Rise of Ultra-Low-Cost Discount Stores: Aldi vs. Amazon

How Japan’s Don Quijote is Shaping Niche Online Retail Market

Recently, I came across an interesting article about the Retail business. It highlighted a surprising trend: Aldi is thriving while Amazon struggles to gain traction in the ultra-low-cost space. Aldi’s simple, no-frills models winning over shoppers, but it made me wonder – could there be more ways for Aldi to innovate? Japan’s Don Quijote, a master of turning retail chaos into success, offers an intriguing case study. As Aldi continues to rise, could lesson from Don Quijote help it stay ahead of the competition and fend off even giants like Amazon? The answer might just lie in how nice markets are evolving.

1. People’s shopping habits are increasingly moving online.

2. As online shopping grows, products become exposed to price comparisons, making it hard to sell anything that’s not the lowest cost.

3. This intense price competition leads to extreme cost-cutting measures.

4. Retailers cut out middlemen, place direct bulk orders from factories, and implement the 3S strategy (standardisation, simplification, specialisation) to slash costs.

5. Small and traditional retailers, who can’t keep up with this price race, begin to disappear one by one.

6. As shopping patterns shifts online, offline stores are becoming more like showrooms (or pop-ups).

7. Customers browse products in physical stores but end up placing their orders online.

8. This shift in customer behaviour first began in Japan.

9. Japanese department stores have been seeing declining sales for over a decade, and large supermarket chains like AEON have also been experiencing continuous drops in revenue.

10. However two types of mid-sized retail chains have managed to grow, even as other stores struggle.

11. The first of these is the variety goods retail chain Don Quijote (ドンキホーテ).

12. Opens in March 1989, Don Quijote has consistently seen its sales and stock prices climb upward.

13. Don Quijote was founded by Takao Yasuda.

14. After graduating from Keio University’s Law School in 1973, Yasuda joined a real estate company. When the company went bankrupt, Yasuda found himself lost and spent 5 years gambling, living as a recluse.

15. In 1978, at age 28, Yasuda invested his entire fortune into opening a closeout store that sold products from bankrupt companies, but this venture also went under.

16. Despite the failure, Yasuda believed in the potential of the discount variety store model, and in 1989, he opened his first Don Quijote store in Tokyo.

17. At the time, most convenience store closed by 11 PM.

18. Don Quijote broke the old by operating from 9 Am to 5 Am, tapping into the demand for late-night shopping.

19. The store targeted young shoppers in their 20s and 30s, who were most likely to shop during late-night hours.

20. Late-night hours, combined with tightly packed displays, helped capture the attention of young customers.

21. This tight packing of products, or “compressed displays,” involved placing merchandise tightly along narrow aisles, creating a chaotic, jungle-like vibes.

22. The store was designed like a maze, so shoppers had to navigate through it like a treasure hunt to find what they wanted.

23. Sometimes, you might actually stumble upon a hidden treasure.

24. Massive discounts on clearance items were tucked away in hard-to-find spots, giving customers the thrill of discovering a bargain.

25. The compressed display strategy wasn’t planned but developed naturally. In the early days, Yasuda would place product wherever space allowed as he sourced them from various places.

26. Eventually, Yasuda turned this seemingly chaotic layout into a strategic advantage.

27. His idea was to deliberately make products “hard to see and hard to choose.”

28. By making customers explore the store thoroughly, like on a treasure hunt, they are more likely to stumble upon and buy additional items.

29. Products in Don Quijote are categorised into three types.

30. These are core products, private label (PB) products, and other miscellaneous items.

31. Most core products are sourced through direct purchases.

32. Don Quijote buys surplus, clearance, and returned items directly from manufacturers and wholesalers, often items that other retailer have all but abandoned.

33. This practice is known as “on-site purchasing”.

34. Products purchased at half price or less are then sold at around 30% off, and even today, this methods accounts for 40% of Don Quijote’s total sales.

35. The second category consists of PB (private label) products.

36. Starting in the mid-2000s, Don Quijote expanded its range by producing its own private label items in countries like China and Vietnam.

37. The third category, miscellaneous products, is all about variety.

38. These include everything from games, toys, perfumes, electronics, adult products, to even cosplay costumes – essentially items that aren’t commonly found in convenience stores or small supermarkets.

39. Thanks to this immense variety, Don Quijote’s product range can reach up to 100,000 times in large stores (ranging from 40,000 in small stores to 100,000 in larger ones, with an average of 60,000).

40. For comparison, even the largest Japanese convenience stores only carry around 3,000 products, making Don Quijote’s selection remarkably vast.

41. With such a wide variety, one might think Don Quijote carries multiple versions of similar items.

42. However, Don Quijote limits each product category to no more than two varieties, allowing them to diversify and still display 100,000 different items.

43. Core products are priced at the industry’s lowest, PB products are cheaper than general supermarkets, and miscellaneous items are prices lowed than those found in convenience stores.

44. While the core items are genuinely low-priced, PB and miscellaneous products aren’t always as cheap as they seen.

45. But from the customer’s perspective, it feels different.

46. Shoppers enter the store, immediately seeing core products displayed front and centre at incredibly low prices, which surprises them.

47. After being impressed by the wide range of PB products, which cover most essential categories, they wanter into the packed shelves of miscellaneous products, and assume all items are prices as competitively as the core products.

48. To minimise risk, Don Quijote orders small quantities of product with long or no expiration dates.

49. They don’t deal in perishable fresh foods, reducing the risk of losses from spoilage.

50. A significant portion of Don Quijote’s revenue comes from foreign tourists.

51. Tourists, who are often busy during the day, find it convenient to complete their shopping during Don Quijote’s late-night hours, making it a popular destination.

52. To cater to international shoppers, the store hire staff who speak English, Chinese, and other languages, and they stock products that are popular with foreign customer, such as cosmetics and medicines.

53. In addition to these items, Don Quijote also carries duty-free products, with duty-free sales accounting for about 10% of total revenue.

54. Although Don Quijote now sells medicines, getting approval for this wasn’t easy.

55. In Japan, selling medicines requires face-to-face consultations with a licensed pharmacist, and initially, the Ministry of Health, labor and Welfare did not approve Don Quijote’s request to sell medicines.

56. Yasuda then proposed a new solution.

57. He suggested installing video call system in the stores so that pharmacists could advise customers remotely.

58. However, the ministry rejected this, arguing that it violates the law because the pharmacist wasn’t physically present to see the customer.

59. Many media outlets expected Yasuda to give up, but he found a clever workaround.

60. Japanese law allowed residents of remote islands to order medicines by catalog without face-to-face consultations, provided they receive remote advice from a pharmacist.

61. Yasuda used this loophole to his advantage.

62. Instead of placing medicine on shelves, Don Quijote placed catalogs with order forms. When customers filled out the form, staff would provide the requested medicines.

63. The Ministry of Health, Labor and Welfare saw this asa loophole and tried to regulate it, but Yasuda turned to the Prime Minister’s Regulatory Reform Committee and launched a public campaign.

64. In the end, the ministry backed down, and Don Quijote was able to continue selling medicines.

65. It’s extremely rare in Japan for a company to successfully challenge the government, but Yasuda managed to pull it off.

66. Yasuda remarked, “Following industry norms is like wrestling under the same rules as much larger companies – you’ll never win that way.”

67. Many foreign tourist now buy large quantities of medicines, and this product category has become a significant revenue driver for Don Quijote.

68. Today, medicines continue to be a top seller, helping to boost Don Quijote’s sale even further.

One liner Comment

In the U.S., there isn’t an exact equivalent to Japan’s Don Quijote, but a few stores come close in terms of offering a wide variety of discounted goods. Stores like Dollar Tree, Five Below, and Big Lots come to mind, along with Aldi for its low-cost product offerings. While they share similarities in pricing, each has its own twist on the discount model.

It’s interesting to think about whether Don Quijote’s unique retail approach could thrive in the U.S. market. If the dollar strengthens, these domestic discount giants could see their profits soar.