Retailing in Japan has been consolidating since the late 1990s, starting with Itochu’s acquisition of Familymart from the now defunct Seibu Saison Group, and the bankruptcy of Sogo soon after. After several years of tentative exchanges and realignments, M&A has at last become a core part of retail strategy, just as it is in many other countries. Over the past three years, the pace of consolidation has continued to increase. We’re now at the stage where many sectors are close to saturation, making acquisitions even more likely in coming months.
Retail consolidation set to peak
It is almost unbelievable to think that in 1990 retailing in Japan was largely dominated by small business, with even the handful of chain operators mostly working to the demands of larger suppliers. Even the prestigious department stores, which had been fantastically successful in the 1980s, had fallen into the trap of selling what suppliers wanted rather than meeting the needs of their customers head on.
How things have changed. From the day that Itochu Shoji acquired Familymart from Seibu Saison Group in 1999, retailing has been following a path of ever increasing consolidation. Today the industry revolves around modernised, profit orientated retailers that view M&A as an important tool in their core strategy. As in many other countries, successful, profitable retailers are looking to buy their smaller counterparts. As individual format sectors consolidate, so the need to use M&As to grab share becomes increasingly unavoidable. Saturation means there’s less room for organic expansion – and less room for poorer retail models to survive too.
Regional chains take a lead
Two major regional groups have emerged in the past few years: Arcs in Hokkaido and northern Japan, and Valor in the Chubu and southern Kanto regions. Both groups have been buying up small, local chains on a regular basis, with Arcs adding three medium sized businesses in Hokkaido since 2010. This is a trend that will likely continue, with the emergence of other regional consolidators in the supermarket sector especially.
Since 1995, Refco’s database of mergers and acquisitions (including management buyouts), includes more than 5,700 cases involving at least one listed company in the retail sector. Some 80% of these have occurred since the turn of the century, with 350 a year between 2005-08, dropping off slightly up to the financial crisis of 2009. Since 2010, however, the number of M&A deals has begun to increase again, hitting 317 in 2013, with 91 deals already complete in the first three months of 2014.
Some sectors, notably supermarkets and drugstores, still include literally hundreds of small, local companies, often with fewer than 20 stores. These small companies are frequently old, run as family businesses, and often lack successors to take over from ageing founders. For the first time, they are under serious competitive pressure from larger, super-regional chains. A key reason is that the old wholesaler and manufacturer support for small retailers is disappearing, a trend that began in the consumer electronics sector, but now extends into all forms of retailing. Given sufficient volume and not too much debt, these smaller companies are ripe for takeover – and increasing numbers are giving in before competitive forces force their extinction.
These smaller deals will continue to make up the bulk of M&As in Japanese distribution for the foreseeable future, simply because there are so many small and medium companies to be had. But the size of deals in the retail sector is increasing. There have been 140 M&A deals involving sums exceeding ¥10 billion in the past 14 years, 19 of them in 2012 alone and another 11 last year (see Chart 3, page 15). There is still only occasional movement at the top of the rankings, but as readers of JapanConsuming will be aware, when it happens, it is significant.
Department stores: fewer, better
In the past 10 years, we’ve seen four mergers among the largest department stores, reducing the 10 leading chains in 2000 to just six: Isetan Mitsukoshi, Takashimaya, J Front Retailing, Seibu & Sogo, H2O Retailing and Kintetsu. So far, and not least because of the declining popularity of the format generally, four of these groups remain focused on department store retailing as their core, but overlaps now exist. Seven & I acquired Sogo & Seibu in 2006, and H2O Retailing announced the acquisition of Izumiya just this year. In the past 18 months, J Front Retailing has divested its supermarket operations, selling to Aeon, and acquired Parco, a much clearer fit for a large format, city centre retail group. Meanwhile Isetan Mitsukoshi has embarked on an organic diversification programme, aiming to build entirely new chains of specialty retail stores. This leaves Takashimaya and Kintetsu as the only remaining large companies in the sector that have not yet joined forces with others – an attempt by Takashimaya to merge with H2O ended with no more than an exchange of shares. Both are increasingly isolated, having a narrow focus on just a single retail format, and facing competition from both within their own sector and from the continued expansion of both more specialty retailers and the two big retail groups.
Trading houses: quiet PROGRESS
In 2011, when we last looked at the who-owns-who of Japanese retailing, the trading houses stood out prominently as major players across the entire industry. While that position has not diminished in the past three years, the five main trading houses of Mitsui Bussan, Mitsubishi Shoji, Marubeni, Itochu and Sumitomo Shoji have been far less active in terms of new additions to retail interests than they were before 2010. Itochu has continued to add new brands and market share in the apparel sector, especially in denim, sportswear and imported brands. All five have consolidated and expanded their interests in food wholesaling, now accounting for more than 10% of the entire ¥78 trillion industry – a figure estimated to rise to more about 15% when affiliates and keiretsu group companies are included.
This aside, however, the trading houses’ interests in large scale retailing are largely unchanged compared to three years ago as they have concentrated on existing business and as the bigger retailers have begun to expand more.
ALL QUIET ON THE TRADING HOUSE retail FRONT
Although there’s been no major new retail acquisitions for the trading houses, all four have been investing in their existing interests (see Chart 2). Mitsubishi’s backing has helped Lawson become one of the most dynamic retailers in the country over the past few years, and its majority stake in Life has also made the supermarket the best performer in its own sector. Aeon’s tie with Mitsubishi has led to improved supply chain efficiency, and the two companies still cooperate on SC development, even though nowadays Aeon Group companies generally control management of new properties.
Mitsui Bussan continues to work with Seven & I Group as its largest and preferred supplier, and plays a prominent role in operational strategy, including for example IT planning, something it could take a major role in as S&I expands its omnichannel ambitions.
Sumitomo, the least retail orientated of the big groups, remains unchanged, but it has invested in expanding Jupiter Shop Channel, the biggest TV shopping operation, with help from new overseas investment. It continues to expand both its drugstore and supermarket operations too. As of the end of 2013, it now has a new partnership with Seven & I, holding the majority stake in Barney’s Japan.
Marubeni continues to run its small and medium supermarket business around the capital, adding a main shareholder position in Sotetsu Rozen, but Aeon bought out a proportion of Marubeni’s business, acquiring 44.2% of Daiei and holding a slightly larger stake than Marubeni in Maruetsu. It is likely that Aeon will seek to raise its stake in Daiei above 50% in the near future, making it a subsidiary, and the same future is likely for Maruetsu too. With Mitsubishi so heavily involved with Aeon, Marubeni may find its supermarket interest significantly cut back in coming years, although it does remain a major wholesale supplier to Daiei and Maruetsu for the present.
Expansion at the top: biggest get bigger
The other main reason that trading houses have added few new options recently is because those that are available have been grabbed by the big retailers. While Arcs, Valor and others are consolidating small and medium sized supermarket chains within their immediate regions, both Aeon and Seven & I show signs that they are ready to move to the next level, taking over chains across the country to develop truly nationwide retail interests.
The first 10 years of Motoya Okada’s tenure as second generation CEO was spent building logistics, merchandising and other systems needed to create a single integrated retail group. In the past three years Aeon has moved to begin the process of genuine consolidation. Superfluous brands have been merged into core areas, particularly at the massive Aeon Retail subsidiary that controls FMCG retailing as a whole, but also in food and, as of last month, now in drugstores too. It has added Tesco Japan, Marunaka, and a dominant stake in Daiei over the past couple of years, taking group sales to more than ¥6 trillion – a position that currently looks unassailable. It is also the market leader in private brand development, the country’s number one SC developer and operator, and has growing interests overseas in China, Malaysia, Thailand and recently as far afield as Vietnam and Laos.
Aeon’s strategy has long seemed to fail at the point of execution with so many parts of its amorphous group interests seemingly in conflict with each other and run by overly independent senior executives. This situation has changed greatly in the past few years, and Aeon’s profitability has improved now that its has finally begun to cut out duplicated functions. Aeon will continue this process for the next 5-10 years. It has always been a highly acquisitive company, and now that its rivals are also moving to buy up better regional and specialty retail interests, that is likely to grow too.
Although not buying as frequently as Aeon, Seven & I has also added a string of acquisitions in the past few years. It remains a much more focused retail group, heavily skewed towards leveraging Seven Eleven convenience store business, but in December it signalled its desire to become the world’s leading omnichannel retailer, linking its physical store operations with sales opportunities online. This is something the convenience store format is ideally suited to given the ubiquity of the stores and popularity of the Seven Eleven brand. It began by buying a controlling stake in Nissen and Bals, and entering into a joint venture with Sumitomo for Barney’s Japan. Most analysts believe that these acquisitions are likely to be just the beginning and that Seven & I will add more partners in companies that can contribute to the same omnichannel model. These will include further specialty acquisitions to add to Akachan Honpo, Loft and Francfranc (through Bals).
More quietly Seven & I has begun its own expansion of FMCG retailing too. It is now the main shareholder in Tenmaya Store, a major player in the Chugoku Region, an area where Seven & I has little presence beyond Seven Eleven but where it hopes it can build traction before Aeon gets there first. It also bought a 30% stake in Kinsho Store in Kansai several years ago, and in Daiichi in Hokkaido. Competition between Aeon and Seven & I for the better regional supermarkets looking to sell is likely to become fierce in coming years.
Real market share emerging
It is easy to overlook the level of power held by major retailers. Looking at individual company sales alone in this large, diverse market, and market shares seem small and the market surprisingly fragmented. In reality there is a lot more cohesion than meets the eye. The capital ties between retail companies have become clearer and are now quite well documented, and non-capital based, operational tie-ups between chains and affiliates are also a lot more transparent than they used to be – something that still can’t be said for the wholesale sector where otherwise entirely independent regional companies still maintain business with just one trading house keiretsu or another, more based on tradition than any form of formal business agreement.
Indeed, levels of concentration by individual retail format are growing rapidly. Chart 4 shows ten retail sub-sectors in addition to the important, but contrasting food wholesale sector. While ¥100 Shop chains are an exception with only five chains in the entire market, for the other nine sectors the minimum share for the leading five chains in the sector is 19.2% for supermarkets – as already mentioned, by far the most fragmented market in the country with the possible exception of apparel. For the rest, five companies account for 85% of GMS retailing (more if Seiyu were included), and 75% of convenience store retailing – all three top convenience stores are linked to one of the major trading houses. Five companies also account for 60% of the department store market and just a little more of the consumer electronics market.
In seven of the 10 retail sectors, a single company holds 10% or more of the market, with Yamada Denki, Aeon Retail, and Seven Eleven all well above 20% in their respective sectors. To the consternation of domestic players, Amazon Japan looms large as the only overseas firm in the ranking, accounting for 10.2% of the direct mail market. Although the ¥5.9 trillion figure used reflects JADMA’s official estimate and understates the market for e-commerce sales by probably about half, Amazon is still a major player in Japan and one that no Japanese retailer can overlook.
Since 2009, every one of the format sectors has seen share increase at the top. In consumer electronics, convenience stores and, significantly, in supermarkets, the leading five chains have expanded share by 6 points or more in just three years. In supermarkets, half of this increase has come from Aeon’s expansion alone, and Yamada Denki, Bic and Edion have accounted for most of the increase in consumer electronics too.
A new wave of M&A to come
In the past six months we’ve seen Seven & I acquire major stakes in Bals, Barney’s Japan and Nissen. Aeon has added Daiei to its group properly, and H2O has acquired Izumiya. These are all top end M&A deals bringing together companies that are in no way small or insignificant. We’ve also seen Arcs add Joi to its own group and Aeon announce that it will consolidate its interests in drugstores to create a single operation.
The wave is building. In order to compete in tomorrow’s retail industry, the best companies will need volume, geographical scope, and strategic cohesion. There is still a long period ahead in which we’ll see older stores and less workable formats decline and replaced with new developments, but for the most part retailing is well into a new stage of evolution. Over the next two to three years, we will see growing numbers of larger M&A deals that consolidate the sector even more. In order of urgency, supermarkets, drugstores, apparel and home centres will prove the most active markets, although there is a high likelihood we’ll see one or two more tie-ups among the department stores too. Meanwhile, formats will continue to improve, innovate and come up with exciting new ideas that match physical stores with the online channel and with O2O (online-offline) marketing.
By the time the dust settles in 2020, Japan’s retail industry will probably have changed as much in six years as it has in the past 20.
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