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Retail Industry Overview

11, 01. 2004

Current State

Department Stores Now a Structurally Depressed Industry

Principal office of Mitsukoshi, Ltd
Principal office of Mitsukoshi, Ltd

   The total sales amount of the department store industry in FY2003 registered year-on-year loses for the seventh consecutive year. The long-continued slump in sales is nothing short of being symbolic of the fact that the department store industry has become one of Japan's structurally depressed industries.
   In 2003, Sogo Co., Ltd. and The Seibu Department Stores, Ltd. consolidated their businesses under a holding company, resulting in the establishment of Millennium Retailing Inc. However, this does not change the fact that the Seibu Department Stores are still under the process of being rehabilitated.

   There are also an increasing number of cases in which a major department store makes a move to support the rehabilitation of a struggling local department store. For example, Isetan Co., Ltd. is in the process of supporting Iwataya Department Store and Izutsuya Co., Ltd. of Fukuoka Prefecture in Kyushu. Furthermore, Mitsukoshi Ltd. is supporting Usui Department Store (Koriyama City, Fukushima Prefecture), and Takashimaya Co., Ltd. is supporting Sakurano Department Store (Sendai City, Miyagi Prefecture).

   In order to revive a department store, it is essential to create a distinctive characteristic that wins the support of consumers. The Men's Annex of Isetan's flagship store in Shinjuku, Tokyo, which reopened in September 2003 after going through a complete renovation, is one of the stores that have won high acclaim as a successful example of the creation of an attractive store. In the autumn of 2004, Mitsukoshi opened a new annex to its main store in Tokyo's Nihombashi in commemoration of the 100th anniversary of its founding. The company is achieving major year-on-year increases, both in terms of the number of customers attracted and in sales. Together with the outcome of the restructuring of business operations, the success or failure of such new or renovated stores also hold the key to the revival of a department store.

Mergers, Alliances and Other Reorganization Also Taking Place among General Merchandise Stores

   A storm of reorganizations is also raging in the general merchandise store industry.
   By making MYCAL Corporation, which it had been supporting, into a consolidated subsidiary, AEON Co., Ltd.'s consolidated sales in FY2004 is forecast to surpass the 4 trillion yen mark for the first time. It is now definite that AEON will overtake Ito Yokado Co., Ltd. - its biggest rival - in terms of the scope of sales. AEON's aggressive strategy is drawing much attention. Despite deflation and sluggish consumption, AEON is aiming to enhance its forces not only through supermarkets but also in overall retail businesses, including home improvement centers and drug stores.
   AEON's investment in home improvement retailing is a move to increase the number of new types of stores being called a "supercenter." These supercenters are large-scale single-story stores that integrate a home improvement center and supermarket. Eyes are on these stores which enable one-stop shopping in regional towns and cities that do not have large-scale retail shops. By investing aggressively in home improvement centers, AEON intends to utilize the know-how it gains in the future designing of new stores.
   Meanwhile, Ito Yokado has always been guarded about expanding its forces through alliances and acquisitions, and this position still does not seem to have changed in a major way. Although Ito Yokado's strategy for the near term will focus around enhancing the competitiveness of its existing stores, the company is, however, starting to display a willingness to expand the number of new stores or enlarge floor space. In 2003, Ito Yokado opened a store on the premises of the former Nara Sogo Department Store, which had been shut down. There is something similar to AEON in Ito Yokado's stance about not been particular about any specific type of operation, such as a supermarket or a department store.

Tesco, the Biggest Retailer in the UK, Extending its Tentacles to Mid-sized Supermarkets in Japan

   In regards to The Daiei, Inc., a possible strategic alliance with Carrefour as well as a possible merger with The Maruetsu, Inc., a Daiei Group food supermarket chain, were all hot topics at one point in relation to the ailing Daiei supermarket chain which was once a top general merchandising firm in Japan. In the end, Daiei submitted an application to the Industrial Revitalization Corporation of Japan to gain support for business revitalization.

Convenience store sales transition and number of shops

   There will probably be increasing cases when troubled supermarkets will have to choose between being absorbed by general merchandiser AEON or a foreign-affiliated retailer, both of which are on expansion tracks, or tying alliances with other supermarkets.
   In 2003, AEON succeeded in investing in Kasumi Co., Ltd. based in Ibaraki Prefecture, gaining a foothold to supermarkets in the Tokyo metropolitan region. Posful Corporation of Hokkaido also finally came under AEON's umbrella.
   Meanwhile, regarding the movement of foreign capital companies, Wal-Mart Stores, Inc. is experiencing some trouble rehabilitating general supermarket chain Seiyu, Ltd., and Tesco plc, the biggest retailer in the UK, is using it as an opportunity to spread its tentacles to mid-sized supermarkets. In 2003, it acquired C Two-Network Co., Ltd. (C2) based in the Tokyo metropolitan area and has just started advancement into the Japanese market. While using C2 stores as experimental grounds for small-sized stores in the Tokyo metropolitan area, Tesco also seems to be continuing to sound out supermarkets nationwide regarding alliances.

Consolidation of Middle-ranking Convenience Stores Also Taking Place

   It had seemed as if consolidations had settled down in the convenience store industry, but with the prolonged consumer recession, there is now a possibility that Act 2 may begin, centering on reorganizations among middle-ranking convenience store chains.
   Seven-Eleven Japan Co., Ltd.'s position as industry leader remains firm, while Lawson, Inc., which is under the Mitsubishi Corporation umbrella, is unfolding a strategy of "make up for what is lacking." Their slogan is, "Break away from the 'Seven' model." Here, 'Seven' refers to Seven-Eleven. Seven-Eleven's business model is one in which it tries to respond thoroughly to customer needs by repeating a process of hypothesis development and verification. As a result of such repeated analysis, Seven-Eleven's business style has become one in which it changes the content of the products displayed on the shelves or even their position on a shelf based on detailed conditions, such as whether the store is in a residential district or office district, whether it is around lunch time or not, whether it is the morning hours or evening hours, and so on. Lawson knows that it cannot compete with the highly-detailed strategy taken by Seven-Eleven, and it is trying to compete on a different arena by concluding alliances with companies of other business types and industry sectors, including the public corporation Japan Post, Tokyo Metro Co., Ltd. (formerly known as Teito Rapid Transit Authority) and banks. FamilyMart Co., Ltd., which is affiliated with Itochu Corporation, is also focusing on partnerships with other industry sectors as well as making an atypical method for selecting store sites, which it calls the "new market." Although Lawson was the first to do so, FamilyMart was next to open convenience stores in China and other parts of Asia, and it is accelerating the development of a market outside of Japan.
   While leading convenience store chains are enhancing comprehensive power by strengthening cooperation with their parent companies, there is a possibility that weaker convenience store chains will be forced to consolidate. Circle K Japan Co., Ltd., under the UNY Co., Ltd. umbrella, and Sunkus & Associates Inc. merged in the autumn of 2004 and became Circle K Sunkus Co., Ltd., but rumors of an alliance with Sumitomo Corporation still remain. There is also a constant stream of rumors flying around about reorganization by Three F Co., Ltd., which is in the doldrums, as well as by Poplar Co., Ltd., which decided to consolidate its purchases of goods to and buy from only Mitsubishi Corporation.


Decline in Sales Continue through the Collapse of the Economic Bubble and Reduced Consumer Spending

   Many department stores of long standing in Japan can trace their history back to the Edo period. For this reason, they dominated Japan's retail industry for a very long time. In recent years, however, their existence is being greatly threatened through the appearance of many other forms of retailing including supermarkets, discount stores and mail-order shopping.
   The current ranking of department stores in terms of consolidated sales is as follows: No. 1, Takashimaya; No. 2, Mitsukoshi; No. 3, The Daimaru, Inc.; No. 4, Isetan; No. 5, Seibu Department Store; No. 6, Marui Co., Ltd.; No. 7, Tokyu Department Store Co., Ltd.; and No. 8, Matsuzakaya Co., Ltd.

Large-scale store sales by type of business

   From the latter part of the 1980s, the industry saw the opening of many large-scale department stores in major cities, and a fierce battle to capture customers ensued. The collapse of the economic bubble and the prolonged reduction in consumer spending made matters worse, and the department store industry is seeing a continuing fall in sales.
   Despite being a department store of long standing, every single one of Matsuzakaya's department stores posted deficits in 2000. Daimaru closed its overseas shops, one after another. Iwataya of Fukuoka closed its new annex, and Tamaya Co., Ltd. closed its Fukuoka Tamaya department store. These are just some of the examples of the effects of the nationwide recession experienced by department stores. Mitsukoshi downsized more than 1,000 employees. With total debts of 1.87 trillion yen, the Sogo Group was finally forced into bankruptcy in July 2000.
   Some take a harsh position and say that department stores have already become a thing of the past. The industry is in a state where major reorganizations and shakeouts will continue to be unavoidable.

Japanese General Merchandise Stores Expanding from Retail to Become Mammoth Conglomerate Enterprises

A shopping store of Ito-Yokado Co.,Ltd
A shopping store of Ito-Yokado Co.,Ltd

  The first self-service, narrow-margin high-turnover supermarket appeared in Japan in 1957. While supermarkets often refer to local chain companies that focus only on the sale of groceries, Daiei, Ito Yokado and AEON, which are said to represent major Japanese supermarkets, offer a massive selection of merchandise that are almost as abundant as at department stores, and so they come under the category of a "general merchandise store (GMS)" or "big stores."
   Many Japanese GMS have diversified widely into areas besides retail. It includes restaurants, fast-food chains, hotels, leisure facilities, nonbanks, airlines, and physical distribution. They have gone from being compound retailers and have become mammoth conglomerate enterprises. Furthermore, major GMS are not only bringing local supermarket chains under their umbrella but have also developed successful 24-hour convenience store chains, the main target of which is unmarried people living in major cities. Daiei developed Lawson, Ito Yokado developed Seven-Eleven Japan and Seiyu developed FamilyMart, and so on.

   However, with the rise of new retail forces such as discount shops, 100-yen shops, discount drugstores as well as shops like UNIQLO (Fast Retailing Co., Ltd.), supermarkets and convenience stores can no longer sit idle.
   Among others, Daiei, the largest supermarket chain in Japan; Seiyu, affiliated to the Saison Group at the time and currently under the Wal-Mart umbrella; and MYCAL, which was based in the Kansai region, all fell into financial crisis through the effects of excessive investment, massive debts, etc., while in February 2000, Nagasakiya Co., Ltd. failed. Convenience stores were note exempted from reorganization either. FamilyMart was sold to Itochu Corporation; Lawson was sold to Mitsubishi Corporation, and Daiei-affiliated middle-ranking supermarket Maruetsu was sold to Marubeni Corporation.

Three Key Points towards the Future

Point 1
Can Daiei Survive?

   Depending on the fate of Daiei, which is currently being revitalized under the Industrial Revitalization Corporation of Japan (IRCJ), there is a possibility that the industry map will change even more greatly.
   About 50 companies, including Ito Yokado and AEON as well as major trading firms Mitsui & Co., Ltd., Marubeni, and Sumitomo Corporation, had raised their hands by November 8, 2004 in response to a call that had been made by the IRCJ for a company to sponsor Daiei's revitalization.

Frozen food aisle of a store of Ito-Yokado Co.,Ltd. with many publicity posters telling that advertising items will be half the sum at cash desks
Frozen food aisle of a store of Ito-Yokado Co.,Ltd. with many publicity posters telling that advertising items will be half the sum at cash desks

   After the second round of applications, the IRCJ officially announced on January 21 that it had narrowed Daiei sponsor-candidates down to three consortiums, each led by Japanese companies: AEON, Marubeni, and turnaround specialist Kiacon Corp. (headquartered in Tokyo). These three consortiums will proceed on to the third round of applications to be held in late February after drawing up a revitalization plan for Daiei's revival based on additional information, such as detailed data related to the profitability of each Daiei store. The sponsor for Daiei's revitalization will be decided by early March.

   Meanwhile, Daiei will hold an extraordinary meeting of shareholders in late March at which time it is expected to seek shareholder approval for new directors from the Daiei sponsor and others, and establish a new management framework. Regardless of how matters proceed, it is certain that the determination of a revitalization sponsor for Daiei represents the beginning of the next series of reorganizations for the major supermarket industry.
   Neither the consortium led by Ito Yokado nor those led by foreign companies - the U.S. including retail giant Wal-Mart, investment firm Ripplewood Holdings LLC and leading grain trader Cargill Inc. - that had initially been considered top favorites remained after the second round.
   The IRCJ plans to acquire a 33.4 percent equity stake in Daiei to promote the rehabilitation of the retailer with a sponsor company. Of the seven consortiums that made applications in the second round, AEON formed an alliance with Kyocera Corp. and appealed its performance of having revitalized MYCAL and other ailing companies. Marubeni was initially in partnership with Ripplewood but switched to Advantage Partners Inc., a Japanese fund, for the second round of applications. It stressed that it will abide by the IRCJ's basic policy of turning Daiei around with emphasis on Daiei's food supermarket business. Kiacon, which had joined hands with Itochu, was apparently recognized by IRCJ for its enthusiasm for creating a new retail model that did not adhere to conventional supermarket management methods.
   The IRCJ plans to shut down and/or sell 53 of 263 existing Daiei outlets while at the same time opening about 100 new food supermarkets within five years. The key to being selected as the sponsor for Daiei's rehabilitation is whether the candidate has know-how in the food supermarket business.

Point 2
How to Coexist with Discount Stores that Are Launching an Offensive

   A favorable wind for the reorganization of the retail industry is the rapid advance being made by discount stores and specialty retailers.
Discount stores such as Kojima Co., Ltd., Yamada-Denki Co., Ltd. and the 100-yen shop Daiso-sangyo have greatly expanded sales by pursuing an economy of scale (taking a multi-store strategy, advancing volume purchasing and conducting mass marketing) as well as by settling accounts immediately, in cash, and collecting up-to-date information on hot-selling products instantly through the introduction of POS.
   Casual apparel chain UNIQLO (First Retailing Co., Ltd.) succeeded through a business model that had not existed before in Japan and has been eating away at the apparel sales share of major supermarkets. It is a new form of business in which planning, design, manufacturing and sales are all conducted in-house for low cost but high quality items. Of the 200 million items sold every year, it is said that about 90 percent are imported from China. In the autumn of 2000, a Japanese textile organization made an application to the Japanese government for a safeguard action.
   Fast Retailing (UNIQLO), the drug store chain MatsumotoKiyoshi Co., Ltd., general discount store chain Don Quijote Co., Ltd., and Toys"R"Us-Japan, Ltd. are said to be the pioneers of a new retail revolution; that they have taken in the needs of the times ahead of others. The key to the revitalization of department stores and major supermarkets is how they can establish a way to coexist with these forerunners of the new retail revolution.

National Consumer Price Index in 2003

Point 3
Will Foreign-affiliated Retailers Prove to Be a Savior?

   Giant overseas retailers such as Tesco of the UK, Wal-Mart of the US and the Metro Group of Germany have their eyes on making a full-scale entry into the Japanese market. For example, Japan's Seiyu is currently transforming its operations with the support of Wal-Mart. At one point, it was thought that the Japanese retail industry would enter into the age of three major retailers: Ito Yokado, AEON and the Wal-Mart - Seiyu alliance. However, some observers say that the restructuring of Seiyu by Wal-Mart is not necessarily going smoothly. In order to forecast the reorganization of the Japanese retail industry, a close watch will need to be kept to see what the next steps of the foreign capital companies will be.

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