Lawson ties with Tsuruha, but pulls back on supermarkets

In the past month, Lawson has confirmed a new deal with Tsuruha, the number three drugstore chain, but announced a surprise retreat in supermarkets. Tsuruha will become a corporate franchisee, using Lawson‘s know-how and convenience store supply system to develop hybrid stores. At the same time, Lawson will close round 260 Lawson 100 and Lawson Mart stores over the next 12 months, a gift to Aeon’s ambitions in city centre food retailing.

It‘s been an up and down month for number two convenience store chain, Lawson. Early in January it confirmed a major new deal with Tsuruha Holdings, one of the leading drugstore chains, to jointly develop drugstore-convenience store hybrids. Lawson signed a similar deal with Qol last year, giving Qol a franchise to open Lawson stores combined with its own drugstores. Tsuruha, which is partly owned by Aeon through the Aeon Hapicom buying group, is the third largest drugstore in the country with a nationwide chain of some 1,300 stores.

The two companies have already opened a trial store in Sendai, but say they are targeting 100 stores within three years. Lawson will provide the supply chain support for general merchandise and foods, and Tsuruha the medicines and cosmetics.

Lawson CEO Gen Tamatsuka is hinting at further deals to hit a target of 500 hybrid stores group wide by 2018. Familymart has a similar model in place with around a dozen small, regional drugstore operators, while Seven Eleven has a fledgling subsidiary business in conjunction with Ain Pharmaciez, the 11th largest chain.

The main barriers to expansion in the past have been different operational expectations between the two formats – an earlier Lawson agreement with Matsumotokiyoshi came to nought for this reason. The regulations requiring licensed sales staff to sell even OTC drugs, mean that the franchise model makes more sense as drugstore operators already have these staff in place. Similarly for the drugstores, there is no better way to expand into food operations than to tie with a CVS chain.

In April, Lawson also plans to open a new medical related format in Saitama called Kaigo Lawson, or ‘Care Lawson‘. The store will offer qualified care advice aimed primarily at senior customers and their carers, with plans to expand the concept nationwide by 2020.

While the Tsuruha deal is positive for Lawson, at the end of the month the chain also announced a major set back. It will close some 20% of stores in the Lawson Store 100 discount supermarket chain and shut down Lawson Mart, a supermarket operation that was only established a year ago by previous CEO, Takeshi Niinami.

Although Lawson 100 is the largest discount supermarket in the country and Lawson Mart had opened 39 stores in just the first nine months, competitive pressures from similar formats and the problem of convincing consumers to buy in small stores rather than larger supermarkets has proven hard. By the end of FY2015, Lawson will close 300 stores in its supermarket operations, leaving around 800 discount stores. Around 100 of the stores to be closed are earmarked for conversion to drugstore hybrids such as those being set up with Tsuruha and Qol.

Despite the popularity of the Lawson Mart format, one of the reasons for the decision has been the difficulty in convincing consumers that ‘cheap food’ is a good thing – consumers assume cheap food can’t possibly be healthy, perhaps ironic given that convenience stores, the biggest food retailers in the country, sell almost nothing but processed and highly preserved food. Even so, Lawson plans to maintain the remaining Lawson 100 chain as a discount format, increasing the proportion of SKUs selling at ¥100 from 60% currently to 80%, in an effort to further differentiate the brand.

The decision also demonstrates the strength of Aeon‘s small supermarket operations in Tokyo, with multiple group chains including Mai Basuketto, A Colle, Maruetsu Petit and recently acquired Big A, all competing directly with Lawson. Competitive pressure from Aeon‘s greater mass in Tokyo looks to have pushed Lawson to withdraw early. Equally, while Aeon is content to sacrifice profitability to make its model work, for Lawson the bottom line and ROI come first, requiring even major projects to contribute early on – a view that has caused more than a few overseas retailers to pull out of Japan over the years, although it is odd that Lawson gave the experiment so little time.

Lawson will continue to develop its fresh produce category at the standard convenience store format and is likely to further grow its direct farm operations too, but its retreat means Aeon will have that much more elbow room.