Calendar year results for the three big format sectors, department stores, GMS and supermarket chains, and convenience stores, provide a quick hint of what to expect from results at the end of the financial year. Although 2014 was a difficult year given the increase in prices from tax hikes and higher cost imports, on the whole the better retailers performed remarkably well. Consolidation at the top is set to continue.
GMS stand out as the losers in 2014
While not the greatest year for retailers in recent history, 2014 was far better than expected for the majority of mass market chains.
After a roller coaster of sales ups and downs in 2013, department stores enjoyed five months of increases from November 2013 on. This culminated in a 25.2% jump in March 2014, well over double the other major formats (see Chart 1). GMS chains, which had seen minor increases every month from May 2013 onwards, actually saw sales fall marginally in January last year as consumers switched purchasing to department stores and electronics chains prior to the April tax increase. With the tax increase in place, however, both of the two larger retail formats slumped for the remainder of 2014, with sales down every month to December.
This picture of decline is indeed symptomatic of problems within most stores in the general merchandise store chains, but it masks progress among the top department stores as explained below. Performance of these two large format, mixed merchandise sectors was in marked contrast to that of the two more specialty food formats, supermarkets and convenience stores.
Convenience store chains have recorded sales growth in all but two months since 2012, the last fall being in January 2014. Even though April was the poorest month for the format last year, sales still jumped 4.2% and have grown around 5% a month ever since.
On the one hand, this is partly due to the continued rapid pace of new store openings by the big three chains. On the other, the sector also managed to achieve growth in same store sales in all but two months between April and December 2014.
This is thanks to the ever improving marketing and service offer of the major chains, with the top three controlling some 75% of the market. With these same companies now rapidly expanding into omnichannel retailing as well as continuing to pile on volume through both organic store expansion and absorption of existing chains such as in-station kiosks, convenience stores are expected to achieve strong growth for some time.
Similarly for supermarkets. Sales growth for the format was negative in April, but, while lower than conveniences stores, the 290 or so chains tracked by the Japan Supermarket Association averaged growth of 2% from April to December, again outperforming their larger, mixed merchandise rivals.
Consumers reduced spending on higher end luxuries after the tax hike, but had less leeway to reduce spending on foods and essentials. Import prices of foods have also risen adding to revenues for supermarkets in particular. Again, the inability of GMS chains to emulate that trend despite themselves being large food retailers points to the underlying weakness in the format (see Page 3).
Department stores did SO well, IT’S BECOMING A TREND
While the performance between formats varied markedly, a deeper look at sales of department stores and GMS chains by company shows that actually some firms also did relatively well, pushing ahead of their respective format sectors. This was particularly true of department stores.
Chart 2 shows the top 30 department stores by location – although most of these manage multiple stores as a single location, and not necessarily all in the same place. Department store sales as a whole were up only 0.3% for January to December 2014, but the leading 30 stores increased sales by 2%, well ahead of the sector overall. Only eight of the leading 30 stores failed to beat the sector average of 0.3% growth, and only seven reported sales lower than in 2013. Among the leading 15 stores, only Takashimaya Nihonbashi and Tobu Ikebukuro failed to increase sales last year.
Together these 30 stores accounted for 51% of total department store sales. The leading 130 stores sold ¥5.1 trillion or 81% of the market, with the remaining 19% spread across the smallest 110 department stores.
Hankyu Umeda (composed of six stores) and Isetan Shinjuku were again the leading two retail stores in the country, both exceeding ¥260 billion and up 5.7% and 2.2% respectively. Kintetsu Abeno (six stores) was third, overtaking Seibu Ikebukuro despite the new Harukas complex in the south of Osaka being poorly received. While the 7.3% increase at Kintetsu was one of the highest of all the leading stores, it was from a base of low sales the previous year when large parts of the store were under redevelopment. So desperate is Kintetsu over the reception of its new store that it plans to spend at least another ¥5 billion on refurbishing it already.
Further down the ranking, other stores that exceeded 5% growth on the year were Takashimaya Nagoya (6%), Matsuya (Ginza & Asakusa, 8.2%), and Isetan Kyoto (5.4%), but the best performance of all was Mitsukoshi Ginza, up 10.3% on the year. Although competing closely with Matsuya, Mitsukoshi is gaining the most from the influx of tourists to the Ginza area, and last year the closing of Matsuzakaya just nearby also helped boost Mitsukoshi’s sales.
By sales densities, department stores remain relatively weak – and figures are distorted as firms lump multiple stores under single statistics. The leading 130 department stores had average sales per sqm of ¥1.2 million for the whole of 2014, so ¥100,000 per sqm per month, whereas the top 30 stores recorded ¥1.65 million per sqm. Isetan Shinjuku was once again far and away the highest in the country with ¥4.7 million per sqm, while second place was a tie between Seibu Ikebukuro and Takashimaya Nihonbashi, both ¥2.53 million per sqm.
Despite being third largest by sales and now the largest by consolidated space with almost 200,000 sqm across six stores, Kintetsu Abeno managed densities of a mere ¥940,000 per sqm last year. Sogo Chiba (1 store) and Marui Imai Mitsukoshi (2 stores) were also below ¥1 million per sqm.
Top department store firms now dominate the sector
The leading 130 stores in the country are run by 25 department store chains. All of the top six chains recorded sales increases, but, apart from Matsuya, all of the remaining 19 chains saw sales fall, meaning that growth was limited entirely to the top few. Number one is Isetan-Mitsukoshi which runs 20 stores among the leading 130 (including jointly managed stores), for turnover of ¥1.032 trillion, up 2.6% on 2013. This was a fifth higher than number two chain, Takashimaya, which achieved a 1.2% increase to ¥856 billion from 16 stores. All of the leading seven chains increased sales last year, led by Kintetsu up 6.5%.
With growth limited to just the very top firms, consolidation in the department store sector continues. Isetan-Mitsukoshi alone accounted for 16.6% of total department store sales last year with the top six firms accounting for 62% of the total.
Again, sales densities varied significantly across firms, but Odakyu, Matsuya and Keio achieved the highest averages of ¥1.7 million, ¥1.66 million and ¥1.56 million per sqm respectively. Takashimaya was close behind at ¥1.51 million, but across a far bigger chain, demonstrating the strength of the company’s best stores compared to most of its rivals.
Every department store firm from Matsuya down generated sales from a single operation (not necessarily a single store). Even for larger companies with more stores, until recently individual locations accounted for large proportions of total sales, but this situation is improving. Despite the strength of the store, Isetan Shinjuku last year accounted for just 25.3% of group sales, while leading stores in Takashimaya and Daimaru both made up less than 20% of total sales. Although the Umeda location accounts for 65% of total sales for H2O Retailing, this one site comprises six of H2O’s 13 stores, so even this is not an extreme proportion, although Hankyu Umeda is by far the group’s most important retail asset.
Department stores in major cities did significantly better than those elsewhere (Chart 3). Sendai, Kyoto and Hiroshima saw sales down, but partly due to store closures in each case, whereas Shikoku was the only region to see sales grow – it has no major cities, but department store spending by the wealthy is particularly high on the island.
The situation in department store retailing is becoming increasingly clear, with stable growth being generated by the leading six chains, while the majority of others continue to decline. Even in a year when consumer spending was less reliable, with the format enjoying a huge sales boost in the first three months, the top six chains still managed to improve sales for the full 12 months overall. Such strong performances would have been unimaginable a decade ago and testament to both significant management changes, as well as the revival in spending by wealthy Japanese and the tourist dividend.
GMS chains still have problems, supermarkets improving
As already noted, GMS and supermarket chains did less well, although there was a lot of variation across chains (see Chart 4). Of the leading 18 chains, half saw sales decline in 2014. Okuwa and Daiei were both down by more than 5% and Ito-Yokado also came close, down 4.9% for the year. Only two of the seven GMS chains recorded gains. Izumi was up by 2% and Heiwado by 2.7%. Both are strong, regional companies, with Heiwado especially beginning to take real advantage of its relative isolation from any major competitors in the Hokuriku region.
Izumi is the largest chain from Hiroshima and south through Kyushu. While it competes with Aeon in the same region, the south has turned out to be Aeon’s weakest area, partly due to Izumi’s more competitive strategy of every day low prices and wider merchandise ranges (again, see Page 3).
In contrast, seven of the 11 supermarket-based chains in the ranking saw sales increase. Inageya had yet another storming year, entirely thanks to repositioning as a more high end, inner Tokyo chain – it added just one store net last year, with no increase in sales space, and still managed to grow sales by 18.3%.
Kasumi and Maruetsu, two companies that last month were absorbed into new Aeon subsidiary USMH, far outperformed the sector, up 6.7% and 7.2% respectively, thanks largely due to the same improved merchandising and positioning of fellow Aeon-affiliate, Inageya – although the two chains did add six and nine new stores respectively.
The only chain to do even better was Life, up 8.5% making it the number three chain and overtaking Daiei for the first time. This success was driven by its close ties to Mitsubishi, eight new stores, and improved merchandising.
Expectations of great annual results for many retailers
The majority of retailers in Japan will look back at 2014 as an unusual and difficult year. No one was really sure what would happen when the consumption tax was increased, but, in the end, the top retailers coped remarkably well. This demonstrated yet again that they now have the marketing knowhow to solve problems without needing to rely on outside help from suppliers or the government.
Few retailers would go so far as to welcome yet another tax increase as initially proposed for October 2015, but equally the top firms would probably approach a second price hike with far more confidence than they did a year ago. Given their current strength and the widening gap with competitors, some may even welcome another tax increase as a tool to further improve their position.
Equally, it’s relatively easy to see how the major sectors are developing. In department stores, after two decades of stagnation and decline, today’s leading groups have emerged as retail powerhouses and look set to move forward with considerable energy. All of the top firms, with the possible exception of Kintetsu, have progressive initiatives in place with high expectations of growth up to the medium term – and Isetan-Mitsukoshi and J Front look to have strategies that should take them even further still, way beyond the department store format.
In GMS, the situation is very different. Results for different formats within Aeon Retail aren’t available for the calendar year, but it’s now clear that the chain did poorly across its various formats. Ito-Yokado, Uny, Daiei (now Aeon of course), Fuji and Izumiya (now H2O) all fared little better.
Executives at Aeon Retail and Ito-Yokado, not to mention their investors, will be hoping to finally discover a way to emulate the top department stores and pull their chains out of the long term decay they’re currently suffering. So far, however, there are few signs of this happening.
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