HMV Shibuya and Tsutaya

Following the disappearance of Tower Records, Virgin Records and other titans of the music industry around the globe, it was inevitable for a similar act to happen in Japan. That Japanese music retailers could last so long is a testament to the propensity of the local population to continue buying music and not download illegally, and to a lesser degree, to the lack of music discounting by retailers (by law). Even Japanese dinosaurs cannot survive beyond their age, and HMV announced the closing of its flagship Shibuya store and several others. The Shibuya store was HMV's first of 66 to be opened in Japan (HMV's Japan website).

(It is appropriate to note that Tower Records Japan continues to fight the good fight, following an MBO of the Japanese unit in 2002 which sidestepped the bankruptcy and liquidation of Tower Records in the U.S. Tower Records Japan did have the foresight to understand CD's do not sell themselves in the internet age and lead marketing campaigns in collaboration with producers. Tower's successful "No Music No Life" ad campaign launched the firm's brand recognition similarly to MTV in the U.S.)

The fall of music in Japan is a topic for another column; there are several factors that play a role, and I will only point them out quickly - antiquated legal code prohibiting the discount of new music albums, written novels and other consumable media, lack of innovation and production of saleable music, and changing demographics.

I would rather take this opportunity to highlight what comes next - from the ashes of HMV Japan rises Tsutaya, the brand driven by the awkwardly-named Culture Convenience Club Co., Ltd. ("CCC"). Its main platform, Tsutaya, grew to market dominancy originally through video rentals (a Japanese version of Blockbuster in the U.S.) and then music CD rentals (which helped the quick drop in CD sales) before further expanding to rent comic books in addition to retail sales of the same consumables.

What is CCC's growth strategy going forward?

Sankei Biz (in Japanese) writes that CCC is currently in negotiations to buy HMV Japan's business from current owner Daiwa SMBC Principal Investments. Allegedly, this will include the absorption of HMV's stores, although it is unknown whether the HMV brand will be kept or jettisoned in favor of Tsutaya. This also neglects the fact that many of HMV's locations in prime retails areas are within close proximity to Tsutaya's own; HMV Shibuya lies within 50 meters of Tsutaya at Q-Front Shibuya.

CCC also looks to expand its retail operations in new directions, including online video rentals a la Netflix (Tsutaya Discas) and an online travel agent (T-Travel). More interesting is an adult-geared entertainment complex with retail, restaurants and parking in fashionable Daikanyama adjacent to Hillside Terrace (CCC's press release), which follows a strategy initiated by Tsutaya in Roppongi Hills and Tokyo Midtown.

->This strategy has also been recognized and favored by other retailers in this age of austerity. While the young are more prone to downloading music and movies and shopping for second-hand items, and the older remain a generation of savers (opening their wallets for vacations rather than CDs), the key spending demographic is the 30-49 year-old slice. This has been widely acknowledged over the past couple years, and the Japanese advertising community continues to zero in. One current example is the successful TV drama Dousoukai by TV Asahi, which tells the stories of families breaking under pressure, love affairs and difficulties in parenting that arise during the 30th year reunion of junior high school friends. As a further press for viewers, the drama resurrects teen idols of the 80's and early 90's for the main character roles. <-

One potential future engine of growth is Tsutaya's Point Card System. CCC's 2009 Q2 investor report shows the rapid increase not only in T-Point members and accepting retails partners, but also in number of transactions. What CCC does not break out is revenue attributable to the T-Point system, both in retail partner fees and in credit card issuance.

Of course, as CCC's approx. 6% interest (indirectly held by Tsutaya Co., Ltd.) in second-hand retailer Book-Off suggests mass retailing of affordable goods, both sales and rentals of new and used items, will continue to be the core business strategy. I imagine that CCC will negotiate down rents for its retail sites to take advantage of falling real estate rents and counter-act revenue decreases, which will hopefully boost operating profits.