Akihabara News (Tokyo) — Mercari was founded in February 2013 by entrepreneur Shintaro Yamada, who had come to the conclusion that there could be a bright future for a new Japanese mobile app that offered a fixed price customer-to-customer service, quite similar to an online flea market.

Yamada had once interned with Rakuten, helping to develop Rakuten Auction, while he was studying at Waseda University. It was after a number of other moderately successful ventures—and after a six-month tour of the world hitchhiking and staying in cheap hostels—that Yamada recruited two colleagues, fellow Waseda alumni Tommy Tomishima and Ryo Ishizuka, and launched the new venture.

Settling on the name Mercari, which means “market” in Latin, the app went online in Japan in both Android and iOS versions in July 2013.

It was an immediate hit with the Japanese public, gaining more than 50,000 users and more than 10,000 listings within three weeks of launching on Google Play.

Innovations

Mercari was not the first online flea market in Japan. The pioneer was Yahoo! Auctions, which launched back in September 1999. Rakuten Auction, where Yamada had interned, was established in December 2005.

But there were several features that allowed Mercari to gain a strong foothold and that contributed to its early success. These can be boiled down to two broad themes—simplicity and security.

Unlike its competitors, Mercari was built for the smartphone era. Potential sellers and buyers could easily browse through the items for sale or post their own. Putting an item up for sale on the other sites could sometimes be a cumbersome process, and one which required use of a computer rather than a mobile device.

But with Mercari, people could just take a quick snapshot on their mobile, fill in a brief description on the app, and then immediately begin the selling process. It took just a few minutes to complete the listing.

This created a much lower barrier to entry. For the many Japanese who owned a smartphone but not a personal computer, it gave them access to this kind of customer-to-customer market service for the first time.

In this way, Mercari created its own culture in Japan, with people unafraid to list even very cheap items that would rarely find their way to the established auction sites. Many people, including some seniors, took advantage of Mercari to clean out their homes of unwanted stuff that they had collected over the years, making a small bundle of cash in the process.

Aside from the virtue of simplicity, the Mercari founders also understood that fear of fraud was a major barrier for many Japanese to begin to utilize such a flea market app.

Buyers needed only tap a button to make their purchases, but what security did they have that the item would actually arrive and turn out to be what was advertised?

Mercari solved this problem by handling the payment process itself. The payment was held by the service secretariat until the purchaser confirmed that the promised item had been delivered. Only then was the payment released.

Also, in addition to using credit cards, payments could be made at convenience stores or by bank ATMs, making the process as painless as possible.

Finally, the Mercari system allowed buyers to remain anonymous, something which was well appreciated in privacy conscious Japan.

Growth

In its early years, Mercari moved from strength to strength. The startup’s growth continued to be spectacular.

Only one year after launch the Mercari app had gathered over 4.5 million users with more than 100,000 new items being listed on a daily basis. Transactions at this point were rising above US$10 million per day.

Investment flowed in from major Japanese venture capital funds, including East Ventures, Global Brain Corporation, Globis Capital Partners, United Incorporated, and World Innovation Lab.

Then, demonstrating a global ambition unusual for a Japanese startup, the Mercari app was launched in the US market in September 2014, with the company’s advertisement describing itself as “Japan’s mobile shopping obsession.”

Mercari’s growth continued, and in March 2016 the company gained the distinction of reaching a valuation of over US$1 billion, thus becoming Japan’s very first startup to gain “unicorn” status. Not only had the firm become a success for itself, it also became a symbol that Japan’s startup community as a whole had finally arrived in the big leagues. It was a shot of adrenaline for many other young Japanese entrepreneurs.

Continuing its aggressive approach, Mercari branched into the United Kingdom in 2017, quickly securing the top spot in the UK app store shopping chart soon after launching. This was intended to be the first step toward gaining a foothold in the wider European market.

Finally, in June 2018, Mercari gave up its unicorn status to go public on the stock market. It had a smashing debut, with shares rising as high as ¥6,000, hitting their daily limit high and valuing the company at as much as US$7.4 billion.

Challenges

By this point, however, not everything was going Mercari’s way, and some of the challenges were serious enough to put the company’s longer-term future in jeopardy.

In its Japanese home market, Mercari was discovering that its great advantage of having a low barrier to customer entry could also sometimes be a problem.

The ease of listing meant that low quality or even illegal goods could find their way onto the network. While brand-name goods were popular on Mercari, buyers couldn’t always establish their authenticity. Transactions involving fake goods left some buyers with a disappointing experience of the app.

There were also some creative but troublesome products that were listed for sale, including such things as completed school assignments allowing students to escape doing their homework.

Perhaps the best known challenge of this kind emerged in early 2017 when Mercari allowed users to sell contemporary coins and paper money—in addition to old collectable coins and bills—with the intention of serving customers who wanted to buy and sell bills and coins with rare printing or minting errors.

This led to the curious circumstance that some people began selling ordinary money on the app. For example, a perfectly ordinary ¥10,000 bill might be put on sale for the purchase price of ¥12,000. The solution to this head-scratcher was that some people who were desperate for immediate cash might obtain money quickly over Mercari using their credit cards, which they could pay back later. In other words, it was a usury scheme.

Despite such bumps in the road, Mercari continued to perform well in its home market of Japan. It was in the firm’s various attempts to expand that it ran into more serious trouble.

The US branch became a perennial loss-maker. Although Yamada had once declared that Mercari had no direct competitor in the US market, since the firm would concentrate exclusively on the peer-to-peer resale of everyday goods, it struggled to make headway against the likes of eBay, Craigslist, and Amazon.

For years the company founders described their US venture as still being in the “investment phase,” a far cry from the instant success that Mercari had experienced in Japan. Financial losses mounted, dragging down the balance sheet of the overall enterprise and disappointing the hopes of stockholders who received no profit from their investment.

The situation was even worse in the United Kingdom, where Mercari proved to be unprepared for local conditions, and struggled even to let people know that its service existed. With its hands full trying to compete in the US market, the company announced that it would cease its European service from January 2019, less than two years after it had launched.

The retrenchment was not only geographical, as a number of branch operations it had tried within the core Japanese market failed to gain sufficient traction. These misfires included a marketplace for books and DVDs called MercariKauru; fashion goods flea market app MercariMaisonz; and its live video-supported trading service, Mercari Channel.

Directions

Japan’s first unicorn has thus had a rough ride since it went public in June 2018, humbled by its missteps, but far from defeated.

Innovation has also continued on Mercari’s main platform with new services such as Instant Pay, which lets verified sellers receive their money in only minutes; and Mercari Authenticate, which remotely authenticates sellers’ handbags after they upload comprehensive photos of the bag through the Mercari app.

One branch to which it is more committed is Merpay, its cashless payments business. Since Merpay’s launch in November 2017, it made the wise decision not to try to go it alone in this fiercely competitive space. Rather, it collaborated in March 2019 with Line Pay to form the Mobile Payment Alliance, allowing users of either service to pay for goods across both brands’ merchant footprints. A few months later NTT Docomo added its considerable heft to the grouping.

By early 2020, Merpay had gathered 5 million users, but was encountering stiff competition. It responded by buying out rival cashless payments startup Origami.

Just before the coronavirus pandemic began to take hold, Mercari launched its first brick-and-mortar operations in Japan, opening outlets in Shinjuku and Musashi-Kosugi. These outlets, called Mercari Station, allowed people to take pictures of their merchandise in a booth so they can post ads online, and then wrap and send the goods for sellers who place them in a “Mercari Post” mailbox. Staffers are also on hand to teach customers how to use the Mercari app. In this way, the firm hoped to reach out to tens of millions of untapped users.

By the second half of 2020, boosted by a pandemic-related surge in online sales, it appeared that Mercari was beginning to claw its way out of the hole. In the July-September quarter, it was able to report its first profits since it had gone public. It still wasn’t clear if it would ultimately succeed or fail in the United States, but the Japanese startup was still in the fight.

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