2014 could be a rough year for some – but problems with consumer confidence could be yet another reason pushing retailers towards greater consolidation. Last month saw what is the most significant merger in retail history between H2O Retailing and Izumiya. There have been bigger mergers financially speaking, but this is the largest between two solvent and actively competitive retailers. The news could well mean a psychological barrier to similar mergers has finally collapsed.
Early February saw the announcement of the merger between H2O Retailing and Izumiya, combining two of the largest retailers in Kansai and creating a new top 12 retail group at a stroke. H2O runs Hankyu Hanshin, one of the biggest department store businesses, a highly successful and innovative SC development and management operation through multiple properties, and an upscale supermarket chain in Kansai called Hankyu Oasis. Izumiya is one of the biggest GMS chains with interests in supermarkets and a chain of SCs, with stores mostly concentrated in the south of the country. Together the combined group will have sales of some ¥920 billion.
As reported last month (JC1402) the move came as a shock, particularly for retailers in Kansai, with some reports suggesting the two companies control 20-30% of the total retail volume in the region already. Given competitive pressures, however, the decision to merge was an easy one.
Although in 2012 H2O reopened Hankyu Umeda, now the largest department store in the country, results have not matched forecasts. In the year to March, the store is expected to have sold ¥188 billion, 30% up on last year and number two in the country after Isetan Shinjuku, but well below the initial forecast of ¥230 billion – it did, however, beat Isetan in December. Kansai is the most competitive department store market in the country with all the major stores there expanding or building afresh over the past decade. H2O sees the merger as just a first step in diversifying its retail portfolio to relieve some of the competitive pressure on its department store operations.
The merger could have wider consequences too, removing a psychological log jam for retail M&A. Although Japan has seen mergers of leading companies in the past, in almost every case one of the companies involved has been in serious financial difficulty – Izumiya has been losing share in recent years, but it remains a solvent, reasonably capable player all the same. The H2O-Izumiya merger is the biggest strategic M&A deal to date and could well be the biggest in terms of impact, signalling a new acceptability in top-end mergers.
At the moment, there is no public indication as to who might move next, but the possibility of other major acquisitions in the next 12 months are high. Seven & I Holdings has made it clear it is in the market, targeting companies that can help achieve its ambition to be the biggest omnichannel retailer, not just in Japan, but in the world according to its own PR. Aeon is also an acquisitive company and will look to tie-up firms before Seven & I.
In GMS and supermarkets, Uny, Life and Izumi are now the only major independent retailers with significant cross-regional chains – along with the very valuable logistics infrastructure to go with them. Equally, Valor in Chubu, Yaoko (partially tied with Life already) in Kanto, Arcs in Tohoku, and Okuwa in Kansai are all large supermarket chains straining at the limits of their regional fiefdoms. Given their success locally, merger might well be anathema for their founders, but this is why the scale and strategic rationale for the H2O-Izumiya deal is so significant – it has made even these independently minded founders realise being powerful in a limited area is no longer enough. Then there is Heiwado in Kansai and northern Chubu and Fuji in Shikoku, both chains with far less financial clout and both successful at least partly thanks to geographical isolation. Like Izumiya, these chains could see the attraction of merger before competition forces their hands.
These are just the biggest players. There are literally dozens of medium sized, capable but now under pressure supermarket chains that could provide a quick and easy way for the larger players to expand share in local markets. Given the arrival of Lawson and other powerful players in their market (see Page 9), they may not want to hang around too long.
So far this is still speculation, and some chains might well prefer to wait and see what happens until the effects of the coming tax increase have dissipated, but even if it takes a few more months, we can be pretty confident that 2014 will end with fewer major retail chains than when it started.
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