Nitori's success principles of 40-year boom during a recession

The Home Furnishings sector is an important focus of investment for GenBridge Capital. Drawing from the success stories of benchmark companies in this field such as IKEA and NITORI, we gain invaluable insights when evaluating entrepreneurial ventures in related domains.

In comparison to the globally renowned IKEA, NITORI may not appear as dazzling. However, the reality is that this Japanese giant, the largest home furnishings chain enterprise, has maintained a continuous 35-year trend of growth in both sales revenue and profits since the fiscal year 1987, making it a true ‘consumption champion’ that transcends economic cycles.

‘Affordability’ is the most striking label associated with NITORI. From initially importing furniture from overseas to building its own supply chain, NITORI gradually established a product positioning based on ‘affordability, coordination, and functional segmentation,’ defining its ‘Where to Play.’

Sustaining its leadership in cost effectiveness, NITORI has made extraordinary efforts in enhancing supply chain efficiency. With the continued expansion of its store count, NITORI’s economies of scale have significantly bolstered its price competitiveness. The experience NITORI has gained in building barriers within its supply chain also aligns with the path taken by GenBridge’s portfolio, Yeswood, providing numerous insights for us and entrepreneurs alike. In terms of ‘How to win,’ NITORI’s robust organizational support is also a core capability that sets it apart.

In this study, we also endeavor to incorporate some well-known sayings from the Chinese classic military strategy book ‘The Art of War’ by Sun Tzu, distilling the essence of wisdom from the ancients to extract principles and experiences for entrepreneurs in their development.

Nitori’s 40 years of growth against the market trend

Akio Nitori and Product Principle of Nitori

“Those who know when to fight and when not to fight will be victorious; those who understand the use of both large and small forces and take actions accordingly will be victorious.”

The founder of Nitori, Akio Nitori, through acquiring market-leading experiences, established his unique strategic positioning in the Japanese furniture industry, beginning to build his competitive advantage centered around cost leadership.

Before delving into Nitori, let us first introduce the founder and key figure of the company: Akio Nitori. For a significant period, Akio Nitori struggled, both academically and professionally. In 1967, he began to manage a small furniture store on the brink of bankruptcy, eventually transforming it over the decades into the renowned ‘NITORI Corporation’ in Japan. Reflecting on his life experiences, Akio Nitori believes that by changing one’s mindset, one can change their lives.

Akio Nitori

The seed of change was planted during a business trip to the United States at the end of 1972. Facing the crisis of bankruptcy in his second furniture store, Akio Nitori, thinking that it might be an opportunity, participated in a seminar organized for approximately 40 individuals in the furniture industry on the West Coast of the United States. This trip shook Akio Nitori to the core.

Firstly, the affordability of American furniture stands out, with prices being only one-third of those in Japan. Secondly, there’s a vast array of choices in terms of variety, styles, and colors, whereas Japan lags far behind in this aspect. During his visit to model homes, not only were American furniture pieces displayed but also combined with home decor items like curtains, demonstrating a holistic approach to interior design. Additionally, in terms of lighting, the US flexibly used indirect lighting, creating a balance between light and shadow conducive to relaxation. Furthermore, American furniture excels in functional segmentation, as represented by the TPOS framework(Time, Place, Occasion, Style), which thoroughly considers the timing, location, occasion, and lifestyle of its users.

Upon his return from the US, Akio Nitori clarified the company’s vision, shifting from a previous focus solely on “increasing sales, maximizing profits, and boosting year-on-year growth” to “providing a vibrant home environment.” He became more determined in adopting a “customer-first” approach, prioritizing the perspectives of buyers and users alike. Inspired by the American market, he established affordability, coordination, and functional segmentation as the three guiding principles for Nitori’s products.

Amidst Japan’s economic downturn at the time, pursuing affordability was the most practical choice for Nitori. Achieving this required leveraging economies of scale. Even when Nitori had only seven stores, Akio Nitori set a goal of expanding to 100 stores and diligently worked towards it. Store expansion allowed Nitori to lower costs through mass production and bulk procurement. Additionally, Nitori autonomously planned and developed new products that disrupted traditional pricing structures, selling them through its channels. Once a furniture style gained market acceptance, the company committed to large-scale procurement and production efforts to drive prices down.

Nitori’s products have always emphasized coordination in design, with store displays changing with the seasons. By concentrating color options, Nitori can seamlessly transition styles with the changing seasons. Typically, when people decorate interiors, they first determine the color palette for the entire residence. Based on this, they decide the ratio of solid-colored items to patterned ones. In the past, Japanese curtains were all patterned, leading to conflicts in coordination and aesthetic appeal. However, even a simple blanket from Nitori is designed with consideration for coordination with cushions. Approximately half of the products displayed in stores are sold year-round, with the other half being seasonal items.

Taking cues from the TPOS principles learned in the US, Nitori innovates and leads trends in product development, considering functional segmentation in its designs. For instance, in Japan’s furniture industry where cabinets dominate, Nitori pioneers categories more aligned with Western lifestyles, such as beds and sofas. Moreover, Nitori designs cabinets that remain upright even during earthquakes (unlike traditional ones that tend to topple over and spill contents when shaken) and cabinets with tough surface coatings (resistant even to scratches from a 10-yen coin).

Secret of Sustained Cost Leadership

Nitori’s business philosophy can be summarized as “Cheap prices first, then quality, then coordination.” Affordability is the primary pursuit for consumers when shopping at Nitori.

The markup rate for Nitori’s products generally stays below 2 times. The company targets a customer base with an annual income of less than 8 million Japanese yen (approximately 400,000 RMB ), offering a broad market foundation. Following the subprime mortgage crisis in 2008, Nitori declared price reduction 12 times, resulting in permanent price reductions for 5,150 products, with discounts ranging from 15% to 40%.

To provide users with inexpensive yet high-quality products, Nitori continuously seeks better solutions. The “business model” introduction is given its own page on Nitori’s official website: to offer a cost-effective, quality and multi-functional furniture choice, the group strives to reduce intermediate costs throughout the entire process from product development and raw material procurement to manufacturing, logistics, and sales, establishing a new business model termed “manufacturing-logistics-retail.”

In the early stages, Nitori’s solutions fell under “opportunistic” procurement, acquiring goods from bankrupt furniture stores and wholesalers. Upon hearing of financially troubled wholesalers or manufacturers, purchasing personnel would directly proceed to make purchases with cash. As the scale gradually expanded, Nitori began adopting a factory-direct procurement model. While goods from bankrupt stores were cheap, they also posed numerous challenges. To be the first to see products, Nitori employees would circumvent wholesalers and secretly visit manufacturing facilities. During the winter off-season (when goods couldn’t be transported due to snow in Hokkaido), they would bring cash to directly purchase goods from factories and quietly retrieve them using company trucks at night.

The company, like a wanted fugitive, concealed its sourcing from manufacturers in different regions of Japan until no domestic manufacturers were willing to sell to Nitori, ultimately forcing the company to formally enter overseas markets in 1982. However, despite the cheaper prices of imported overseas-manufactured products, quality issues often arose, and the product sizes were not suitable for Japanese consumers. In pursuit of cheaper prices, zero-complaint quality, and coordinated products led by Nitori, overseas production commenced in 1994, with stringent control over the supply chain quality and the customization of innovative products tailored to Japanese consumers.

To achieve this, Nitori established the following supply chain capabilities: Firstly, to hedge against exchange rate fluctuations (Japanese yen against the US dollar), Nitori directly procures low-cost raw materials overseas, laying the foundation for the production of low-cost and quality-controlled products. Nitori collaborates with a total of 700 factories distributed across 18 countries, with 90% of products manufactured overseas. The company directly procures upstream raw materials to produce accessories in-house, enhancing quality control. For instance, the production of materials like polyurethane for mattresses in-house enables Nitori to sell its own brand of beds at half the price of other companies. Additionally, Nitori established two self-owned factories in Indonesia and Vietnam in 1994 and 2004 respectively, and deployed personnel to collaborate with partner factories to manage product quality and enhance local production and manufacturing technologies.

Secondly, Nitori established 10 logistics centers in Japan, investing heavily in building its own logistics warehousing system. In 1980, the company introduced the industry’s first automated vertical warehouse, began utilizing IT systems in 1995, and subsequently streamlined the backbone system, enhancing operational accuracy. In 2016, Nitori introduced the automated warehouse picking system, AutoStore, which automatically confirms inventory and schedules deliveries upon entering customer order details into the “order issuance system.” The company also employs a system in its delivery service that automatically designs the shortest delivery routes, promoting improvements in logistics efficiency.

Setting Goals and Unifying Objectives

Unity of Purpose Leads to Victory – Whether it’s nationwide or within the military, when everyone is aligned with a common will and works together, success follows.

Nitori places great emphasis on setting ambitious goals and breaking them down so that everyone within the organization can work their part towards a unified objective.

Nitori highly values goal-setting and decomposition. It sets lofty goals based on grand visions for the future, then determine what actions should be taken in the present.

Nitori’s weekly accounting system:

Weekly Goals: Work plans are broken down into “30 years -> 10 years -> 3 years -> 1 year (52 weeks) -> one quarter (13 weeks) -> 1 week” to achieve annual targets, with goal management conducted on a weekly basis for each store, region, and product category through data analysis.
Weekly Meetings: Daily morning meetings are convened with 30-40 managers; three times a week, department heads speak after observing, analyzing, and evaluating the week’s data.
Weekly Reports: Managers are required to submit weekly reports containing observations, analyses, and evaluations. When problems arise, not only must the root causes be analyzed but solutions must also be proposed after confirming the facts.

Nitori’s first 30-year goal consists of 7 “1” – 100 stores, 1 trillion yen in revenue, 1000 tsubo (approx. 3300 square meters) of store area per store, an average revenue of 1 million yen per tsubo, 10 billion yen in revenue per store, 10 million yen in employee wages, and 100 million yen in employee shareholdings.
When setting goals, Nitori adheres to the philosophy of “100x thinking.” Merely doubling or tripling the original goals can usually be achieved with perseverance. However, aiming for 100 times the original goal is impossible if simply following traditional methods. Thus, a change in mindset is necessary, requiring personal growth from the business owner.

Lastly, once goals are set, it’s crucial to ensure that everyone within the organization never forgets them. Goals should be easy to remember when set, such as setting targets for store numbers not as 80 or 90 but as “100 stores, 1 trillion yen in revenue.” Additionally, repetition is key; every individual should discuss the plan, and the plan should be prominently displayed where everyone in the company can see it to reinforce the impression.

Akio Nitori himself repeatedly discusses vision and goals both within and outside the company whenever there’s an opportunity. For instance, during the annual business policy briefing, quarterly accounting briefings convened with store managers and above, monthly store manager meetings, and even during post-meeting dinners, he consistently emphasizes these topics. Not only does he speak, but he also encourages company executives and employees to discuss goals together. Each responsible person shares their views on “how to achieve the company’s vision and goals” and “what actions should be taken this year to do so.”

Preparations to Transcend the Market Cycle

Victory Awaits the Prepared — By being fully prepared to face the unprepared, one triumphs.

During times of market optimism, Nitori maintains vigilant and prepares to withstand risks; whereas during market downturn, Nitori seizes the opportunity to increase market share.

Akio Nitori believes that one of the most important tasks for a founder is to predict the future. The ability to forecast the business environment and formulate accurate plans is closely tied to the fate of the company.

For example, Nitori predicted the 2008 economic crisis in advance and prepared for it. Every year, Nitori goes to America with hundreds of employees for training. After 2000, he observed that housing prices in the United States continued to rise, tripling in just a few years. Believed that the economic bubble would burst once prices reached this level, a principle universally applicable throughout history, Akio Nitori sold off all bonds, bolstering cash reserves in anticipation of an economic downturn.

In September 2008, the Lehman crisis erupted in the United States. After that, Nitori implemented price reductions every three months, for a total of eight reductions. The strategy of lowering prices once the economy faltered had been planned in advance, and funds had been prepared accordingly. Despite the overall decline in retail sales, Nitori’s sales bucked the trend and rose.

Furthermore, Nitori also predicted that the Japanese yen would depreciate, posing a significant challenge to the company’s import procurement. Therefore, in 2013, Nitori entered into forward exchange rate contracts, avoiding losses exceeding 80 billion yen from 2013 to 2015.

Unlike others who invest in booming markets, Nitori prefers to increase investment during economic downturns. This is because monopolies accelerate during downturns, presenting significant opportunities in the process of market consolidation. This premise is based on Nitori’s comprehensive preparation for the Great Depression, accumulating valuable funds required to achieve its vision and goals.

Organization and Management Mechanism

The Victorious Empowers Rather than Commands — A commander proficient in military affairs and adept at wielding power without interference from the sovereign triumphs.

Nitori’s success cannot be attributed to individual efforts or the endeavors of a few, but rather the establishment of a rational system and the delegation of authority to employees.

For Nitori, the realization of its vision and goals is contingent upon the implementation of mechanisms in organization and management. In the book “Nitori’s Five Principles of Success,” Akio Nitori elucidates Nitori’s understanding of passion, perseverance, and curiosity. These principles often differ from the literal meanings commonly understood by people and are derived from Nitori’s vision and goals.

For instance, passion stems from “setting high goals.” The manner in which Nitori maintains passion is by speaking in numbers: there is a fundamental difference between saying, “I must strive to increase by 20%” and “I must strive to increase by 100 times.” The work content of employees must contain numerical targets: employees are required to include numbers in any task. Lack of numbers implies abstraction, making it difficult to understand and leading to futile efforts and failures.

Secondly, efforts are made to systematize experiences within the organization. For example, while individual employees may spend a considerable amount of time increasing sales, others might say, “I can’t do that.” Therefore, maintaining enthusiasm crucially involves establishing a system that allows employees to naturally complete the same tasks without expending much time.

Lastly, as a manager, one must learn to let go. For if one clings to everything, progress becomes impossible. Tasks that others can do should be delegated to them, while founders and managers focus on more critical matters and tasks that others cannot perform.

Akio Nitori reflects that he initially placed too much emphasis on “having to do everything himself.” However, he gradually realized that “the company cannot grow this way,” so he began delegating tasks that he had originally taken on to subordinates, focusing only on tasks that he himself had to do. He then devoted all his spare time to deep contemplation. Deciding “what not to do” and “what to do” are both crucially important.

Our lessons from Nitori

The home furnishing industry inherently possesses complexity, with myriad segmented consumer demands and complex SKUs, making it prone to uneconomical scale. In China, there are few large companies in this industry, which indirectly underscores its difficulty. Therefore, in determining “victory belongs to those who know when to fight and when not to fight, and those who understand the use of many and few,” choosing the right battlefield and positioning are particularly crucial.

Cost leadership is a classic form of differentiation competition, but this strategy also entails high demands on business models and organizational “efficiency.” Nitori provides a solution to achieve ultimate efficiency: in its business model, it controls key raw materials and builds its own warehousing logistics; in terms of organization, it establishes clear, goal-oriented culture and implements systematic digital management and weekly accounting mechanisms.

Presently, Chinese consumers exhibit preferences similar to those in Japan in the last century when selecting furniture: high cost-effectiveness, emphasis on natural-made and health, the demand for both individual and holistic design coordination, and the need for functional segmentation. These are also the product principles that our partner Yeswood pays great attention to when designing products.

Nitori also serves as an important case study for exploration in business for both GenBridge Capital and its founders, encompassing strategic positioning, control of raw materials and supply chains, digital management, and organizational upgrades. We share the experiences of this benchmark company, Nitori, with more practitioners in the home furnishing industry, hoping that China will soon produce more globally influential leaders in the home furnishing sector.

Author: Chenxi Luo, Executive Director of GenBridge

Nitori’s success principles of 40-year boom during a recession