GMS crisis deepens: top chains announce store closures

Oct 07

It is no secret that the general merchandise store (GMS) sector is past its prime, but recent results suggest the crisis is only getting worse. Last month two of the largest chains announced store closures, following on from similar announcements from Seiyu. Aeon too is looking to restructure its operations. Is there any chance the sector can emulate department stores and turn things around? Things do not look good.

GMS Sales, 2000-2014

Uny Holdings confirmed in September that it plans to close as much as 20% of its 230 store GMS chain over the next three to five years. As reported last month, this is not a surprise given that the dreadful performance at Uny’s multiple GMS banners was the main reason Familymart said in August that it was postponing a proposed merger between the two companies.

Uny’s problems are not, however, unique. All of the big GMS chains are planning to downsize. So far, only Aeon says it will not close stores, although most believe it is only a matter of time before it changes its mind. Seiyu, owned by Walmart, was ahead of the game, announcing the closure of around 30 of its 400 or so stores last year.

The announcement from Uny was followed almost immediately by an identical one from rival chain Ito-Yokado. It too will close as many as 40 stores by 2020, 20% of current volume. Previous plans to cut Ito-Yokado stores were mostly curtailed. The company is happy to relate stories of regional mayors visiting Tokyo to beg the company to stay open, but in many cases it simply couldn’t stomach the loss of sales. This time, however, there are numerous reasons to expect real cuts.

Japan’s GMS chains can be described in a single word: bland. Their origins lie in an era when distribution was dominated by manufacturers and mom-and-pop stores were protected by regulations restricting large store openings. Led by Daiei, GMS chains attempted to beat the system by adding scale, a strategy that worked until the 1990s since the format was the only mass market game around. The retail industry then evolved and the GMS sector was soon left behind.

Of course, department stores too looked to be dying in the 2000s. While that sector suffered a similar competitive crisis due to shifting trends and over-expansion, department stores still have a clear role in serving the affluent, are highly respected brand names and mostly command excellent locations that can easily adapt, becoming shopping centres or hybrids.

Department stores have returned thanks to better management, but GMS chains continue to decline. Based on METI’s definitions, in 2012 there were 1,112 GMS stores in Japan, 40% fewer than 1997. In the same period, sales dropped 27%, and more damningly, sales per sqm per year fell 37% from ¥730,000 to just ¥460,000.

The first thing to go was the GMS market for durables, notably white goods – in the early1990s Daiei sold more white goods than any other retailer. By 2000, Yamada Denki, Edion, Bic and others had built a more specialised service with wider ranges of product and aggressive pricing. GMS chains could never match specialty chains either in terms of product range – they couldn’t afford the space – or price discounts.

Next the bottom dropped out of GMS apparel sales around 2000 as specialty chains like Fast Retailing and Shimamura rapidly acquired share. They did this by offering more exciting, varied product at prices similar to, or lower than, anything the GMS could match.

Since then all the big GMS players, desperate to revive the high margins available only from apparel, have tried multiple times to fix things – apparel does, after all, take up 30-40% of sales space in many GMS locations and as much as 20% of sales (see Focus page 12). Hiring in ‘talent’ from top department stores, attempting to build SPA-like operations, putting greater resources into better targeted private brands, all have largely failed.

And this is really not all that surprising. There are now many good specialty brands in Japan, both domestic and foreign. Shoppers no longer even need to go to a GMS for casual basics, let alone reasonably priced fashion. Yet at the same time, GMS chains in other countries have thriving apparel sales in equally competitive markets dominated by specialty chains – in the UK Asda in particular has seen huge success with its George brand. In the end the problem is customer perception driven by decades of poor management and intransigence.

Then there’s food. GMS chains lost the plot even here, banking erroneously on the notion that shoppers would travel some distance for a one-stop shop, rather than go to convenience stores for daily essentials and local supermarkets for fresh food. They were wrong. Unless consumers live within a short bicycle ride from a good GMS, most will choose to do a large proportion of their food shopping at those other, more convenient specialists.

Belatedly Aeon has grasped this concept and begun to consolidate food retailing in Tokyo through small formats – albeit with a clumsy, hesitant and uncoordinated mixture of banners and store types. Seven & I has of course always led the convenience store sector, but that same focus has in many ways also hastened the decline of its Ito-Yokado GMS chain.

Finally the rapidly accelerating shift to shopping online is further catalysing the growing irrelevance of GMS chains. Seven & I as much as any other retailer is contributing to this trend too, making it even more certain that this time around the planned closures of its own Ito-Yokado stores will indeed take place.

Is there anything at all that the GMS chains can do? Probably not much, but the example of Izumi, the one chain to record growth in recent years, suggests there may be another way. Its success is partly due to its dominant position in the south of the country, but it has also been far more local market orientated.

Crucially, unlike other chains, Izumi gives over much of its space to a wide range of tenant brands, providing the specialty brands that consumers clearly want, and adjusting the mix on a store by store basis. Handing over more space to speciality tenancies is clearly one option for the GMS sector to survive but, unlike department stores, few GMS are optimally located or have the regional power of Izumi.

So much capital is invested in GMS retailing that it won’t disappear anytime soon. Today, however, it’s hard to imagine the sector managing anything like the escape eventually engineered by the department stores when they were similarly beleaguered. Seven & I’s tie up with Jean Paul Gaultier looks pretty bold as an apparel solution, but for now, the current round of store closures are likely to be the first of many as a result.