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Red-Tape Traumas: To All U.S. Managers Upset by Regulations: Try Germany or Japan --- In Most Ways, the Americans Have It Easy, as Problems Of Three Retailers Show --- A Limit of Two Sales a Year
By Wall Street Journal Staff Reporters Bob Davis in Washington, Peter Gumbel in Berlin And David P. Hamilton in Tokyo

12/14/1995
The Wall Street Journal
A1
(Copyright (c) 1995, Dow Jones & Company, Inc.)

You think the government's on your back? Just look at Big Government through the eyes of discount retailers in the world's Big Three economies.

In Recklinghausen, in Germany's industrial Ruhr, Allkauf SB-Warenhaus GmbH has struggled to build a store for 15 years. The discounter owns the land, but that doesn't matter much. Local authorities can -- and do -- bar new stores if they believe existing ones will suffer. Even at best, it takes about five years to get authorization. And if a community opposes a store, Allkauf Chairman Eugen Viehof says, "there's no use even trying."

In the city of Saga on Japan's southernmost island of Kyushu, Mr Max Corp. has spent three years persuading more than 20 farmers to sell their land and petition the government to rezone it for commercial use. Next come at least 18 months of haggling with local merchants, who legally can demand concessions when new stores open nearby. Mr Max expects to open its new outlet by early 1997, but to placate opposition will almost certainly have to shrink the store's planned size at least 20% and pay inflated membership fees to a local trade association.

In Abilene, Kan., Duckwall-Alco Stores Inc. can act quickly. It sneaks into small Midwestern towns and quietly takes options on property. Only then is the local mayor contacted. "I say, `We're a discounter and want to move into your town,'" says John Hedeen, Alco's vice president for real estate. "There's silence on the line. They think, `My God, this will ruin the town.'" But if the property is already zoned commercial, the town can do little. (Eventually, most towns wind up welcoming the stores and the new jobs.)

Most businesses around the world complain about red tape, often with good reason. But a comparison of regulatory burdens in the U.S., Japan and Germany shows that while many American businesses have valid complaints, they generally have it much easier than their foreign counterparts. "If you look at the details of the system, few people in the U.S. would substitute the Japanese or German economies for their own," says Edward Hudgins, director of regulatory studies for the libertarian Cato Institute in Washington.

Each nation's regulations reflect and reinforce its brand of capitalism -- predatory in the U.S., paternal in Germany and protected in Japan -- and its social values. It's easier to open a business in the U.S. than in Germany because Germans value social consensus above risk-taking, but it's harder to hire people because Americans worry more about discrimination lawsuits. It's easier to import children's clothes in the U.S. than Japan because Japanese bureaucrats defend a jumble of import restrictions, but it's harder to open bank branches across the U.S. because Americans strongly defend state prerogatives.

Although global competition makes many industries around the world resemble their rivals, business conditions on their home turfs vary strikingly. Government rules in the Big Three economies affect managers, workers and customers of discount chains, for example, very differently, with Germany's many regulations pushing prices of most goods much higher than in the U.S. and even Japan.

Retailing has yet to become a global business like the auto industry, even though the three retailers sell generally similar merchandise. One big influence on each of these chains isn't a government agency at all but the world's largest retailer: Wal-Mart Stores Inc. Alco's strategy is run-and-hide, opening stores -- typically with 18,000 square feet -- in towns with fewer than 5,000 people. It figures Wal-Mart won't bother with such small markets, and it feels safe so long as no Wal-Mart is within about 30 miles.

In Germany and Japan, where retail consolidation lags behind that in the U.S., Allkauf and Mr Max dream of becoming the next Wal-Mart. Allkauf wants to emulate Wal-Mart's electronic scanners and computerized inventory controls to cut costs. Its stores usually have at least 50,000 square feet. Mr Max wants to copy Wal-Mart's mega-size, opening 100,000-square-foot stores in a format it calls "Hyper Mall Merx" -- a U.S.-style shopping center anchored by a Mr Max and a supermarket and including a dozen small retailers.

Of the three discount chains, Moenchengladbach-based Allkauf is by far the largest, with sales of $2.55 billion in its latest fiscal year and 9,000 employees. Fukuoka-based Mr Max's sales totaled $588.3 million; it has 518 permanent employees and about 500 part-timers. Alco, of Abilene, rang up sales of $242.1 million and has 3,500 employees. Allkauf, which is closely held, doesn't report net income; Mr Max earned $11.7 million and Alco $4.1 million in their latest years.

In a store's day-to-day operations, the hand of government is nearly invisible in the U.S. Alco stores open every day except Thanksgiving, Christmas and Easter and stay open as late as they choose, though 8 p.m. is usually late enough for customers on the prairie. Each season, the stores feature a sale in the center aisle -- of Halloween candy, of Christmas ornaments, of lawn furnishings in spring.

Germany, though, has a welter of rules, some dating to the Kaiser's era, limiting store hours and competition. That gives store clerks regular hours and helps Allkauf's smaller rivals but inconveniences customers. Allkauf stores can be open only 68 1/2 hours a week and must close at 6:30 p.m. on weekdays and at 2 p.m. on Saturdays. Sunday shopping is forbidden. At Allkauf's Moenchengladbach store, the crush of shoppers is unbearable on Friday evenings and Saturday mornings; the rest of the week, the store is fairly quiet.

Meanwhile, under a Hitler-era "rebate law," German stores can hold full-scale "sales" only twice a year, usually in January and late July. Even then, they can't discount food. The rules are enforced by regulatory cops from the industry-run Central Institute for the Combating of Unfair Competition, which fielded 20,000 complaints about violations in 1994. There's talk in parliament of easing the restrictions, but so far nothing has changed. "Every structure must have rules ensuring order so as not to hurt the rights of others," says Reiner Muenker, the institute's deputy director.

At first glance, Japan seems a shoppers' paradise by comparison. Mr Max usually can stay open until 8 p.m. But to placate smaller retailers, Japanese law requires it to take 24 days of "holiday" a year, closing its stores twice a month for no other reason.

And Mr Max faces restrictions that would appall a U.S. retailer. It can't give discount coupons, for fear of violating laws designed to protect consumers from "confusion." Moreover, the government's antitrust watchdog, the Fair Trade Commission, forbids it to discount such copyrighted products as compact disks, books and magazines. (Mr Max offers a 10% break on CD purchases anyway but doesn't advertise it so as not to draw fire.)

Mr Max faces one of its toughest government burdens when importing goods, which it needs to do to keep prices low. Motioning toward the kitchenware in a store near corporate headquarters in Fukuoka, Yoshiaki Hirano, Mr Max's 37-year-old president, sounds as frustrated as U.S. trade negotiators describing Japan's barriers.

Japanese customs officials once decreed that each carton of Thai-made plastic food containers must be tested six times, once for each of three different-size containers and their lids. So Mr Max decided to buy from a domestic wholesaler and now charges about $3.45 a container. "If we could have imported, we could sell for maybe one-third or one-fourth what the Japanese consumer pays now," Mr. Hirano says.

Another time, Japan's health authorities held up a shipment of American-made baby-size T-shirts because they contained too much Formalin, a chemical the ministry claims causes skin disease. Mr Max eventually gave up on that issue, too. "We're just asking them, `If it's good enough for a U.S. child, why can't we sell it here?'" says Toshio Yamamoto, Mr Max's merchandising manager.

Other rules rankle, too. Japanese fire codes were designed for cramped, multistory buildings. So, Mr Max must install fire shutters that lower automatically to contain a fire, even though fires wouldn't spread vertically in its big single-story stores. The codes also require an exit at the end of each aisle. Mr Max builds the doors but then, despite the local inspectors, puts shelves and products in front of them. In all, Mr Max calculates that the requirements add 30% to construction costs.

In the U.S., Alco wrestles with liability laws. Alco won't sell exercise equipment or child car-seats unless the supplier carries as much as $5 million in liability insurance. And the retailer won't buy property unless the owner certifies that any environmental mess has been cleaned up. That's necessary, Alco executives say, because under U.S. law retailers can be sued for problems arising from the goods they sell or the property they buy even if they didn't create the problems.

Alco also faces tough antidiscrimination laws -- and U.S. commitments to a multiethnic society that are lacking in Germany and Japan. Alco gives store managers a list of questions they can't ask job applicants: Don't ask a woman if she wants to be called Miss, Mrs. or Ms., don't talk about "mother tongue," and don't ask where an applicant was born. Such questions, Alco worries, could be used in a lawsuit by someone rejected for a job.

In the U.S., of course, an employer would be especially leery about asking a job applicant about religious preferences, even if the question might seem appropriate. But in Germany, employers don't have a problem: A person's religion is listed on work papers because, by law, German churches get a slice of income-tax revenue, and the tax authorities need to know which denomination should receive the money.

Even more critical for Alco are minimum-wage levels. Its clerks and cashiers make the federal minimum of $4.25 an hour. Department supervisors earn $6 an hour. None get health insurance. Yet in rural Kansas, where four-bedroom houses sell for $50,000 and jobs are scarce, Alco often has five applicants for every opening. The stores frequently hire mothers who work part time while their children are in school. Alco worries that the government will raise the minimum wage by 25 cents an hour, which, the company calculates, would have reduced last year's $6.7 million pretax earnings by $912,000 -- about 15%.

Alco's mix of cheap wages, cheap land and cookie-cutter buildings helps it keep prices low by international standards. A gallon of Alco paint, for instance, costs about $12; Allkauf's and Mr Max's equivalents cost about $60. A 25-inch Magnavox color television set goes for $399 at Alco, compared with the $570 Allkauf charges for a 25-inch Condor and the $468 Mr Max charges for a 25-inch Sharp. Alco isn't always the cheapest, though. The Japanese chain sells Ma Montre brand jeans for $14.88, Alco sells Rustler jeans for $14.99, and Allkauf sells Red Baron jeans for $36.

Germany's regulatory system is designed to keep peace between labor and management even if consumers pay more. Through its collective-bargaining system, clerks at Allkauf and throughout German retailing earn the equivalent of $16 an hour and get six weeks of vacation. Forget about firing them. Unions have a major say in setting severance pay. When Allkauf closed a Hanover store, it ended up paying just over $20,000 to each of its 100 employees there. When Alco closes a Midwest store, by contrast, it pays no severance. Alco helps workers fill out unemploymentcompensation forms, gives them a letter of thanks and asks whether they are willing to move to another location.

The Japanese minimum wage isn't a problem for Mr Max, which pays part-time employees about $6.60 an hour, some 10% above the local minimum wage. After adjusting for Japan's steep cost of living, which is almost twice that of the U.S., the part-timers earn less than Alco wages. Mr. Max's career (or "lifetime") employees, all university graduates, start at about $32,000 a year, roughly as much as a veteran Alco store manager. Japanese workers benefit from a national social-security system that provides health care and a small pension, although they must make income-based contributions; career employees get more generous company-sponsored health and pension plans, plus a chance at rapid advancement.

No rules prevent Mr Max from laying off career workers, but Mr. Hirano says he wouldn't do so for fear of damaging the company's reputation among college seniors. In addition, the Labor Ministry scrutinizes all firings for cause and weighs in when its investigators think that a company acted unjustly. The ministry is known for leaning quietly on employers to prevent layoffs.

While the German regulatory system is virtually immovable, Japan is slowly loosening its rules. For years, Japan's LargeScale Retail Store law made opening new stores nightmarish. Now, Mr Max owes its growth to 1990 changes that facilitated expansion. Local retailers can't stop big stores from opening, though they can still insist on restrictions.

Mr Max usually has to scale back the size of planned stores to win their approval, sometimes as much as 70%. Once, in Saga, merchants even made it promise not to close one of its older consumer-electronics stores in a nearby shopping center. They feared for their own businesses if it pulled out.

Now Mr Max can co-opt some opposition by opening mall-size retailing centers. "We're in a position to ask [local retailers] to join us," says Mr. Hirano, who once worked as a New York investment banker. With greater leverage, Mr Max can open stores faster. It started building its latest Hyper Mall Merx only two years after buying the property -- slow by U.S. standards but fast compared with the nearly eight years Mr Max needed to get approval in the town of Kasuga, near Fukuoka.

For Allkauf, German unification was a breakthrough that allowed it to expand in ways impossible in West Germany. Federal authorities were so eager to provide goods for people to buy that they waived most store-opening rules in East Germany. And East Germans were so starved of goods that, for several years, they bought like crazy, often on credit. Allkauf's revenue grew 25% during those years.

Neither Japan nor Germany, though, is likely to match one advantage of the U.S. regulatory system: A company can start over. In 1989, crushed by debt and too much competition from Wal-Mart and Kmart Corp., Alco filed for bankruptcy protection. All three nations have bankruptcy laws, but they are used more extensively in the U.S., where business failure isn't considered a moral disgrace.

Over the next two years, Alco negotiated to repay its unsecured creditors, settling for nine cents on the dollar, and devised a new retail strategy. By 1991, it was out of bankruptcy proceedings. Three years later, it raised $13 million in a public stock offering. Hardly any company likes government rules, but in this case they gave Alco a second chance.