Retail results for FY2014 show just how well corporate retailing weathered the impact of the consumption tax increase in April 2014. Market share for the largest companies continues to grow, as does the percentage of sales taken up by private brands, but dynamism is also reflected in the emergence of new success stories. These are seemingly inevitable in the apparel sector, but can now also to be found in drugstores, discount retailing and local food retailing. All three formats threaten GMS chains which fared the worse in 2014 and will struggle further unless big changes are made.
Even with tax increases, Retailers do well yet again
April 2014 saw the consumption tax raised from 5%, where it had stood for 16 years, to 8%. Unsurprisingly this brought problems for some retailers, but not as many as some had feared. Prior to the change, most of the industry made hay while consumers stocked up on everything they could get. Then came the anticipated slump.
One year on and the first set of full year results show a remarkably varied story, much more so than most forecasts, but overall retailing achieved a steady performance indicative of the health of the sector, but with some glaring exceptions at the top.
Retailing has come a long way since the last tax increase in 1998. Both Aeon and Seven & I are larger by several factors and many analysts expected these groups to plough forward regardless. They are the only companies with nationwide reach; they control a wide variety of retail operations, truck loads of new private brands, and unprecedented buying power that should have allowed them to keep prices low, and consumers happy, even after the tax rise hit.
How wrong we all were. Last year’s financial results show it was the big GMS chains that suffered most – and, it seems, not because of the tax increase, but more because of the increasing blandness of their retail offer, and sclerotic supply chains.
The two biggest takeaways from FY2014 are just how badly Aeon Retail and Ito-Yokado pulled down consolidated results for both of the big groups, and just how well certain other chains performed despite several months of relative downturn following the tax increase. In effect the tax increase helped catalyse a longer-term process of competition sorting the wheat from the chaff.
Bigger share, thinner margins
Average margins across the leading 20 retailers have been falling for the past five years, even while their share of the market has been growing. A brief uptick in FY2013 was reversed last year, with both pretax and net margins on average lower again at 4.97% and 2.37% respectively. Operating margins, however, are the important KPI for retailers and, for many, this is the figure that really showed up the poor performers.
Consolidated operating margins for the top 20 chains actually grew in FY2013 from 4.43% to 4.84%, but dropped to 4.66% last year. Given that this figure is for the top chains only, the culprits are easy to spot: department stores, consumer electronics (CE) chains, but primarily Aeon Group.
The country’s largest retailer recorded operating profit down 17.5%, with its main GMS chain Aeon Retail dropping 90% to just ¥2.5 billion. Seven & I Holdings actually increased operating profit by 1.1%, although this was, as ever, entirely due to Seven Eleven, which accounted for 65% of total profits, while Ito-Yokado’s operating profit dropped by 83.5%.
Elsewhere Familymart, Yamada Denki, Edion and K’s Holdings all saw operating profit down in double-digits. Uny Group Holdings didn’t record an official change in operating profits due to accounting changes, but on an absolute basis, the group’s operating profit fell 20%, with the Uny GMS chain alone down 14.3%.
Whereas FY2013 was a spectacularly profitable year for retailing with even department stores making something of a comeback, FY2014 saw many top retailers struggle. Analysis of Nikkei’s ranking of the 500 retailers willing to answer its annual results survey shows how this problem is indeed concentrated on the bigger chains.
Chart 1 shows the change in operating profit across a number of key formats over the past three years. It is a striking picture. Whereas back in FY2012, four of the six formats saw operating profit down in double-digits, all but national GMS chains increased profits in FY2013.
Last year the picture was more mixed. Specialty chains, which make up the majority of retailers in the top 500, saw profits decline by around 9% overall, but once again the largest GMS and supermarket chains saw operating profits down a huge 24.7%. Convenience store chains improved marginally, largely due to continued improved performance at Seven Eleven and Lawson. Department stores, while negative, saw profits fall by a mere 0.1%, demonstrating resilience thanks to rapidly expanding high margin private brands and strong sales of luxury items to affluent consumers enjoying the fruits of PM Abe’s economic policies, and to tourists.
While the big chains continued to decline, regional chains like Izumi, Heiwado and Fuji all saw profits surge, as did smaller local chains such as Yaoko and Valor. The only conclusion is that the three remaining large-scale GMS chains, Aeon, Ito-Yokado and Uny, face the same problem of obsolescence that was applicable to department stores less than a decade ago – i.e. unless they change radically they could go the way of dinosaurs. Their parent companies, while tweaking, adjusting and attempting to emulate the kind of success in non-food that they enjoyed up to the 1990s, seem to be as much in denial as department stores were up to the early 2000s.
The good news is that today’s retailers, like Japan itself, have a capacity to change and surprise, even though, again like Japan as a whole, there is a tendency to resist change until the very last moment followed by revolutionary upheaval.
This is what happened with department stores, which, in the case of some chains, are now innovating in ways that are radical and unprecedented.
For now, GMS chains are simply getting worse. Although the largest domestic GMS firms continue to avoid anything like the paradigm shifting changes that department stores found necessary, the same is not true for the one foreign owned chain. Seiyu, now owned and operated by Walmart, may not be completely out of the woods, having spent the past decade restructuring from near bankruptcy, but that situation, and its American management, have at least forced it to do things differently. While JC estimates total sales for Seiyu, the 4.3% increase in same store sales was confirmed recently (see Page 6), making it the best performing GMS chain in the country – a worrying precedent for domestically owned firms, and proof that there are ways to turn things around, starting with streamlined supply chains feeding through to lower prices, expansion of private brands, more popular tenants, and slashing low return locations.
Like Seiyu, regional and local supermarkets are now outmanoeuvring the few national rivals rude enough to encroach on their markets, offering much more targeted merchandise, often sourced locally, and now even developing private brands that also provide a much better fit than anything centrally developed by Aeon or Seven & I.
Worse, excessively high cost structures at Aeon Retail, Ito-Yokado, Uny and Daiei mean the larger chains’ efforts at price competition have also been half-hearted, allowing local players to compete easily when they have to. Having the support of local suppliers again helps regional players enormously, both in reducing logistics costs (local suppliers often deliver just-in-time, direct to stores) and in tweaking prices and product recipes.
A steady year for most: average sales up 3.5%
Chart 2 lists the 53 retail companies with sales of ¥250 billion or more in FY2014, two more than last year, and includes a further 23 subsidiary chains of similar size. Despite the issues with the big GMS chains, only 14 of the top retailers recorded declines in sales, and average sales growth was 3.5% across all leading chains. Operating profit fell by an average of 2.7%, while pretax profit increased on average by 0.4%, a solid performance given the pressure on prices and the higher cost of sales.
The largest chains are made up from eleven retail formats, with some overlap within holding companies. There were 14 supermarket chains, 12 specialty retailers and 10 drugstore chains. The average sales increase for seven of the 11 formats exceeded the 3% tax increase. H2O Retailing’s absorption of Izumiya meant it reported a 46% increase on FY2013, pushing the average up for holding companies too.
Only department stores (-1.2%), GMS chains (-0.5%) and specialty chains (-0.3%) recorded overall average sales declines, while the only two non-store retailers of this size, Amazon and Askul, both managed increases in double digits – further demonstrating the rapid rate of growth in online retailing.
The two outstanding physical retail formats were drugstores, up 7% on average, and discount stores up 8.1%. In this latter format privately-owned Daiso Sangyo didn’t report, while Don Quijote was joined in the rankings for the first time by Trial Company with sales up 8.4%, surging into the top rankings at No. 37. Trial is a promising local version of Walmart, providing a low cost option at a time when regional consumers really need it.
While sales were good, the opposite was true for operating profit for the reasons stipulated above. Despite these pressures, three formats, supermarkets, department stores and discount stores, managed average increases in operating profit. Pretax profits were also up for the same three formats.
Even though profitability was down for many, the bigger companies continued to consolidate their share. Although the retail sector shrank 1.2% from April 2014 through March 2015, the leading 20 individual retailers recorded sales of ¥31.409 trillion last year, up 1.4%, meaning share expanded by 0.6 points to 22.5%. However, the leading five companies saw sales grow by 5.8%, taking their total market share to 13.3%, up 0.8 points on the year before. Consolidation remains the preeminent theme in Japanese retailing and will remain so for the decade ahead.
Within the rankings this year there is a clear pattern of winners and losers. All the CE retailers dropped down the ranking. H2O Retailing and Tsuruha Holdings both jumped up the ranks thanks to M&A, but this aside a number of other companies moved rapidly ahead last year. These included Fast Retailing, Amazon Japan, Nitori, Cosmos Yakuhin, Trial Company, Mandai, OK Super, Geo Holdings and Askul. All nine are definitely ones to watch in the future, particularly given their performance in such a difficult year, showing again their capacity to attract customers while others struggled.
Specialty retailing: M&A potential
Chart 3 provides a detailed ranking of 46 specialty retailers with consolidated sales of ¥150 billion or more. CE retailers remain the largest specialty sector with nine retailers accounting for ¥4.39 trillion in sales, close to 80% of the entire market for this product category. While Bic Camera increased sales by 3%, with Nojima and Kitamura also growing due to organic expansion, it was the only category to see average sales fall in FY2014.
Drugstores are now the second largest format with ¥3.6 trillion from 11 chains. Matsumotokiyoshi and Sundrug, the two leading chains, were the only two that failed to grow in FY2014, with eight of the top chains seeing sales increase by more than the 3% tax increase thanks to a combination of new stores, private brands, M&A and improved operations. Average sales per company remain at around ¥330 billion, with the leading chains all reasonably close.
Consequently, drugstores are the specialty retail sector with the most potential to consolidate given the number of similarly sized players competing for market share.
Five apparel chains also exceeded ¥150 billion in consolidated sales, with both Fast Retailing and Adastria increasing sales by more than 20% in a single year, although for the latter this was partly thanks to consolidation. Aoyama Shoji was the only top chain to see sales decline last year. While Adastria’s profits were up relative to its poor performance the year before, the other four chains saw profitability plummet, although apparel as a whole remains one of the most profitable retail categories. Fast Retailing is now overwhelmingly dominant in apparel retailing with no other single company even close in terms of volume (see below).
Home centres and furniture retailers had a far more mixed year. The nine chains in the ranking saw average sales increase 0.6% to a total of ¥2.197 trillion, and profitability among these retailers is good with only apparel (and Don Quijote in discount retailing) higher on average. At the same time, profits fell significantly for most chains last year, with only Nitori and Shimachu improving.
Nitori, the country’s single largest furniture retailer and a perennially strong performer, is set to overtake DCM Holdings next year and is likely to break ¥500 billion within two years, especially if its overseas ventures payoff.
As with drugstores, the relative size of leading chains in the home centre market is noticeably uniform, but, unlike drugstores, there is considerable diversity in the way these chains are run, the types of merchandise they offer – varying from GMS-like merchandising through to more trades orientated DIY stores – and, like supermarkets, a number of chains are dominant in particular regions – only Nitori, Cainz and Komeri are strong in multiple regions. The sector may well see consolidation over the next decade, but the variety of operational formats means it is still less mature than drugstores or supermarkets.
The remaining specialty categories with more than one chain over ¥150 billion are discount retailing, sports and entertainment.
Don Quijote continues to stride ahead in discount retailing, opening more large stores and diversifying into smaller formats that even include food. Its new convenience store chain has just a handful of stores and has received a mixed response from both analysts and market observers, but as a truly unique new format, everyone will be watching closely. The biggest question is how quickly Don Quijote can build volume.
Trial Company, as mentioned above, has grown rapidly in recent years and is another retailer with significant prospects going forward. It is the fastest growing and most ambitious retailer in the deep discount sector, a rarity in itself. Other chains, such as Mr Max and PLANT that have toyed with the discount category, have failed to expand in recent years and have become marginalised, increasingly competing with GMS chains and home centres rather than diversifying and concentrating on genuinely low price retailing. This means that Trial’s formula is unique in Japan, not least because it is the first retailer of its kind to achieve this kind of scale.
The entertainment category grew again last year, led by Geo and CCC, but joined for the first time at the top of the rankings by Lawson HMV. All three chains have been expanding their online retail offer, with HMV leading Lawson’s online business for music, videos, magazines and ticketing.
Alpen and Xebio also saw sales grow as they continue to dominate the sports goods sector, but both chains saw profits take a nose dive, particularly Xebio where profits were down by more than half.
Food and Apparel: private brands become the marker for success
Last year the rankings for food and apparel retailers alone were all about increasing concentration at the top. This story continues to hold true in apparel thanks to Fast Retailing’s record breaking performance in 2014, but Aeon, as already outlined, seems to have dropped the ball in both categories. In apparel, this is not a major surprise, but the failure in food is a serious concern.
Charts 4 and 5 show the largest food and apparel retailers in the country respectively. In food, the dismal performance of Aeon Retail means that Aeon Group slips to second place in terms of consolidated food sales, allowing Seven & I to take the top spot – the ongoing growth at Seven Eleven is the key contrasting difference between the two groups.
Food sales at Aeon Retail grew just 0.5% to ¥1.088 trillion, falling behind both Familymart and even consolidated sales at Uny Group for the first time. Aeon’s performance last year has already come under considerable scrutiny and the company has responded with a compete restructuring of store management and private brand operations (see JC1505 and JC1506), but nothing is more damning than the drop in food sales at the core chains operated under Aeon Retail. Until now, food is the one category where the company has dominated and continued to move forward, but the worry is that it will now begin to lose ground even here.
Equally, while struggling just as much with its GMS chain and over-reliant on Seven Eleven convenience stores, Seven & I is finding success through the introduction of an ongoing stream of private brand products. Local analysts would argue that Aeon adopted a private brand strategy similar to what has been seen in the west, aiming simply to replace manufacturer brands with its own, cheaper alternatives. Seven & I, however, has understood the need for something new and unique. Customers are responding accordingly and are shopping at Seven & I’s stores specifically for those same private brands. Indeed, Seven Premium and Seven Gold brands remain a relatively new, low volume initiative with the best yet to come.
Aeon has at least suggested that it understands the seriousness of last year’s results, but few analysts expect a quick fix and the trend of decline is likely to continue without far more wide reaching innovation in all aspects of the company’s operations, not least management intransigence blocking good ideas from the top. Aeon Group sales in total are well ahead of Seven & I, but unless it quickly fixes the problem in food, that may be a lead it won’t be able to sustain longer-term.
METI statistics put total food sales in FY2014 at ¥50.83 trillion, an increase of 3.5% on FY2013. On this basis, Seven & I and Aeon account for 7.38% and 7.25% of the market respectively, a combined share of 14.6% that represents an increase of 0.3 points on the previous year. Of course all of this growth came from Seven & I and even more specifically from Seven Eleven, which alone accounts for 5.2% of all food sales in Japan, up from 5% last year.
In total the leading five food retailers, Seven & I, Aeon, Lawson, Familymart and Uny, accounted for 21.8% of all food retailing in Japan in FY2014, up 0.4 points from last year, a much slower pace of growth compared to the previous year and a reflection of higher growth among regional and local chains in the food category.
In apparel, the story was all about the surge in sales at Fast Retailing. It has been the single largest apparel retailer for the past six years, and in FY2013 it began to pull away, selling around a third more than nearest rival Aeon Group. Last year it moved forward again and is now 2.6 times larger than Seven & I Holdings’ entire group in the apparel category. As in food, Aeon fell back, dropping from third to fourth with Shimamura overtaking it. Worse, while Aeon continues to decline, Daimaru Matsuzakaya, Isetan-Mitsukoshi, Sogo Seibu and Takashimaya are all growing.
METI figures put total fashion sales in FY2014, including footwear and accessories, at ¥14.23 trillion, up 2.5% on FY2013. Fast Retailing alone now has a 9.7% share of all apparel sales in Japan, up a whole 1.5 points in a single year. Fast Retailing is set to grow further, even if its own astronomical long-term sales forecasts remain little more than PR. Despite the poor showing in June at Uniqlo, in the next year the company could well break 10% of the entire market, an unprecedented level of control in such a diverse, fragmented category – electronics is the only other category with such high market share at the top, and there the market is dominated by just nine firms.
The five top companies, Fast Retailing, Shimamura, Seven & I, Aeon and Daimaru Matsuzakaya, have a combined market share of 22.6%, remarkably similar to the level of concentration in food, but actually down by 0.7 points on FY2013, partly due to reporting differences, but also due to growth among mid-sized apparel firms in the ¥50-100 billion category.
Another Successful Year for most
FY2014 was an unusual year, with some companies surging forward, not necessarily at the top of the rankings, and some leading retailers straggling behind the growth curve, unable to respond to the sudden changes in spending patterns. While the problem with GMS chains stands out as of increasing concern, for most category sectors, retail will consolidate further in coming years.
In FY2014 the best retailers proved that they’re capable of reaching out to consumers with improved marketing and exciting concepts, even when facing the challenge of a consumption tax increase. This proves the point more than ever that, for most of those who lag behind, they can only blame themselves.
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