The Cult Japanese Retailer Making Billions Breaking All the Rules

(Bloomberg Businessweek) -- Entering a branch of Don Quijote, the ubiquitous Japanese discount chain, can be a jarring experience. At the entrance of every location is an array of exotic fish that would put many pet stores to shame. It might feel like a drugstore inside, with rows of obscure unguents—think cream for damaged skin made from fish roe—for sale. Go upstairs, and every floor takes on a different identity: a clothing shop with rows of kitschy shirts next to a boutique area with Coach bags, then an electronics shop that sells iPhone accessories as well as cassette tapes.

For years, Don Quijote—an unclassifiable seller of everything from humidifiers to sex toys—has been a cult phenomenon in Japan, favored by the cash-strapped households of the so-called recession generation. Now it’s big business. Thanks largely to the discounter’s rabid fan base, its parent company, Tokyo-based Pan Pacific International Holdings Corp., is on track to become Japan’s fifth-largest retailer, with revenue likely to reach 1.4 trillion yen ($12.5 billion) in the fiscal year ending June 30. That’s a remarkable feat for a chain that barely sells online and does almost no conventional marketing.

Now Don Quijote is trying to come up with a strategy to take its unique formula across Asia, eyeing locations in Hong Kong, Indonesia, Malaysia, and the Philippines to add to recent experiments in Singapore and Thailand. Chief Executive Officer Koji Ohara and founder Takao Yasuda are betting that an only-in-Japan retail phenomenon can translate abroad and buck the trend toward online shopping that’s hobbled merchants worldwide.

“I haven’t seen anything else quite like Don Quijote,” says Michael Causton, a retail analyst in Tokyo for Japan Consuming. “It’s chaotic, messy stores, which belie what’s behind it—a highly disciplined, extremely rigorous management philosophy.” Investors seem to agree: Pan Pacific’s shares have climbed 34 percent in the past year, giving the company a market value of 1.2 trillion yen.

As convention-defying as its literary namesake, Don Quijote is a little like a mashup of TJ Maxx, Dollar Tree, Costco, and the no-frills grocer Aldi, with a dollop of Japanese eccentricity thrown in. It also shares DNA with European brands such as Flying Tiger Copenhagen, whose stores stock an unpredictable mix of cheap products intended to spur impulse buys.

Retail experts have described Donki, as it’s popularly known, as a jungle, a hoarder’s paradise, even a fire hazard, with shelves so heavily packed they look as if they might fall over. But the heart of its strategy is simple: Floor staff should have near-total autonomy to decide what to sell. Store managers control merchandising, negotiating prices directly with suppliers, and decide how to change sales displays to keep customers coming back. And they come anytime they please, since all locations stay open 24/7.

In the past year, Don Quijote has closed branch offices and cut the number of regional-level managers to ensure store staff answer to fewer people and make decisions themselves. Managers can spend on costly frills when needed. Consider the roller coaster installed on the roof of Donki’s outlet in Tokyo’s Roppongi entertainment district (never used because of complaints from neighbors), or the Ferris wheel in front of one Osaka store.

At the seven-story outpost in Tokyo’s hip Shibuya neighborhood, that flexibility is plain to see. During a recent visit, a shelf facing the beauty section heaved with cooling wipes, sunscreen, and multicolored deodorants. Until that morning, manager Yohei Hasebe says, the space had been devoted to moisturizers. Anticipating warmer weather, staff decided to make a swap. They were also chasing a vendor to send more stock of a gadget that waxes nose hairs—a surprise hit they can barely keep on the shelves. Downstairs, the food area drew in teenagers with tapioca milk tea, a trendy beverage in the capital. Hasebe says he might soon add a section for spicy snacks, designed to appeal to Chinese tourists. Unusual in risk-averse Japan, experimentation isn’t avoided but rather encouraged. “We’re just always in a trial-and-error mode,” he says.

That ability to change tack is largely a function of Don Quijote’s sourcing strategy. Almost half of its products are leftover goods that manufacturers couldn’t otherwise sell. Most Japanese retailers ship unsold items back to producers with minimal payment, so manufacturers will eagerly resell them for next to nothing—which is where Don Quijote steps in. Analysts estimate that half the company’s gross profit comes from selling such leftover items acquired on the cheap.

Don Quijote has successfully taken the pulse of Japanese consumers for four decades, but as it expands it also must grapple with its newfound size. Last fall, Pan Pacific made its largest acquisition, a 28.2 billion-yen deal to take full control of Uny, a 182-store chain that it’s now working to convert to Don Quijote-style discount emporiums. Analysts say that effort, which will involve indoctrinating Uny’s senior management and store staff into Donki’s decentralized retail philosophy, will be the company’s biggest short-term challenge.

Appealing to overseas shoppers also may prove a struggle. Founded by Yasuda in 1978 as a Tokyo variety store called Thieves Market, the chain had never made a serious effort to expand outside Japan—where it has about 300 locations—until two years ago. While the operating company changed its name to Pan Pacific in February to reflect these wider ambitions, it says it’s still in an “experimental” mode for foreign stores. CEO Ohara wants to eventually generate at least one-third of sales abroad.

That means studying foreign consumer habits and hiring locally, as the chain does for store managers and staffers in Singapore and Thailand. It’s also tweaking offerings. Don Quijote devotes as much as 80 percent of the Singapore stores to food, betting on the popularity of Japanese classics such as sushi and donburi. That compares with only 30 percent in its Japanese stores. And listening to locals helped Donki score a hit selling baked yams year-round in tropical Singapore—even though they’re typically eaten only during cold months in Japan.

Even if Don Quijote implants itself in a few new Asian markets, it will still be far from matching the success and global name recognition of Japan’s larger retail superstars, Fast Retailing Co.’s Uniqlo and Ryohin Keikaku Co.’s Muji. “Management seems confident about their prospects in Thailand and Singapore, but that’s not a big enough market” to give the international push a major impact, says Sho Kawano, a retail analyst in Tokyo for Goldman Sachs Group Inc. “The hurdle is still high for them.”

If the company does expand more widely abroad, it will find more than a few eager customers who got to know it as visitors to Japan. One of them is Philip Chung, a 22-year-old from Toronto on his second trip—and his 10th visit to a Don Quijote. “Everything was cheap. Snacks everywhere. Snacks here, snacks there. I thought it was amazing,” he says at the Shibuya location, his basket filled with sweets. Two keychains featuring the Donki mascot—a blue penguin called DonPen—dangle from his bag. “I just wish they had a Don Quijote in other countries.” —With Ayaka Maki

To contact the editor responsible for this story: James Ellis at jellis27@bloomberg.net, Matthew Campbell

©2019 Bloomberg L.P.