Consumption Tax widens supermarket performance gap

Nov 15

The effect of the April Consumption Tax increase has been far milder than many expected, but it has still hit more unprepared and intransigent retailers. This is most evident in the supermarket sector, where many chains survive on the thinnest of margins. While in most regions chains have indeed struggled as consumers worry over prices and suppliers pass on cost increases, in Kanto some have done surprisingly well and overall like for like sales have increased as a result.

By August, four months on from the increase in the consumption tax, some department stores, Aeon, and many regional supermarkets and GMS chains, were complaining that it hit their business quite hard, yet, at least in Kanto, supermarkets seem to be doing exceptionally well.

According to the Japan Supermarket Association (JSA), supermarket sales dipped as expected across the country in April, although by just 3.6%, so not as badly as in 1997 when the tax was last increased. Since then on average sales have been at least as good as 2013 nationally, but sales in Kanto have far outperformed last year. In August, supermarket sales in Kanto were up by 4.2% on a same store basis, higher than at any time last year. In contrast, sales in Kansai, Chubu and most other regions have not been so good. After falling 3.5% in April, same store sales in Kansai have improved, but remained negative compared to 2013 in every month since.

Although chains everywhere are facing the same pressures and dealing with the same issue of higher wholesale prices, the difference between Kanto and Kansai is striking. It is indicative of how much progress there has been in Kanto, where there is more competition, forcing innovation in marketing terms to keep customers coming through the doors. Aeon is focusing on Kanto to establish its new, small format supermarket chains designed for urban areas. Lawson, the other major player in small supermarkets, is also expanding and introducing new ideas primarily in Kanto, such as the Lawson Mart supermarket format. Kanto is also home to some of Japan’s best medium sized chains, including OK, Yaoko, Ozaki and Summit. In Kansai, there is far less competition all round, with both fewer and mostly smaller chains.

One more reason for the better performance in Kanto is the pressure from convenience stores. The excessive development of convenience stores in the capital has forced supermarkets to compete on convenience and marketing, and by offering healthier options at much lower prices. This in turn has generated something of a resurgence of customers now avoiding processed convenience store foods in the supermarkets’ favour. Lawson’s shift into fresh foods is targeting this same market from the other side.

Maruetsu is still the single largest banner in Tokyo by sales volume. It is forecasting a 3% rise in sales for 1H2014 (March-August), along with a 30% jump in operating profits. Same store sales were up 4.9%, and in August alone they surged 7.3%. It says that fresh produce and deli items sold unexpectedly well from May onwards and the chain is aiming to take away custom from Tokyo convenience stores using its established network of city centre supermarkets under the Maruetsu Petit banner.

Like Seiyu, rather than make deli items in-store, Maruetsu has shifted to central production to supply most of its smaller stores, while also investing in store refits last year, anticipating the need to boost competitiveness post tax increase. All this seems to have paid off handsomely, and the chain is forecasting an equally good second half – it will be its last as an independent chain before being absorbed into Aeon’s USM Holdings (see Page 5).

Kasumi, Ecos and Life (which has stores in both Kanto and Kansai), all report far better than anticipated results so far this year in the Kanto area. Yaoko too has increased same store sales by 5% in the first six months.

The lack of competition in Kansai and some other regions has led to the opposite result away from the capital, with fewer signs of recovery so far. Okuwa, the dominant chain in Wakayama and a major player in Osaka and Nara, has seen sales slump 4.3%, and expects same store sales to drop by at least 5% in the second half. Like most chains outside Tokyo, it says it has been squeezed by wholesale prices on one side and price conscious consumers on the other, but then so have most Tokyo chains. The difference is that even major chains like Okuwa have built neither the buying power nor marketing skills of their Tokyo counterparts.

Elsewhere too, many chains have had to cut profits in order to keep customers happy following the price increases. Maxvalu Chubu expects a large shortfall this year as it has reduced prices on many items in order to maintain volumes.

As the government ponders the appositeness of a further increasing consumption tax to 10% a year from now, regional supermarkets will be watching what has happened in Tokyo with great interest. The best chains are finding new ways to attract customers, such as catering more to the elderly or to commuting housewives, adjusting product ranges to suit rather than simply emulating another store down the road, and most importantly even taking on aspects of convenience store retailing. These are the ones that are more likely to do well.