Online retail in Japan: Too late for new entrants?

This is the first of a series of articles on e-commerce around the world. You can also check out our work on China, Brazil and India.

To get a reputation for foresight, here’s a simple rule: If you predict a number, omit a date. If you mention a date, fudge the numbers. McKinsey opted to forgo this advice in March 2010, when we published our analysis of the future of Japan’s online retail market. We forecast then that online shopping (a $33 billion market in 2009, excluding non-physical goods such as digital media and tickets) would grow to $56 billion by 2015. We also predicted that e-commerce standouts Rakuten and Amazon Japan would continue to increase their market share and squeeze out those whom we termed “slow movers.”

So how did we do? Pretty well. By 2011, Japanese e-commerce retail spending had already reached at least $46 billion. With growth running at 7 percent, that puts the market on course to exceed our headline figure of $56 billion by 2015 and hit $62 billion the following year.

As for the Rakuten/Amazon juggernaut: The two giants continue to outgrow the market significantly, with a combined market share that grew from an estimated 32 percent to 40 percent in just two years and could hit 50 percent soon. Rakuten, launched in 1997, continues to lead most segments, including drugs, food and beverage, beauty care, and consumer electronics. It features 95 million products and more than 35,000 associated merchants; merchandise sales (i.e., excluding tickets and downloads) is about ¥1 trillion (US $12.5 billion). More than three-quarters (76%) of online shoppers say they visit Rakuten. Amazon Japan, launched in 2000, remains an ambitious and shrewd number 2; 62 percent of online shoppers visit it. Amazon is the only non-Japanese online retailer of any significance (Yahoo! Japan, a shopping portal, is not a retailer) with an estimated ¥500 billion ($6.2 billion) in sales. Founder and CEO Jeff Bezos is aiming for 30 percent a year revenue growth. Amazon’s service, including free and same-day delivery, which competitors have begun to copy, has earned it profound consumer loyalty. The company is pushing into new categories, including food and most importantly fashion; it is also adding new distribution centers to its current nine, and is preparing to launch a Japanese version of the Kindle.