Electronics retailers likely to phase out point systems

November 15th, 2010 by Philip Brasor & Masako Tsubuku

Yamada's Nabi store in Shibuya

Yamada's Labi store in Shibuya

Thanks to the eco-point campaign implemented by the government to spur consumption and encourage the use of “green” appliances, electronics retailers have enjoyed a banner year. Almost every one has seen record sales. The upstart Yamada leads the pack, with ¥1.14 trillion in revenues for the first half of the fiscal year (April-September), the first time any electronics retailer has broken the trillion-yen mark for a six-month period. That translates as ¥47 billion in business profits, an 87 percent increase over 2009, and ¥28 billion in net profits, a 72 percent increase over the same period last year.

The eco-point system, which rewards consumers who buy certain energy-saving goods with points that can be redeemed for other goods later on, is the reason for this windfall, but retailers are worried that sales will drop considerably after Dec. 1, when the number of points allowed per purchase will be cut in half. Retailers are making a big push before then, and competition is fierce. The real fear is not so much the loss of the eco-point incentive, which is scheduled to end altogether in March, but that the incentive itself has been so successful people won’t want or need to buy anything after it’s finished.

Consequently, sales could be depressed next year. Given the enormous profits earned in 2010, that doesn’t sound like a serious problem, but it could play havoc with retailers’ accounts. One of the solutions is to do away with the in-store point systems that almost all the major discount retailers offer. The purpose of point systems, which award redeemable points for purchases that can only be used in the same store or chain, is to get customers to return to the same store for their next electronics purchase. These point systems have gradually replaced discounts as a primary sales incentive in areas where competition among different companies is fierce, such as railroad hubs in major cities. Some stores offer up to 20 percent in points for certain items.

The problem is that as tax and accounting rules become stricter with regard to points, which are the equivalent of cash in the mind of consumers, retailers will be obligated to put money aside in order to cover them when they are redeemed in the future. So next year, when the eco-point system is gone, electronics retailers are afraid that more people will be coming to their stores simply to redeem points rather than spend cash. It’s impossible to predict how much that could cost, but some smaller retailers are afraid it could break them.

Yamada, which started out in the countryside and is now busily expanding in major cities (they are set to open a huge Labi store at Shinjuku Station East in April, where the once mighty Sakuraya, which recently went bankrupt, used to rule), isn’t taking any chances. According to a report in the Asahi Shimbun, the company has already started phasing out its point system. Yamada’s newspaper inserts advertise a choice: points for purchases or straight discounts.

In truth, the two systems are not equivalent. Though one point is equal to one yen, 20 percent in points is not monetarily equivalent to a 20 percent discount. For instance, if you buy a ¥100,000 TV and receive 20 percent in points, you can use those points to purchase, say, a ¥20,000 DVD player the next time you go to the same store, but you will not receive points for the DVD player. On the other hand, if the store gives you a 20 percent discount on the TV that’s ¥20,000 off, and when you buy the DVD player next time, the 20 percent discount means ¥4,000 off; which means, overall, you save ¥4,000 for the two purchases. Economist Takuro Morinaga figured out that 20 percent in points in the long run means that stores pay 16.7 percent in cash; 10 percent points is 9.1 percent cash. Consequently, Yamada’s discount incentive is lower than its points incentive. In its ads Yamada says you can receive 20 percent in points or an unspecified discount, which is probably 10-15 percent.

Retailers who don’t use the point system say that it is misleading for consumers. If everyone competed just with discounts, consumers could compare prices more easily. K’s Denki, another upstart retailer that’s headquartered in the countryside and which has seen great success in recent years (first half 2010: 98 percent increase in business profits, 65 percent increase in net profits), has never used a point system, though it has yet to make a concerted push into urban areas.

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