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Drugstores were mostly small, independent stores or small regional chains as recently as 10 years ago. Today they make up one of the most dynamic retail sectors in the country. In volume it is about to become the latest retail sector to overtake department stores, and is one where, again, Aeon dominates with 22% share. Consolidation and further modernisation is on the cards. This and the diverse formats and even wider array of merchandise mean they are an increasingly important conduit for a multitude of consumer brands from cosmetics to food, and a great channel to reach women.
CHARTS
Chart 1: Drugstore and related retailing statistics, 2001 to 2012
Chart 2: Retail related M&A and MBO deals exceeding ¥10 billion, 2010-14
Chart 3: Market Share by Format Sector, FY2013
Drugstores: rapid change
Retailing in Japan is in the throes of consolidation and drugstores are at the forefront of this trend. It is an often overlooked sector, and one that long enjoyed competitive protection from regulations on supply and sale of drugs and medical products. Today it remains fragmented, with many very small chains of fewer than 10 stores each, often surviving thanks to long-held licenses for prescription drug services and comfortable relationships with local hospitals and doctors. But the sector is about to become the latest to overtake department stores by overall sales volume, just as convenience stores did five years ago.
Drugstores are a key channel for overseas firms selling toiletries and cosmetics. It is the second biggest channel for beauty products after department stores and while the latter cater purely to the top end of the market, lower end sales through drugstores have risen steadily for the past decade. In 2012, HCI estimated the chain drugstore market at ¥4.6 trillion, with cosmetics and beauty products accounting for around 28% of the total, the single largest category for the format. As online sales of cosmetics expand, drugstores are under as much pressure as department stores, but given their growing presence in the high street and improvements in branding, the channel is expected to continue to expand share.
The place to sell to women
Drugstores are fast becoming the convenience store format for women. Whereas the majority of shoppers at Seven Eleven and its rivals are men, drugstores are much preferred by women – a recent trade report suggested that some chains derive more than three quarters of sales from female customers. Drugstores have taken over cosmetics sales from keirestu cosmetics chains and, at the lower end, from cosmetics counters in department stores, toiletry sales and household product sales from supermarkets, and are rapidly taking share from prescription pharmacies too. Most of the big chains have also increased their range of foods, drinks and health gadgets – food, including health food and supplements, is the second largest category in chain drugstores. There’s still a large variation in sub-format in the sector depending on chain, ranging from largely toiletry focused chains, to prescription drug chains, through to a number of sub-banners in Kawachi Yakuhin, Sundrug and others that specialise almost entirely in low priced cosmetics. There are also chains like Kusuri no Aoki and Cosmos Yakuhin, both regional chains, that stock a broader range of products, extending into household and cooking utensils and a larger range of foods.
Drugstores come of age
The 2012 Economic Census amalgamates a variety of retailers selling medical, home cleaning, toiletries and other products. This sector has proven robust, with store numbers dropping only 2% since 2001 and still holding firm at more than 85,000 stores nationwide. Of these, 13,000 are keiretsu cosmetics stores (tied to a single brand), half the number in 2001. Another 30,000 are small, independent stores, varying in size and selling a mixture of drugstore and cosmetics items. The remainder are chain drugstores and prescription drug specialty chains (see Chart 1), both of which have grown in the past decade and, until now, have served two distinct markets.
Prescription pharmacies increased in number by 33% from 2001-07, but dropped by 18% between 2007-12 to just under 30,000 stores. The average pharmacy is just 52 sqm and has sales per sqm of just ¥367,000. Sales densities have dropped by 26% since 2001. Prescription drugs remain profitable, but these chains have seen their share rapidly eroded by general drugstore chains, and since the deregulation of over-the-counter (OTC) drugs, the decline has steepened markedly. While doctors and hospitals continue to support small pharmacies, customers find them inconvenient and are becoming used to the one-stop-shop options of larger drugstore chains.
The drugstore sector alone has grown markedly over the past 10 years. The Economic Census in 2012 recorded chain drugstores for the first time, numbering 14,000 stores, only 16.8% of stores, but accounting for 69.5% of total sales, around ¥6.2 trillion. Drugstores were significantly larger than other retailers in the sector, averaging 430 sqm, with sales densities of more than ¥1.7 million per sqm, almost five times more than prescription pharmacies.
Major players emerge
The Japan Chain Drugstore Association (JACDA) put the drugstore market at ¥5.94 trillion for FY2012, just slightly below that of the department store sector at ¥6.2 trillion. Even with improved results at department stores in recent months, the drugstore sector may well have overtaken department stores in FY2013 given the higher growth rate and continued rapid organic expansion by the larger chains.
It is not surprising that drugstores are getting increasing levels of attention from investors and brands alike. The top chains are consolidating through M&A and expanding into new territories. Indeed, there’s increasing cross-over with the convenience store sector, with all three leading convenience store chains also expanding so-called hybrid stores, and Aeon looking to open convenience drugstores too.
Seven & I has a stake in Ain Pharmaciez and has begun to open cosmetics and beauty orientated stores similar to Boots in the UK. The venture has launched its own format called Seven no Bi Garden, again largely orientated to beauty, but including some standard drugstore fare. Around 50 Seven no Bi Garden stores were open by May this year.
Lawson’s tie-up with Matsumotokiyoshi has struggled to make progress, and the convenience store chain began a new collaboration with Qol last year. Qol is owned by Medipal but has ties to Aeon’s Hapicom buying group. Lawson has handed Qol a corporate franchise license, allowing it to open jointly branded, hybrid conbini-drugstores and making this new format a core part of its store expansion programme.
Familymart, meanwhile, has taken a similar route to Lawson, but in order to expand more rapidly has made deals with a number of smaller chains across the country – it had 11 such agreements as of May 2014. Each chain is tasked with expanding a new Familymart based hybrid. In some cases, the deal involves multiple drugstore chains for a single franchise, some providing general drugstore merchandise with others prescription services. This kind of deal attracts smaller, regional chains that are eager to work with Familymart, but lacks the brand impact of working with larger chains.
Aeon: 22% market share
In the next 12 months we are likely to see some significant developments. In addition to outperforming other formats and likely overtaking department stores overall, the sector is increasingly dominated by major chains and these are no longer able to avoid each other by staying out of each other’s territories. As in supermarkets, competition to acquire existing regional chains will become fierce, and those same regional chains may have little option but to choose a side in order to remain in business. This will lead to a new round of high end mergers over the next two years, as the largest chains look to consolidate against the big two groups, Matsumotokiyoshi and Aeon Welcia.
As of FY2012 seven chains had sales exceeding ¥300 billion (see Chart 2). Equally, among the leading 14 chains, Fuji Yakuhin was the only chain to achieve a growth rate lower than 4%. The top 20 chains opened a net 1,050 new stores, with four chains, Matsumotokiyoshi, Cocokara Fine, Welcia and Qol, all adding more than 100 stores each, including both organic openings and new acquisitions. In total, the leading 20 chains accounted for ¥4.2 trillion out of the total ¥6 trillion market, with the top 10 alone having a 52.6% share. The top 20 chains overall saw sales up by 8.9% in FY2012.
These figures are impressive by any standards, but as in other sectors, the true level of consolidation is masked by more political factors. There are in fact just five major buying groups within the sector, led by Aeon, Matsumotokiyoshi, Cocokara Fine, Fuji Yakuhin and Sundrug (see Chart 3). Seven & I (with Ain Pharmaciez) and Sugi Holdings add two smaller buying operations. Together these seven companies account for ¥3.8 trillion in sales within the sector alone, but they also supply most of the large GMS and supermarket chains in the country too. These buying groups account for 12,000 stores out of the 14,000 in the sector as a whole.
The two largest groups by a significant margin are centred on Matsumotokiyoshi, the single largest chain, and Hapicom, a buying operation controlled by Aeon. Matsumotokiyoshi remains a mostly Tokyo based chain with just a few directly run stores in the regions, although its affiliates now stretch nationwide. It recently revised its forecast for FY2014 to March next year, targeting a 3% increase in sales to ¥510 billion, facilitated primarily by the absorption of Shimeno Yakkyoku, a chain of 70 stores in Hokuriku that it acquired in December. It is now increasing the pace of expansion into the regions and by 2015 plans to have sales of around ¥600 billion, 25% higher than 2013. Outside Tokyo it will add both new stores and seek more acquisitions. Matsukiyo is aiming to have sales of at least ¥30 billion in every region, but clearly will be hoping for more. Arguably, where it is relatively weak is in prescription sales. The higher profits available from prescription drugs have led most of its rivals to concentrate more on this sub-sector. Some have considerable backing, notably Ain Pharmaciez which is 8% owned by Seven & I and is one of the country’s strongest prescription service chains.
Matsukiyo’s main challenge will be from Aeon. Up to this year, both groups maintained a politically safe ‘affiliate’ model for their buying group members, but Aeon changed this stance over night in March. It announced that its main drugstore arm, Welcia Holdings, will become a wholly owned Aeon subsidiary by February 2015. Aeon currently owns 29.2% of Welcia, which in turn is made up of three chains: Welcia Kanto, Takada Yakkyoku and Terashima Yakkyoku. The new group will absorb other majority owned subsidiaries, notably Shimizu Yakkyoku, Takiya and CFS. Other members of the Hapicom group may follow.
As of August 2013, Welcia’s sales alone were just ¥334.4 billion, ranking it sixth in the sector, but add in other affiliates and H&B sales at both its own Aeon Retail operations and through newly acquired Daiei, and Aeon’s total influence in the drugstore sector comes in at around ¥1.34 trillion and in excess of 3,800 stores – a market share of 22%, and not too shy of double that of Matsumotokiyoshi’s buying group.
Welcia’s future consolidation will depend not only on how its competitors react, but also on Aeon’s careful handling of the political ramifications of taking away its members’ independence. Sugi Holdings is still 10.9% owned by Aeon, but it left the buying group in 2007, unhappy with conditions for merchandise quotas. CFS, which tried to leave the group for similar reasons, found itself acquired instead. The position of Tsuruha will be the main test. Aeon owns 13.3% of Tsuruha, but Tsuruha has turnover of ¥343 billion, bigger, currently, than Welcia. Although it remains part of Hapicom for the time-being. Tsuruha has also acquired several smaller regional chains in the past year, and is the third largest chain in terms of store numbers, accounting for a third of Hapicom’s operations. Aeon will need to tread lightly in order to keep Tsuruha as part of its group.
Even so, Aeon’s new consolidation stance suggests it will become more openly active in trying to buy capacity in the medium-term. Rivals will be scrambling to keep pace. In addition to Matsukiyo and Welcia, in the past two years Cocokara Fine has emerged as the third major group, making a series of acquistions. It is the first to apply uniform branding to new acquisitions, a strategy Aeon now plans to emulate.
There are still plenty of good sized drugstore chains that could make excellent targets. Some are particularly strong in their own regions, notably Kawachi in Kanto (¥230 billion turnover in FY2013), Kusuri no Aoki in Hokuriku (¥93 billion in FY2013), and Cosmos Yakuhin in Kyushu and Shikoku (¥329 billion in FY2012). Smaller chains are also scattered across the country. All of these chains are ripe for merger and will come under increasing pressure to give in to approaches in order to survive and grow.
Online offline, buying drugs
Two other issues currently face the drugstore sector, both of which could have a significant impact on its future development.
One of these is shortage of qualified staff. Plans to expand the number of graduating pharmacists have been in the works for close to a decade, but supply still doesn’t meet demand. Recent reports suggest that drug manufacturers are also worried about the problem and have increased graduate recruitment. The limited supply of qualified people for drugstore employment is likely to shrink even further in the short-term. Given the high margins on prescription services, and again dominance of particular chains like Ain Pharmaciez and Nihon Chozai, this too could further spur M&A activity.
The second issue is the gradual shift to selling drugs and related products online. Major online retailers, notably Rakuten, are keen to sell more pharmaceutical and health products on the Internet and are battling with ministries to bring down regulatory barriers – barriers that the drugstore chains are equally keen to maintain. From 2013, some OTC drugs and a host of non-medical products were approved for online sale, although some require telephone consultations with on-call pharmacists before a customer can place an order. All the major chains have set up online operations and offer phone consultations with pharmacists during standard retail opening hours. The availability of telephone pharmacists is currently a significant point of competition between chains, so JACDA developed a set of sales guidelines for online sales which, as of September last year, had been adopted by 12 companies across 23 online stores.
Rakuten and its peers will continue to push for further opening up of online drug sales, and the continued opposition of high street drugstore chains will be something to watch. As in consumer electronics, existing chains are hoping to protect their physical store investment for as long as possible, but equally this may backfire in the long run. The same stores face new competition from non-drugstore formats too, with consumer electronics, supermarkets, GMS chains and home centres all now selling OTC drugs.
The drugstore make-over
Much of Japanese retailing has undergone a makeover during the past 20 years, but so far consumer electronics is the only sector to have emerged as a customer focused retail format led by a handful of large, capable players each with a significant share of the market – other sectors remain fragmented and relatively less competitive, although the nature of apparel retailing does make it an exception. While supermarkets and home centres look set to consolidate in the medium term, the drugstore sector looks to be the next format to enter the modern age. The next few years will see Aeon establish a drugstore model that it has been developing since the turn of the century, with unified branding and retail strategy across a seriously large number of stores. The other major buying groups are likely to follow, ramping up competition and aggressively adding volume, while consolidating brands and expanding regionally.
By 2020, the drugstore market in Japan is likely to be in the hands of just 3-4 players with the remainder clinging on as also rans or diversifying into more niche markets such as beauty and cosmetics. Unlike consumer electronics, some of this development will depend on future regulations, but the direction is clear: bigger, branded chains aiming to take ever larger shares of the market.