Aeon taking axe to private brands

May 15

For some analysts Aeon Group’s enduring inability to turn its huge scale into profits is unforgiveable. The sense that it has hit make or break with its GMS chain was confirmed last month with news of far reaching strategic changes, some of which represent a reversal of 10 years of policy. While some of the changes being implemented would seem to make sense in the short-term, they don’t necessarily mean Aeon is on the right track.

FY2014 was a tough year for Aeon Group. It is far and away the largest retailer in Japan, but consistently fails to show a respectable profit, and many analysts now view Aeon’s strategy as not fit for purpose. Last month the group announced it would radically rethink its policy on private brands.

Aeon is Japan’s most acquisitive retailer, now owning  three of the top five retailers from 2000. It has also poured money into organic expansion, seeing income from rents as at least as important as retail sales. This pursuit of higher volume was backed up by in-house logistics systems, centralised planning and buying and the country’s biggest private brand (PB) programme. While impressive on the surface, Aeon has pursued volume at the cost of real understanding of its markets.

A case in point was the acquisition and ‘Aeon-ification’ of Marunaka in Shikoku in 2011. Along with Fuji, Marunaka is one of only two large scale FMCG retailers on Shikoku Island, with its past success built on understanding local customer needs, an eclectic and regionally focused food offering and, vitally, a virtual monopoly on the best local fish supplies. After Aeon took over, merchandise variety was cut back, with many products replaced by Aeon Topvalu PBs. Marunaka stores took on the same bland uniformity seen in Aeon stores all over the country. Worse, with fish supplies being sourced centrally, Marunaka’s main USP disappeared in one, self-defeating stroke, allowing rivals to grab the bigger share of local fish supplies.

Similar stories have emerged in other regions too. Aeon is criticised, even by some of its own senior operations managers, for excessive centralisation, random local marketing and, worst of all, ‘boring stores’.

Given such massive investment and a consistent lack of return, Aeon’s right to excuse this performance as a work in progress no longer washes with major investors.

Panic induced strategy changes

In late April Aeon announced it would completely rethink the PB strategy.

  • Each and every Topvalu item will be assessed for profit contribution, and an axe taken to any SKU that adds little to the group’s bottom line.
  • At least 40% of the 6,000 SKUs currently on offer are expected to go.
  • Aeon will no longer use manufacturer brands as its benchmark for new PBs, taking more care to create products that offer original value.
  • Product development and procurement functions at HQ are being turned over to parts of the company that operate its stores.
  • Aeon Shohin Chotatsu, the ¥70 billion subsidiary set up as a central buying operation, will be dismantled, with its functions absorbed into six regional operating companies under the Aeon Retail umbrella – this will happen within weeks.
  • Topvalu will now be controlled by Aeon Retail, with regional managers given opportunities to develop suitable ranges based on their knowledge of customer needs. Apparel and household items have already been moved across, with food and other FMCG products shifting to Aeon Retail by September this year.

Daiei will be the first to benefit from a more circumspect approach to ‘Aeon-ification’ of new acquisitions. In the past, any SKUs stocked by acquired companies that were not already on Aeon’s books were summarily removed, while around 30-40% of total stock was switched to Topvalu brands. In Daiei’s case, existing lines will be considered on their own merit. For example, Daiei stocks a far wider range of olive oils than Aeon, so, at least for now, Aeon will take on Daiei’s full range rather than pare it down. It remains to be seen whether this shift will allow the venerable Daiei name to survive – last year Aeon  firmly insisted it would be killed off.

These are clearly radical measures designed to counter investors’ concerns over poor profitability as much as any admission that Aeon has misunderstood regional customer needs.

Bathwater gone, and baby goes too

Whether this is the right thing to do, however, remains debatable. Aeon’s press interviews pander to traditional views of how ‘Japanese retail’ should be run, but it could equally be argued that Aeon’s mistake was actually that it was too timid and too slow, especially on PB development.

While Aeon’s HQ in Makuhari tried to unify group strategy, it remained constantly hampered by a management system that relies on too many senior people at local level who were ‘acquired’ in takeover deals, and who often oppose centralised control. This has led to a mishmash of central planning with patchy, unformulated local implementation.

No matter what Aeon now does with its buying operations, this problem remains as stark as it ever was and performance is likely to vary across regions and even across stores.

This is also a symptom of the problems with the Topvalu brand. Once again, Topvalu was designed for volume – but little else. Over the years Aeon never attempted to raise the perception of the brand, leaving it as just a poor alternative in consumers’ eyes. The danger now is that regional management will simply reduce reliance on Topvalu in favour of better supported, but higher cost national brands.

Manufacturers, the same ones that loudly refused to supply Aeon’s logistics centres for fear of Aeon’s power, will be delighted to have wrestled back control of Aeon’s shelves and will fully expect to retake control of retail prices too. For Aeon’s long term profitability, it would be a mistake to allow this to happen.

Nor does it need to happen. Despite Aeon’s poor implementation of its PB strategy, its main rival Seven & I has recently been providing a master class in how things should be done.

Beginning a PB programme some 10 years behind Aeon, from day one Seven & I’s aim was less about replacing manufacturer products with alternatives of its own, and far more about building brand value. Named with no doubt calculated irony, the ‘Seven Premium’ brand has the same mass market position as Aeon’s Topvalu, but it has enjoyed much more focused and effective marketing backing.

More important still, Seven & I quickly introduced a genuinely premium alternative in the form of ‘Seven Gold’, designed not to emulate other products, but to be both unique – using its own consumer data to design products unseen before on the market – and to sell at price points even higher than national brands. Topvalu Black Label was Aeon’s premium alternative, but even this is no more than a ‘higher quality’ version of products that existed already – and convincing the consumer that your soy sauce is higher quality than Kikkoman’s is like offering glass when they want diamonds.

Clearly there is room and demand for PBs in Japan’s FMCG market, and Seven & I has proved it. The strategic changes announced at Aeon last month don’t mean Topvalu is completely dead, but the direction of change suggests that Aeon has lost confidence and Topvalu may now take lower priority.

What is really needed is a complete relaunch, with far greater marketing backing, and far, far more product innovation. Topvalu ranges were only ever used to create economies of scale. The PB strategy needs to create unique, innovative products that consumers can only buy in Aeon stores, and they should be sold in stores that consumers can’t wait to visit.

Over a fairly long period, Aeon might just turn a more dispersed buying and control model back  into profit, but it won’t happen overnight and the danger is it could prove the wrong direction altogether.

 

Aeon’s net profit falls 23%, GMS chain now a real worry

Aeon suffered a sharp profit decline in FY2014. It had originally forecast a profit increase, aiming for pretax profits of around ¥210 billion, but only achieved ¥150 billion, 15% lower than FY2013 and the second consecutive fall. Net profit fell 23% to just ¥35 billion.

Despite blaming the tax increase and the usual uncooperative weather, the fact is that rivals faced the same issues and, for the most part, came out smiling. Both Aeon and Ito-Yokado tried to use lower prices to keep up footfall, but both chains underestimated the lack of interest from consumers.

Aeon’s sales were up about 10%, exceeding ¥7 trillion, but this too was largely due to store expansion and acquisitions. Since Daiei’s sales were booked to the accounts from August, Daiei’s perennial losses helped drag down profits further. While not yet confirmed, non-food at Aeon’s GMS chain overall is expected to be several billion in the red following a ¥35 billion profit last year.

The few bright spots were improved sales overseas, notably in Malaysia, as well as potential growth from the seven new, large-scale domestic shopping centres opened in the past year. The new style of station SC typified by Aeon Okayama, which opened only in late 2014, is being touted as Aeon’s big domestic hope with several similar SCs coming online in the near future (see JC1503).

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