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TOKYO-Discount retailers, relatively small players in Japan until recently, are now opening all over the nation and phenonemon has so shaken the market that experts predict a shakeout within the next decade.

Prompted by deregulation in 1990, and nurtured by the Japanese recession that started that same year, discounting "will be the biggest trend [in Japan] within the next 10 years or so," said Mike Allen, senior analyst at Barclays de Zoete Wedd Securities. The impact on retailing will be so strong, in fact, that Isao Nakauchi, chairman of Daiei, Japan's largest supermarket chain, predicts that as many as half of Japan's 1.5 million shops will shut down by the year 2010.

Department stores, with higher overhead, more amenities and more expensive distribution systems, are also finding it hard to compete. Sales at department stores fell 5.6% to $14 billion last year. "Department stores have the most to lose from the rising popularity of discount retailers," said Baring Securities senior analyst Paul Heaton.

Much to the dismay of some suppliers, discounting has insinuated itself into several categories, including men's suits, where such low-price stores as Aoyama Trading and Aoki International now account for one-quarter of the overall market. Discounting is also rife in the liquor category, where Kawachiya and other discounters account for only 1% of liquor stores but 17% of category volume. Sales are also up 54% from four years ago at discount home centers, a type of general merchandise retailer, to $17 billion in 1992.

Discounting took off most drastically in 1990 when the recession hit in Japan at the same time that the country liberalized its Large Scale Retail Store Law of 1974, allowing discounters for the first time to open stores without the approval of neighboring small retailers. Until then, the law had slowed the growth of supermarkets and discounters to a snail's pace.

In the liquor segment, discounters regularly charge about 30% below other retailers' prices and as a result are expected to hold a 20% share of the 9.7 million kiloliter market this year. Privately owned Kawachiya, the country's largest discount liquor retailer, said its sales were up 30% over each of the past three years, and expects them to double to $142 million for the fiscal year ended this month.

Kawachiya relies on already considerable word-of-mouth advertising rather than a major media. Its ads are limited to newspaper inserts, or "orikomi" touting prices in areas near their stores.

But such bargains have also attracted the ire of suppliers. Last year when Kawachiya tried to expand its liquor offerings with low-priced cosmetics, Shiseido abruptly cut off supplies. Kawachiya claimed Shiseido objected to seeing prices of their cosmetics cut 25%-30%, a charge Shiseido denied. Shiseido's 25,000 affiliated retailers account for an estimated 70% of its sales and some located near Kawachiya had complained bitterly. Kanebo and Kao also reduced their cosmetic supplies to Kawachiya and the discounter complained to Japan's Federal Trade Commission. The results are due in June.

Another tussle surfaced in men's suits when Onward Kashiyama, Japan's leading suit marketer, stopped supplying Aoyama last March. Aoyama had angered Onward by opening a store in the fashionable Ginza district close to several pricy department stores-the kind that account for 70% of Onward's sales. Aoyama works with Hakuhodo's Hiroshima branch, using modest TV ads mainly promoting local store openings. It advertised this store with TV ads, flyers and newspaper inserts noting that its suits were selling "for less than half of department store prices."

But Onward miscalculated. There were long lines at Aoyama and other discounters rather than department stores and Onward's sales are expected to fall 6.2% to $1.9 billion when sales are calculated for 1993 fiscal year ending March 31.

Aoyama still makes no bones about its prices. In a recent TV ad, a well-known Japanese actor browses through a suit rack muttering, "Cheap, cheap, cheap."

Supermarket chain Daiei is taking the discount concept a step further, opening Japan's first club store last fall with plans to open another 3 or 4 within the next year. The club store has 150,000 members to date and sales for the first year are expected to reach $95 million. Prices at the club stores are on average 50% lower than regular shop prices and 20% lower than those at Daiei's standard supermarket. The cost to members is an annual fee of $24 plus $4 for a membership card.

Daiei VP Jun Nakauchi said one of Daiei's 12 hypermarkets, Hypermart Sakaide, opened last November on Shikoku island as "an experiment to see how far we can cut facilities, services, the range of goods and other factors, to lower retail prices." The store was built from prefabricated sheets for 40% less than the average supermaket and sells only the most popular lines in other supermarkets.

Its advertising from in-house agency Daiei Communications Co., has also been focusing on its `Everyday low prices" in both print and TV with ads promoting special sales. A variety of agencies buy space, time and do commercial production for the chain's $2 million budget.

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