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Doing Business : Toys 'R' Us Finds That Opening Up in Japan Is No Kid's Game : The giant American retail chain thought it had a winning formula for operating in Tokyo. But local competitors cried foul and circled the wagons. Now the project may be in trouble.


TOKYO — When the giant U.S. retail toy chain, Toys 'R' Us, unveiled an ambitious plan for operations in Japan at the beginning of the year, it made the challenge of penetrating this notoriously closed market look like child's play.

What's required are big stores, and lots of them--maybe 100 over the next decade, the American toy strategists decided.

The winning formula would combine drive-in convenience, economies of scale, low prices--and hamburgers. McDonald's Japan, which owns 20% of the Toys 'R' Us venture here, was to build adjoining restaurants.

No doubt an affluent generation of young Japanese parents is ready to beat a path to a fast-food and toy-store door. This is, after all, a land where distribution is choked by inefficient layers of middlemen, and consumers are increasingly mindful that they are being gouged by tiny mom-and-pop shops.

McDonald's is already a phenomenal success here, but the toy retailing business is a classic example of the insular and old-fashioned domestic distribution system that U.S. trade officials believe helps keep foreign products off the shelves.

The Toys 'R' Us plan was so good, in fact, that local competitors immediately cried foul. Small toy store owners in provincial Niigata, the first site announced by the American chain, complained that American-style retailing would drive them out of business. They invoked Japan's "big-store law" to negotiate a reduction in floor space, possibly even to strangle the project with red tape.

Now the response to the American toy store invasion has escalated to encompass the rural toy trade's more prosperous city cousins. And they are fighting back with another time-honored Japanese tradition, by forming a "cooperative industry association"--the kind that sometimes can work much like a cartel.

On Friday, a group of 11 major toy retailers banded together to establish the Japan Assn. of Specialty Toy Stores, with the aim of organizing the domestic industry to cope with Toys 'R' Us.

"Facing dramatic changes in our business practices with drastic relaxation of the big-store law and Toys 'R' Us coming to Japan, we have decided to form an association to protect retail stores nationwide," the association said in a statement.

Toshikazu Koya, president of the Tokyo-based Kiddy Land stores, told the Nihon Keizai newspaper that he hopes to pool resources with other Japanese retailers to buy large lots of inventory at competitive prices. British toy stores were late to organize and suffered badly when Toys 'R' Us began operations there, Koya said, but West German retailers minimized damages by ganging up to pool their purchasing power.

"I definitely would like to do joint inventory purchasing in Japan," said Koya, who is a practicing attorney in addition to running a nationwide chain of 53 medium-sized toy stores.

Initial plans are to include about 600 retailers in the association, then expand membership to about 1,000 vendors, out of an estimated total of 5,500 to 6,000 toy stores nationwide. In addition to collaboration on inventory, the association aims to study the rationalization and modernization of the distribution system.

Robert Nakasone, vice chairman of the Paramus, N.J.-based Toys 'R' Us, scoffed at the Japanese wagon-circling.

"It doesn't concern us," said Nakasone, who is also president of the company's worldwide toy store division. "We're as determined as ever.

"The same thing occurred when we moved into Europe," he added. "The ironic thing is that in all these countries, if you went back a year later you found the market actually expanded in size because of the diverse product lines we introduced."

Not many of the toys stocked by Toys 'R' Us are made in America, it should be noted, so the U.S. trade deficit with Japan isn't at question here. But openness and fairness are--and the perception that Japanese companies are free to go to the United States and conduct whatever business they like, while reciprocal access is denied foreigners in Japan.

Earlier this year, the Toys 'R' Us controversy became a flash point in U.S.-Japanese trade friction during the Structural Impediments Initiative talks, when U.S. negotiators demanded that Japan abolish its big-store law.

The law, administered by the powerful Ministry of International Trade and Industry, is aimed at protecting small and mostly rural stores by subjecting their more powerful competitors to an excruciating process of negotiation and review before they are allowed to open larger stores.

The size of proposed stores is invariably trimmed, and plans have been delayed by as much as a decade. But under U.S. pressure, the Japanese side agreed to revise the law and streamline the bureaucratic process, limiting delays to 18 months.

Whether the Toys 'R' Us plan will go smoothly from here is still not certain. It remains a symbolic cause for the American side.

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