Lawson to acquire Seijo Ishii

Lawson will add its second major acquisition for the year this month, taking over leading upscale supermarket chain Seijo Ishii. The supermarket has been managed by a Mitsubishi-backed investment fund for several years, and it is no surprise that Mitsubishi’s convenience store subsidiary should want to add another supermarket banner to its portfolio, although Isetan-Mitsukoshi is reportedly disappointed to have been overlooked.

Number two convenience store chain, Lawson, will acquire Seijo Ishii this month for a reported ¥55 billion. Seijo Ishii is the leading upscale supermarket chain in the country by scale, and has been without a proper operating owner since Rex Holdings (now Reins International) sold off its interest to Mitsubishi-backed fund, Marunouchi Capital, for a reported ¥42 billion in 2007.

Seijo Ishii was established back in 1927 and currently operates around 110 stores. It concentrates on high end deli items and sells a high proportion of branded imported goods alongside many exclusive items. Despite problems with the management of previous owners, sales at the chain are also good, with FY2013 the fifth straight year of sales growth. In FY2014 the chain is expecting another 10% increase to around ¥60 billion, with operating profit also forecast to grow 36% to ¥4.5 billion.

Rumour has it that both the serial acquirer Aeon and Isetan-Mitsukoshi were also keen to acquire the chain. In Isetan-Mitsukoshi’s case, the company was so keen to buy that it reportedly offered a joint deal rather than lose out to Lawson entirely. Its own upscale supermarket chain, Queens Isetan, has been unable to move out of the red for some time, partly because of lack of volume.

Seijo Ishii would have solved its problems; while most supermarkets operate on gross margins in the 20% range, with even Yaoko at around just 30%, Seijo Ishii now supports gross margins of around 40% with operating margins of more than 6%. Further, 40% of its merchandise is exclusively manufactured for Seijo Ishii alone – what most other chains call ‘private brands’. In the end, however, the decision to sell to another Mitsubishi affiliate with existing interests in similar formats should make a lot of sense.

Lawson acquired Shop 99 several years ago, turning it into the largest discount supermarket chain in the country with more than 1,000 stores in operation. It set up a completely new supermarket banner, Lawson Mart, in February, and has spent the past three years building a growing agricultural supply base from its own directly run farms. The Seijo Ishii banner will add a new, high volume operation at the top end of the market. Unlike with Shop 99, Lawson plans to retain the current Seijo Ishii branding although some current and new Lawson private brand lines will be introduced into the supermarket chain. It will also consolidate parts of Seijo Ishii’s distribution network into Lawson, improving profitability.

This is the second major acquisition for Lawson this year following its buyout of United Cinemas in August, the third largest operator of  cineplexes in Japan. That move was designed to expand Lawson’s growing omnichannel operations, linking with a previous purchase of HMV to offer digital music sales and digital ticket sales for movies and other events.