Seven & I saved by record profits at Seven Eleven – again

Seven Eleven has long propped up its sister companies in Seven & I Holdings, but the situation is getting worse rather than better. While the convenience store posted another record profit for the first nine months of FY2014, Ito-Yokado and Nissen, both important for the group‘s omnichannel strategy, suffered major dips in performance yet again.

Seven Eleven saw an increase in same store sales for the first three quarters of FY2014, up 2.4% March to November 2014, resulting in record operating profits of ¥170 billion. It was the only convenience store chain (CVS) to see growth; Lawson was down 1.4% and Familymart down 1.5%. All three chains have been pushing forward with new store openings, but Seven Eleven is adding far more volume than its rivals.

On the down side, this new record further highlights the gap between the CVS chain and the rest of the Seven & I Holdings Group. Although group operating revenue rose 7.5% and operating profit 4.8% on the back of Seven Eleven‘s performance, net profit was flat due to ongoing difficulties in other parts of the group. The only other group company doing well is Seven Bank, itself a business created to support Seven Eleven. Ito-Yokado again was in the red for the same period, while Sogo Seibu department stores and Seven & I Food Systems are experiencing higher costs and continued pressure on profits.

Ito-Yokado was profitable in 1QFY2014, but fell into the red in the following two quarters, with a cumulative operating loss of ¥2.5 billion, down from a ¥3.7 billion profit in the same period in FY2013. The chain had been making headway through cost cutting and better customer communication, but the loss came on the back of increased price sensitivity post-tax hike, coupled with higher costs of imported goods and part-time workers. It also had to reduce prices on apparel due to competition.

In January, Ito-Yokado‘s CEO Kazuhisa Toi decided to head the chain‘s apparel division himself, in a bid to finally find a solution after a decade of failed attempts to fix collapsing sales. He believes the GMS chain‘s recent expansion of own brand ranges has been too broad, introducing a lot of excess across multiple brands, and hinted at plans to cut SKUs by half.

Given that Ito-Yokado has never been a price leader, the importance of rebuilding the high margin apparel category is a vital issue for the group, although it does mean that resources and time are taken away from the clearly more effective food category.

In addition, Ito-Yokado has cut back on store openings, reverting to a more characteristically slow but steady pace of expansion. It had planned seven to 12 stores in FY2014, but will have added only three by the end of March. Improving same store sales and profitability, including a more localised, store-by-store merchandising policy rather than centralised merchandise planning from Tokyo, will both be key initiatives.

While becoming an omnichannel retailer remains the group’s core strategy, the 2013 acquisition of Nissen Holdings, Japan‘s number two catalogue retailer, is also a drag on the group‘s overall performance. In FY2013 Nissen made a ¥3.3 billion operating loss, down from a ¥600 million profit the previous year, due to decimated sales.

With Seven & I still coming to terms with how it plans to use its new asset, Nissen‘s strategy was rethought in December after end of year profit forecasts were revised downwards from an original operating loss of ¥4.6 billion ¥6.7 billion. The original plan to increase the number of catalogue issues and diversify target segments was clearly out of sync with the reality of consumers shifting to buying online, and the increased number of players in that market. In the first nine months of FY2014, Nissen saw unit orders drop more than 10% to 3.51 million. In the same period, Seven & I‘s total online operations saw sales of ¥196 billion, but made an operating loss of ¥4.7 billion.

As a result, Seven & I replaced the Nissen CEO in December and confirmed that it would move away from catalogues towards online. The decision to stick with a 35-year Nissen veteran, Shinko Ichihara, as the new boss rather than introduce new blood is similar to the way it began after acquiring Sogo Seibu in 2006, with the department store failing to improve until an outsider was finally appointed after two further years of stagnation.

In initial interviews Ichihara is indeed quoted as saying Nissen‘s main strategy will remain unchanged, diversifying to new micro targets such as working mothers or people who are ‘heavier than average‘. No mention was made of issues with Nissen‘s inflexible and sclerotic merchandising and sales model – aside from its successful m-commerce targeting young women – something that will need to change if it is to make new headway.

There is growing commentary from analysts about just how bad things are at Seven & I, with the more ridiculous comments even suggesting that Ito-Yokado should be sold off. The decision to appoint Yasuhiro Suzuki, second son of 82-year old group chairman (and ‘retail god’ ) Toshifumi Suzuki to lead the omnichannel strategy has been widely questioned. Reports claim Suzuki Junior is not highly respected in the company, let alone among analysts who rightly fear that failure in omnichannel retailing would seriously harm the company overall.

Even so, Seven Eleven has carried its sister companies for much of the past 20 years and is likely to continue to do so, given the room it has to expand both at home and overseas. Seven Eleven and the omnichannel strategy go hand in hand, and the opportunity to provide greater integration and, it is hoped, new customers for the entire group should make it stronger still. To succeed, however, both Ito-Yokado and Nissen need to make some drastic changes, which may even include discarding some legacy business, in order to stay relevant.