Japan: An Overlooked E-Commerce Opportunity To be successful in Japan, you will have to spend much time on localization and research, but if done right, its steadily growing e-commerce industry can bring huge rewards.

When Elon Musk announced that Yusaku Maezawa would be the first commercial passenger to fly around the moon onboard a SpaceX spacecraft, the name of the Japanese entrepreneur and billionaire didn't immediately ring a bell for many.

Maezawa made a fortune after founding Japan's largest e-commerce fashion retailer Zozotown. Last month, he launched a startup competition, offering to invest up to 30 billion Japanese yen (about $280 million) in the businesses of 10 entrepreneurs in his home country.

This past summer, Maezawa sold a majority stake in Zozotown to Yahoo Japan for nearly $4 billion. With the deal, Yahoo Japan, which is owned by Softbank, is looking to double down on the country's attractive e-commerce sector and catch up to Amazon.com and Rakuten, another domestic heavyweight.

Yahoo Japan chief Kentaro Kawabe said the company wants "to make e-commerce its main growth driver."

Japan is sometimes overlooked by companies trying to expand abroad or set up shop in a new country. However, the nation has plenty to offer for established businesses and startups in the e-commerce sector alike, and its e-commerce sector boasts impressive growth potential.

Growth of E-Commerce in Japan

Japan has continuously ranked among the top five of the world's largest e-commerce markets. Not only that, but its e-commerce market is among the fastest-growing globally, boosted by a very developed economy, highly urbanized population, high internet penetration, and single-language culture. Ecommerce businesses there also benefit from the small country size and excellent infrastructure, allowing for speedy delivery.

The internet penetration rate is above 93 per cent, and surprisingly, it remains on that level even for older generations.

Thanks to these factors, Japan's e-commerce sector is expected to keep growing actively in the years ahead. Analysts have estimated that Japan will remain among the world's top five when it comes to online sales. Ecommerce revenue is forecasted to grow by about 6 per cent annually between 2018 and 2022.

Emerging Startup Ecosystem

The competition for online spending is high in Japan's market, where tech is very advanced, internet usage extraordinarily high, and citizens are flush with money. Nevertheless, big foreign firms such as Amazon have gained a strong foothold there, while domestic players such as Yahoo! Japan and Rakuten are also well positioned.

Aside from the heavyweights, there are a handful of up and coming e-commerce companies. These are mainly focused on two segments: customer-to-customer e-commerce, as well as marketplaces, focused on young female customers.

There are a few up and coming e-commerce marketplaces in Japan focused on selling to young women interested in affordable and trendy products.

The consumer-to-consumer, or C2C, e-commerce has grown strongly over the past years. These marketplaces offer consumers to sell to other consumers, the most prominent example being eBay, but the segment also includes online auction sites, and platforms to sell handmade products, such as Etsy.

Japan's C2C market has expanded significantly over the past years, reaching some $6 billion in 2018. This growth, however, was mostly driven by one hugely popular app that allows people to buy and sell second-hand items: Mercari.

The app has been downloaded more than 100 million times and has around 18 million monthly active users, with total annual sales of about $3.9 billion in 2018. This compares to Yahoo! Auctions 16 million users and $8.3 billion in total sales, and Rakuten's Rakuma with 8 million users and an estimated $1.4 billion in annual revenue.

Mercari said recently that it would try operating brick and mortar stores to unlock the untapped potential of tens of millions of users in the Japanese market.

Ecommerce businesses that focus mostly on young women are Wowma! and Qoo10, both of which offer cheap apparel, cosmetics, and other affordable products.

The success of Wowma! and Qoo10 makes sense because Japanese consumers expect prices to be markedly lower on the internet. Unlike many other countries, where the gap is much more narrow, nearly half of products in Japan can be bought cheaper online, when compared to prices in local brick and mortar stores, according to American Economic Review.

Innovation in the Country

Before the emergence of Silicon Valley, the world was looking to Japan, when it came to the next significant technological innovation. Benefitting from this long legacy of technological disruption, Japan has much to offer to startups and founders.

While legacy businesses such as Sony still play an essential role, there is a growing number of startups ready to follow their footsteps. As the example of Zozo shows, Japan's startup ecosystem is marked by blockbuster acquisitions and mergers, as well as IPOs. Often traditional companies will buy an innovative startup or invest via dedicated funds.

However, this propensity for deals also means that established players can buy out the competition. Something that was demonstrated when Rakuten bought rival flea-market app Fril to merge it with its service.

One crucial difference to other e-commerce markets is that in Japan, the older generation is a key driver of online sales. This means that gearing your business towards the elderly can offer a massive business opportunity here.

This fact gains even more importance once you consider that Japan is an aging society, with about a third of people above the age of 65. Not only are elderly in Japan avid smartphone and internet users, but they also have much money to spend. The monthly consumption of people in their 50s is nearly $3,000, significantly higher than that of people in their 20s, according to Japan's Ministry of Economy, Trade, and Industry.

Japan's e-commerce industry is set for further growth in the years to come. The country offers a massive opportunity for startups and e-commerce businesses looking to expand into new markets. But entrepreneurs thinking about selling their products in Japan should also be mindful of the peculiarities of the market, such as the importance of elderly buyers and the intense domestic competition.