Aeon has begun full absorption of its Welcia Holdings affiliate, the start of plans to shake up drugstore retailing, with Welcia and three other major drugstore chains merged by the middle of 2015. This will create the largest single chain in the country, overtaking Matsumotokiyoshi, and put Aeon in a position to make even further gains through increasing buying power and more uniform branding, impacting the cosmetics, health, household goods and drugs markets significantly.
Aeon will make its core drugstore operation, Welcia Holdings, a fully owned subsidiary by the middle of 2015. Aeon already owns close to 40% of the company, and purchasing outstanding stock will reportedly cost around ¥20 billion, at which point Welcia will be delisted from the TSE.
In addition to bringing Welcia into Aeon Group, three other drugstores in which Aeon has large stakes will be absorbed at the same time, the largest of which is CFS Corporation. The new subsidiary will jump to the top of the drugstore rankings as a result, with combined sales in excess of ¥514.2 billion on last year’s figures, exceeding long-time sector leader Matsumotokiyoshi which stood at ¥495.3 billion.
Aeon has been the number two player in drugstores for more than a decade, and, unlike in supermarkets where it set up its own direct operations, had hoped to build its influence subtly through a buying and affiliate group model, usually with Aeon taking a 10-15% stake in group members and contributing to executive decisions and strategy. Its hopes for this approach were shattered after Sugi Holdings, today the fifth largest company, acrimoniously dropped out of the buying group – Aeon retained its 10% stake – with CFS Corporation quickly attempting to follow suit. CFS, at the time one of the top three chains, was seen as too important to lose, so with a distinct lack of subtlety, Aeon initiated a hostile takeover, one of few ever to succeed in the Japanese retail industry. Aeon has taken a more aggressive stance on group cohesion ever since, but it still waited until the death of the Welcia founder this year to begin the long overdue process of consolidation.
And this is just the beginning. While Welcia and Matsumotokiyoshi will be the two single largest drugstore operating companies, both also sit at the head of far larger buying operations, with Aeon’s Hapicom group again slightly larger than its rivals. The drugstore sector remains fragmented and it has stayed that way due to tight regulation and the need for pharmacy licences, but even this situation will soon give way to the need for scale. While older independents and small chains of prescription pharmacies will survive thanks to cosy relationships with doctors and hospitals, the speed at which bigger groups take over is increasing as services improve, and newly graduated pharmacists are lured away from competitors with higher salaries. Independent regional drugstore chains are under increasing pressure and many may well chose to merge rather than risk being forced out altogether.
The question that remains is how the other nationwide chains will react. Sundrug, Sugi and Cocokara Fine have all been in rapid expansion mode for the past few years, each building up their own rival groups of affiliates – with Cocokara the most aggressive of all, actually buying out members to build a strong central brand. More important still is Tsuruha Holdings, a Hokkaido based chain with national coverage and an equal willingness to acquire, and which itself is the third largest chain in the country. Tsuruha is currently a member of Aeon Hapicom too with Aeon holding its usual ownership stake. Aeon’s relationship with Tsuruha is one that analysts and competitors alike will be watching with interest. Losing Tsuruha’s membership in Hapicom would be a serious blow, but Tsuruha is unlikely to want to give up any more independence and will be wary of Aeon.
Even without Tsuruha fully committed, Aeon’s move to consolidate Welcia should put it well ahead of the rest of the sector. In addition to its standalone drugstores, it also runs the largest chain of GMS and supermarkets in the country, all of which carry Welcia brand items and many house a Welcia tenant store. In total, Aeon’s reach in drugstore and pharmacy related product areas is already dominant. More unified branding, along with better synergy with other parts of Aeon, will present problems for the other major players. As a result there’s every reason to expect some significant mergers in the near future as the big chains look to counter this power.
At present the drugstore market has a value of roughly ¥6 trillion, but it is expected to be the third largest growth sector after e-commerce and convenience stores between now and 2020, with Aeon’s own forecasts suggesting an increase of at least one third to ¥8 trillion. Given that the aggressive growth of this new type of chain drugstore is meeting increasing demand from Japan’s ageing and highly health conscious population, there’s every reason to expect that forecast to be met.
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