FY2013 retail results were heavily influenced by both renewed consumer confidence and increased spending spurred by the pending tax increase, but they also represent a new benchmark for the industry. Whereas a decade ago, the high performing retailers stood out as the exceptions, last year the opposite was true, with just a small number of strugglers in the top 50. Some worry that this represents a peak for some companies, but given the way the industry has evolved, it’s more likely to be a starting point for the next phase.
FY2013: BUST TURNS TO BOOM
It’s now 15 years since JapanConsuming launched and in that decade and a half Japanese retailing has evolved from a depressed, often directionless industry into a major powerhouse for the Japanese economy. Consumers here have always been avid shoppers, but what has changed fundamentally is the companies who supply this demand. Today the retailers themselves are in charge. Not just growth, but profitable growth is the strategic focus of all the successful companies operating today – and the majority of the biggest firms are doing amazingly well with good prospects going forward.
FY2013 was an unusually good year for most retailers. Consumers were more willing to spend than they have been for a long while, and most retailers were happy and able to take full advantage. At the same time, market consolidation and price competition continue to advance, pushing gross margins down for some, but this is being largely offset by much more efficient, better marketed operations, helping profitability improve for most last year.
Largely due to consolidation through mergers and acquisitions, sales for the leading five retail corporations jumped 10.8%, while the top 20 firms were up 14.9% – this in a year when total retail sales rose a mere 0.3% overall. As a result, the leading five chains now account for 12.8% of the total market, up 1.2 points on the year, while the leading 20 chains control 22.6%, up almost 3 points in the past 12 months alone (see Chart 1).
Average margins also increased for companies reporting figures. For the leading 20 companies, average operating margins stood at 3.64%, with pretax margins at 4.14%, both improvements on FY2012. Overall net margins fell for the first time in three years to 2.13%, but only by a very small amount.
Consolidation will continue. There are signs of increased M&A activity in both supermarkets and drugstore sectors, while both Aeon Group and Seven & I Holdings, the two largest companies, are also on the look out to add greater volume in order to stay ahead.
Fast Retailing leads big Gains over past 5 years
The success of the leading companies is increasingly clear this year. Chart 2 shows the total sales growth for the leading retail companies, mixing both parent chains and total retail groups at the top of the ranking. Of the top 20, 15 companies have recorded sales increases in the past five years. Five of these, Fast Retailing, Bic Camera, Seven Eleven, Familymart, and Lawson have all increased sales by a third, while Aeon Group is also up by more than 25%. For Aeon and Bic, these figures are largely due to M&A and internal group consolidation. For the three convenience store chains, huge expansion in store numbers has pushed volume forward significantly.
But Fast Retailing stands alone in terms of recent growth. Since FY2009 the company has expanded sales by 66.9%, an incredible achievement. In this period Fast Retailing has rapidly shifted from a single brand to a multi-brand apparel conglomerate with GU now growing quickly as the group’s second core brand, with a target of ¥100 billion this year. Fast Retailing is, of course, now focused on overseas expansion, with plans to maintain this pace of growth. It will need to have the nerve to take advantage of opportunities for large-scale acquisitions if it is to meet its own astronomical target of ¥5 trillion by 2020, but at the current rate of growth and store expansion, ¥2 trillion actually seems quite realistic.
Chart 2 also demonstrates clearly the direction of some of the other major groups. While Isetan-Mitsukoshi expanded sales by 2.3% – all of this growth in the past 12 months – J Front increased sales by 16.7% in the past five years through merger, coupled with real growth in department stores, SCs and other retail assets. Seven & I has grown by 10.2%, again a respectable number, but this is entirely down to Seven Eleven and far less than Aeon. Ito-Yokado, the group’s GMS chain lost 4% of sales in the same period and continues to struggle. The Sogo Seibu department store operation, an increasingly important part of Seven & I, also shrank by 5.4%, although much needed efforts in reforming the chain store by store are, at least in flagships like Ikebukuro, Yokohama and Chiba, bearing fruit. It will take a good few years before the entire chain is performing as well as it should, however, with the Kobe and Hiroshima stores currently undergoing major reforms.
Uny too has lost sales at its core Uny GMS chain, down 9%, but also at the Uny Group overall. The group was down 2% in the past five years, a very disappointing result and one that will again point to the growing possibility of Uny merging with other players.
This leaves Yamada Denki and Daiei, both of which require relatively less comment. Yamada Denki was the investors’ darling throughout the 2000s, but it has lost 6.1% compared to FY2009, not surprising given the saturation in the consumer electronics market – Yamada was saved from greater decline with an impressive 11.5% increase last year alone. Daiei, of course, spent all of the 2000s clinging to existence. It is a shadow of its former self but also, as of August last year, now owned by Aeon, so this could well be the last year it appears in the rankings independently of its new owner (see Page 5).
2013 a sell out year for top retailers
This year again JapanConsuming has compiled a list of all retailers with sales of ¥250 billion or more. Given the excellent performance of most leading companies the list has expanded yet again from 49 chains last year to 51 in FY2013, with a further 24 chains of this size that are part of larger groups – there were 22 last year – for a total of 75 companies.
Overall, results were astoundingly good. In FY2012, of the 71 companies we listed, 25 saw sales fall compared to FY2011, with three making operating losses and five overall net losses. Last year only 11 companies saw sales fall. The worst of these was Tokyu Department Store, which still only just squeezes into the ranking, down 4.2%, followed by Okuwa down 2.4% and, again, Daiei down 2.1%. Of those companies which make operating profit figures available, only one, Kojima, recorded an operating loss and even this ¥1 billion deficit was offset by Bic Camera, Kojima’s new parent, which increased operating profit by 220% to ¥13 billion. Three companies made an overall net loss. Kojima was ¥8 billion in the red overall, half what it lost in FY2012 so still an improvement. Okuwa also made a loss of ¥429 million. Daiei, however, once again performed the worst of all major retailers, losing another ¥24.3 billion, well up from the ¥3.6 billion lost in FY2012. Given the volume of divestments and restructuring Daiei will undergo this year, it will likely continue to lose money, but, again, by next year Aeon will have turned it into a completely different animal largely incomparable to its current structure.
At the top of the ranks, Aeon Group and Seven & I Holdings grew by 12.5% and 12.8% respectively. Even excluding Daiei, Aeon is now a ¥6.4 trillion business compared to Seven & I’s ¥5.6 trillion. Including Daiei, six affiliates are part of Aeon Group and even greater internal consolidation has already been announced for the coming months.
Seven & I includes five affiliates with sales above ¥250 billion. The company has made it clear that it sees its future as an omnichannel retailer, and that this cross-channel operation is the best way to continue to leverage the Seven Eleven convenience store chain. Once again, however, its profit record confirms that the group is excessively reliant on Seven Eleven and that finding ways to leverage the chain is not just a sensible idea, but actually vital. Seven & I remain’s the country’s most profitable retailer by a long way, but 76.5% of net profits come from Seven Eleven alone. Ito-Yokado and York Benimaru improved profits markedly last year, but the overall level remains low compared to the convenience store, while Sogo Seibu is some years away from even breaking even.
Further down the ranking, 13 more companies recorded sales growth in double digits. Excluding merger and consolidation related figures like those for Bic, Cocokara Fine and Sugi Yakkyoku, outstanding performers were Fast Retailing, up almost a quarter in a single year, and Cosmos Yakuhin, which was up 18%, confirming it as one of the most dynamic retailers in the country. Its unique format combining drug and hardware store continues to expand in Kyushu and the chain will be looking to move further north in the next couple of years. Most other drugstore chains also did well. Furniture retailer Nitori also continues to grow at an impressive pace, overcoming fears that the weaker Yen would put pressure on its low pricing policy. Yaoko, another perennial performer, achieved the highest year on year growth of any supermarket, up 10.6%.
In terms of profitability, Seven & I Holdings along with Seven Eleven remain the undisputed profit kings of Japanese retailing, coining ¥175.6 billion in net profit last year, up 27.3% on the year before. This was double the next best company, Fast Retailing, which also grew net profits by 26% to ¥90.3 billion. Seven Eleven is also the most profitable retailer in terms of operating and pretax profit.
In contrast, Aeon Group had the second highest operating profit at ¥171.4 billion in FY2013, a 10.2% decline on the previous year, but a higher cost structure meant that the group’s net return was less than half of Fast Retailing at just ¥45 billion. The only other retailers to exceed ¥35 billion in net profits were Lawson and Nitori. These were also the only other chains to make more than ¥50 billion in operating profits.
A number of companies saw double-digit growth in operating profits last year, including several drugstore chains and a couple of the consumer electronics chains, but it is the department store sector that stands out in this regard. While Isetan-Mitsukoshi Holdings saw sales up 6.9% to ¥1.3 trillion to become the largest group in the sector, the biggest single department store chain remains Takashimaya with ¥701 billion at the parent chain compared to only ¥678 billion at Daimaru Matsuzakaya and ¥675 billion at Isetan-Mitsukoshi. All three of the largest companies grew operating profits in double-digits, but J Front Retailing was by far the highest, achieving ¥41.8 billion for a net return of ¥31.6 billion. In contrast, Isetan-Mitsukoshi made ¥34.6 billion in operating profit, but only ¥21.2 billion net, and Takashimaya ¥29 billion operating profit, but only ¥18.7 billion net profit, less than half that of J Front.
It is unlikely that the same levels of success will be repeated this year, without the spending stimulus caused by the pending consumption tax increase. It is possible that sales will stay strong as taxes and inflation push up final figures, but there is likely to be increased pressure on profits as consumers take greater care as to where they make their purchases. Price competition will be stronger in mass market sectors, while the department stores are likely to rely on new formats and upgraded flagship stores to maintain sales, a process which will increase costs in the short-term.
DRUGSTORES & CONSUMER ELECTRONICS lead specialty retailing
For specialty store retailing, excluding food, again consumer electronics led the way for the largest chains. Eleven chains exceeded sales of ¥100 billion last year, all of them increasing sales with the one exception of Best Denki which is now owned by Yamada Denki. The top five chains all increased sales by double digits. Kitamura is a specialist camera store, but the remaining three large scale CE chains, Joshin Denki, Nojima and Denkodo all cling to independence, a situation that may not last much longer. With the market estimated at around ¥7 trillion and shrinking, these 11 chains account for almost 90% of the total, with much of the remainder already in the hands of online retailers. Further consolidation is almost a certainty.
For apparel, Uniqlo is by far the single largest brand with Japan sales of ¥683.3 billion to August 2013, although Shimamura also broke ¥500 billion last year. Aoyama Shoji, the largest menswear specialty chain, is less than half this figure. Last year United Arrows and Aoki both outperformed with sales up 11.7% and 12.4% respectively.
Four discount chains entered the ranking this year, with Seria appearing for the first time, making it the second largest ¥100 Shop in the country with impressive 11.3% sales growth and the second highest pretax profit among the discount formats. Don Quijote continues its powerful lead with sales well above ¥500 billion and strong growth and profits yet again.
Thirteen drugstore chains sold more than ¥100 billion last year, all of them recording impressive increases in sales and most with equally impressive profits. This was the second largest sector after consumer electronics. Of the 13, four chains saw pretax profits up in double digits, with only Cawachi Yakuhin seeing profits fall compared to the year before.
Home centres continue to expand but more slowly with some concerns over profits. While furniture specialist Nitori is the largest chain at ¥387.6 billion, both Cainz and Komeri also sold more than ¥330 billion each. This was the weakest sector of all in terms of sales growth and five of the leading chains also saw pretax profit fall in FY2013, three of them significantly. Homac and Kahma, both parts of DCM Holdings the biggest single home centre operation, saw pretax profits down 15.5% and 13% respectively while Daiki, the third member of DCM, didn’t report last year.
Among the remaining smaller sub-sectors, CCC, which didn’t report in the FY2012 rankings after its MBO, returned with sales up 12% to ¥196 billion. Lawson HMV was recorded for the first time too. Maruzen and Kinokuniya still manage to enter the ranking as the country’s top book sellers, and neither performed too badly last year considering that the channel is rapidly becoming obsolete. Ryohin Keikaku remains one of the most difficult to classify large retailers. The Mujirushi Ryohin chain had a particularly good year with sales up 17.7% and pretax profit up 16.6%, in keeping with performance at other premium retail brands. Yamaya, Aeon’s upscale liquor and imported food chain, was also up in double-digits for both sales and profits too. In sports, Xebio ranked higher than Alpen for the first time, but Alpen will return to the top spot when it files this year’s returns due for June. There’s been a change at the top of the footwear ranking too, with ABC Mart now by far and away the largest in the sector, with sales up again last year by 18% and profits also up by 13%. Chiyoda, the long time leader, continues to lose ground, and it was one of the few retailers to see sales and profits decline last year. G-foot, Aeon’s budding footwear operation, left the rankings with sales of just ¥98 billion, a drop from ¥102 billion last year, due to brand restructuring.
FOOD & APPAREL: CONCENTRATION INCREASING
Chart 5 shows the rankings for food retailers with sales of ¥150 billion or more and apparel retailers selling more than ¥50 billion. The order of the rankings for both categories remain largely the same as FY2012, but the growth of the leading retailers shows a pronounced widening of the gap between companies. Last year Aeon Group and Seven & I were neck and neck in terms of food sales, but Aeon has taken a small but definite lead in the past 12 months – both calculations include Daiei in Aeon’s overall food sales, but this year adds in new acquisitions such as Marunaka in Shikoku and faster organic growth at Aeon’s multiple supermarket chains across the country. As a result, Aeon outperformed Seven & I last year and now has total food sales in the region of ¥3.7 trillion compared to Seven & I’s ¥3.6 trillion. This gap is expected to widen in coming years as Seven & I turns towards higher margin categories, notably apparel. Aeon’s food sales rose 9.6% last year compared to 6.6% at Seven & I.
Having said that, Seven Eleven remains Japan’s largest single food retailer by a large margin, selling around ¥2.5 trillion in food last year alone, up 9.8%. More than ¥1 trillion of this was fast food, outselling McDonalds Japan by four times, while a further ¥978 billion was processed foods.
Lawson is the second largest food seller, but still significantly behind Seven Eleven at a mere ¥1.56 trillion, again most of which was fast food and processed foods. Lawson’s sales of fresh produce remain just a tiny fraction of the total and are currently classified as ‘processed foods’ along with other deli items such as salads. In this sub-category Lawson comes close to matching Seven Eleven, selling ¥957 billion last year, whereas its sales of fast foods, albeit under a slightly different definition, is only a third the scale of Seven Eleven.
Familymart, the third largest convenience store chain, sold just a little less food than Aeon Retail last year, both selling just over ¥1 trillion. Again using its own definition, Familymart concentrates more on so-called daily foods such as breads and dairy, matching even Seven Eleven on this measure with sales in this category alone of around ¥482 billion. In comparison, Familymart’s sales of fast food are minuscule, at just ¥78 billion.
Further down the ranking, Uny Group now sells less food than each of the major convenience stores, although food sales at its core GMS chain actually rose 1.7% last year. Ito-Yokado, however, saw food sales down 2.4%. Yaoko was the star performer overall, increasing food sales by 11.1% to ¥214 billion last year alone.
METI figures show that the total food market in FY2013 to March was ¥50.83 trillion, up in line with total retail sales by just 0.31%. On this basis, Aeon and Seven & I have respective shares of 7.3% and 7%, or a combined 14.3% of the total market, up 1 point on last year. The leading five retailers, excluding overlaps with these groups, had food sales of ¥10.68 trillion, or 21.4% of the total market. This was also up 1 point on 2012 showing that growth was led entirely by the two main groups.
Similarly for apparel, the extent of the lead held by the top retailers in the category widened once again last year, particularly because of Fast Retailing’s storming set of results. It is now the first ¥1 trillion apparel retailer in its own right, some 40% larger than Aeon Group. Aeon continued its lead over Seven & I due to the ongoing restructuring at Sogo Seibu and continued issues with apparel sales at their respective GMS chains. Shimamura is also strong, but growth is considerably slower. Given Seven & I’s recent acquisitions in the apparel category, it is likely to catch up with Aeon in the next 12 months if all affiliate sales at Nissen and Barneys Japan are included.
Including fabrics and accessories, METI figures put the total apparel market in FY2013 at ¥13.88 trillion, up 0.29% on the previous year. Given this small growth overall, the leading chains expanded share once again. Using consolidated figures, Fast Retailing alone now has a share of roughly 8.2% of the entire apparel market, with Aeon and Seven & I having 4.9% and 4% respectively. This means that these three retailers alone account for some 17.1% of total apparel sales, up 1.3 points on last year. Add in Shimamura and Daimaru Matsuzakaya, and the leading five chains own just under 23% of the market.
Consolidation in both key categories of food and apparel continues to strengthen year on year with the largest companies leading strongly from the front. This fact is not generally covered in the local press, partly due to difficulty in calculation, but the companies leading this development are undoubtedly some of the most dynamic and successful retailers Japan has ever seen. Consumers are more than happy with what they are doing and are equally willing to provide support by opening their wallets. In comparison to other markets, a top five share of 21% in food and 23% in apparel is not particularly high at all. The difference is that both figures are actually unprecedented in Japan and are likely to grow sharply in coming years, bringing the Japanese market more in line with other advanced economies.
A NEW ERA OF RETAIL GROWTH ABOUT TO BEGIN?
FY2013 was an excellent year for Japanese retailing, spurred on by increased spending from confident consumers, with top retailers showing an ability in marketing and execution perhaps unthinkable just a few years ago.
The question now is whether these results represent an aberration caused by temporary political policy and economic conditions, or are a sign of something better to come? It is almost certainly the latter. Regardless of how Japan’s political landscape evolves in the next two years, and the impact on consumer sentiment of both this and the continued stagnation in wages, retailers themselves are now as technically capable as anywhere in the world – further evidence for this can be seen partly in the increasing numbers who are heading overseas to demonstrate their strengths in new markets too.
The top groups will continue to expand, driven by strategies that are unprecedented in their clarity and determination, and their share of total spending will continue to grow. The best specialty retailers will also evolve and demonstrate further innovation, often involving more use of online channels and adapting to changes in consumer needs, but also using their increasing profitability to buy share within their sector and to launch into new ones.
There will be casualties along the way. The industry as a whole remains overly fragmented and some sectors, notably supermarkets and drugstores, are highly likely to see both acquisitions and bankruptcies over the next few years.
The current financial year will be a testing ground for the marketing strategies now in place at the country’s top retailers, but few are in doubt that these strategies are robust enough to meet this challenge. We have finally moved from an era of restrcuturing, shrinkage and bankruptcy, to one where the top chains will lead and grow. JC
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