USM Holdings: Aeon’s new base for a national supermarket chain

Aeon has taken the next step towards its goal of consolidating the supermarket sector, beginning with the key market of Kanto. The retailer is tying with Marubeni to establish USM Holdings in March 2015, which in turn will take over ownership of Maruetsu, Kasumi and Maxvalu Kanto, all major Kanto supermarket chains. Together the operation will be larger than any other supermarket chain in the country, but this is just the first step. It will then start canvasing for other supermarkets to build a nationwide chain.

Aeon and Marubeni will establish a new joint venture in March 2015 that will act as a holding company to consolidate Aeon’s major supermarket assets in Kanto. The new company kills two birds with one stone, allowing Aeon to take full operational control at Maruetsu – where Marubeni still owns a significant stake – and combining three major supermarket banners under a single management. This last objective is long overdue and the lack of centralised management has been a stumbling block to Aeon’s supermarket ambitions for much of the past decade. Indeed, consolidation at Aeon is a priority across the group now, with Aeon’s Welcia operation being rolled up into a similar model in drugstores (see Page 10), its specialty divisions now firmly under HQ control, and SC operations also soon to be managed under one roof.

The new holding company was confirmed on 31 October and will be called USM (United Super Market) Holdings. Marubeni and Aeon will establish a joint venture, 30% owned by the trading house and 70% by the retailer, which will hold a majority stake in USM, with the remainder publicly listed. USM will acquire all shares of Maruetsu, Kasumi and Maxvalu Kanto, and further Aeon supermarket assets in Kanto may well be added soon after. Both Maruetsu and Kasumi will be delisted from the TSE next February.

Even with just these three chains, USM will command sales of around ¥643.9 billion and 479 stores, making it the largest single supermarket in the country – Life, the current largest, had turnover of ¥534.9 billion last year. Moreover, USM’s interests lie entirely in Kanto, a food market with an estimated value of ¥10 trillion. Aeon currently accounts for close to ¥1.6 trillion of this through all its retail interests, about the same as Seven & I Holdings, but its share is broken up into multiple banners and a fragmented distribution infrastructure. This is about to change.

The current CEO of Maruetsu, Makoto Ueda, will be appointed USM’s president, with the much older Hiromasa Komatsu, Kasumi’s CEO, becoming executive chairman. At the initial press conference, Ueda said USM is looking for more supermarkets to join the new operation and confirmed more M&A was on the cards. Both Inageya and Belc, two more large, Kanto-based Aeon affiliates, are widely expected to join in the near future, but both may attempt to delay. Inageya and Belc are performing better than they have for years, with both sales and profits improving – Inageya has even been expanding stores and introducing new formats.

By 2020, Aeon is targeting 1,000 stores under USM’s wing and sales of ¥1 trillion, which along with its other food interests, would take its share of the Kanto market to around 20% on current values. Whatever the outcome, other food retailers, not just in Kanto but nationwide, are fearful they’re now seeing the future of their sector being formed as they stand idly by. There are still more than 20,000 supermarkets in Japan with ‘multiple’ chains of 10 or more stores. While many have maintained independence and profits thanks to localised wholesaling and supply conditions, and the support of loosely tied buying groups like CGC or Zennisshoku, they’ve never before faced companies with direct and international supply reach, significant economies of scale, and aggressive marketing. For many the writing is on the wall.

Aeon struggles in first half

Despite some aggressive moves towards consolidation in supermarkets and drugstores, Aeon is not having a happy year so far. For 1H2014, the group’s net profit fell 91%. Overall turnover was up 15.1%, but most of the growth came from the absorption of Daiei and new store openings. Operating profit fell 41.2% to just ¥43.3 billion.

Aeon’s GMS operation made a ¥3.8 billion loss from March-May, but bounced back in 2Q to make a ¥13.1 billion profit for the half. Like other retailers, Aeon is blaming the tax hike and bad weather for the falls, with people cutting back on non-essentials as utility and fuel prices continue to rise. At the same time, Aeon says its newest stores have not been as effective as hoped.

For the full year, group sales are forecast to rise 9.5%, making Aeon the first retailer to break ¥7 trillion a year, with operating profit also up 20% to ¥210 billion – this does, however, presume a particularly profitable 2H, and Daiei might well prove a bigger than expected drag.