Don Quijote originated from a surplus wholesale business called “JUST.” While the treasure hunt experience and the nighttime economy serve as its weapons, surplus supply was its early shield. In 1978, founder Ryuou Yasuda, 29 at that time, opened a small discount store called “Thief Market” in Tokyo. During the second oil crisis in Japan, many businesses and factories faced bankruptcy, and to ensure cash flow, they needed to quickly liquidate their inventory. Yasuda seized this opportunity to purchase surplus goods at extremely low prices and cleverly utilized the nighttime economy to sell various goods to consumers. Over time, he conceived the idea of becoming a surplus wholesale distributor, selling “Thief Market” to others in 1980, and establishing the surplus wholesale company “JUST.”
Thief Market Established in 1978
According to his account in a book, when founding “JUST,” there were thousands of soft discount stores in Japan. Despite the low entry barrier for the soft discount format, attracting a considerable number of entrepreneurs, Yasuda discovered over ten years in the surplus wholesale business that none of these stores achieved scalability. He emphasized that during good economic times, these store owners made a little money and then spent it on luxury items and real estate, unable to resist the temptation to focus on their business. In 1989, seeing no formidable players emerging in the market, Yasuda returned to the retail side and opened the first store in Fuchu City, a suburb of Tokyo. Initially, he attempted a franchise model, opening around 13 stores, but later found that no one understood his treasure hunt experience operational mindset. Consequently, he decided to switch to a direct-operated model.
Don Quixote Store in Fuchu City in 1989
Leveraging its supply chain advantages, Don Quijote maintained a product mix of 60% regular goods and 40% discounted goods in its early stages. Regular goods were priced 10% to 30% cheaper than other channels such as convenience stores and Ito-Yokado. For 100 to 150 high-repurchase-rate SKUs with high consumer price sensitivity, Don Quijote set the prices at the lowest in the region to gain consumer trust. The prices of discounted goods could be as low as 50% or even less than the regular prices due to “opportunistic purchasing.” Most purchasing decisions were made by store staff, promoting integrated purchasing and sales responsibility. The unique characteristics of Don Quijote’s decentralized store management system will be discussed separately in the section on store management.
For Don Quijote, the 40% of discounted goods procured through “opportunistic purchasing” serve as a source of profit. They have a slogan, “High price for cheap stock, low price for expensive ones.” These inexpensive goods are often surplus or leftover items from manufacturers or wholesalers during product packaging iterations, challenging to circulate through normal channels. Contrary to popular belief, non-food items constitute an essential source of gross profit for the channel. Currently, only 15% of Don Quijote’s gross profit comes from food items, while sports and outdoor goods yield a gross profit as high as 35%.
Upstream suppliers for Don Quijote are referred to as “Rack Jobbers” – suppliers offering shelf service. These suppliers not only provide goods but also assist with product display and replenishment. If a new store opens, they help set up shelves and merchandise, ensuring their products get better shelf positions. According to a former high-ranking Don Quijote executive, many shelf suppliers have been loyal to the collaboration, transforming from small enterprises with only two or three people into hundreds of people, thanks to their longstanding cooperation with Don Quijote. Additionally, in the early days, Don Quijote negotiated a payment term of only 2 to 3 days in cash settlement with suppliers. Consequently, suppliers recommend good products to Don Quijote first. Being one step ahead in obtaining good and scarce supplies became one of its early critical competitive advantages.
The method of purchasing surplus goods from upstream suppliers and manufacturers may differ based on the company’s development stage. In the early stages, store staff had a portion of the budget, allowing them to communicate directly with suppliers or brand owners for purchases. However, as the company reached the mid-term development phase, this approach was a waste of time and energy at the store level and also risks corruption. Consequently, it transitioned to a centrally supervised procurement system: each store accessed the internal procurement platform app to obtain the latest product information and then competed for sources independently. According to a former Don Quijote executive, this app is similar to LINE, allowing stores to communicate with suppliers anytime, with a plethora of product information available every day, and on a first-come, first-served basis. However, large quantities of surplus goods from major brands are directly purchased by the headquarters’ merchandise department, coordinating with the brands.
Due to the unique nature of opportunistic purchasing, Don Quijote adopted the “Consignment Inventory” model in its warehousing and logistics operations starting in 2000. In this context, “consignment” refers to Don Quijote entrusting suppliers with inventory management and distribution. The ownership of goods remains with the suppliers until they reach the stores, and the wholesalers share the costs of inventory and distribution. Before this model, suppliers primarily distributed goods to each store based on their own plans, with the staff responsible for purchasing the product and handling the receiving process. However, as the number of suppliers exceeded 2,000, store personnel could no longer coordinate every delivery. Since 2000 (when revenue was approximately 5.5 billion RMB), Don Quijote gradually introduced this model into 50% of its products, then gradually increasing the percentage every year. Through this, Don Quijote achieved zero inventory risk, reduced stockout rates, and shortened the time and effort required for replenishment. For non-cooperative suppliers, high logistics sponsorship fees, up to 1.5% of the product value, were imposed, enforcing compliance.
As Don Quijote continued to grow, a trend of insufficient supply emerged in the “opportunistic purchasing” category, constituting 40% of the product composition. Transforming limited supplies of surplus goods into unlimited supplies posed the most significant challenge for the soft discount format in the long term. In response, in 2008, Don Quijote launched its PB “Passionate Prices.” Currently, Don Quijote’s PB accounts for approximately 10% of total revenue, contributing 16% to the overall gross profit. 2008 was also the year of the subprime mortgage crisis, and Japan had surplus production capacity, providing Don Quijote with an excellent opportunity to reach upstream supply.
Three different PB brands corresponding to three different price ranges
Capacity utilization rate in Japan from 1968 to 2020. Daiei introduced the first PB of Japan during the first oil crisis in 1973. Don Quijote’s PB, cleverly introduced during the economic crisis in 2008, took advantage of surplus production capacity.