Marui to switch to SC model

Marui is often classified as a department store because most of the brands in its buildings are contracted on a concession basis, just like a traditional department store, even though many of the tenants are specialty chains. This definition also makes sense given Marui’s low level of profit, partly the result of this same operating model. Marui will finally fix this, shifting its entire portfolio of stores to the shopping centre model by 2018. More stable revenues and higher profits should follow, and the switch in contracts will mean an overhaul of tenants too.

Marui will scrap its current concession model in favour of a shopping centre style tenant arrangement in the next three years. By the end of 2018 it expects all tenants will have been moved to the new agreements, making Marui a true shopping centre operator. Until now Marui has used the ‘Shoka Shiire’ model, a concession system where the tenant holds title to stock until the point of purchase, at which point ownership passes to Marui which, after taking a percentage, passes the remainder back to the tenant after any other contributions it may have negotiated, such as central marketing and staff.

At the same time, Marui will take over more space for direct management, taking a leaf from the latest management strategies of Isetan-Mitsukoshi and others. Around 40% of space will be under direct management through 2018-19.

The principle benefit of moving to an SC system is stability of revenue. Under the concession system Marui is dependent on tenant sales for all its income whereas SC tenancies can be a fixed rent, a percentage of sales or a mix of the two. In recent years, Marui has seen its gross income decline year on year, especially from apparel tenants, and Marui believes it will be impossible to lift profitability in future years using the current model. Marui itself has plenty of experience running SCs through its subsidiary Aim Create, which operates SCs in Machida and other locations in the capital and neighbouring prefectures, as well as offering consulting services to other SCs (www.aim-create.co.jp).

The switch over will mean less need for its own shop staff but Marui will reassign most to its other divisions such as its large consumer credit arm. It will also give Marui a chance to review all its tenants. It is highly likely this will mean radically reducing the amount of space dedicated to apparel, much as it has done at some of its flagship buildings like Shinjuku, where accessories, lifestyle and cafes now take up a much greater share of space. Marui wants all its buildings to offer a similar ‘lifestyle experience’, an emporium of goods, services and dining to meet the needs of young urban singles in city centres and young families in the suburbs. The first property to operate under the new model is Marui Machida which has just reopened after a refurbishment.

At the same time, Marui is also as keen as specialty retailers and the likes of Isetan-Mitsukoshi and Sogo Seibu on expanding private branded merchandise, given the much greater margins available. Marui is particularly confident about this because it has seen stronger sell through of its own lines compared to tenants in recent years, and has a good track record of successful own brand development, including its own specialty store division.

One of Marui’s biggest successes in the private brand sphere is Rakuchin (meaning ‘comfy wear’ in Japanese). The chain began development of the brand in 2010, starting with women’s shoes but then expanding into accessories, apparel and later some men’s shoes too. It now has around 50 lines in the series, and women’s shoes alone have sold more than 1 million pairs in the past four years. Rakuchin sales totalled ¥6.9 billion in FY2012, but then doubled to an impressive ¥12.2 billion in FY2013, 3% of total sales, and Marui expects another 30% increase this year.

As a result of these changes, within three years, Marui expects operating profit to jump by ¥9 billion to ¥36 billion. Marui has always looked profitable because of its consumer credit arm which has kept Marui flush, and even with the changes, only ¥11 billion of profit will come from retail and ¥24 billion from consumer credit.