H2O and Takashimaya claim deeper collaboration

Apr 15

H2O Retailing and Takashimaya have been flirting for years but have never got together. The two department stores now claim they will deepen collaboration, yet at the same time reducing their respective equity holdings in each other. The two firms were never a good match, and the latest announcement suggests a still minimal level of cooperation. This makes sense for H2O, but Takashimaya is looking isolated.

H2O Retailing and Takashimaya have confirmed plans to deepen their ties over the coming year. In addition they have agreed to continue their capital tie up, although with reduced equity holdings of 5%.

Concretely this means working more closely on development of private brands in food and apparel. In food, the two department stores will develop more ranges of gifts for the two main, but waning, gift seasons in June and December (o-chugen and o-seibo), as well as centralise logistics for these, which should mean a significant saving.

In apparel, they will develop new private brands together, although Hankyu will likely be in the driving seat given its better record on apparel development.

Takashimaya and H2O have been skirting each other for years. Under pressure from the mergers of Daimaru/Matsuzakaya and Isetan/Mitsukoshi in 2007-8, and with Hankyu itself losing its long-time partner Isetan, both companies felt the need to explore a partnership. In 2008, they agreed to purchase 10% stakes in each other, as a precursor to a possible merger. By 2010, all bets were off, with a collapse in negotiations. Necessity makes strange bed fellows, however, and the two firms agreed to maintain reduced stakes in each other, and to collaborate only on clearly delineated areas – i.e. food and apparel.

If nothing else the ownership of each other’s stock has proved profitable in the last two years, given the rise and rise of the Nikkei. Currently, H2O holds 9.3% of Takashimaya, and the latter 8.3% of the former. Both will now sell shares to reduce their holdings to 5%.

Equity windfalls aside, the level of collaboration at the product level remains minimal. Sales of jointly developed product reached just ¥4.5 billion in FY2014, and will rise to ¥10 billion in “the future”. These are tiny numbers for businesses with combined sales of more than ¥1.5 trillion and, in truth, the collaboration is no more than window dressing and much the same as the department store buying group ties of old, but which still persist today. This is a shame given the clear promise that private brand development has for improving department store apparel cost performance and profitability, as is already the case for rivals like Isetan-Mitsukoshi.

There is clearly now little hope of a merger. This is actually good news for H2O which is carving out a useful role as a multi-format retail powerhouse in Kansai and further south. Takashimaya, however, remains the only independent national department store chain. While some of the best-performing department stores in terms of sales densities are in its portfolio, Takashimaya also has some duds such as its branches in Okayama and Shimane. If it closes the latter stores or converts them to SCs, its smaller scale will make it harder to compete with its larger, merged rivals especially on private brand lines, but if it keeps the poorer stores just to stay big, profitability will continue to suffer.