promotion funds this past year were for partici- pation in Foodex, the annual international food show in Japan, with lesser amounts allocated for promoting cut flowers and sponsoring a processed foods mission to -Japan. Page 13 GAO/NSIAL%9@134 hternationel Trade Appendix II Foreign Marketing Organizations’ Efforts to Gain Market Share The Agricultural Counsellor stated that his office does not have the resources to undertake in-depth research activities. The staff members in Japan of two Dutch marketing boards, the Flower Council of Holland and the International Flowerbulb Centre Holland, research their markets through their contacts with industry representatives. The Flower Coun- cil’s Director for Japan performed initial research into the cut flower market several years ago. At that time, he was working within the Japa- nese flower distribution system as a European Community management trainee. Similarly, the International Flowerbulb Centre Holland’s Mana- ger initially researched the Japanese bulb market about 5 years ago, when he was a university student in Tokyo. Both continue researching their markets through their daily contact with members of the flower distribution network. New Zealand Embassy staff stated that they perform market research only at exporters’ request and charge the clients by the hour for the services. For example, a recent 57-page report on the market for kiwifruit wine was requested by the industry, which paid for it. In addi- tion, the New Zealand Meat Producers Board and the New Zealand Dairy Board have commercial operations that perform some market research for the meat and dairy industries. Trade and Technical The marketing organizations we reviewed offer several types of trade Assistance and technical assistance to exporters. These include matching exporters and importers, acting as liaison between exporters and the Japanese government concerning compliance with import regulations, negotiating with the Japanese government to change or modify regulations affecting imports into Japan, and disseminating market and trade information to producers and exporters. Matching Importers and Most marketing organizations we reviewed match potential exporters Exporters and importers, most often at the request of an exporter who thinks a product might be saleable in Japan. In some cases, however, the import ers solicit the business, having recognized demand for a particular prod- uct. For example, when Japanese domestic fish supplies decreased, Japanese importers inquired through the British Embassy Commercial Section about possibilities of importing fish and fish products from Scot- land, and the Embassy consequently contacted potential exporters. The marketing organization generally supplies the would-be exporter with a list of indust,ry contacts for the exporter to contact to establish Page 15 GAO/NSlAlMC-134 International Trade Appendix 11 Foreign Marketing Oganizatioms’ Efforts to Gain Market Share Dissemination of Market Foreign organizations disseminate information to producers in various Information ways. They pass information to producers through official government channels and through periodic publications and reports; they answer direct requests from producers; and they keep and make available gen- eral marketing information in their Japanese offices. Some organizations distribute marketing information to producers through official government channels. For example, Canadian Embassy officials told us that the government’s Department of Industry, Science, and Technology distributed through its provincial offices the market profile for bottled water. The profile had been prepared by Embassy staff. Similarly, the British Embassy’s Commercial Section provides market information through official channels such as the Department of Trade and Industry’s Export Intelligence Service. Another method of dissemination is through periodic publications or reports distributed to producers in their home countries. For example, the Australian Meat and Live-Stock Corporation distributes to producers newsletters that inform them of market trends in Japan and other coun- tries Similarly, the German marketing organization reports marketing information to producers through its central office in West Germany. Foreign organizations also provide marketing information in response to requests from producers to determine whether a potential market exists for exporting their products to Japan. For example, the Italian Trade Commission sends market information to potential exporters upon request and suggests possible links with Japanese importers. Similarly, the Danish Agricultural Counsellor said that he spends the majority of his time advising exporters on whether or not a market exists for their products. Several organizations keep general marketing information in their offices that is available to exporters. Exporters may obtain the informa- tion either by contacting or by visiting the offices. For example, the Brit- ish Embassy’s Commercial Section distributes general information pamphlets to assist potential exporters; the German marketing organiza- tion provides general information to producers on arranging in-store promotion displays; and the Canadian Embassy distributes market sec- tor information to requesters. Page 17 GAO/NSIAD-W-134 International Trade Appendix II Foreign Marketing Organizations’ Efforts to Gain Market Share assess the programs’ effectiveness. The French marketing organization’s Director in Japan noted that, while he does not always hear exporters’ opinions on campaign effectiveness, he believes the exporters would not continue to participate in special campaigns if the exporters did not believe they were effective. Finally, some representatives believe that their experience, knowledge of the market, and close contact with the various participants in the trade gives them a fair idea of their pro- grams’ effectiveness. Evaluation of promotional efforts has led some organizations to alter their activities. For example, the Canadian Embassy no longer offers monetary incentives to supermarkets for sponsoring Canadian food fairs because the staff accurately perceived that the supermarkets would host the fairs anyway. The Canadians arc also planning to build a hall for exhibiting Canadian products as an alternative to participating in Foodex. Embassy officials believe larger exhibitions probably over- shadow the Canadian exhibitions during Foodex, and a smaller exhibit of only Canadian products may be more effective. Similarly, the Austra- lian Trade Commission previously advertised Australian products but discontinued the practice about 12 years ago, after concluding that advertising produced little reaction. The marketing organizations’ representatives generally seemed confi- dent that their evaluation efforts are appropriate, given their products’ market situations and the organizations’ limited resources. Some stated, however, that they would like to evaluate their activities’ effectiveness more systematically to better direct future efforts, but do not have the resources to do this. Promotion Activities Trade Exhibitions Most of the marketing organizations we reviewed arrange or help to arrange exporters’ exhibits at large, international food shows such as Foodex. Foodex is an annual exhibition in Tokyo that features food products from all over the world. The event lets Japanese food trade representatives see exporters’ products and establish business links. For several marketing organizations, funding Foodex activities is an impor- tant promotional activity. For example, a Canadian Embassy official said about 60 percent of the Embassy’s agricultural market promotion budget is allocated to its Foodex participation, Page 19 GAO/NSIAD-90134 International Trade Appendix II Foreign Marketing Orgmizatiom Efforts to Gain Market Share Cmsumer and Retailer Education Several officials told us that educating consumers and retailers is an important part of market promotion. They believe that informed con- sumers are more likely to buy products, and knowledgeable retailers are more likely to stock products. For example, Wine Australia, an organiza- tion that promotes Australian wines in Japan, has funded wine tastings for wine traders and conducted seminars aimed at educating retailers on all aspects of wine. The markets for two high value agricultural products, beef and wine, Case Studies- provide examples of how marketing organizations promote naps in Different Approaches Japan. to Marketing Beef and Wine Marketing Beef According to officials from several marketing organizations, Japan offers significant export potential for foreign beef producers. They believe there is a latent demand for beef that, when combined with Japan’s high level of personal income and relatively low per capita con- sumption of beef, will result in greatly increased sales as beef restric- tions are phased out. A principal beef exporter to Japan, Australia is investing considerable market promotion efforts, with the goal of increasing its share of the beef market once quotas are lifted. The Australian Meat and Live-Stock Corporation funds numerous pro- motional activities. For example, during 1988 it participated in trade exhibitions such as Foodex, in-store promotions, and restaurant promo- tions. The corporation also promotes through advertising. It has chosen to invest in a costly nationwide television campaign, and its Director in Japan stated that the television campaign goals are to promote Austra- lia’s image along with the product and to reach as many people as possi- ble. Although the cost is high, the Director believes television is the best way to reach the largest number of people. Other activities sponsored by the Australian Meat and Livestock Corpo- ration to promote beef include cooking competitions, a butcher exchange program, and trade missions consisting of journalists, Japanese govern- ment officials, and Japanese food industry officials. Page 21 GAO/NSIADB&134 Intemational Trade Appendix II Foreign Marketing Organizations’ Efforts to Gain Mark& Share Because Australian wine is comparatively unknown in Japan, Wine Aus- tralia has concentrated on linking Australian wine exporters with Japa- nese importers which, it hopes, will build business contacts through long-term, calculated planning and activities. Wine Australia’s promo- tional efforts are directed toward basic education to the wine trade on all aspects of wine (because the wine market is still relatively undevel- oped) and specifically on Australian wine as a viable competitor with the better-known French, German, Californian, and Italian wines. Over- all, Wine Australia is trying to create an image of Australian wine as a good wine value and of Australia as the “Wine Paradise in the Southern Hemisphere.” Wine Australia plans to aim promotional efforts at Japa- nese consumers only after establishing a solid business relationship with t,he wine trade. Page 23 GAO/NSIAD-SO-134 International Trade Appendix III Nontraditional Importation Methods Can Fncilitate Market Penetration Similar to the New Zealand Meat Producers Board, the New Zealand Joint Ventures-The Dairy Board began commercial operations to unify New Zealand’s previ- New Zealand Dairy ously fragmented dairy export efforts. According to the Dairy Boards Board Approach representative in Japan, in the early 1980s the Board’s Directorate believed its position in the Japanese market was strong enough that it could lessen its dependence on the large Japanese trading companies. It planned to lessen its dependence by entering into joint ventures and dis- tributing its products through the Japanese trading companies. In 1981, the Dairy Hoard formed New Zealand Milk Products in a 50-50 joint venture with a Japanese firm, Nosawa and Company. In 1983, the Dairy Board purchased an additional 25 percent and now holds 75 percent of the joint venture. Similarly, in 1982, the Board formed Nippon Proteins in a 50-50 joint venture with Nissei Kyokei Company for the marketing of various high technology milk-derived protein products. The Dairy Board’s Japan representative said the move to joint ventures has improved its members’ positions in the Japanese market by lessen- ing their dependence on the large trading companies. However, the rep- resentative noted that the joint ventures’ success is due to two factors. First, the joint ventures were undertaken with the Japanese companies with which they had previously established relationships. The Dairy Board hired the existing employees and administered the joint ventures as normal Japanese companies, following local procedures for financing, credit, insurance, and personnel matters. In addition, the Dairy Board invested considerable effort in maintaining good relationships with buy- ers who were accustomed to working with the local companies. In this sense, the Dairy Board did not make as independent a break as did the Meat Producers Board, which formed completely new companies. Sec- ond, and perhaps most importantly, the Dairy Board acted from a strong market position because it possessed both products and technology that the Japanese companies wanted and could not otherwise obtain. The Dairy Board made it clear to the Japanese companies that if they did not agree to joint ventures, they risked losing opportunities for distributing those products. Page 26 GAO/NSIAD&O-134 International Trade Appendix IV -~ Major Contributors to This Report National Security and Judith K. Knepper, Evaluator-in-Charge International Affairs Division, Washington, D.C. Karla Springer-Hamilton, Evaluator Far East Office David J. Wise, Evaluator (483540) Page 27 GAO/NSL4D@O-134 International Trade - Requests for copies of GAO reports should be sent to: U.S. General Accounting Office Post Office Box 6015 Gaithersburg, Maryland 20877 Telephone 202-275-6241 The’first five copies of each report are free. Additional copies are $2.00 each. There is a 25% discount on orders for 100 or more copies mailed to a single address. Appendix III Nontraditional Importatim Methods Cm Facilitate Market Penetration Some Japanese retailers and wholesalers are using “nontraditional” Japanese Companies’ methods in order to import HVPS more cheaply. They are engaging in Nontraditional direct or parallel importing and offshore production. Importing Methods Direct Importing Some Japanese retailers are importing directly from producers as an alternative to working through the usual distribution system. For instance, The Daiei, Inc., a large Japanese chain store, employs this method for about 30 percent of its imported food. Company officials told us they prefer direct importing because The Daiei can obtain prod- ucts more tailored to the company’s specifications. Also, by eliminating various middlemen involved in the traditional distribution system, the company is able to offer products at lower prices and, therefore, be more competitivcl. Parallel Importing To cut costs, some Japanese companies are “parallel importing” HVPS from sources outside of Japan rather than buying the identical, but more expensive, products that are produced locally. The identical products, which are also produced under license in Japan, may be cheaper when exported either because of the relative strength of the yen or because input costs are lower outside of Japan. For example, an official from Mitsui and Company, Ltd., one of Japan’s leading trading companies, told us that Mitsui can import Coke bottled in the United States or Singa- pore and resell it more cheaply than they can sell the same item pro- duced locally. Offshore Production To offset high production costs in *Japan and to take advantage of the strong yen, some -Japanese manufacturers are developing production facilities overseas, where the costs of materials and labor are signifi- cantly lower than in -Japan. For example, the Mitsui officials told us they are importing canned tuna that is being produced in a Japanese-run facility in Thailand. According to the officials, Mitsui provides technical assistance to ensure that the product meets Japanese specifications. Although the label specifies that the item is made in Thailand, the prod- uct is the same as the one produced in Japan. The officials estimate the product can be produced for 20-30 percent less in Thailand than in Japan and can, therefore, be sold more cheaply to Japanese consumers. Page 26 GAO/NSIAD-90134 International Trade Appendix III Nontraditional Importation Methods Can Facilitate Market Penetration In an effort to be more competitive in the Japanese HVP market, import- ers are increasingly using innovative, or “nontraditional,” methods to import and distribute their products. The rationale for these methods is to circumvent the traditional steps, or middlemen, that control product distribution and add to product cost. By gaining more control over the products and by cutting costs, the innovative exporters and importers hope to make their products more competitive and successful in Japan. Specifically, among the exporters, two foreign marketing organizations distribute their products through private companies or joint ventures they established rather than through traditional Japanese distribution channels. Among the importers, some Japanese retailers and wholesal- ers are using nontraditional means to import items more cheaply, as the following examples illustrate. In 1984, the New Zealand Meat Producers Board established its own Independent commercial operations to market sheep meat in Japan. Previously, Commercial 38 New Zealand producers exported sheep meat independently. Accord- Operations-The New ing to the Board’s Asia Director, the individual export efforts were inef- ficient and fragmented and, as a consequence, the large Japanese Zealand Meat trading companies were able to keep prices down and limit exporters’ Producers Board access to markets. The Meat Board’s Directorate believed that producers needed a unified effort to build up their markets in Japan. Conse- Approach quently, they established three companies-one each for importing, processing, and distributing-to work together to sell New Zealand meat in Japan. Janmark, the company marketing lamb, is in the early stages of a major marketing development program with the goal of establishing a solid, medium-sized market for New Zealand lamb. The Meat Board’s Asia Director said that there had been resistance among Japanese importers and traders to the Board’s independent approach. However, the Meat Board’s Asia Director stated that the Meat Board had hired outstanding local people and, through them, is patiently developing contacts throughout the industry. He believes the approach has been successful so far in gaining a larger share of the sheep meat market. The Meat Board’s Director in Japan suggested that some U.S. companies are large and powerful enough to establish independent com- mercial operations effectively. Page 24 GAO/NSIAD90134 International Trade Appendix II Foreign Marketing Organizations’ Efforts to Gain Market Share Independent Beef Australian and New Zealand marketing organization officials believe the Distribution Once Quotas upcoming lifting of beef import quotas may lead to the formation of additional, independent commercial distributors in Japan. At present, Are Lifted beef importation and distribution in Japan are strictly controlled through quotas and restrictions imposed by the *Japanese government. Representatives from several organizations believe the latent demand for beef is large, and they expect beef consumption to rise considerably when the quotas are lifted-offering profitable opportunities for for- eign beef producers. The Director of the New Zealand Meat Producers Board believes some U.S. meat companies are large and powerful enough to establish independent commercial operations in Japan. In so doing, they could circumvent the traditional distribution system, saving middleman costs and expanding as much as the market will allow-sim- ilar to what the New Zealand Meat Producers Board did in the sheep meat market. The Director noted that establishing independent opera- tions may be difficult due to resistance from Japanese traders and importers, especially because of the potentially large market-and prof- its-involved. Marketing Wine The SociCtC pour 1’Expansion des Ventes des Produits Agricoles et Ali- mentaires (SOPEXA), the French marketing organization, and Wine Aus- tralia are two marketing organizations taking different approaches to promoting wine in the Japanese market. France is the top wine exporter to Japan, followed by West Germany, the United States, Italy, and Aus- tralia. According to SOPEXA, Japanese wine consumption is low-about one liter of French wine per person per year, compared with 80 liters per person in Italy. Both SOPEXA and Wine Australia recognize Japan as a promising market for wine and are, therefore, gearing their promo- tional efforts toward increasing sales to Japan. According to the SOPEXA representative, SoPEx.4 is developing a campaign to make French wines more available to the Japanese consumer. While French wine enjoys a good reputation and is well known in <Japan,in the past most French wine sold there was the more expensive, premium wine sold through only a few channels such as hotels, restaurants, and department stores. It was not stocked in the smaller liquor shops that sell moderately priced wine and, therefore, was not available to a large portion of the Japanese public. SoPExA’s current campaign emphasizes moderately priced wines and entails promoting them through the smaller liquor shops in order to capture the consumer market. Page 22 GAO/NSIAIWO-134 International Trade Appendix II Foreign Marketing Organizations’ Efforts to Gain Market Share Marketing organizations also participate in smaller, regional food exhibi- tions. For example, the Netherlands Embassy participated in the Nishi Nippon fair in Kitakyushu and in other fairs in Sapporo and Osaka. In-Store Promotions Japanese supermarket officials and foreign marketing officials believe in-store promotions are an effective way to introduce products to con- sumers. They noted that Japan’s supermarket business is extremely competitive, and most consumers shop daily. A typical in-store promo- tion will include free samples, possibly a special sale of a particular product, and some promotional literature. We observed several in-store promotions occurring simultaneously in the food section of Mitsukoshi, a leading Japanese department store. Products featured included German sausage, U.S. beef, and Danish cheese. Because competition for limited shelf space in supermarkets is keen, some officials stressed the importance of obtaining shelf-space commit- ments from supermarket managers so as not to lose the effects from in- store promotions. For example, the German marketing organization Director said that he obtains agreements for continued shelf space from supermarket officials prior to participating in a store’s promotion. Restaurant Promotions Several marketing organizations use restaurant promotions to introduce consumers to particular products. For instance, a promotion that we observed for New Zealand beef was in a restaurant located in a Tokyo office building. A large sign outside the restaurant, and a prominent dis- play on the luncheon menu, pictured the special at what appeared to be a reasonable price (about $8). The Japan Director of the Australian Meat and Live-Stock Corporation told us that he considers restaurant promotions for lamb important because introducing consumers to a product that is correctly prepared is more likely to result in a positive impression of the product and, therefore, to encourage sales for home consumption. According to the Director, one problem with increasing consumers’ acceptance of lamb is that most consumers do not know how to prepare it properly; a restaurant is helpful in promoting overall con- sumer knowledge of the product. As part of its restaurant promotion program, the corporation sponsors prizes, such as trips to Australia, and consumers also receive information on ordering lamb directly from sup- pliers. The Director also said that he obtains commitments from the res- taurants to maintain some Australian dishes as permanent features of the regular menu. Page 20 GAO/NSIAJS9O-134 International Trade Appendix II Foreign Marketing Orgmizations’ Efforts to Gain Market Share Trade Missions Many foreign marketing organizations sponsor Japanese trade missions to their countries for Japanese importers in an effort to encourage agri- cultural exports. Marketing organization officials told us that these mis- sions can be an effective means of linking exporters and importers. In addition, they hope the missions will generate favorable publicity in Japan on the country’s products and familiarize Japanese importers with the range of products available. Some include journalists as mission participants with the expectation that they will write positive articles in Japanese publications from their experiences and, according to the Scotch Whisky representative, this response does occur. In addition, a Danish Embassy official said that he tries to schedule trade missions around large Danish agricultural fairs in order to maximize the mission’s exposure to Danish products and exporters. A Canadian Embassy official said that he devotes considerable time ensuring that trade mission participants receive a favorable impression of Canada on their trip; that all arrangements proceed smoothly; and that the participants meet as many potential exporters as possible. Evaluation of Market Most of the marketing organizations evaluate the results of their market Development Activities development and promotion activities either formally or informally, and they sometimes alter activities as a result. Some stated that resources limit the type and extent of evaluation they can perform. Among the formal evaluation methods some marketing organizations we visited use are consumer surveys, sales reports, and other evaluations following food fairs and in-store promotions. They also conduct follow- up discussions with participants of trade missions and with those who have received trade services. For example, the Australian Meat and Live-Stock Corporation contracts with local firms to conduct consumer awareness surveys before and after advertising campaigns. Also, Cana- dian Embassy staff talk with importers and exporters after helping to link them, and they require Foodex participants to complete evaluation forms. The German marketing organization requires sales data from store managers following in-store promotions. Marketing organizations informally evaluate the effectiveness of their efforts in various ways. Several organization representatives stated that they sometimes hear from companies following promotions or after other services, and Italian Trade Commission newsletters even request such feedback. Also, several organizations follow export statistics, mar- ket shares, or sales trends of products from their countries as a way to Page 18 GAO/NSIAD-W-134 International Trade Appendix II Foreign Marketing Organizations’ Efforts to Gain Market Sham business relationships. In other cases, however, the marketing organiza- tion carries out the matching process to help find the best business com- binations. For example, a Canadian Embassy representative stated that he tries to connect exporters with importers that are not already han- dling a similar product. This matching is done so that importers cannot drive prices down by playing suppliers off against each other. Similarly, the Wine Australia representative explained that he spends considerable time matching exporters with “appropriate” Japanese agents because it is especially important in the wine business that the exporter and agent have compatible marketing strategies. Liaison Activity Many of the marketing organizations we reviewed provide assistance to companies regarding compliance with Japanese import regulations. Gen- erally this assistance takes the form of researching or interpreting regu- lations that limit ingredients. For example, the German marketing organization’s Director informed a German company that routinely uses saccharine in its products that Japanese government regulations pro- hibit saccharine. Also, an Italian Trade Commission official told us he keeps wine industry officials informed of chemical t,esting requirements. Similarly, Canadian Embassy officials stated that they often help par- ticipants in the large annual food show-Foodex-clear their products through Japanese customs. Trade Negotiations Foreign embassy officials also negotiate with the Japanese government to modify existing regulations that affect agricultural imports. For example, officials from the Netherlands Embassy negotiated for nearly 5 years with the Japanese government to permit inspection of cut flow- ers before the flowers leave Holland rather than once they arrive in Japan. According to the Area Manager of the International Flowerbulb Centre Holland, this pre-shipment inspection saves transportation costs’ and allows the flowers to be delivered faster and fresher-making them more competitive in .Japan. Other officials noted that IJ.S. efforts in negotiating the modification or removal of various trade barriers, such as those on dairy products, beef, and other processed foods, have benefited the export community in gen- eral. The Danish Agricultural Counsellor said he believes that the United States has the power to influence the Japanese government, and this helps smaller, less influential countries that subsequently benefit from the 1J.S.’ efforts to reduce or eliminate trade barriers. ‘Pre-shipment inspections rmable Dutch producers to avoid the costs associated with shipping flowen which are rejected by Japanrw mspwtors. Page 16 GAO/NSIAD90-134 International Trade Appendix lI Foreign Marketing Organdtions’ Efforts to Gain Market Share At the other end of the spectrum, the Australian Meat and Live-Stock Corporation’s budget for promoting Australian meat during the period July 1, 1987, to June 30, 1988, was about $7.2 million, including a recently launched television advertising campaign for Australian beef. According to the Director, Australian beef producers are willing to invest heavily in promoting beef because they believe that, with the upcoming lifting of the Japanese beef quotas in 1991, Australian beef producers have an opportunity to improve their share of the beef mar- ket. Under the Cooperator and Targeted Export Assistance Programs, U.S. 1988 market development expenditures in Japan totaled approxi- mately $42.7 million (about six times the expenditures of its nearest competitor, Australia). Foreign marketing organizations in Japan conduct a wide variety of Types of Market market development activities, including market research, trade and D&elopment and technical assistance, and numerous types of promotional activities. Promotional Services Market Research Most organizations we reviewed offer some research services; however, there is a great variety among organizations in initiating and performing the services and in the depth of the services performed. The following examples illustrate research services that three foreign competitor mar- keting organizations offer in Japan. Canadian exports receive market research assistance from the Canadian Embassy, which conducts some market research and contracts with local firms for other research. The Embassy staff conduct limited mar- ket research projects for exporters, but they generally contract for more in-depth, industrywide surveys or consumer attitude surveys. For exam- ple, the Embassy recently contracted for a profile of the Japanese retail food and beverage sector, but it researched the Japanese market for bot- tled water with its own staff, producing its own report on this potential market. Embassy representatives told us they see market identification as one of their roles, and they follow market trends with that role in mind. They stated that the Embassy staff constitute the only marketing group performing market research on behalf of Canadian exporters in Japan. Most market research for exports from the Netherlands is performed by product-specific marketing organizations rather than by the Embassy. Page 14 GAO/NSIALWO-134 International Trade Appendix I H&h Value A@lcultwal Products and the Japan Market In response to perceptions that Japan is a difficult market to enter and Japanese to international criticism over increasing trade surpluses with trading Government’s Import partners, Japanese government officials told us that they are working to Promotion Efforts encourage and to promote imports. According to the Ministry of Interna- tional Trade and Industry, as of January 1, 1986, the Japanese govern- ment had reduced or abolished tariffs on nearly 2,000 items. Additionally, on July 20, 1988, the United States and Japan completed negotiations to end or reduce import restrictions on nine categories of processed foods, such as dairy products and pasta. The Japanese gov- ernment also agreed to reduce tariffs on other items, including cereals, soups, and prepared or preserved pineapples, and to eliminate imported beef quotas by April 1991. The Japan External Trade Organization was established more than 30 years ago to promote exports from Japan to other countries. It currently maintains 77 offices in 57 countries, including 9 offices in the United States and Puerto Rico, and employs 600 personnel in Japan, 300 staff overseas, and 300 foreign nationals. This organization is redirecting its efforts toward promoting imports from other countries due to Japan’s economic strength. Page 12 GAO/NSIADSO-134 International Trade Appendix 1 H&h Value Agricultural Products and the Japan Market formulation-thus increasing production costs-to suit the unique pref- erences of Japanese consumers. As a result, marketing organizations invest considerable t.imtt and money while developing the market in Japan. HVP Competitiveness Foreign marketing officials and Japanese supermarket representatives noted that because Japan is an affluent and developed country, IWP exporters compete actively in Japan to expand market share. In addi- tion, Japan’s numerous medium-sized supermarket chains compete avidly for consumers. Chain officials closely monitor what is succeeding in the marketplace and frequently change stock items in an effort to attract customers. Because supermarkets are relatively small, producers must also compete for limited shelf space. Several foreign officials told us that uncertainty over obtaining commitments of long-term shelf space from supermarket executives may discourage potential exporters. A Complex Distribution Several foreign marketing officials specifically mentioned that the com- System plex, multilayered distribution system can limit a foreign company’s growth potential. This distribution system includes large and powerful Japanese trading companies, one or more levels of wholesalers, and many large and small retailers. Several officials told us that the large trading companies’ control over the distribution network can limit a for- eign company’s access to the network. As a result, importers’ growth potential is limited, and companies may, therefore, be reluctant to enter the market. The nature of the distribution system requires the development of per- sonal relationships, which are considered vital in maintaining the links between the system’s layers. Relationships between wholesalers and retailers tend to be close in Japan, and retailers have a strong preference for working with their traditional suppliers, whom they know to be dependable. The New Zealand Meat Producers Board Director in Japan, speaking from his experience in developing a market for New Zealand lamb, stressed the difficulty of breaking into the Japanese market quickly-the Japanese emphasize personal contacts and trust, which take time to cultivate. Several officials told us that companies entering the Japanese market- place must be prepared to invest considerable time, effort, and money in cultivating the relationships needed to operate in the Japanese distribu- tion system. For example, one Danish marketing representative stated Page 10 GAO/NSIAD.90-134 International Trade High Value Agriculturail Products and the Japan Market Agricultural products are commonly classified as either bulk commodi- ties or high value products. Bulk commodities include raw materials such as grains and cotton. High value agricultural products (HVPs) gener- ally include three groups: high value unprocessed foods such as eggs, fresh fruits, and nuts; semiprocessed products such as flour, oilseed products, and meats; and highly processed products such as prepared meats, dairy products, and soups. HVPs have accounted for about two- thirds of world agricultural trade since the 1960s. Japan is a large and potentially lucrative market for exported HVPS. According to the Foreign Agricultural Service (FAS), average per capita disposable income is higher in Japan than it is in the United States, and the average Japanese consumer spends about 25 percent of disposable income for food, compared to 12 percent for Americans. In 1987, Japa- nese consumers spent $398.2 billion on food and drink out of a total personal consumption bill of $1.4 trillion. According to the Japan External Trade Organization, in 1988 Japan imported agricultural products valued at about $27.4 billion, and according to FM, 51 countries competed with the United States for the Japanese agricultural import market. Agricultural imports from the nine countries in our review (New Zealand, Australia, Canada, France, West Germany, the United Kingdom, the Netherlands, Italy, and Denmark) plus the United States represented about 63 percent of all agricultural imports to Japan in 1988. The United States had the largest share of that market, with about $9.9 billion, or 36.1 percent, of the total agricul- tural import market in Japan. According to FAS, HVPS constituted about 56 percent of this total,’ and bulk commodities represented about 44 percent of all agricultural imports into Japan from the United States. (See table I. 1 for total agricultural imports into Japan from the United States and from the nine countries in our review. Also included in the table are their export promotion expenditures in 1988.) ‘Forest products, which are clarified as HVPs, represented about 24 percent of all agricultural imports into Japan from the IJmted States. Page 8 GAO/NSIABSO-134 International Trade Contents Letter 1 - Appendix I 8 High Value Japan-A Difficult Export Market 9 Japanese Government’s Import Promotion Efforts 12 Agricultural Products and the Japan Market Appendix II Foreign Marketing Types of Market Development and Promotional Services Case Studies- Different Approaches to Marketing Beef Organizations’ Efforts and Wine to Gain Market Share Appendix III 24 Nontraditional Independent Commercial Operations-The New Zealand 24 Meat Producers Board Approach Importation Methods Joint Ventures-The New Zealand Dairy Board Approach 25 Can Facilitate Market Japanese Companies’ Nontraditional Importing Methods 26 Penetration Appendix IV 27 Major Contributors to National Security and International Affairs Division, Washington, D.C. 27 This Report Far East Office 27 Table Table I. 1: Agricultural Imports and Export Promotion 9 Expenditures in Japan for 10 Countries in 1988 Abbreviations FM Foreign Agricultural Service GAO General Accounting Office HVP High value agricultural product SOPEXA Soci&tC pour I’Expansion des Ventes des Produits Agricoles et Alimentaires (French food and beverage marketing organization) Page 6 GAO/NSIAB9@134 International Trade B-226269 Foreign and Japanese companies alike are gaining greater access to the Nontraditional Japanese market by using nontraditional methods of importing or dis- Methods Can tributing goods in Japan, and one foreign marketing representative Facilitate Market stated that U.S. companies could use similar techniques to penetrate the Japanese market. For example, two New Zealand organizations formed Penetration their own companies in Japan or entered into joint ventures with Japa- nese firms to import and distribute their products, bypassing the tradi- tional, but expensive and restrictive, distribution system. The New Zealand Dairy Board’s representative in Japan stated that the move to joint ventures has improved its market position in Japan by lessening its dependence on large trading companies. The New Zealand Meat Produc- ers Board Director in Japan suggested that some U.S. companies are large and powerful enough to establish independent commercial opera- tions effectively. Some Japanese companies are also beginning to bypass the traditional distribution system by importing directly from foreign producers and using parallel importing and offshore production techniques to import goods more cheaply. One Japanese trading company told us it imports canned tuna from a Japanese-operated facility in Thailand because the product can be produced from 20 percent to 30 percent cheaper than in Japan. We interviewed foreign embassy and marketing organization officials of Scope and the nine competitors which, according to U.S. Foreign Agricultural Ser- Methodology vice estimates, spent the most on high value product market promotion in Japan during 1987. Four countries-France, West Germany, Italy, and Canada-each have only one marketing organization conducting market research and promotion activities in Japan, and we spoke with a representative from each. The others-New Zealand, Australia, the United Kingdom, the Netherlands, and Denmark-have both govern- ment and nongovernment marketing entities conducting research and promotional activities in Japan. For these, we talked with a representa- tive of each government organization and at least one nongovernment organization. In addition, we met with Japanese officials from government organiza- tions who are working to promote agricultural imports, Japanese trad- ing company officials, and Japanese wholesalers and retailers who market imported agricultural products. We also visited Japanese super- markets and department store food sections to observe market promo- tion activities first hand. In addition, we interviewed representatives Page 4 GAO/NSIADSO-134 International Trade B-226269 agricultural trade, and Far East markets offer excellent opportunities for exporters of these products. Japan is a large and potentially lucrative market for exported high value agricultural products. According to the Foreign Agricultural Ser- vice, Japanese average per capita disposable income is higher than it is in the IJnited States, and the average Japanese spends about 25 percent of disposable income for food, compared to 12 percent per American. In 1987, *Japanese consumers spent $398.2 billion on food and drink out of a total personal consumption bill of $1.4 trillion. The value of its market for all agricultural products in 1988 was $27.4 billion, according to the Japan External Trade Organization. According to Foreign Agricultural Service estimates, 1988 market devel- opment expenditures by foreign governments in the Japanese market ranged from $900,000 (Italy and the Netherlands) to $7.0 million (Aus- tralia), while the linited States spent $42.6 million under its Targeted Export Assistance and Cooperator market development programs.’ -~~-~ -~~ Japan is thought to be a difficult market for companies to penetrate due Japan-A Difficult to the competition for shelf space in supermarkets for HVP products; the Export Market complexity of Japan’s product distribution system; quotas and tariffs that either restrict trade or make products more expensive and there- fore less competitive; and the need to adapt product size, packaging, or formulation to suit the preferences of Japanese consumers. Foreign companies must be willing to invest considerable time and money to develop markets for their products in Japan. According to one estimate, large companies should allow at least 5 to 7 years for products to become profitable. They should also expect to spend between $2 mil- lion and $2. 5 million for the first 1 or 2 years to develop the market for their product(s) and about $1 million for follow-up surveys, additional market research, and evaluation. The New Zealand Meat Producers Board Director in Japan, speaking from his experience in developing a market for New Zealand lamb, stressed the difficulty of breaking into the Japanese market quickly- the Japanese emphasize personal contacts and trust, which take time to ‘For a general discussion of forqn market development for high value agricultural products, see International Trade: Foreign Market Development for High Value Agricultural Products, (GAO/ NSIAD-90.47. Jan 17, 1990) Page 2 GAO/NSIAD-SO-134 International Trade
International Trade: Competition for Japan's High Value Agricultural Market
Published by the Government Accountability Office on 1990-03-30.
Below is a raw (and likely hideous) rendition of the original report. (PDF)