Japan's economy once again is growing, albeit slowly, but the road back from the nation's longest recession since World War II is rocky. With the job market still unsettled and the Yen dropping in value, wary consumers are not returning to their old shopping habits. A different breed of Japanese consumer has emerged in the wake of the global financial meltdown and may be here to stay. Once known for their mass consumption of luxury goods, they now are getting a reputation as avid discount shoppers. As traditional department store revenues plunge, discount retailers are enjoying a surge in popularity. Take Wal-Mart. For the first time since it entered Japan seven years ago through its Seiyu subsidiary, the world's largest retailer expects to generate a profit in Japan in 2009. 

This conversion of shoppers from chic to cheap signals a new reality for Japan's retailers and consumer products makers. The recession accelerated shifts in shopping habits that have been gaining momentum throughout almost two decades of economic slowdowns and stagnation. In addition to becoming more budget conscious, Japanese shoppers have become less loyal—willing to change where and how they shop, all in a search of better values. And even young consumers are becoming savers. They're shopping at less-glitzy neighborhood stores and secondhand shops. Meanwhile, cash-strapped shoppers of all ages are entertaining themselves more at home and making more online purchases. Online sales grew 22% in 2008.

As Japan's consumers evolve, so must the companies that serve them. The trouble is traditional business models aren't able to keep pace. Our research and work with clients shows that retailers and consumer products companies that succeed are those that fully integrate their management structure, processes and culture with the aim of addressing fast-changing consumer needs. They invest to generate the intelligence that helps them understand how customers are-and are not-changing. They create nimble organizations capable of quickly responding to those changes with new or reformulated products-or ways of better serving customers. 

What's striking in Japan is that many of the winners are middle to smaller businesses. Their ability to emerge from the recession in even stronger shape provides important lessons for larger companies about how to adapt to consumers who are breaking with tradition. While it may seem difficult for large, established firms to mimic their success, the truth is that these are things that companies of all sizes should be doing.   

Consider the innovative concept introduced by eyeglass maker Megane Top when it realized that customers' fast-paced lives gave them less and less tolerance for waiting. The company revised its business model and supply chain and introduced Japan to 25-minute eyeglasses. Previously, it took one week to deliver glasses. The concept boosted sales from 34 billion yen [$377 million] in 2006 to 46 billion yen [$511 million] by 2008. And when casual wear maker Uniqlo saw department store sales plunging with successive downturns, it opened shops in railroad stations with product lines geared towards travelers. These midsize shops now sell four times more merchandise than the company's larger stores.

Companies also must adapt to another major shift. The Japanese consumer is getting older, with changing needs and interests. The nation's most influential consumers are families whose heads of households are over 50 years old. The segment has continued to grow in recent years and now accounts for 80% of consumers' financial assets and income.

We found other new trends that are altering shopper's buying habits. For all their thriftiness, Japanese shoppers are becoming more individualistic. They told us they are willing to make a purchase that once might have been viewed as indulgent if it will promote their lifestyle or improve their self image. And, while they are more price conscious, the lowest price isn't always the deciding factor. Over 62% of consumers surveyed by Nomura Research in 2006 said they primarily consider "value for the money" compared to 52% in 2000.  

Winning consumer product companies and retailers are able to use these changes in consumer behavior as a springboard for their business. They succeed by organically integrating five major business skills that give them a competitive edge. 

Top management at winning companies has an unrelenting focus on customers changing needs. They look for every opportunity to track consumer shifts, relying on sophisticated data gathering systems to analyze customer buying trends. But the difference sometimes boils down to this: some senior executives do not rely solely on computer-generated reports. Often, they spend time in the field themselves. At specialty shoe retailer ABC-Mart, President and Director Minoru Noguchi and his staff visit and work in stores on weekends to learn first-hand what customers want. That's how the company first struck upon the idea of boosting profits by selling private-label brands. For its part, cosmetics' maker and health food company Dr. Ci:Labo has tapped into a wealth of new concepts by inviting customers to register their ideas for new products on its community web site. A few of them now are successful products such as scented moisturizers Rose Charge and Karada Mint, delivering substantial sales.

Market leaders know how to redefine a product's quality, cost and price to better meet consumer needs. ABC-Mart has earned a reputation for purchasing low-priced foreign product lines and then repositioning them as a major private-label brand through well-targeted product development and promotion. Hawkins is a prime example. Former CEO Masahiro Miki spotted the brand's potential during a trip to London. It ultimately won the trademark to manufacture the Hawkins brand as its own private label. It targets younger women and now generates 20% of ABC's sales. In September, same-store sales rose 6.3% from a year ago. In addition to becoming a sales engine, the Hawkins experience has given ABC-Mart knowledge about shoe production costs that has helped the company negotiate better deals with other shoe manufacturers.

Leaders also look outside their own companies for partners that can help them develop products that provide added value for consumers. In 2006, Uniqlo teamed with yarn maker Toray's engineers to create high-tech thermal underwear that's promoted as quick drying, warm and preserves skin suppleness. The product has become a perennial winner each winter for Uniqlo. Sometimes, innovation can be as simple as changing a product's image. Kobayashi Pharmaceutical boosted sales of its "Nicitol 85" by turning the women's diet product into a diet medicine for men with metabolic syndrome.

As they innovate products, winning companies also work to foster stronger ties with customers. One way is by finding more occasions to interact with them. Dr. Ci:Labo uses its call centers to provide what the cosmetics maker calls "counseling order-taking." Staffed from 9 a.m. to 9 p.m. year around, the 120 female operators are encouraged to spend time talking with customers as they place orders, counseling them about the best products to buy and, at the same time, gaining insights into what the largely female clientele wants.

Another way companies are building customer loyalty: adding full-time employees in high-sales areas so that customers receive more personalized attention. Ozeki found it improved customer service in its supermarkets by doubling the number of sales staff on the floor compared to competitors.  Other retailers build customer communities and promote memorable experiences. The goal is to encourage customers to return, again and again. Village Vanguard bookstores achieves this by creating playful environments, with its trademark humorous point-of-sale displays. DiskUNION develops its stores around music genres and uses employees with music skills to foster communities. 

To gain a competitive edge, winners also are expert cost cutters, often while improving performance. They trim operating costs by moving manufacturing sites to less expensive countries. And they reduce total costs through operational improvements. Ozeki has increased the efficiency of its inventory management by purchasing smaller quantities and better understanding what customers want so inventory isn't left on the shelf.

Kobayashi is able to save on costs and speed ideas to market by streamlining the product innovation process. The company implemented a program by which R&D and product development occur simultaneously, minimizing yield loss and cutting the time required to get new products to market. For example, its popular nighttime facemask product was launched just 13 months after its conception. Within six months, it was generating sales at an annual rate of $10 million. 

In addition to honing operations, leading consumer products makers and retailers take full advantage of each employee's potential. In doing so they build a winning culture that can help them consistently outperform the competition. Culture motivates employees to do the right thing, not just the easy thing, and always with customers in mind. The importance of culture was validated by a Bain & Company worldwide survey of 1,430 top executives conducted as the global downturn intensified in January 2009. Among the respondents, 88 percent said culture is as important as strategy for business success. Yet our research indicates that fewer than 10 percent of companies succeed in building vibrant, distinctive cultures.
 
Ozeki's management team motivates its workforce by spending 20% of its time working alongside employees in the supermarkets and using the occasion to provide coaching. Kobayashi maintains a decentralized management structure that values continuous employee feedback. And ABC-Mart deploys a point-of-sale system that shows employees their sales ranking in real time, encouraging internal competition. Other companies empower workers by urging them to take risks. For example, workers at Village Vanguard bookstores individualize displays based on their own beliefs about what will please their customers.

As Japan's economy rebounds, the winners will be those companies that can integrate these five skills. Success depends on their ability to innovate the way their organizations work, a skill that's not common in Japan. Most important, top management must do more than simply set the vision and tone for an unrelenting focus on changing customers—they must take the lead, staying personally involved to champion the effort. Because Japan's consumers are breaking with tradition, companies serving them must do the same.

Hiroshi Makioka is a partner in Bain & Company's Tokyo office and a member of the firm's Consumer Products and Retail practices.