Nitori: 28 years consecutive profit increase
Nitori, the largest furniture company, has recorded 26 years consecutive increase in its operating profit. Its operating model has supported the low-price strategy and the proposed concept of “Total Coordination”.
Background & Business Model
Nitori Holdings Co Ltd (“Nitori”), the largest furniture and home accessories retailer in Japan, has rapidly grown with its effective set of business/operational models. As of FY2015 Nitori has achieved 28 years consecutive increase in its operating profit.
While its rival, Otsuka Corporation, has focused on middle to high-end products, Nitori has succeeded in capturing volume zone by the concept of “Total Coordination” and the low-price strategy. Nitori’s has:
- Developed unmet needs of “Total Coordination” in the Japanese home furniture industry: With its vision of “Present Japan and the Whole World with the Abundant Home Decoration that is as Splendid as that of the Europe and the USA”, Nitori has changed the minds of Japanese towards furniture. Japanese didn’t tend to coordinate furniture and interiors goods inside home by color, design or material. Nitori has continuously proposed the excitement of total coordination inside house.
- Provided low-price products with good quality: Its business model has been to provide adequate quality products at inexpensive prices so that mass consumers could enjoy fashionable furniture at affordable costs.
Operating Model
Nitori’s operation model is similar to IKEA’s but some difference exists, making some of Nitori’s products 30% cheaper than IKEA’s.
- Product Lineup / Coordination
Nitori intentionally expanded interior goods. The sales of furniture account for less than half of total revenue, while interior goods and others accounted for the majority. In Japan, Nitori is the pioneer of “Home Furnishing Store”, the store offering a full line-up of home products, from large furniture to decorative interior goods such as curtains, carpets, dishes and household goods.While the frequency to purchase furniture tends to be low as they typically do so when moving. On the other hand, customers more often purchase interior goods. By increasing the product lineup of interior goods, Nitori increased customer visits.In order to encourage “Total Coordination” to customers, furniture are displayed in coordinated (in colors and styles) sets for living rooms, kitchens and bedrooms as if the space is a real home, making it easy for customers to form an image.
- Fewer StaffA furniture store with large floor usually required many staff. But Nitori adapts self-services system in its selling spaces in the same way as IKEA does. Instead of placing staff in selling spaces, Nitori built customer services centers. Fewer staff in the selling spaces not only reduces labor costs, but also leads to shortening customers shopping time.To support customers with fewer staff, the floors are arranged in the organized way with the large main aisle, easy to follow. Also there are lots of signs and instructions placed inside stores to navigate customers.
- Store Opening StrategyWhile Otsuka Corporation opened many of its stores in major cities, Nitori has opened its stores Home Furnishing Stores mainly in suburban areas to targets low-mid income families.Nitori also started smaller format stores to improve the convenience of customers’ access and to increase the customer visits:
- Home Fashion Stores (mainly in shopping centers): sell interior goods (no furniture).
- Deco Home (mainly in the Tokyo metropolitan area): sell only frequently-purchased essential daily goods in a limited space.
- Manufacturing, Distribution and Retail Sales Model
Nitori has created a “manufacturing, distribution and retail sales model” that takes the traditional “specialty store, private brand apparel (SPA)” approach to the next evolutionary level. Over 80% of Nitori’s products are developed in-house and Nitori handles every process in-house from product planning to final delivery.
- Unlike other retailers such as UNIQLO, Nitori does not use external designers. Nitori’s internal team reflects end-customers’ preference on the products design and material selections to assure the adequate quality and functionality.
- Nitori has own production facilities located in Indonesia and Vietnam. IKEA takes the SPA approach but uses OEM for its production.
- While typical retail companies outsource most logistics activities, Nitori is involved in every logistics process, from overseas production facilities to the end-market in Japan.
- Nitori use its own delivery network to deliver completed furniture within company specified areas free of charge, while IKEA expects customers to assemble products themselves.This vertically integrated operation enables Nitori to assure the product quality and to reduce the costs by scheduling production volume precisely.
Conclusion
We can see that its store design/location strategy has driven its access to mass markets and developed the unmet needs and that its vertically integrated operation and staff allocation has achieved affordable prices with good quality.
<Sources>
- Company Website (and its disclosed materials): http://www.nitorihd.co.jp/en/
- Chief Executive Officer Akio Nitori’s Interview (in Japanese) : http://www.assist-plan.co.jp/business_letter/2005_8/yellow.php
- Feature article by Tokyo Broadcasting System Holdings, Inc. (in Japanese): http://www.tbs.co.jp/gacchiri/archives/20130929/2.html
- Toyokeizai (Japanese Institution) online (in Japanese): http://toyokeizai.net/articles/-/77317
- Forbes article: http://www.forbes.com/global/2010/0607/companies-akio-nitori-japan-sugiyama-doing-ikea-one-better.html
It is very interesting to see how Nitori follows the Ikea business model but customizes its operating strategy to create and satisfy the unmet needs of Japanese market. Nitori’s comprehensive product line up (from furniture to smaller home deco goods) as well as mini-home display in-store support its “Total Coordination” business strategy, while its low cost strategy is met by careful selection of store location and manufacturing/distribution strategies.
However, owning the entire design to delivery process implies that Nitori requires a good talent acquisition and retention strategy. Given the high labor cost in Japan and strong competitor like Otsuka, I would like to learn how Nitori attracts its think tank (the designers) while keeping the cost low.
On the other hand, while Nitori outsources its manufacturing process, its business is still relatively asset heavy requiring large warehouses and good logistics services, which requires huge capital expenditure – just like how Alibaba and JD.com in China differ in their cost structure due to the splendid logistics services that JD.com owns. I am interested to learn how Nitori develops its own logistics services and keeps the cost under control.
Qing, thank you very much for your comments.
I agree with your concern on the costs for designers but Nitori said that using internal designers are cheaper than using external designers. Their products are low-to-middle end so they do not require “elaborate” design. Their products are relatively simple. I agree that some training would be needed but I assume their costs for designers are not so different from other workers.
On the manufacturing side (please let me clarify that Nitori has its own manufacturing process (in Indonesia and Vietnam) and the one who outsource manufacturing process is IKEA in my understanding), I appreciated you sharing the difference between Alibaba and JD.com. I think Nitori has built sophisticated logistics system as they emphasized to improve the system from early on. One early example is that, in 1980, Nitori implemented automated warehouse to save labor and maintain storage.
Kohei, thanks for giving me a heads up about this post when we ran into each other the other day; I really enjoyed reading about this business I’d never heard of before!
A few questions:
(1) How are Nitori and IKEA perceived differently in Japan? How does that factor into the performance of their businesses in the region? I ask because at HBS, I’d guess IKEA is known as the poster-child of many of the business/operating practices that you discuss, yet in Japan, Nitori has achieved a much stronger market position. How much do you think this has to do with different and potentially superior business/operating models (e.g. the focus on interior goods rather than furniture) versus localization/home-team and first-mover advantages? If it is the former, how feasible do you think it would be for Nitori to expand its business to and win in other regions?
(2) How have you found the experience of using Nitori’s logistics services? How often did you use the in-house service versus third-party logistics specialists? Is there a meaningful cost differential to the end consumer?
Thanks again for sharing! If you happen to have any Nitori products in Boston, I’d love to swing by and check them out at some point!! 🙂
Mike, thanks for giving me your thoughts on my post.
My thoughts to you questions:
(1) IKEA is also perceived “inexpensive / affordable” in Japan however the difference is that Nitori is cheaper than IKEA and IKEA is more fashionable than Nitori (which is simpler). I see the difference in their positioning in this sense. And IKEA has been expanding its market share, but I understand that at this moment Nitori has stronger market presence in Japan. In addition to lower price, Nitori’s advantage come from its store locations and services. In terms of stores, IKEA has only 8 large stores in Japan located in suburban area while Nitori has over 300 stores. Nitori also started its stores in suburban area but these days it has opened the stores in urban area as well. So it is obvious that Nitori’s stores are more easy to access, which is better for low-to-middle income population in Japan because unlike other countries, it is often the case that people does not own cars. Another thing is services. in last 5 to 10 years in Japan, young generation tends to live by themselves leaving parents house. For those, Nitori’s services to deliver completed furniture for free has been powerful. I think that definitely Nitori should expand its business abroad further. They did some in Asia, which likely fit their business. But probably US/Europe would be difficult market for them given the IKEA’s presence.
(2) Nitori’s delivery service is powerful as it deliver some completed products to some areas for free. I imagine that young female who live alone would appreciate that service as it is difficult for them to assemble if they just get parts of furniture (like DIY service). Nitori uses both in-house delivery services and third-party logistics for their products delivery to end users, but I could not find the percentage between them. Customers does not see price difference between in-house delivery services and third-party logistics as Nitori set same price for both. But having own logistics improved its level of service quality as the staff can assemble large furniture when delivered.
Great post Kohei! Nitori seems to truly understand the Japanese market and I can’t see any international company being as successful as they have been inside of Japan. I think its very interesting how they actually have been able to change consumer behaviors inside Japan and have been able to generate excitement for furnishing entire rooms with an overall style theme which wasn’t common in Japan.
I also though it was a very smart strategic move to increase their interior good product line in order to encourage more store visits, and subsequently more purchases. This leads me to ask the question: Do you think they will sell their product lines through other retailers, or keep them selling them from their own store only? I see the potential to greatly increase market penetration if they are able to sell through other retailers.
Jeff, thanks for your comments.
Nitori’s 26 years continuous operating profit increase is No.1 record in Japan at this moment!
To your question, although I did not think about it, I agree with your thought that it would be great opportunity if they sell their products from other retailers. As I wrote in the section “3. Store Opening Strategy” above, Nitori recently try to open smaller store focusing on interior goods. So why not selling interior goods via other retailers? Their products are simple and not many customer services are required in the selling places. My only concern is that they have stuck to vertical integrated operation and that the culture is not so aggressive. Therefore there will be some hurdle to change their mind. They want to control all the operating process.
This is very interesting post, Kohei!
I did not know Nitori before your post. They certainly seem to have a very good business model and a strong supporting operating model. To be honest, I was very impressed to know they were cheaper than Ikea and still managed to turn a profit.
A few questions:
(a) Do they have a strong online presence? I suppose this would help them avoid high rental expenses
(b) How does their product quality compare to Ikea? I suppose a large % of their COGS is material costs, so having cheaper materials would help reducing costs.
Thanks a lot!
Francisco
Francisco, thanks for the comments and questions!
To your questions,
(a) Although my post has focused on real stores, Nitori has strong presence in online business. It opened e-commerce site on 2004 and the e-commerce business’s revenue has grown to over 15.5bin JPY (over 129 mil USD) in FY2015/2. I agree that it has achieved higher margin by avoiding rental expenses.
(b) Our perception in Japan is that Nitori is cheaper but IKEA is more fashionable. Nitori’s products are easy to use but simpler than Nitori. In addition to cheaper materials costs, I understand that cheaper design costs maybe a reason although the business models are similar.
Thanks for sharing Kohei. I saw some comparison and am wondering below:
1)comparing to IKEA’s DIY design, Nitori sells the final product. As the former model could sort of outsource the labor cost to end customers themselves, how could Nitori counter that negative impact on its cost?
2)comparing to UNIQLO, the inhouse design model Nitori adopts seems to facilitate good quality control. However, a core competence UNIQLO owns is product innovation, hence they can introduce low cost materials with consistent/stable enough quality to oursource the design / supply chain without compromise in quality (for example the classic winter coat). I’m thus curious about Nitori’s capability of product R&D.
Thanks for your comments, Chris.
To your quations:
1) For (not all but) many products, Nitori delivers completed furniture (or assembles the parts for end-users at customers house) for free, and I can assume that additional material time are required for staff to assemble. This is negative impact but in other part of operating process, Nitori counters well. I think that the biggest contribution is the fact that Nitori’s production facilities are concentrated in Indonesia and Vietnam where labor costs are still low, while IKEA uses OEM for its production in many places around the world. The Nitori said that their manufacturing process are really efficient. For example, they use up 95% of a lumber while competitors typically use 50-60%.
2) In terms of product design, my sense is that Nitori has not spent much money on it as they did not use external designers. It was said that Nitori does not require much costs on designs because they mainly targets low-to-middle customers with simple design. In terms of product innovation, Nitori said they try to reflect customers’ demand/preference into products’ functionality, but I don’t feel that Nitori’s products are innovative as some of UNIQLO’s products do. This would be the next step for Nitori especially because it recently opened its stores in urban areas. Most recently the store was opend in Ginza (famous for expensive department stores)! (I hope you may know it.) They need to attract middle-high customers if they want to succeed in Ginza.
Hi Kohei, thanks for writing this great post.
I was interested in digging a bit deeper into the Nitori-Ikea comparison. Ikea is significantly larger in scale: 2014 sales were around $35b, making it the largest furniture manufacturer and retailer in the world. This is around 10x the size of Nitori. In furniture manufacturing, wood accounts for a bulk of your raw materials, and superior sourcing is paramount. Ikea is said to account for 1% of the world’s wood each year and is therefore able to exact the best prices possible. How is Nitori, then, able to charge significantly lower prices (30%) for its products while still maintaining an incredibly consistent (and impressive) 10% bottom line margin (and 50%+ gross margin) according to bloomberg? Ikea’s net margin is around 11% and I would imagine they have significantly stronger pricing power given the higher end nature of their goods and the brand equity they have developed, while Nitori remains a lower-end player. Any thoughts? Thanks.
Or is it pricing power? Ikea mid. Nitori is lower so perhaps more price contious.
Hi Tariq, thank you very much for giving me deep insights on IKEA. It is very interesting to compare.
As for the net margin we may have to care about the difference in tax rate. Japan corporate tax rate is 39% while I am sure Ikea is subject to lower tax rate. If compare gross margin, Nitori is 52% LTM basis while IKEA is 44% (based on Cap IQ).
I am not 100% sure which is more efficient / profitable especially given the Ikea’s significant bargaining power as you mentioned, but Nitori has much efforts on costs cut every year. I think that the biggest contribution is that Nitori’s production facilities are all in Indonesia and Vietnam where labor costs are still low. My understanding is that IKEA uses OEM for its production in many countries around the world, so I assume their manufacturing costs are higher than Nitori. Nitori said that their manufacturing process are really efficient. For example, they use up 95% of a lumber while competitors typically use only 50-60%.
Sorry, please disregard the last line of text, which I included by mistake 🙂