Top wholesalers see sales grow 4% in FY2013 but profit falls for many

Japan’s wholesale sector enjoyed higher sales in 2013. In food and household products, huge wholesalers continue to play a prominent role in the distribution channel as traditional intermediaries, but even in some cases as budding retailers in their own right. An overall increase in profitability was largely due to the better performance among pharmaceutical suppliers, with both food and apparel wholesalers struggling with costs.

Leading 30 Wholesalers FY2013

The wholesale sector continued to expand in FY2013, enjoying brisk business as consumers rushed to stock up prior to the April tax increase. In Nikkei’s annual survey and sales ranking for the sector, the 515 companies listed saw sales up 4% overall to ¥36.77 trillion, the fourth consecutive year of growth and the highest increase since 2005. While only 10% of total wholesale sales, these companies make up the bulk of the industry supplying consumer products. Profitability was lackluster, however, with only the larger companies performing well. Overall, operating profit increased 1.4%.

While there are major differences between product categories in wholesaling, trends remain similar to last year, especially the key theme of consolidation. The ranks are once again led by the biggest pharmaceutical and food wholesalers, which take up all of the top nine places. and account for some 70% of total sales. These are the main suppliers to mass market retailers in the supermarket, GMS, home centre and drugstore sectors. There has been further consolidation within food and drugs, with regional affiliate companies continuing to be absorbed into parent operations, although there have been fewer major mergers or acquisitions at the very top.

Food wholesaling, which accounts for 180 companies and 40% of sales, increased turnover by 3.7% last year, after a 3.2% increase the previous year. The big increase in demand didn’t work entirely in food wholesalers’ favour, however. Spikes in demand around Christmas and before the end of the financial year put many companies under huge pressure to meet orders, and with much of the sector still relying on labour intensive systems, meant costs rose, while at the same time retailers continued to pressure wholesale prices downwards. As a result overall operating profit for food wholesalers fell 12.2% last year. Retail System Service (RSS), a Tokyo based firm ranked only 18th among food wholesalers, achieved the highest sales per employee of ¥1.191 billion, whereas number two company Nihon Access, at a mere ¥486 million per employee, was still the tenth highest overall. RSS has just 130 employees while Nihon Access has 3,500. Many of the wholesalers in the ranking employ little technology beyond basic IT systems, but the larger players are planning investment in this area in the next few years, which will reduce labour costs.

A limited number of food companies, with Itochu Shokuhin prominent among them, continue to develop their own private label ranges for sale through preferred, mostly regional, supermarket chains. Itochu Shokuhin reports growth for this business, but it is little more than a hedging measure. It gives control over a small volume of directly managed products and keeps regional supermarket clients nicely biddable, but the volume is never likely to match the private label business of even one of the major retailers. Itochu and all its peers are just as keen to take a lead in supplying the big retailers’ own brands wherever possible, and it is this supply model that is most likely to grow the most in coming years.

Pharmaceutical wholesalers, which split their businesses between supplying hospitals and doctors with drugs and medical supplies, and the FMCG retail sector with general household products, also grew sales by 4.7% last year. Unlike the mostly smaller scale food wholesalers, this category is now heavily concentrated and operating profits increased by 27.3%. While enjoying high demand for FMCG items, pharmaceutical wholesalers are also protected from pricing pressures by fixed prices on many of their medical supplies. The same companies are bullish about the medium-term too, with drugstore retailing expanding rapidly and expected higher demand for medical products as the population ages.

Apparel wholesaling is today a galaxy apart from other categories, with the biggest players, World and Onward, both having significant interests directly in retailing on top of their wholesale businesses. Despite the generally good performance in other categories, sales were variable for apparel wholesalers, mostly due to increased competition in apparel retailing and replacement of wholesale brands with private brands by department stores. Meanwhile profits suffered due to the weakened Yen. Even World, the largest company overall, saw sales fall by 5.7%, with operating profit down 21.3%. Onward did increase sales by 8%, helped by its overseas businesses, but again operating profit was down by 15.8%. Overall, apparel wholesalers saw sales up 3.3% but operating profit fell by 14.8%. Apparel firms are expecting another difficult year profit-wise given the exchange rate and growing competition from vertically integrated retailers.

In other large volume sectors such as liquor and books, there are fewer leading companies, and even the top firms are under increasing pressure due to rapid advances in the retail channel. For example, Nihon Shuppan Hanbai is still Japan’s tenth largest wholesaler, but it is in a dying business selling books and media, and was one of only two wholesalers among the top 30 that saw sales fall in the past 12 months. Even in other sectors, such as electronics and toys, retailers are now clearly the channel leaders and the role of wholesaling is increasingly diminished. This trend will strengthen in coming years, with some large companies coming under pressure to merge, or to diversify into new services and businesses in order to survive.