Kumiko Otsuka moves to update her Japanese furniture retailer

Image: Irwin Wong for Forbes

Have you heard about the changes at Otsuka Kagu? I went to check it out,” says the young woman in a TV commercial last year for the major Japanese furniture retailer.

The word “changes” doesn’t even begin to describe what has transpired at the company. At the centre of it all is President Kumiko Otsuka.

Last year, foreign and domestic investors alike gave her a huge vote of confidence. They threw their support behind her in a proxy fight with her father, Katsuhisa, 72, and her plans to revamp the nearly 50-year-old retailer’s strategy and strengthen corporate governance, namely making external directors a majority of the ten-member board.

Moreover, Otsuka, 48, led the company back to an operating profit of nearly $4 million in 2015, after its first operating loss in four years in 2014, when her father temporarily took back the reins from her and reversed some of the changes she had made, including ramping up spending on marketing. Revenue increased by 4.5 percent to over $513 million. Her comeback in January 2015, the return to profit and plans for a share buyback have helped Otsuka Kagu boost its market cap above $235 million, outperforming Japan’s Jasdaq market over the past year.

Brandes Investment Partners was one of the shareholders that backed Kumiko Otsuka. “She thinks long term and has been proactively challenging the status quo in light of the rapid[ly] changing industry dynamics,” says Shingo Omura, director at the San Diego-based investment management firm. (Brandes has subsequently reduced its stake to 4.8 percent, saying the stock has risen closer to its fair value.)

In the shareholder battle her father, who declined to comment for this article, lost his post as chairman and subsequently trimmed his stake to 9.6 percent from December 2014’s 18 percent. He has announced plans to start a new, appointment-only furniture store called Takumi Otsuka. Kumiko Otsuka has a seat on the board of a family asset-management company, Kikyo Kikaku, which has a 9.8 percent stake and is headed by one of her siblings.

The imbroglio may seem like nothing more than a family feud. But in Japan’s patriarchal—as well as hierarchical—society and its buttoned-down corporate world, it was headline news for weeks.

More important, the governance issues raised have been central to some of Japan Inc’s perennial problems. In the largest and most recent cases, Olympus covered up losses, and Toshiba inflated profits. Otsuka Kagu, which is not related to office supplier Otsuka, wasn’t involved in any illegality, but the situations at all three, in part or in whole, involved the reluctance of older executives to allow changes.

At Otsuka Kagu, the clash was over whether to maintain a previously successful sales strategy or to move with the times. From 1993, the retailer’s model involved a membership system, whereby customers filled out a form and checked in every time they shopped. A salesperson would accompany the buyers, often engaged or newlywed couples who were usually looking to buy a whole dwelling’s worth of furniture. In the three years following the system’s introduction, revenue nearly doubled, and sales hit a peak of nearly $650 million in 2003.

The membership system allowed Otsuka Kagu to offer cheaper prices. Bypassing wholesalers, it bought directly from furniture makers. Under the usual relationship between manufacturers and retailers, stores could negotiate discounts with their customers but weren’t allowed to display those cheaper prices. But most manufacturers approved showing the reduced prices if it was to members only.

Later, the membership model made people reluctant to browse, especially casual buyers looking for individual pieces. The system, and the company’s advertising, left the impression that its furnishings were expensive—a serious problem as companies like Ikea and domestic retailer Nitori Holdings made inroads with inexpensive yet stylish furniture.

“For people on a schedule [like newlyweds in the past], it had made sense, but for people replacing furniture, it’s better to allow self-service,” says Otsuka, who started relaxing the membership system during her first tenure as president, from 2009. “It was quite irritating for undecided buyers just wanting to browse.” Her father made countermoves during his brief restoration.

The number of new housing starts in Japan is falling, while the number of already built and ageing homes is increasing, indicating that people are staying put in older dwellings. Therefore, Otsuka says, the company must focus on attracting and retaining customers by offering ways to improve the quality of their homes.

“The sophistication seen in Japanese clothing and cuisine will eventually encompass living spaces, too. We are already seeing the signs of that as the number of interior design magazines and books has increased quite a bit,” she says. “We need to be able to provide the goods and services to stimulate that demand.”

She adds that Japan’s rapidly greying society isn’t necessarily a minus, because as people age, they tend to spend more time at home and more money on decorating, and less on dining out and travel. (At 25 percent, the proportion of Japanese aged 65 or more is the highest in the industrialised world and is forecast to hit 39 percent in 2050, says the OECD.) Otsuka must also try to bring back customers, now shopping at lower-priced rivals such as Ikea and Nitori, by using marketing to show that it has a wide range of mid- to low-price furniture and by making its stores more inviting.

Through those and other changes, including expanding its commercial and business sales, Otsuka Kagu plans to target return on equity of 8-10 percent in its next three-year plan running through 2020. Current return on equity is 1 percent versus rival Nitori’s 14 percent, according to S&P Global Market Intelligence.

Otsuka, one of few women running a listed business in Japan, is reluctant to talk about her role models, saying it’s a “delicate” issue when asked about her parents and their influence on her career choices. After graduating from the elite Hitotsubashi University, she worked at one of Japan’s major lenders, Fuji Bank (now part of Mizuho Financial Group), for three years before joining the retailer in 1994.

“Rather than having the goal of being a career woman from childhood, I decided that I just wanted to be able to support myself, to be independent,” she says. “Being in a family operating a business—my mother was working as a co-founder—it was probably quite natural for me.”

Japan is trying to get more women into the labour force to help fill the worker shortage and increase the proportion of female managers and executives. The goal for the latter for 2020 was originally an ambitious 30 percent but was cut in half last December. Currently it’s 9.2 percent, according to the government.

Otsuka says 30 percent of her company’s more than 1,700 employees are female and that it would be natural for 30 percent of managers and executives to eventually be women—though now it is about 10 percent.

“One reason that working women may be reluctant to take on additional work and risk is because they already have more demands put on them in the home (compared with men), making them hesitant to add more stress to their lives,” Otsuka says. Though she doesn’t have children of her own, as the eldest of five, she understands the rigours of looking after them.

In the meantime, she is eager to put the proxy fight behind her and be evaluated based on her management prowess. But the retailer wasn’t above using the clash for humour in the ad mentioned above. At the end of the commercial, with a father and daughter arguing over a fabric sample, the mother admonishes them: “Don’t fight!”