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Retail revolutionary

As founder and head of online superstore Rakuten, Hiroshi Mikitani is fast conquering Japan and has set his sights on the wider world


Staff writer

On a bitterly cold mid-February day, in the midst of an even harsher economic climate, Hiroshi Mikitani — founder, president and CEO of one of Japan's largest online retailers, Rakuten Inc. — shook off a slight cold to announce at a concise news conference that in fiscal 2008 his company had achieved record results.

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Forward-looking: Founder, president and CEO of Rakuten Inc., Hiroshi Mikitani, discusses his vision for the Internet retail super-company at his office in Higashi- Shinagawa during his JT interview in mid March. YOSHIAKI MIURA PHOTO

Rakuten's net sales for the year were up 16.8 percent to ¥250 billion, he said, having been buoyed significantly by 20.2 percent sales growth in its core e-commerce segment and 24 percent growth in its travel sector. E-commerce sales hit ¥92 billion for the year and contributed a record ¥26 billion to the company's annual profits. Meanwhile, Rakuten Travel — an eight-year-old offshoot from the retail business — attracted 25 million domestic travelers in 2008, topping even heavyweight Japan Travel Bureau's total for 2007 (the latest figures available).

All that was against a backdrop of belt-tightening nationwide that saw, for example, total department-store sales contract by 4.3 percent — the sector's biggest fall in over a decade.

Even the sole item of bad news to emerge at the conference was interpreted by the media as a temporary stumble, and one for which Rakuten was not entirely to blame.

In his latest attempt to expand his empire — which currently comprises the travel agency, a stock brokerage, an e-bank, a credit company and a baseball team in addition to the core retail service — Mikitani had been buying up shares in Tokyo Broadcasting System (TBS). The global financial crisis laid waste to TBS's stock price, leaving Rakuten's investment valued at about a third of what they paid for it. News had also recently emerged that in order to resist Mikitani's apparent takeover bid, TBS would turn itself into a "government-certified broadcasting holding company" — meaning no single owner could control more than 33 percent of its shares. (Mikitani is now trying to get TBS to buy his shares back.)

In a JT interview in 2003, Mikitani said he was aiming to create a new kind of online zaibatsu. That seems to have been achieved, and he now says one of his prime interests is to expand his business overseas. To that end, he's tasked his staff to develop a system enabling people anywhere to buy and sell anything legal. All he needs now is a global "e-commerce free-trade agreement," he jokes.

After earning his first degree in Japan, Mikitani, 44, received an MBA from Harvard University and did a stint at the Industrial Bank of Japan (IBJ) before founding Rakuten in 1997 with just six employees. It now has around 4,500 staff. It also has over 26,000 retailers utilizing its system and an astounding 47 million registered users — equivalent to almost 40 percent of the country's population.

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Team player: Shortly after creating the Sendai-based Tohoku Rakuten Golden Eagles baseball club in late 2004, Hiroshi Mikitani (left) visits its training camp at Fujiidera Baseball Stadium in Osaka. KYODO PHOTO

Analysts generally attribute Rakuten's phenomenal success to its unique core retail service, called Rakuten Ichiba (Market). Under Mikitani's business model for this, Rakuten neither holds nor stores any merchandise itself, but instead operates like a giant virtual notice board, where — for a small flat fee — retailers offer their products for sale. When a consumer orders a product through Rakuten, the order is forwarded to the retailer, who is responsible for shipping the product. Rakuten then takes around 2.6 percent of the retailer's sales revenue.

In his 2007 book, "Principles for Success," Mikitani says this system forces retailers to compete with each other — in the same way they do in the real world. "Retailers had to think about how to present their products on the site . . . and had to deal directly with customer feedback, forcing them to make further improvements."

Mikitani's IBJ experience is in some ways ironic. That bank was created by the government to provide loans to industries — but it got wrapped up into the Mizuho Financial Group in 2002. Rakuten is now doing much the same thing — though instead of loans, it is providing a vast pool of consumers to businesses all over the nation. "Rakuten has made a lot of businesses viable," says Mikitani, referring in particular to enterprises in the regions where depopulation had been forcing many to the wall.

In this interview with The Japan Times in mid March at his office in Higashi-Shinagawa, Tokyo, Mikitani says it is the knowledge that his company is helping other small companies thrive that makes his work worthwhile. But he doesn't deny that Rakuten's sizeable profits help too.

In February you announced that Rakuten's sales were up for 2008. How is it that you are unaffected by the global financial crisis?

Well, are we really unaffected? Or is it the case that we would have been doing even better if the economy had been better?

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Upbeat: "We've been able to achieve a win-win-win situation for Rakuten as well as for the retailers and consumers," says Mikitani during his interview with the Japan Times. YOSHIAKI MIURA PHOTO

There are a number of reasons online retail is strong. One is that human consumption is extremely diverse, and with the Internet people can buy more and more things they didn't have access to in the past. The second is that because times are tough, people are paying more attention to prices. They are looking for good deals on the Internet, because online shopping is cheaper. The third is that online shopping is convenient; You shop from your home.

Those characteristics are present at any time, but they're why online shopping is strong in times of a weak economy.

So you are saying that as the economy worsens people are more careful with their money, and that benefits online retailers.

Yes. I think another factor is what I call the "small luxury market." The economy is bad, so people don't want to go to a restaurant, but they might go online and buy higher-grade meat than normal.

At the end of last year, sales of high-end sechi ryori (traditional New Year's Day delicacies) were actually quite strong. It's the same idea. In the past, where they might have splurged on an overseas vacation, they are now staying at home and treating themselves to a nice meal.

In the space of 12 years, Rakuten has become one of the largest Internet companies in the world. When you started the company in 1997, did you ever imagine it would go so well?

Well, in some ways, yes, and in some ways no. Yes, because I started it with a big dream. I wanted the Japanese people — as many as possible — to use Rakuten. I wasn't hugely confident I could make that happen, but I was determined to show people that I could do it.

Was the plan to just go after as many customers and retailers as possible?

Yes. You know, when we started the company there were still no high-speed Internet connections. Everyone was using dial-up connections — on 56kpbs modems. So the spread of high-speed Internet has obviously been very important. I also knew that if the company got to a certain point, it would grow from there naturally. There are now a lot of surprising products selling really well on Rakuten: traditional crafts, like lacquerware, as well as Harajuku fashion. I had a vague idea that if we could capture such a diverse range of products, then sales would really take off. That has turned out to be true.

Are you satisfied with the company's position at the moment?

Satisfied? I'm a businessman, so I am always setting new goals.

So is there no rest for you?

Yes, it's a kind of sickness!

You're one of the wealthiest people in Japan. Is there no point at which, if you attain it, you will retire?

No. It's not just about money. The reason I like Rakuten Ichiba is because, unlike Amazon, which is all about the expansion of their own business, Rakuten is simply a large grouping of many small retailers. Rakuten is assisting those retailers, and by doing so it is helping to enliven Japan, and in particular regional Japan. So I feel like I am contributing to society.

I wanted to ask about that. Is it simply a happy coincidence that your desire to help regional areas is also furthering the success of your company?

The margin that Rakuten takes from retailers is about 2.6 percent. That's far lower than other companies such as Amazon. That's why we've been able to achieve a win-win-win situation for Rakuten, as well as for the retailers and consumers. It's because of the efforts of our staff that we are able to function as a company on such a small margin. Most big companies couldn't make it work, but our reward is the success of our company.

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