JR West to takeover 60% of Isetan-Mitsukoshi’s Osaka store

Partnerships between JR operators and department stores have been successful for the most part, notably Takashimaya Nagoya, Daimaru Sapporo, and most recently Hankyu Hakata. In Osaka, JR West has been cursing its deal with Isetan-Mitsukoshi since well before the opening of their joint store at Osaka station in 2011. JR West will now take control of most of the space, creating a 50,000 sqm SC, with major retailers already queuing up.

As expected, JR West has finally bitten the bullet on its large scale joint venture department store with Isetan-Mitsukoshi at Osaka Station. By this time next year, Isetan-Mitsukoshi Osaka will be less than half the size, with 30,300 sqm of the current 50,000 sqm store handed over to Lucua, the JR West-run SC next door.

Although not a surprise, the decision is still a blow for Isetan-Mitsukoshi, which has wanted to grab a share of the Osaka market ever since Mitsukoshi’s previous store in Kitahama was damaged in the Hanshin earthquake in 1995 – although given the poor location, financial performance and outward appearance of the store at the time, this was largely a blessing in disguise.

Although Isetan essentially took over Mitsukoshi in all but name, much of the planning for the prestigious store had already been completed. No matter how much Isetan might like to pass the buck on this project though, it still had three years to do some reconfiguration of the Osaka store, but arguably the Isetan approach too is less suited to Osaka than pretty much any other major city in Japan. The new store put off Mitsukoshi’s previously loyal but traditional customers in Osaka, and the mausoleum style design and brand selection didn’t appeal to younger local tastes either.

The results speak for themselves. For FY2012, Isetan-Mitsukoshi Osaka sales fell 2% to just ¥30.3 billion (against an initial forecast of ¥50 billion) from footfall of 23.5 million, down 17%. Sales are expected to be even worse for FY2013. Lucua on the other hand increased sales by 5% to ¥35.7 billion against a forecast of ¥34 billion, from 37 million visitors. In terms of sales densities, this means the department store side produces a mere ¥50,500 per sqm per month against ¥154,166 for Lucua – Lucua is now the 11th highest selling SC by sales densities behind Lumine Yokohama.

The JR Osaka Isetan-Mitsukoshi disaster has had relatively little negative impact on the Isetan-Mitsukoshi Group itself. The real legacy has been that, fearful of competition from this much hyped new store, local competitors went on a frenzy of investment and expansion in central Osaka, notably Hankyu, Takashimaya, Daimaru and Kintetsu. The net result has been a huge excess space problem, exacerbated by the arrival of new SCs. Daimaru Umeda has added 40% more space and another ¥20 billion in annual sales, Hankyu Umeda has wrested back its old sales levels, and Grand Front itself has taken around ¥40 billion out of the pie. All this in a market which is not seeing any real growth, has the lowest average incomes and expenditure of any major region in Japan, and in a culture where being thrifty is a celebrated virtue.

For Isetan-Mitsukoshi the completeness of the Osaka store’s failure was actually just the kick it needed, helping modernisers in the business take control. The results of this new blood are being seen today, in both innovative upgrades to existing department stores like Isetan Shinjuku, but more particularly the moves into specialty retail chains like Isetan Mirror and MI Plaza, and into e-commerce. Whether Isetan-Mitsukoshi has really learnt its lesson will be clear from what it does with the remaining 19,700 sqm at the Osaka store.

JR West has the bigger challenge. Although Lucua was an out of the park hit when it first opened, sales have declined since Grand Front Osaka opened just across the tracks. JR West does not have the SC management record of JR East, but now has to prove it can fill a 50,000 sqm property and make it perform in what is one of the most competitively retailed urban districts anywhere in Japan.

On the other hand, as Grand Front Osaka showed, there is pent up demand for well located SCs in Osaka, SCs that offer generous space for large scale Kansai flagships of both Japanese and international specialty retailers. There are numerous brands that have yet to open good sized stores in the city, and many of these can offer the kind of entertaining, no nonsense value that Osakans want. The new Lucua will offer them a great opportunity. JR West is sitting on the prime spot in Osaka, and if it cannot make it work there, its ambitious plans for a string of SCs across Kansai in imitation of Lumine, could flounder.

For now, JR West says it hopes to raise sales to ¥80 billion for the combined space, up from the ¥70 billion produced by Lucua and Isetan-Mitsukoshi last year. This is a safely conservative forecast. It was anyway scheduled to overhaul the tenant mix at Lucua this coming summer as the three year contracts come up for renewal, which should further boost sales, before the full relaunch of the entire SC in Spring 2015.