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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\u2014think cream for damaged skin made from fish roe\u2014for 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.<\/p>\n\n\n\n
For years, Don Quijote\u2014an unclassifiable seller of everything from humidifiers to sex toys\u2014has been a cult phenomenon in Japan, favored by the cash-strapped households of the so-called recession generation. Now it\u2019s big business. Thanks largely to the discounter\u2019s rabid fan base, its parent company, Tokyo-based Pan Pacific International Holdings Corp., is on track to become Japan\u2019s fifth-largest retailer, with revenue likely to reach 1.4 trillion yen ($12.5 billion) in the fiscal year ending June 30. That\u2019s a remarkable feat for a chain that barely sells online and does almost no conventional marketing.<\/p>\n\n\n\n
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\u2019s hobbled merchants worldwide.<\/p>\n\n\n\n
\u201cI haven\u2019t seen anything else quite like Don Quijote,\u201d says Michael Causton, a retail analyst in Tokyo for Japan Consuming. \u201cIt\u2019s chaotic, messy stores, which belie what\u2019s behind it\u2014a highly disciplined, extremely rigorous management philosophy.\u201d Investors seem to agree: Pan Pacific\u2019s shares have climbed 34 percent in the past year, giving the company a market value of 1.2 trillion yen.<\/p>\n\n\n\n
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.<\/p>\n\n\n\n
Retail experts have described Donki, as it\u2019s popularly known, as a jungle, a hoarder\u2019s 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.<\/p>\n\n\n\n
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\u2019s outlet in Tokyo\u2019s Roppongi entertainment district (never used because of complaints from neighbors), or the Ferris wheel in front of one Osaka store.<\/p>\n\n\n\n
At the seven-story outpost in Tokyo\u2019s 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\u2014a 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\u2019t avoided but rather encouraged. \u201cWe\u2019re just always in a trial-and-error mode,\u201d he says.<\/p>\n\n\n\n
That ability to change tack is largely a function of Don Quijote\u2019s sourcing strategy. Almost half of its products are leftover goods that manufacturers couldn\u2019t otherwise sell. Most Japanese retailers ship unsold items back to producers with minimal payment, so manufacturers will eagerly resell them for next to nothing\u2014which is where Don Quijote steps in. Analysts estimate that half the company\u2019s gross profit comes from selling such leftover items acquired on the cheap.<\/p>\n\n\n\n
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\u2019s now working to convert to Don Quijote-style discount emporiums. Analysts say that effort, which will involve indoctrinating Uny\u2019s senior management and store staff into Donki\u2019s decentralized retail philosophy, will be the company\u2019s biggest short-term challenge.<\/p>\n\n\n\n
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\u2014where it has about 300 locations\u2014until two years ago. While the operating company changed its name to Pan Pacific in February to reflect these wider ambitions, it says it\u2019s still in an \u201cexperimental\u201d mode for foreign stores. CEO Ohara wants to eventually generate at least one-third of sales abroad.<\/p>\n\n\n\n
That means studying foreign consumer habits and hiring locally, as the chain does for store managers and staffers in Singapore and Thailand. It\u2019s 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\u2014even though they\u2019re typically eaten only during cold months in Japan.<\/p>\n\n\n\n
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\u2019s larger retail superstars, Fast Retailing Co.\u2019s Uniqlo and Ryohin Keikaku Co.\u2019s Muji. \u201cManagement seems confident about their prospects in Thailand and Singapore, but that\u2019s not a big enough market\u201d to give the international push a major impact, says Sho Kawano, a retail analyst in Tokyo for Goldman Sachs Group Inc. \u201cThe hurdle is still high for them.\u201d<\/p>\n\n\n\n
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\u2014and his 10th visit to a Don Quijote. \u201cEverything was cheap. Snacks everywhere. Snacks here, snacks there. I thought it was amazing,\u201d he says at the Shibuya location, his basket filled with sweets. Two keychains featuring the Donki mascot\u2014a blue penguin called DonPen\u2014dangle from his bag. \u201cI just wish they had a Don Quijote in other countries.\u201d<\/p>\n\n\n\n