People have short memories. Long-time participants in Japanese retailing—no less than those, usually Western players now seeking entry—too often forget that, during the past quarter century, the industry has only appeared to be a frozen, multi-layered, impenetrable monolith. At times it has been very much in flux—as it is today. Though traditional formats remained quite successful throughout the 1980s, they lost their magic as the new decade began (Exhibit 1).

Compelling evidence is everywhere to be found. The problem lies not in any particular format, but in the whole Japanese approach to retailing. Mom and Pop stores are losing money, market share, and their privileged hold over local consumers’ shopping habits (Exhibit 2). Major urban department stores find themselves stuck with outdated value propositions and inflated operating costs. General merchandisers (GMS), watching their growth rates slow, have found no effective ways to rev them up again.

At the same time, successful new ways of doing business—the use of private label brands, for example—are popping up all over. So are new formats, such as mail order, convenience stores (CVS), and discounting. And some obstacles to doing business are disappearing—central among them,...