FOCUS: Department Stores FY2014: over the hurdle

Sep 14

After sales at department stores rose for the first time in 16 years in FY2013, most forecasts suggested those gains would be wiped out by the collapse in spending post-tax hike. This didn’t happen for most major stores in most big cities, even while regional stores continued their decline. The surge in tourism helped, but overall still accounts for less than 5% of turnover. The main contribution was the renewed support from affluent Japanese, thanks to their real and perceived new wealth under Abe, but, as important, customers responded to the huge amount of work done by department stores to get rid of legacy management, interiors and thinking, and meet the needs and desires ot today’s consumer.

 

CHARTS: Top 30 Department Store BusinessesLeading Department Store Firms by Operating Profit, FY2014Top 50 Department Stores by Sales, FY2014,

 

Department store sales densities rise 7.3% in 5 years 

The combined sales of the 240 department stores in the Japan Department Store Association (JDSA) came to ¥6.21 trillion in FY2014, up 0.3% on a same store basis and down 0.1% overall. This is the third straight annual increase in same store sales. While not as noteworthy as the increase in 2013, which was the first overall increase in 17 years, in a way it is more of an achievement.

These numbers are for calendar year 2014, which includes the splurge in spending from January through March 2014, but the last time the consumption tax was increased, sales collapsed and stayed down for years. More indicative of the sustained recovery in department stores, especially those in major cities, is the fact that in 2015 sales to July have been positive in all months except January and March.

As impressive was the fact that, despite a 3.4% contraction in sales space, overall sales only fell 0.1%. Sales densities for all 240 stores averaged ¥50,134 per sqm per month – still appallingly low, but a considerable jump on the ¥46,518 in 2010.

This 7.7% increase in sales densities above all reflects the current status of department stores: they have managed a significant shift in efficiency, but the still low sales densities, and indeed profitability, show just how much more can be done – even more so when you compare the top performing locations with the rest.

Growth in CY2014 came from cosmetics, up 6.6%, jewellery and watches up 5.3%, followed by accessories, up 4.5%, apparel accessories which rose 2.7% and services, up 2.2%. Menswear rose 0.3% but womenswear fell by 1.8%. Food sales were down 0.8%.

Stores in the biggest cities had a good year; for stores in the top 10 cities, sales increased by 1.2% overall and 1.5% on a same store basis, well above the national figure. Osaka led, up 3.1%, followed by Nagoya just behind with 3.1%, Fukuoka with 2.4% and Tokyo rising by 1.5%. Sales at stores in regional cities fell 2.1%, a reflection of the tougher trading for ageing stores within some rapidly depopulating and ageing cities (and some are really just large towns these days). Hokkaido suffered the worst fall, down 3.7%, followed by Kanto down 2.6%.

Top 100 only fall 1.4% in FY2014

The data that matters more to most foreign brands is the performance of the leading department stores which account for most of the share of the sector – and indeed their interiors and locations more closely match most people’s definition of what a department store is. The remainder are often little more than glorified general merchandise stores or dilapidated shopping centres.

In FY2014, i.e. the 12 months after the consumption tax hike, the top 100 stores by sales posted a small contraction of just 1.4%. This was the first time in four years the top 100 had seen sales fall, and a resilient result given the hangover from the tax increase.

The following sections provide summaries of results and major trends last year by company and store, as well as analysis of strategies and performance going forward.

Leading department store companies

  • The top 30 firms had sales of ¥5.79 trillion, down an average of 2.6%, a market share of 93.3%. Just four firms increased sales. The relatively poor performance compared to the top 50 stores, reflects the inclusion of several regional department store groups such as Meitetsu and Keihan, as well as firms with stores under reconstruction like JR West Isetan.
  • The top 10 businesses had sales of ¥4.44 trillion, down 1.5%, and a share of the department store sector of 71%.
  • If you include their separate subsidiaries, the top four businesses alone, Isetan-Mitsukoshi, J Front, Takashimaya and Sogo Seibu, between them control around ¥4 trillion of the ¥6 trillion department store market.
  • The highest single increase in sales was recorded by Matsuya, up 8.3%. Matsuya is on a roll following upgrades to key floors as well as strong support from tourists, both foreigners and Japanese from outside Tokyo. It is also a destination for locals shopping for footwear and accessories thanks to an increasing focus on high end brands less commonly found in other nearby department stores.
  • JR Tokai Takashimaya was runner up, posting an increase of 4.7% on the back of updates to the store, a slight expansion in sales space, and the ongoing shift in shopping traffic from Sakae to the station area.
  • Profitability is clearly improving, but this is very much a work in progress. Marui remains the most profitable department store firm due to its more SC like operations, although this isn’t saying much. With an operating margin of 6.9%, up 0.2 points, it is still only on par with the leading GMS chains and lags well behind even mediocre specialty chains. Marui will also switch entirely to shopping centre contracts for tenants through 2018, so its inclusion in this ranking will increasingly be moot.
  • Among the rest of the top 15 only three of the firms with margins above 3% are major chains, Isetan-Mitsukoshi, Daimaru-Matsuzakaya and Hankyu-Hanshin. Isetan-Mitsukoshi also posted the biggest improvement for the second year running, rising from 3.4% to 3.7%, having jumped from 2.8% the year before – its margins were close to zero five years ago. Daimaru-Matsuzakaya increased margins to 3% and from 2.4 two years before.
  • While profitability remains low, only three department store firms posted a loss in FY2014, compared to two in the boom year before.
  • Profitability will continue to improve in the next few years – as long as there is no major shock – especially among the big firms, on the back of more renovations, better store profiling, more tenant income, further rationalisation, expansion into new channels like online and specialty, but above all from the rapid expansion of private brands.
  • The shift to directly managed private brands, inbound tourism and diversification into small format retailing will be the most important trends in the department store sector in the next five years.

Sales by department store branch

  • The top 50 department store branches were down 0.7% on average, compared to increases of 3.7% in FY2013 and 1.6% in FY2012.
  • Total sales for the top 50 were ¥4.01 trillion, giving them a market share in department store retailing of 65%.
  • Sales for the top 10 stores hit ¥1.53 trillion, a market share of 25% of the entire sector, the same as the year before.
  • Only three of the top 10 saw sales fall, compared with nearly half of the top 50.
  • Sales densities give a clearer picture of management’s ability to squeeze more sales from the same space in recent years. Isetan Shinjuku remains the most efficient store by far with sales densities of ¥303,317 per sqm per month, although this was down from ¥344,049 due to recalculations of sales space and the 4.5% drop in sales. It was still ¥80,000 ahead of second ranking Takashimaya Nihonbashi and six times the average for the sector.
  • The lowest sales densities in the top 50, at ¥40,333, were at Maruhiro, an agglomeration of several stores around Kawagoe. Among proper department stores, Fukuya performed the worst at ¥52,382, down 2.5%, but there were much worse numbers lower down the sales rankings.
  • The biggest improvement was at Matsuzakaya Ueno, up 48% partly because it reopened a section of the store, but also because it closed more than 50% of the store as part of the rebuilding of its South Annex – showing perhaps how efficient some stores could be if they were smaller. Hanshin in Osaka was up 41% for similar reasons, but Kintetsu Abeno Harukas’ increase of only 13% in densities after rebuilding is worrying, and it is no surprise it is already spending more on remodelling.
  • Average sales densities for the top 50 stores rose 2.1% to ¥121,632, after a 4.1% increase the year before, and are now 2.5 times higher than the average for the sector. This is an impressive result for a difficult year, and testament to management changes and efforts to extract more Yen from every floor.

The main reasons for solid performance were:

  • Sustained support from affluent Japanese unaffected by the squeeze on incomes that hit the mass of consumers.
  • The real and perceived increase in personal wealth and general optimism about the economy among this group, and the growing gap between their income and asset growth compared with the rest.
  • Major investment in upgrading, and sometimes expanding, city centre stores.
  • Some recovery in sales of re-opened stores like Kintetsu Abeno Harukas
  • Incremental improvements at stores like Matsuya, Mitsukoshi Ginza, Daimaru Tokyo, and JR Takashimaya.
  • The rapid increase in inbound tourism, which has benefited stores in the biggest cities in particular.

Apparel sales by store

The apparel floors of the leading 30 stores by apparel sales had a solid year, down just 0.7% compared to increases of 2.9% and 2.1% the years before. For the most part, the strongest performances came from stores in major cities.

With sales of just over ¥1 trillion, these 30 stores accounted for just under 10% of the apparel market. The biggest vendor of apparel by far remains Isetan Shinjuku, 40% higher than second ranked Hankyu Umeda.

Mitsukoshi and Matsuya in Ginza recorded the best performances, up 8.8% and 6.9% respectively, followed by Daimaru Tokyo and Takashimaya Shinjuku – the latter store is finally beginning to pay its way, almost entirely due to support from tourists, thanks to its location and its renewed focus on brands favoured by Chinese tourists in particular.

Accessories by store

Accessories showed a stronger performance than apparel at the top 30 stores with average sales up 1.5%, compared to 8% and 3.1% in the two years before. Again the best performances were from stores in major cities. The increase was even more impressive given the partial closure of Hanshin Osaka and Takashimaya Nihonbashi. Without these, sales would have been up nearly 2.5%.

Matsuya Ginza led by far, with an 18.4% increase in accessories sales. As mentioned above a plan hatched five years ago to become known as Tokyo’s accessories emporium for wealthy women has paid big dividends, attracting locals, Asian tourists, but also domestic visitors from the regions who make a visit to Matsuya a priority, as well as Asian tourists. Mitsukoshi Nagoya was up strongly again, increasing 13.4%, after a 34% increase the year before.

Hankyu Umeda was the top vendor of accessories for the second year running, with a 1.6% increase in sales compared to 2.4% at Seibu Ikebukuro, the second ranked store. JR Takashimaya in Nagoya was up 12.2% in third place.

The impact on foreign brands and retailers

The solid results in 2014 after excellent returns in 2013 and 2012 have reassured the industry that it is on a solid footing.

This would not have been the case without huge upheavals in ownership, management, store design and tenant mix. While  department store share of retailing has dwindled to just 4.5% compared to 20% for shopping centres, as interesting is the fact that some of the bigger firms are themselves gradually transforming into multi-format retail conglomerates of which department stores are just a part.

What is also true is that a mix of conversion or partial conversion to shopping centres, better store profiling, and the tourist dividend are all injecting new life and sales into many stores, and the era of mass closures is behind us.

In other words, while true department store retailing has indeed contracted massively, the leading businesses and the buildings themselves are adapting to market need, a net benefit for all brands and retailers selling through this sector.

The impact on foreign brands and retailers of all this upheaval is mixed. There has been a good deal of debate and worry that the rapid increase in both private brands and space converted to specialty tenants will squeeze out foreign brands.

There is some argument for this, but for several reasons, the changes should actually result in a net benefit for overseas firms:

  • More private brands should mean better cost performance and bring more customers through the door benefitting all brands.
  • The same can be said for partially converted department stores; while the increased traffic doesn’t always flow through the store, it can only help.
  • The increase in department store managed sales floors is proving a boon for overseas designers and labels since almost all merchandise is foreign.
  • For the bigger overseas brands, investment in rebuilding and refurbishment is opening up opportunities to negotiate larger concessions.
  • Narrow, clear store profiling means more of the right type of visitor coming through the door.
  • The enthusiasm for tourists and the efforts being made to better service them is a net positive for everyone.

Perhaps more than any of these changes, the emergence of new department store branded, small format stores offers opportunities for overseas brands to reach new customers and new areas in unprecedented ways.

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