Wholesalers struggle with profits as retailers demand regional support

The wholesale sector remains an important part of most distribution channels, notably in food, drugs and toiletries. In others, such as electronics, wholesaling is on life-support if not actually dead, while apparel has evolved into a vertically integrated channel where single companies control all aspects of distribution, and traditional wholesale manufacturers have shifted into retailing directly. Changes in food wholesaling show the growing shift to regionalism.

In FY2014, while many retailers moved forward despite the problems with tax hikes and lack of consumer spending, wholesaling had a much tougher year. Overall, wholesale sales for FY2014 were flat, rising just 0.1% to ¥327.6 trillion, and for larger firms in most category sectors, the situation was worse.

Wholesale sales & Operating Profit by Category, FY2014

The leading 540 wholesalers had sales of ¥37.51 trillion, only 11% of total wholesale turnover, but accounting for an estimated 40% of all consumer goods sales. These top companies reported sales down 0.4% overall, and profits fell in all categories except food and FMCG. Wholesale sales of furniture and interior products were down 2.6% as consumers avoided major new purchases last year, and sales in textiles, apparel and accessories also fell 1.4%. Sales of drugs and toiletries, including to hospitals, fell 0.6%.

Wholesale_Ranking

At the same time, wholesale sales of food and beverages surged 3%. This was partly due to relatively rapid recovery in spending on foods and other basics at the expense of more discretionary items, but also because food wholesalers implemented a number of consolidation and restructuring strategies last year that increased power in the channel – moves that were helped along by poorer performance among some of Japan’s largest general merchandise retailers.

Food remains the one consumer goods category where wholesalers continue to play a major role, taking on much of the logistics function for smaller and regional supermarket chains, and still acting as major suppliers to larger ones. Kokubu, the number three food wholesaler (see Chart 2), pushed further into regional markets last year, strengthening its packaged goods business, and growing operating profit by a quarter – although years of restructuring has left it half as profitable as its two larger rivals, and even behind Kato Sangyo, the Shikoku-based fourth ranked company. Kokubu split its operations into seven regional companies and two logistics operations to better streamline the business and provide sales and customer support on a region by region basis.

The other large food wholesalers are also concerned with providing improved focus. From this Spring Nihon Access set up new divisions divided by product type, such as chilled and seasonings. Mitsubishi Shokuhin, the sector leader, has maintained its existing regional infrastructure, but introduced new systems to provide better sales and support integration with head office, allowing it to maintain scale in its buying and production functions, but adjusting to regional demand where necessary.

These companies report that regional services are in demand from both large and medium retail chains as well as local retailers, and emphasise how important regional differentiation is. Aeon too has blamed excessive centralisation for its recent financial struggles and is now looking to differentiate more by region. It will leverage ties with Mitsubishi and other major wholesalers to achieve this.

For the first time in several years there were no major mergers in the pharmaceuticals and toiletries sector. Two drug suppliers, Medipal and Alfresa, remain the largest wholesalers by far, as well as the most profitable. Overall, pharmaceutical wholesaling commands similar margins to food, although last year operating profits fell 18% for the sector, whereas those for food increased.

In contrast to food and pharmaceuticals, textile and apparel wholesaling is much smaller as the sector has evolved into a vertically integrated channel across all stages of the supply chain. Only four apparel wholesalers have sales above ¥200 billion, with the largest, World, only a tenth as large as Medipal. Apparel and textile wholesale sales fell 1.3% last year, but operating profits were down 19.6% due to rising import costs, the only sector to do even worse than pharmaceuticals. This was also partly due to wholesale operations of these vertically integrated companies needing to provide financial support for their own retail chains.

While retailing was relatively strong despite uncertainty over consumption spending, the wholesale sector saw profitability drop significantly last year, partly due to its supporting role in propping up retailer performance. Improvements in supply efficiency and other cost cutting will remain the most immediate issue across most product sectors. Food remains the strongest category, with leeway for the biggest firms to add value through regional product selections and even their own brands.

Overall, however, FY2014 leaves the industry at a crossroads, with retailers still moving towards ever greater channel control.