Market Review - Japan
by Fabian Panthaki, Assistant Editor - Namnews

Email this Article to a Friend

Japan's retail market is the second largest in the world with per capita retail sales closely trailing those of the US. The country also has the second highest GDP in the world, but a sluggish economy is causing the market considerable difficulties.

Numbers and Trends:

Japan’s retail scene is one of the most highly developed markets in the world – and is also extremely competitive and highly saturated. Major conglomerates dominate the field, operating multiple chains in separate, and often in the same, formats. However, the country’s overall retail sales market has seen limited growth in recent years – a 0.3% rise in 2004, a 1.2% rise in 2005, and a 0.2% fall in 2006. This has been partly due to a weakened economy as a result of declining exports to the US, and has led in the astonishing statistic of supermarket sales declining on a year-on-year basis in 43 of the last 44 months (till October 2007). Grocery retailers constituted 32% of total Japanese retailing current value sales in 2005, and food sales account for 63% of the total sales at all supermarkets.

There are an estimated 5,000 supermarket chains in the country, many of which operate only a handful of stores in a narrow geographical area. The food retail market is highly advanced, reaching the fourth-generation of private label brands and being at the forefront of innovation in terms of marketing strategies, tie-ups with other formats, and customer service enhancement. However, the density of local retailers has made it difficult for international retailers to make a mark, as evidenced by Carrefour, which had to exit the market after racking up losses of US$264m in four years of operations.

These factors have resulted in a series of mergers and acquisitions in recent times. This activity is two-fold in nature - smaller chains joining up to survive against bigger retailers; and the bigger chains diversifying into newer sectors to protect against saturation. The market is also seeing the creation of newer niche segments, as the retailers fight to extract every yen possible.

Retailers are also becoming increasingly inventive, constantly searching for new ideas and practices in order to attract customers back into their stores. Several of the chains recently introduced electronic money, using cards that are accepted at their own stores. The major department stores are focusing on personal shopping services for wealthy individuals, to compensate for declining overall customer traffic. They have also initiated other efforts to target niche consumer groups, such as elderly shoppers or housewives. Meanwhile, internet retailing, convenience stores and pharmacy chains are expected to continue to be the key drivers of constant value growth.

Who’s Who:

Japan’s retail market is dominated by two diversified retailing groups, and littered with numerous middle-level players and regional chains.

Seven & I Holdings is the biggest retail conglomerate in the country, and the holding company was formed by the merger of the Ito-Yokado supermarket chain, Seven-Eleven convenience chain, and Denny’s department store chain. It now controls 81 subsidiaries and 12 associated companies. It is followed by Aeon Co, the holding company for Aeon Group, which operates the Jusco, Wellmart and Maxvalu supermarkets, the Ministop c-store chain, and other speciality outlets. It has also acquired control of Maruetsu, Tokyo’s largest supermarket chain.

The other major supermarket chains in the country are Daiei, Seiyu (owned by Wal-Mart), and Tsurukame (Tesco). Regional supermarket chains include Nagasakiya and U-Store.

The major convenience store chains are 7-11, Lawson, FamilyMart, MiniStop, Cocostore, Circle K Sunkus, and Metro Cash & Carry. The department store sector is ruled by chains such as Isetan, Mitsukoshi, Daimaru, Takashimaya and Matsuzakaya.

Recent movements:

Supermarkets - One of the biggest moves in recent times has been the growing expansion and consolidation of Aeon’s operations. The group acquired a 20% stake in Maruetsu from Daiei in March, and simultaneously took a stake of 15% in terms of voting rights in Daiei from trading house Marubeni Crop, after Daiei spent three years being rehabilitated with help from the state-backed Industrial Revitalization Corp of Japan.           

After these moves, Aeon, Maruetsu and Marubeni teamed up for a business tie-up regarding joint purchasing and product distribution. Under the deal, the three groups will jointly develop private label brands, share information on operational systems and tenant information, and cut costs by cooperating on merchandise procurement and product development.

Meanwhile, Aeon is set to bring its 150 group firms under the umbrella of a holding company, to be established in 2008. It will also spin off its supermarket business into a separate entity, and will divide the firms into nine business areas. The holding company will oversee all group personnel, accounting and financial matters. The move is expected to help its units to boost operating efficiency, and enable them to cooperate more effectively.

Wal-Mart has recently taken control of its subsidiary Seiyu Ltd, through a tender offer which raised its existing 50.9% stake to over 95%. Frustrated with six consecutive years of annual losses at the chain, the US giant is looking to speed up the revival of the chain.

Meanwhile, Tesco took the gamble of opening its first Tesco Express earlier this year, and by next summer plans to open a total of 23 Express stores. Tesco has had a presence in the Japanese market since its acquisition of the C Two-Network in 2003, which operates over 100 small supermarkets in and around Tokyo under the Tsurukame banner.

Convenience Stores – This sector is witnessing some of the most intense competition, as the smaller companies try to fight off competition from the chains operated by Aeon and Seven & I. FamilyMart and Circle K Sunkus have joined forces to jointly develop private label products, and are expected to be joined by Itochu and U-Store. The joint move is an unusual one for Japanese convenience store chains, as they belong to different corporate groups.

C-store chains are also moving into other ventures to generate revenue, such as FamilyMart’s tie up with video store chain Tsutaya to open combined outlets including at train stations. Some of the chains are also reportedly ready to introduce a regional pricing scheme, charging higher in urban areas.

Department Stores – This sector has also seen two major deals this year, upsetting the existing status quo. First, market leader Takashimaya was dethroned by the merger of the Daimaru and Matsuzakaya. The two chains formed J Front Retailing, an entity having combined sales of ¥1.17trn. This group in turn was replaced by a merger of Isetan and Mitsukoshi, the No.4 and No.5 store chains. The new company will have sales of ¥1.60trn. Isetan and Mitsukoshi have very little geographical overlap and have a different clientele - upscale Mitsukoshi targets wealthy customers, while fashionable Isetan attracts relatively young shoppers.


Results:

For the 2006/07 fiscal year, Seven & I reported operating profit of ¥287bn, as sales grew 37% to ¥5.33trn.

For the first half of the current year, operating profit rose 1.3% to ¥144bn, with supermarket profits up 70% and c-store profits down 2.6%. For the full year, it expects operating profit of ¥300bn, and net profit of ¥145bn.

For the 2007 fiscal year, Aeon’s operating profit rose 14% to ¥189.73bn, while sales rose 8.9% to ¥4.83trn. For the first half of his year, operating profit fell 18% to ¥67.8bn, despite a 7.7% rise in sales to ¥2.53trn. For the year to February 2008, Aeon projects consolidated sales of over ¥5.25trn and operating profit of ¥200bn-210bn.

In 2007, Daiei’s net profit fell by 90% to ¥41.3bn, while revenue fell 23% year-on-year to ¥1.28trn. For the first-half to August 2007, operating profit slumped 79.7% to ¥5.15bn, while sales dropped 10.7% to ¥600.38bn. It has forecast a 68.5% fall in net profit to ¥13bn for the full year.

Seiyu generated a consolidated net loss of ¥11.4bn for the January-September period, compared with a loss of ¥59.5bn yen last year. It said food sales were strong, but apparel sales were sluggish. Overall sales, excluding operating revenue, dropped 1% to ¥700.9bn, while same-store sales were down 1%.

Store Numbers of Key Retailers:

Date article published: 01/12/2007