J Front acquires stake in Senshukai to build omnichannel platform

Omnichannel retailing seems to be the holy grail for retailing these days. Seven & I catalysed the strategy when it bought Nissen, aiming to make it the centre of an omnichannel retail empire, and many other major retailers are looking to incorporate e-commerce as part of a multi-channel strategy too. Now J Front has followed suit, buying a large stake in Senshukai. This looks like being a better deal than the purchase of Nissen by Seven & I.

J Front Retailing (JFR) and Senshukai agreed a deal in April to join their two businesses. J Front will pay around ¥10 billion to acquire new stock as well as purchase from existing shareholders, making Senshukai an affiliate through a 22.65% stake.

The tie-up looks like being a genuinely synergistic relationship, with plans to create an omnichannel retail group with Senshukai acting as the non-store heart of JFR’s disparate retail interests. Longer term it is likely that Senshukai will be absorbed wholly into JFR in the usual 3-step dance that is a feature of major Japanese mergers.

The two companies have long been friendly, with even some small collaborations on product development in the past, and both are pillars of the Osaka commercial establishment, giving them a cultural commonality that will help smooth the process of merger. It seems discussions between executives have been ongoing for a while, and the final push was made possible by the death of Senshukai founder and chairman, Yasuhiro Yukimachi, late last year.

At the start, further product development will form the heart of the relationship. Senshukai has strong credentials in this regard, including the kind of middle market, good quality and slightly aspirational clothing and home fashion merchandising that is an excellent fit for JFR’s expanding private brand programme. Senshukai’s Belle Maison brand is popular enough in its own right to possibly form the base for a new department store brand within JFR’s Daimaru-Matsuzakaya chain.

A better buy than Nissen

The JFR deal with Senshukai has echoes of Seven & I’s acquisition of Nissen, itself promulgated as an ideal way to bring non-store and online expertise into the heart of Seven & I’s much mooted omnichannel platform.

There is a major difference between the two deals though. Nissen itself has been haemorrhaging sales at an alarming rate since before the takeover 18 months ago, and its product development skills just aren’t on a par with Senshukai.

In the first three months of this year alone, Nissen’s sales dropped a further 25%. The latest falls look like being a hangover from the pre-tax ramp up in 2014 (Senshukai itself saw sales fall 16% over the same period), but Nissen was actually down around 8% in the first three months of 2014 on both a parent-only and consolidated basis. This could be put down to the decline in catalogue sales, and the offloading of subsidiaries, but even online-only sales at the parent company have been negative for most of the past 18 months. These are appalling numbers during a time when apparel and home fashion markets have been relatively steady, and made worse by significant net losses.

Senshukai, on the other hand, ended FY2014 up 0.7%, and remains reasonably profitable, a creditable performance helped by its efforts to cull underperforming divisions. This is in part because Senshukai had already faced its demons during the difficult years of 2007-2010 when sales fell by ¥22 billion from a peak of ¥158 billion, a time of significant restructuring. Since then sales have recovered to ¥142 billion.

Good synergies both ways

This year it expects sales to rise 2.4% to ¥146 billion. Senshukai is now overwhelmingly an online business; just under 75% of sales now come from internet sources, including a leading share in fashion mobile shopping through assets like its Mobacolle subsidiary. It also has a healthy ‘house wedding’ business through its Dears Brain subsidiary – another good fit for JFR’s Daimaru-Matsuzakaya and Parco chains.

Senshukai also has a particularly loyal following among expectant and new mothers due to long years developing catalogues and online advisory communities for them.

Senshukai prints around 4 million catalogues a year, actually more than in past years, but today the purpose of these printed door stoppers is to drive online sales, and in a market awash with so many strong competitors battling the waning impact of banner ads and search engines, databases of customers’ physical addresses is actually a major advantage, even if print distribution is expensive.

What has also helped Senshukai remain competitive is its renewed emphasis on value through an overhaul of merchandising in the last five years, making its ranges now much better suited to online sales. It has also worked hard to increase the equity of its brands among the core target of 30s to 50s women. Since its 2007 crisis, Senshukai has sharply increased the ratio of directly sourced product, creating its own distinctive, unique lines, including strengthening private brands such as Benebis. Fashion accounts for some 50% of sales and interiors/household goods another 30%.

JFR too has been expanding direct sourcing and private brands such as Sofuol, a womenswear line sold in its department stores. It is determined to make Daimaru-Matsuzakaya a chain operation in all senses of the term, and a large ratio of private brands is at the heart of this. Combining the two product development operations should be easy, creating significant economies of scale and pooling of expertise.

Senshukai has also been busy making its own acquisitions. Last month it acquired a 33.4% stake in Yukijirushi Megmilk, a leading dairy products producer, with the aim to develop new health products for sale through its Shufu no Tomo catalogues. These will soon be rebranded as Belle Neige, and Senshukai plans to build on products like Megmilk’s calcium enhanced Everyday Bone Care MBP milk substitute lines.

At the same time, JFR’s department stores have merchandising skills that Senshukai can exploit online, particularly in areas like cosmetics, and gifts for the traditional gift giving seasons.

At the heart of this omnichannel business will be fulfilment logistics. Senshukai has invested heavily in building up its own logistics infrastructure, largely in the Chubu region, so it can reach most of the country quickly. This investment will allow it to act as JFR’s logistics hub for omnichannel distribution.

The first real omnichannel retail group?

It is these assets and skills that make Senshukai a tantalising new affiliate for JFR. Its core target is exactly the one that JFR is trying to hold on to through its department stores, and Senshukai’s database of 4 million active customers within a larger database of some 15 million is one of the most valuable assets for JFR – combined with the 6 million customers of Daimaru-Matsuzakaya and Parco, and it has a gold mine of data on Japan’s shopping habits in its hands.

In essence then, JFR will be able to tap Senshukai’s merchandising teams to create a powerful new product planning and supply chain team, while targeting Senshukai’s 15 million strong database. At the same time it can begin building an omnichannel model consisting of strongly branded online stores, a clutch of mostly good department stores, the Parco chain, and specialty chains like Plaza and Senshukai’s own stores, all supported by Senshukai’s logistics team.

JFR’s positive record with acquisitions like Parco and Plaza provides a lot of optimism, and the latest deal should propel the JFR group into the front line of online retailers, and likely make it one of the first to build a true omnichannel retail business.