Rakuten: Japan Post tie-in threatens Amazon’s online dominance

In Japan, local companies enjoy a home team advantage that is one of the strongest in Asia. Multinationals have struggled to localise their businesses to Japanese tastes. Ecommerce has been an exception, with Amazon a notable success. That could now change.

Rakuten, Amazon’s homegrown rival, will raise $2.2bn through a stake sale to companies including Japan Post, Tencent and Walmart. The shares rose 24 per cent on Monday reflecting hopes of a turnround in earnings.

Rakuten pioneered online shopping in the late 1990s. Amazon was a late contender. But it overtook Rakuten as Japan’s biggest online retailer in an aggressive push. the US group offered same-day delivery for a service area covering about 80 per cent of the population.

The stake sale will give Rakuten’s deteriorating balance sheet some relief. A $2.1bn loss at the mobile phone unit triggered a record $1.1bn group net loss last year. Debt-to-equity has almost quadrupled in the past four years to 396 per cent.

The investors should be just as useful as business partners. Japan Post, which will take an 8.3 per cent stake, will help Rakuten skip a costly logistics network buildout. The postal operator has a national distribution network, including 24,000 post offices which will help with delivery. Shared data and payments systems will cut costs. China’s Tencent should be able to contribute low-cost tech and access to the Chinese market.

There are still reasons to be wary. Recent gains have pushed Rakuten shares up 140 per cent in the past year, giving it an enterprise value of more than 20 times forward ebitda. That is in line with larger rival Amazon which does not have costly side ventures weighing it down. Mobile unit losses are set to widen this year. More base stations are needed. Investments could be up to 40 per cent higher than planned. Fierce competition will keep margins squeezed.

Still, Rakuten’s new alliance is a shrewd elaboration of its online strategy. It should help arrest the group’s downward spiral in earnings to the benefit of investors.

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