Mizuho 1038 retail

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Mizuho 1038 retail

  1. 1. Japan Industry Outlook / 38 2012 No.1 Table of Contents1, Comprehensive Industry - Japan 15, Broadcasting (Japanese only)2, Iron and Steel - Japan 16, Marine Shipping (Japanese only)3, Non-ferrous Metals - Japan 17, Logistics - Japan4, Paper and Pulp (Japanese only) 18, Electric Power - Japan5, Cement - Japan 19, City Gas (Japanese only)6, Chemicals - Japan 20, Retail - Japan7, Pharmaceuticals - Japan 21, Food and Beverage - Japan8, Petroleum - Japan 22, Food Service Industry - Japan9, Automobiles - Japan 23, Construction (Japanese only)10, Shipbuilding (Japanese only) 24, Real Estate and Housing - Japan11, General Machinery (Japanese only) 25, Travel and Tourism - Japan12, Electronics - Japan 26, Nonbank (Credit Cards & Credit) (Japanese13, IT Services - Japan only)14, Telecommunications - Japan 27, HR Service Industry (Japanese only) Contact: Industry Research Division Mizuho Corporate Bank, Ltd. mizuho.ird@mizuho-cb.co.jp
  2. 2. FY2012 Japan Industry Outlook (Retail) RETAIL Summary■ Despite a rise in demand for semi-durable goods on the back of increasing consumption of energy conserving items, nominal personal consumption in FY2011 is expected to see negative year-on-year growth due to a fall in demand for durable goods from the end of special demand buoyed by government assistance measures. In FY2012, nominal personal consumption is forecast to see positive growth as the employment and income climate improves on the back of post-earthquake reconstruction work, but in the second half of the year demand from post-earthquake reconstruction should peak, and other factors exerting downward pressure remain, indicating a touch-and-go situation will persist.■ In the supermarket industry, the operating environment will remain challenging as the unit price of food, which temporarily increased immediately after the earthquake, is slated to fall once again. In FY2012, in order to respond to budget-minded consumers and the return of population to the downtown Tokyo core, Japan’s major supermarket chains will likely focus more attention on the discount business and more smaller urban storefronts, while mid-tier as well as small- and mid-sized supermarkets are expected to undergo restructurings focused on business succession in order to cope with competition from new players and convenience stores■ In the convenience store industry, the size of the market is set to expand given an increase in customer traffic owing to measures to expand target customers to include housewives and seniors, in addition to an increase in average spending per customer from the rise in cigarette prices. In FY2012, although effects from the cigarette tax hike will be shed, convenience store operators are forecast to see an increase in storewide sales thanks to the continuing drive to expand customer segments. Japan’s major convenience store chain operators have had an aggressive stance toward new store openings, and as competition among stores heats up more, major players that excel at product development should capture a bigger piece of the market.■ The department store industry took a huge hit in sales immediately following the earthquake and the market contracted for the 15th consecutive year in 2011, but positive signs were also seen during the second half as sales of big ticket items boomed beginning from the middle of 2011 and lasting into the second half of FY2011. In FY2012, sales should rise off the lows seen in the wake of the earthquake, but sluggish conditions will persist in regional stores, and as a result, a full-scale market recovery is unlikely.■ In the specialty store industry, companies are moving forward with the development of business structures aimed at supplementing consumer needs in order to breakthrough sluggish market growth. As part of the effort to respond to consumer needs, apparel companies are moving forward with SPA*, while big box electronics retail stores are strengthening sales through partnerships with companies from different industries, which has paved the way for the development of new markets. In addition, drugstores are also advancing efforts toward new overseas expansion. (*SPA: Store Retailer of Private Label Apparel)■ With the population aging rate forecast to rise, Japan’s major retailers are in the process of launching new businesses geared toward seniors, including home delivery services and living assistance services. As a sales strategy to spark consumption and mitigate senior’s reluctance toward the use of such services, retailers are expected to develop business structures where they can provide products and services geared toward seniors at stores that are located in their immediate vicinity. 1 Mizuho Corporate Bank, Industry Research Division
  3. 3. FY2012 Japan Industry Outlook (Retail)I. INDIVIDUAL CONSUMPTION TRENDS1. Nominal personal consumption in FY2012 is expected to rise year-on-year, but uncertaintywill heighten in the second half Although a drop is Nominal personal consumption in FY2011 is expected to register negative expected from the end year-on-year growth due to the fall in demand for durable goods that was of the eco-car and eco sparked by last year’s eco-car subsidy and eco point program for consumer point programs, the external environment electronics and the impact from exaggerated demand consuming future has improved on the demand. This despite positive growth in demand for semi-durable goods like back of demand energy saving items and “Cool Biz” apparel buoyed by the rise in the related to post-quake consumption of energy saving goods since the Great East Japan Earthquake. reconstruction Consumer mindsets, which had been improving since the start of 2010, tanked in March following the earthquake and tsunami disaster, but since the summertime improvements have been seen thanks to a reversal in cutbacks on purchases caused by the earthquake and on the back of an increase in employment offers seen in the manufacturing industry to capture post-earthquake reconstruction work (see Fig. 20-1). Since the middle part of 2011 consumers with descent incomes became more proactive toward purchases after holding off for a long period of time, as sales of big ticket items have been booming, but consumers have been cutting back even further on commodities like foods and daily essentials, indicating a polarization in consumption is currently taking place. Sales trends in 2011 as viewed by product show that household goods fell dramatically beginning in the summer with the end of the eco point program for consumer electronics. Food products, for which prices rose sharply due to supply shortages following the earthquake, began to see lower prices once again on the back of the strongly-rooted cost cutting mentality of consumers, and as a result, food sales have fallen steadily. Whereas, clothing, for which prices had fallen for the past several years, is seeing a recovery on the back of the improved employment and personal income climate seen since the second half of 2011 (see Fig. 20-2). 2 Mizuho Corporate Bank, Industry Research Division
  4. 4. FY2012 Japan Industry Outlook (Retail) [Fig. 20-1] Consumer confidence index [Fig. 20-2] Year-on-year growth rate of product trends by item expenditures by sector (%)50 10.045 8.0 Period subject to eco-p oint 6.0 p rogram40 4.035 2.030 0.0 -2.025 Consumer confidence -4.0 Livelihood20 Income growth -6.0 Overall Employment environment Food15 -8.0 Clot hing Buying opportunity for consumer durable goods Household goods -10.010 1 4 7 0 1 4 7 0 1 4 7 0 1 4 7 0 /0 /0 /0 /1 /0 /0 /0 /1 /0 /0 /0 /1 /0 /0 /0 /1 /1 /3 /5 /7 /9 /1 /3 /5 /7 /9 /1 /3 /5 /7 /9 /1 1 /1 1 /1 1 /1 1 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 09 09 09 09 09 10 10 10 10 10 11 11 11 11 1108 09 10 11 Source: Compiled by MHCB Industry Research Source: Compiled by MHCB Industry Research Division Division based on the Cabinet Office’s “Consumer based on the Ministry of Internal Affairs and Confidence Survey”. Communications’ “Household Survey Report”. Note: Does not include assets related to “transportation and communication” (e.g. automobiles, gasoline). Six-month Nominal personal In FY2012, nominal personal consumption is forecast to see positive consumption in year-on-year growth, driven primarily by the service sector (travel, restaurants, FY2012 is forecast etc.), which has normally seen a late recovery compared to consumables, to see year-on-year growth centered on because of a rise in demand following the excessive self-restraint in the wake the service industry of the earthquake as well as an improvement in the employment and personal income climate. Among this, a polarization in consumption will likely take pace focused on aggressive spending on big ticket items, like hobbies and leisure, and passive spending on daily essentials like food. In the second half of the year, demand from post-earthquake reconstruction will likely peak, and concerns point to a downturn in corporate earnings as a result of the European debt crisis and deterioration in the personal income climate. Furthermore, elements exist that could dampen consumer mindsets even more, such as tax hikes to pay for the reconstruction effort. Accordingly, uncertainty concerning personal consumption will remain strong in particular into the second half of the year. Japan’s retail industry in 2012 is forecast to experience stiffer inter-industry competition between supermarkets and discount stores as well as convenience stores and discount stores as consumer orientation toward lower prices, centered on foods, becomes more pronounced. 2012 is set to be a particularly challenging year for supermarkets as they will likely not see a recovery in personal consumption. Viewed by primary business category, convenience store operators are expected to see an increase in storewide sales thanks to their efforts to capture new customer segments like seniors and housewives since the earthquake, while supermarket sales appear headed for a dip as food prices fall. Although sales of certain products like big ticket items will be strong, department stores are expected to see a slight decrease in the size of the market due to the closures of some regional department stores. 3 Mizuho Corporate Bank, Industry Research Division
  5. 5. FY2012 Japan Industry Outlook (Retail)II. INDUSTRY TRENDS AND CORPORATE EARNINGS1. Supermarkets(1) Industry trends: With pressure intensifying for food price reductions, 2012 will be a year when Japan’s supermarkets will need to endure stiffer competition Pressure intensifying Net sales for all supermarkets in 2011 (Japan Chain Stores Association basis) for food price were off 0.8% year-on-year on a like-for-like basis, as the drop in sales reductions suggests contracted compared to 2009 (down 4.3% year-on-year) and 2010 (down the market will 2.6% year-on-year). Net sales for all supermarkets saw positive growth for the contract in FY2012 first time in 9 years thanks to an increase in the number of member stores with the Japan Chain Stores Association, but this still represents a fall of roughly 25% from peak sales (16.9 trillion yen in 1997) (see Fig. 20-3). Viewed by product, like-for-like sales of food products saw positive year-on-year growth temporarily after the earthquake, but since August 2011 sales have recorded negative year-on-year growth. The main reason for this is that immediately following the earthquake consumer hoarding and supply shortages occurred, causing demand for food items to skyrocket and retail store prices to rise, but once product supply networks were restored, store prices fell back due to the strongly-rooted cost cutting mentality of consumers. Clothing sales were down overall due to the downturn in the wake of the earthquake, despite comparatively stronger sales of men’s apparel from heightened “Cool Biz” related demand in the summer. Whereas, like-for-like net sales of household goods in 2011 remained on par with the previous year thanks to demand in the run-up to the shift to digital terrestrial broadcasting in July 2011 and strong sales of energy saving goods following government orders to cut back on electricity usage (see Fig. 20-4). As consumers begin to show a strong inclination toward daily essentials, net There is momentum in place to sales for all supermarkets are forecast to decline 0.8% to 12.6 trillion yen re-examine because there will be added pressure to lower prices for mainly food products, pricing strategies. which account for more than 60% of net sales. Following the earthquake, 2012 set to be a year consumers have a much more austere outlook toward the prices of daily where Japan’s supermarket essentials, and such a budget-oriented mentality of spending only on operators will be inexpensive products or products that offer good value is forecast to heighten. forced to endure Some supermarkets will likely shift their pricing policies from “high & low 1 ” tougher competition centered on bargain sales to the “everyday low price (EDLP) 2 ” and once again work toward boosting sales of their low-price private brands. Conventionally, mid-tier as well as small- and medium-sized supermarkets have primarily used the “high & low” method to combat the prices of larger supermarkets. As they1 A sales method where a retailer will sell certain products at a low price for a limited time and then raise this price higher afterward.Typically, the “margin mix” method, in which the storewide margin is maintained because bargain products attract higher customertraffic that in turn purchase higher margin regular products, is used simultaneously.2 A sales method where a retailer sells all products at comparatively lower prices than its competitors every day. A retailer will needto reduce its product purchase price and reduce operating costs to ensure profitability in using this sales method. 4 Mizuho Corporate Bank, Industry Research Division
  6. 6. FY2012 Japan Industry Outlook (Retail) are largely unable to build the low-cost management structure needed to shift to EDLP, 2012 will be year in which mid-tier as well as small- and medium-sized supermarkets will be forced to endure the competition. [Fig. 20-3] Storewide supermarket sales [20-4] Year-on-year growth in like-for-like sales by category and storewide (JPY trillion) (%)18 10 (%) 5 Ove rall House hold goods15 Food 5 012 9 0 -5 6 -10 Other sales -5 Clothing 3 Household goods sales Clothing sales Food sales Grow th on previous year (right axis) -15 0 -10 08/1 08/7 09/1 09/7 10/1 10/7 11/1 11/7 (CY) 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Note: Compiled by MHCB Industry Research Source: Compiled by MHCB Industry Research Division based on materials from the Japan Chain Division based on materials from the Japan Chain Stores Association. Stores Association. Note: Three-month moving averages. Note: Figures for FY2012 are based on MHBC Industry Research Division forecasts. Major supermarket Major general merchandise stores (GMS) are focusing more actively on (1) chains strengthening the discount store business, centered on stores that primarily carry food their discount store business and products, to meet consumers’ budget-oriented mindsets toward daily essentials increasing the and (2) developing small storefronts in urban areas to capture the return of number of small populations to urban area. Seven & i has opened stores under the discount urban stores store chain THE PRICE mainly as part of Ito-Yokado’s shift in business operations, but having found a low-cost store management model, Seven & i plans to accelerate the pace of new store openings. In addition, Seven & i opened one “Ito-Yokado Shokuhinkan” store each in 2010 and 2011 as a new small urban storefront, and plans in the fiscal year ending February 2013 and beyond call for the pace of new store openings to increase to 10 annually. Aeon has already opened about 100 THE BIG discount stores across its entire group, while small urban store chain My Basket, which has 222 stores in the greater Tokyo metro area, is operating independently as a consolidated subsidiary. In this regard, Aeon is quickly moving to establish itself as a dominant discount store player in the greater Tokyo metro area. Challenging operating In contrast, the climate surrounding mid-tier as well as small- and mid-size environment for supermarkets is growing more challenging with each passing year owing to mid-tier as well as consumers being oriented toward lower prices and because of competition small- and mid-sized supermarkets, a sector from food discount stores in the suburbs and competition with convenience which is restructuring stores, which are moving to capture customers from small supermarkets and in order to resolve expand their target to include housewives, in urban areas. The increasing business succession challenges 5 Mizuho Corporate Bank, Industry Research Division
  7. 7. FY2012 Japan Industry Outlook (Retail) number of small- and mid-size supermarkets filing for bankruptcy in recent years indicates that even more small- and mid-size supermarkets, which have predominantly survived through their strong roots in the local community, are now succumbing to price competition from major supermarkets. Given this, in 2011, smaller regional supermarkets have turned to alliances to beat out competition or just to survive, such as the management integration involving Arcs of Hokkaido and Universe of Aomori, while regional supermarkets have also been acquired by major supermarket chain operators, such as Aeon’s acquisition of Marunaka (a supermarket chain located in the Chugoku and Shikoku regions). Many small- and mid-size supermarkets are faced with business succession challenges as their owners are growing older, and as a result, 2012 is likely to see more active sector restructuring as concern toward the future grows for these operators.(2) Corporate earnings: With less room for cost cutting, supermarkets are looking for the nexteffective means to improving earnings Consolidated Reflecting the recent trend seen in the supermarket industry of lower revenues earnings for FY2011 but higher profits, each of Japan’s four major GMS recorded lower revenues should continue to but higher profits in their FY2011 interim consolidated results (operating see lower revenues but higher profits profit basis), with the exception of Aeon which saw an increase in revenues. Each of Japan’s four major GMS also achieved a greater than 20% increase in operating profit year-on-year thanks to their fundamental cost cutting measures implemented from before the earthquake (see Fig. 20-5). Seven & i recorded a 7.9% year-on-year drop in sales profits owing to changes in the way it recognizes sales profits from its North American subsidiary, but its core CVS business continued to act as a key revenue driver, producing a 25.9% year-on-year boost in operating profits, which represented a significant improvement. Aeon was the only of Japan’s 4 major GMS to post an increase in consolidated revenues thanks to sales growth seen from its supermarket business and strategic small store business (including Ministop and My Basket, etc.), and it also recorded the highest consolidated sales profits of any Japanese retailer. In terms of profitability, Aeon achieved higher revenues across all of its businesses, centered on GMS, due to progress made with personnel cost reductions from rationalization measures for personnel positioning. Uny and Daiei also achieved significant gains in operating profits thanks to thorough cost cutting. 2012 is set to be a Despite a boost in revenues seen from the CVS business, which is working to year in which capture more housewives and seniors as customers, the FY2012 consolidated supermarkets are looking for the next results of Japan’s 4 major GMS are expected to show a dip in net sales effective means to because of a drop in revenues from a downturn in demand for energy saving improving earnings consumption, which grew rather strongly in 2011. Profits are expected to rise thanks to strong earnings from other businesses, such as the CVS business 6 Mizuho Corporate Bank, Industry Research Division
  8. 8. FY2012 Japan Industry Outlook (Retail) (see Fig. 20-6). However, the cost cutting race between GMS has already run its course not only once, but twice, indicating there is little room left for additional cuts and any improvement is seen as being limited in nature. 2012 will likely become a year in which supermarkets are looking for the next effective means to improve earnings, such as developing the internal infrastructure needed to shift to EDLP or transforming their GMS into specialty stores. [Fig. 20-5] FY2011 interim results for Japan’s four major [Fig. 20-6] Earnings for Japan’s four supermarkets major supermarkets (JPY millions) [Actual] No. of companies FY10 FY11 FY12 <Consolidated Seven & i Aeon Uny Daiei (Consolidated) (Unit) (Actual) (Estimate) (Forecast) Sales profits 2,357,241 2,509,994 537,276 437,899 4 Sales profits (JPY 100 m.) 122,409 117,406 115,935 (Growth rate) -7.9% 0.2% -2.4% -5.6% 4 Operating profit 150,186 76,424 23,286 2,045 Operating profits (JPY 100 m.) 4,541 5,147 5,163 (Growth rate) 25.9% 22.9% 41.3% 150.0% Ordinary profit 150,878 82,963 22,585 295 [Rate of Increase and Decrease] (YOY) (Growth rate) 26.4% 22.8% 46.9% - No. of companies FY10 FY11 FY12 (Consolidated Net income 52,790 27,416 2,203 -9,357 (Unit) (Actual) (Estimate) (Forecast) 4 (Growth rate) -15.4% -18.5% -31.3% - Sales profits (%) - 0.3% - 4.1% - 1.3% <Non-consolidated> Itoyokado Aeon Retail Uny Daiei 4 Operating profits (%) + 20.5% + 13.4% + 0.3% Sales profits 672,884 1,088,871 396,499 348,800 (Growth rate) -0.9% - -2.5% -6.3% [Actual] Operating profit 6,071 9,816 8,324 500 No. of companies FY10 FY11 FY12 (Growth rate) - - 143.1% - (Non-consolidated) (Unit) (Actual) (Estimate) (Forecast) Ordinary profit 9,450 9,356 400 4 Sales profits (JPY 100 m.) 46,307 50,546 49,800 (Growth rate) - 127.8% - 4 Operating profits (JPY 100 m.) 489 680 675 Net income 12,187 2,297 -7,900 (Growth rate) - 7.3% - [Rate of Increase and Decrease] (YOY) year-on-year comparison No. of companies FY10 FY11 FY12 (%) -3.3 1.4 -0.8 -2.0 (Non-consolidated (Unit) (Actual) (Estimate) (Forecast) 4(Results for previous year) -2.5 -2.2 -2.8 -4.0 Sales profits (%) - 4.4% + 9.2% - 1.5% 4 Operating profits (%) + 107.2% + 39.0% - 0.7%Source: Figures 20-5 and 20-6 are both compiled by MHCB Industry Research Division based on IR materials of each company.Notes: Figures for FY2011 and FY2012 are based on MHBC Industry Research Division forecasts.The four major supermarkets are Seven & i Holdings Co., Ltd., (Ito-Yokado on a non-consolidated basis), Aeon Co., Ltd. (AeonRetail on a non-consolidated basis), UNY Co., Ltd., and The Daiei Inc.Aeon Retail merged with Aeon Marche and Mycal in fiscal 2011; hence year-on-year growth rates are omitted in [Fig. 20-5]. 1. Convenience stores (1) Industry trends: Despite a dip in sales as the effect of cigarette tax hikes subsides, CVS are aiming to unlock new growth opportunities by continuing to capture new customer segments Although the effect Net sales for all Japan’s CVS in 2011 (Japan Franchise Association basis) rose of the cigarette tax firmly by 8.2% year-on-year to about 8.7 trillion yen. Although this figure was hike has run its boosted by an increase in average spending per customer owing to the course, CVS are expected to see an cigarette tax hike implemented in October 2010, following the Great East increase in revenues Japan Earthquake, consumers have begun to take notice once again of the in FY2012 thanks to convenience offered by CVS, which offer easy access for daily essentials, efforts to expand while CVS have made efforts to capture new customer segments, such as their customer base 7 Mizuho Corporate Bank, Industry Research Division
  9. 9. FY2012 Japan Industry Outlook (Retail) housewives and seniors, which has helped to expand their market size considerably. Even with aggressive new store openings implemented by major CVS chains, like-for-like net sales continued to remain firm. A breakdown shows that the average spending per customer saw positive year-on-year growth since September 2011 when a fall in demand was seen following the end of strong demand in the run up to the cigarette tax increase, while customer traffic growth was generally positive. Although the effect from the cigarette tax hike will dissolve and a decline in cigarette sales from a fall in the number of smokers should exert downward pressure, net sales for all Japan’s CVS in 2012 are forecast to increase 1.3% year-on-year owing to demand from home-meal replacements from expanded prepared food line-ups as well as company efforts to capitalize on growing demand for daily purchases from restaurants and supermarkets through expanded fresh food offerings. Whereas, like-for-like net sales are forecast to dip 0.8% year-on-year due to heightened competition between CVS stores attributed to each chain’s aggressive stance toward new store openings. [Fig. 20-7] Storewide CVS sales [Fig. 20-8] Year-on-year growth in like-for-like(JPY trillions) CVS sales (%) 8.7 8.8 10 8.08 7.9 7.9 8 7.1 7.3 7.4 6.7 6.8 6.9 Custome r traffic 6.1 6.5 6 5.5 46 2 04 -2 Ave rage sale pe r custome r -42 -6 Ne t sale s -80 07/1 07/7 08/1 08/7 09/1 09/7 10/1 10/7 11/1 11/7 99 00 01 02 03 04 05 06 07 08 09 10 11 12 (CY) Source: Figures 20-7 and 20-8 are both compiled by MHCB Industry Research Division based on materials from the Japan Franchise Association. Notes: CY2012 data in Figure 20-7 is based on MHBC Industry Research Division forecasts. Figure 20-8 indicates three-month moving average data. CVS will accelerate Despite the expanding customer base of CVS since the earthquake, the retail store openings market in Japan is widely believed to be saturated since the country’s overseas as part of population is already experiencing a downward trend and consumption has their growth strategy already reached a mature stage. Given this environment, major CVS store operators are stepping up their efforts to open new stores overseas and become a dominant player, centered mainly on the Asia region with its growing middle class, as part of their future growth strategy. Family Mart has an overseas network of 10,290 stores primarily in South Korea and Taiwan, which already exceeds its domestic network of 8,568 stores (number of stores overseas and 8 Mizuho Corporate Bank, Industry Research Division
  10. 10. FY2012 Japan Industry Outlook (Retail) in Japan as of August 2011). Going forward, Family Mart has also announced a strategy to boost its presence in Asia, including plans to increase its network of stores in China from about 660 today to 8,000 by the year 2020 as well as plans to open stores in new markets in Southeast Asia, following Thailand and Vietnam. Although its overseas network of stores consists only of 342 stores mainly in China as of August 2011, during FY2011 Lawson (1) increased its investment stake in its joint venture company in Shanghai to obtain management control and (2) pushed forward with plans to move into the Indonesia market as well as accelerate new store openings in China, Southeast Asia and India. As they morph into multinationals in 2012 and beyond, Japan’s major CVS chains appear ready to establish regional headquarters companies in Asia in order to strengthen their sales capabilities in the region. (2)Corporate earnings: With competition intensifying, CVS earnings are forecast to see a widening disparity between chains FY2011 interim The FY2011 interim results for Japan’s 4 major CVS chain operators (on a results saw higher non-consolidated basis) showed positive year-on-year growth in storewide as profits on higher well as like-for-like sales, boosted by the effects from the cigarette tax hike. revenues, and full-year results In terms of profitability, each company realized significant profit growth, should also be strong including greater than 8% growth in operating profits and greater than 10% growth in ordinary profits. Sales remain firm in the second half from an expansion of their customer base to include housewives and seniors as well as their development of prepared foods and cooked rice products that capture consumer demand for home-meal replacements, indicating that Japan’s 4 major CVS chain operators are expected to see generally higher revenues and higher profits for full-year FY2011 (see Figs. 20-9 and 20-10). [Fig. 20-9] FY2011 interim results for Japan’s four [Fig. 20-10] Earnings for Japan’s four major major CVS chains CVS chains (JPY millions) [Actual] <Consolidated> Seven-Eleven Lawson Family Mart Circle K FY10 FY11 FY12 Total operating revenue 240,020 167,570 98,561 (Unit) (Actual) (Estimate) (Forecast) (Growth rate) 8.5% 2.7% 0.3% 4 Storewide sales (JPY 100 m.) 69,258 74,766 76,127 Operating profits 32,569 24,589 13,293 (Growth rate) 8.0% 12.2% 26.3% Operating profits 4 (JPY 100 m.) 2,814 2,983 3,021 Ordinary profits 32,601 25,719 13,159 (Growth rate) 9.8% 12.7% 26.9% [Rate of Increase and Decrease (YOY) Net income 8,960 7,655 3,221 FY10 FY11 FY12 (Growth rate) -27.1% -32.3% -19.0% (Unit) (Actual) (Estimate) (Forecast) <Non-consolidated> Seven-Eleven Lawson Family Mart Circle K 4 Total operating revenue 290,252 136,813 140,808 82,615 Storewide sales (%) + 8.5% + 8.0% + 1.8% (Growth rate) 4.4% 2.6% 1.7% -0.9% 4 Operating profits (%) + 10.3% + 6.0% + 1.3% Operating profits 97,432 29,607 22,442 12,642 (Growth rate) 8.2% 8.9% 12.6% 21.6% Source: Figures 20-9 and 20-10 both are compiled by Ordinary profits 29,654 24,055 12,022 (Growth rate) 10.7% 12.7% 18.8% MHCB Industry Research Division based on IR Net income 9,175 7,825 3,048 materials of each company. (Growth rate) -27.5% -28.4% -25.1% Notes: Operating profits in Figure 20-10 are on a Storewide sales 1,639,640 816,169 773,923 455,190 consolidated basis (non-consolidated basis for Seven & (Growth rate) 11.7% 9.2% 6.3% 5.9% year-on-year comparison i only). Figures for FY2011 and FY2012 are based on (%) 8.0 6.4 4.9 4.6 MHBC Industry Research Division forecasts. The four(Results for previous year) -0.5 -2.4 -2.3 -4.3 major CVS chains are Seven-Eleven, Lawson, Family Mart and Circle K Sunkus. 9 Mizuho Corporate Bank, Industry Research Division
  11. 11. FY2012 Japan Industry Outlook (Retail) Higher profits and FY2012 results are expected to see sales growth flatten out because the boost higher revenues are gained from the cigarette tax hike has run its course and the declining number set to continue in of smokers will actually become a negative factor. However, customer traffic FY2012. The disparity between should increase as company efforts to appeal to more customer segments pay major and mid-tier off, and since major CVS chain store operators are planning to aggressively will grow, as top increase store openings in Japan, both revenues and profits are forecast to rise operators will gain once again year-on-year. Although customer traffic has increased following a bigger piece of the earthquake as consumers are now using CVS as a supermarket replacement to buy prepared foods and fresh foods, the significant expansion in store numbers that is expected will likely lead to stiffer competition between CVS chain store operators. Disparities in customer traffic growth are also beginning to appear between major CVS chains and mid-tier and lower chains owing to differences in fresh food and prepared food offerings as well as the ability to develop attractive PB products. Going forward, disparities are forecast to widen in terms of corporate earnings due to differences between CVS chains in terms of their ability to further cut costs by leveraging scale merits. Although an oligopoly dominated by major CVS chain store operators already exists in Japan, top operators are positioned to gain an even bigger piece of the market moving forward.1. Department stores(1) Industry trends: Although a rebound is expected off the drop in sales immediately following the earthquake, a full-scale recovery likely remains out of reach Despite positive Net sales for all Japan’s department stores in 2011 (Japan Department Stores signs, such as Association basis) fell 2.2% year-on-year to 6.2 trillion yen, marking the 15th strong sales of big consecutive year of declining sales since 1997. This also means that the ticket items, a full-scale recovery department store market has contracted by about 37% since its peak in 1991 in the department (9.7 trillion yen) (see Figs. 20-11 and 20-12). In March 2011 immediately store industry after the earthquake stores in East Japan had to reduce their business hours, likely remains out causing like-for-like net sales to fall significantly by 14.7% year-on-year, and of reach although this negative year-on-year growth continued in subsequent months, in December 2011 it moved into postiive territory (up 0.8% year-on-year) for the first time in six months, providing a positive outlook for the time being. All of Japan felt a cold snap beginning in December and with sunny weather continuing on the Pacific Ocean side of the country, weather related factors played a key role in spurring seasonal demand, while big ticket items in the “Art, Jewelry, Precious Metals” category, such as luxury watches and imported goods, maintained firm sales from the middle part of 2011, indicating factors other than weather were helping drive the slight recovery. Viewed by region, downtown flagship stores in Tokyo and Osaka saw strong sales of winter clothing in the runup to the holiday season in December on the back of weather related factors, as department store operators recorded comparatively strong year-on-year growth in sales, but regional department 10 Mizuho Corporate Bank, Industry Research Division
  12. 12. FY2012 Japan Industry Outlook (Retail) stores, with the execption of the Tohoku region that saw strong demand from the reconstruction effort, have seen weak sales, illustrating a rather contrasting tone between urban and rural markets. In 2012, department stores are expected to see positive factors, including a rebound off the significant drop in sales seen in the wake of the earthquake as well as increased sales of big ticket items, but little has changed regarding the fact that station buildings and shopping malls are capturing more of their core clothing product market, and regional department stores are forecast to see a continuation of weak sales, with the exception of the Tohoku region. As a result, little in the way of a full-sale market recovery can be anticipated, as like-for-like net sales in 2012 are expected to gain only 0.1% year-on-year, while net sales for all department stores will decline slightly by 0.3% year-on-year.Department stores Since June 2011 Japan’s department stores have seen strong sales of big ticketexpected to focus items, including high-priced brand clothing, high-priced watches, andmore on the high-priced jewerly. Sales trends in the department store stastical categorygift-giving market inorder to promote “Art, Jewelry, Precious Metals” indicate that sales of big ticket items hadgreater consumption already posted a recovery in the second half of 2010. Later, however, spendinginvolving big ticket on big ticket items was missing because (1) a shift in demand from big ticketitems items in department stores to eco-friendly consumer electronics spurred on by the consumer electronics eco-point program and (2) a drop in consumption following the Great East Japan Earthquake. The authors believe that firm sales of big ticket items seen recently represent pent up demand due to consumer cutbacks on big ticket items over the past year. In addition, a new consumption trend seen in 2011 following the earthquake that has garnered attention is “kizuna (bonds or ties) consumption” in which consumers spend more money in order to strengthen solidarity with the local community or close relatives. Going forward, the department store will likely focus more attention on the gift-giving market between parent and child and husband and wife as part of its efforts to promote sales of big ticket items. 11 Mizuho Corporate Bank, Industry Research Division
  13. 13. FY2012 Japan Industry Outlook (Retail) [Fig. 20-11] Storewide department stores sales [Fig. 20-12] Year-on-year growth in and number of stores same-store sales by product (JPY trillions) (Stores) (%) 410 400 9.5 2 9.2 9.2 9.0 9.0 8.8 8.8 8.8 09 8.6 8.6 8.3 350 -2 8.1 7.9 7.8 7.8 -48 7.7 311308 7.4 -6 300 294 303 297292288 -87 285281 6.6 6.3 271273268 277 278280 271 6.2 -10 262 6.1 258 261254 250 -12 Clot hing6 St orewide sales (left axis) P ersonal it ems Number of st ores (right axis) -14 Food Japan Depart ment St ores Associat ion5 200 -16 General merchandise 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 (CY) Household goods -18 08/11 09/5 09/11 10/5 10/11 11/5 11/11 Source: Compiled by MHCB Industry Research Division based on materials from the Japan Source: Compiled by MHCB Industry Research Division Department Stores Association. based on materials from the Japan Department Notes: The number of stores represents data as of Stores Association. December 31 for each year. Figures for FY2012 are Note: Three-month moving averages. based on MHBC Industry Research Division forecasts. [Fig. 20-13] Year-on-year growth in same-store sales for the “Art, Jewelry, Precious Metals” category (%) 10 5 0 -5 Back to positive growth since June -10 Mild recovery in 2011 the second half of -15 2010 Drop before and after -20 the earthquake -25 08/11 09/5 09/11 10/5 10/11 11/5 11/11 Source: Compiled by MHCB Industry Research Division based on materials from the Japan Department Stores Association Note: Three-month moving averages. (2) Corporate earnings: With intense competition continuing between downtown department stores, the department store industry will look to improve profitability through cost cutting initiatives FY2011 results The FY2011 results for Japan’s 4 major listed department stores (consolidated were a mixed basis) indicated that combined revenues fell due to the significant impact felt bag for major from consumer austerity seen in the wake of the earthquake. However, Isetan department stores in terms Mitsukoshi Holdings and H2O Retailing recorded an increase in revenues due of both net sales to the effects from the grand reopening of Isetan Mitsukoshi Holdings’ Ginza and profits 12 Mizuho Corporate Bank, Industry Research Division
  14. 14. FY2012 Japan Industry Outlook (Retail) Store and the grand opening of H2O Retailing’s Hakata Hankyu Store. In terms of profitability, results turned out to be a mixed bag. Isetan Mitsukoshi Holdings and Takashimaya both posted increases in profits owing to an improvement in earnings from their credit card subsidiaries and progress made in SG&A expense cutbacks centered on personnel costs. In contrast, J Front Retailing and H2O Retailing both posted a decrease in profits due to cost increases from new store openings. Sales are likely to rise in the second half of FY2011 amid new store openings and increased sales floor area. As a result, the combined full-year FY2011 results for Japan’s 4 major listed department stores are expected to include an increase in sales profits (profits) on par with FY2010. With competition Despite plans for more new downtown flagship store openings and sales floor growing more fierce in area expansion, Japan’s 4 major listed department stores are expected to see downtown areas, major only slight year-on-year growth (0.5%) in net sales in FY2012 amid forecast department stores will closures of unprofitable stores in rural areas and due to persistent market look to cost cutting initiatives to secure contraction over the medium to long term. As for profitability, Japan’s higher profits in department stores are forecast to see higher profits thanks to further progress FY2012 made in cost cutting initiatives (see Figs. 20-14 and 20-15). With restructuring involving rival department stores having run its course, department stores will now look to integrating business units more, such as standardizing systems, in order to concentrate management resources on strengthening sales capabilities through the grand reopening of flagship stores and other means. [Fig. 20-14] FY2011 interim results for Japan’s four listed [Fig. 20-15] Earnings for Japan’s four listed major department stores major department stores (JPY millions) [Actual] Isetan FY10 FY11 FY12 J Front <Consolidated> Mitsukoshi Takashimaya H2O Retailing (Unit) (Actual) (Estimate) (Estimate) Retailing Holdings 4 Sales profits 583,645 455,440 410,069 236,382 Sales profits (JPY 100 m.) 35,054 35,074 35,250 (Growth rate) 0.6% -2.4% -3.0% 6.7% 4 Operating profits (JPY 100 m.) 600 648 655 Operating profits 9,046 7,243 9,069 3,660 (Growth rate) 886.5% -1.5% 13.5% -23.1% Ordinary profits 15,704 7,710 10,789 3,840 [Rate of Increase and Decrease] (YOY) (Growth rate) 82.8% -6.2% 6.8% -27.6% FY10 FY11 FY12 (Unit) (Actual) (Estimate) (Estimate) Net income 20,576 2,282 5,376 -1,237 4 (Growth rate) 4882.1% -37.8% -35.7% -149.1% Sales profits (%) -3.2% 0.1% 0.5% Isetan J Front 4<Non-consolidated> Mitsukoshi Takashimaya H2O Retailing Operating profits (%) 35.7% 8.0% 1.1% Retailing Holdings Sales profits 295,475 308,483 326,550 175,468 (Growth rate) - -1.9% -3.5% 6.6% Operating profits 6,054 3,231 2,348 2,231 (Growth rate) - -5.1% -33.7% -40.8% Ordinary profits 6,188 2,803 3,985 (Growth rate) - -9.3% -33.6% Net income 16,081 96 5,862 (Growth rate) - -89.8% 168.4% Source: Figures 20-14 and 20-15 are both compiled by MHCB Industry Research Division based on IR materials of each company. Notes: Mitsukoshi and Isetan merged in April 2011 to become Isetan Mitsukoshi. Following the merger, both companies’ mail order business that had been operated at department stores was carved out into a new company; hence year-on-year growth is not included in Figure 20-14. Figure 20-15 data is on a consolidated basis. Data for FY2011 and FY2012 in Figure 20-15 is based on MHBC Industry Research Division forecasts. 13 Mizuho Corporate Bank, Industry Research Division
  15. 15. FY2012 Japan Industry Outlook (Retail)1. Specialty stores(1) Apparel companies: Differentiation measures shifting from pricing to quality, functionality and design Consumer mindsets Japan’s apparel industry is in the process of shifting its differentiation shifting to quality, measures from pricing to quality, functionality and design. With huge even if the sales price quantities of low-priced merchandise found in the market today, consumers is slightly higher are now deciding to make purchases based not only on affordability, but on quality and design as well (even if the sales price is slightly higher). Apparel companies are In addition to these changes on the consumer side, merchandise procurement strengthening planning prices have risen amid minimum wage hikes in China, both of which have and production to forced apparel companies to revise their differentiation strategy more toward differentiate products quality, functionality and design, rather than just price. Yet, most apparel in terms of quality, companies are dependent on multiple apparel manufacturers and trading functionality and companies for planning and production, which has added to the degree of design difficulty to differentiate products in terms of quality and functionality. Given this environment, some apparel companies are strengthening their upstream presence, including product planning and management of clothing factories, as well as moving forward with SPA 3 initiatives. Moreover, in addition to strengthening their own upstream presence, apparel companies are also working to complement their upstream presence through partnerships with prominent apparel manufacturers. Traditionally, Japan’s apparel companies have selected merchandise based on product samples brought in by apparel manufacturers. Going forward, however, apparel companies will likely pursue a strategy to strengthen their product planning and production structure so that they can personify their own brands by partnering with prominent apparel manufacturers for marketing, merchandising 4 and production process management.(2) Drugstores: Despite hurdles from restrictions placed on foreign companies, Japan’s drugstores are beginning to move forward with market entry in China and ASEAN With the domestic With the domestic market peaking, Japan’s drugstores, in particular larger market peaking, chains, are moving forward with overseas expansion plans. However, China drugstores are now has stringent regulations in place on the investment stake of foreign looking toward the China and ASEAN companies in Chinese enterprises and on pharmaceuticals that can be sold by markets drugstores, while the low-margin nature of pharmaceutical sales in the country means Japan’s drugstores will be unable to utilize a “margin-mix” pricing strategy like in Japan. Thus, there are a variety of hurdles present to entering the China market (see Fig. 20-16). Actually, cocokara fine, which had been3 Store Retailer of Private Label Apparel: A highly integrated vertical sales format from manufacturing to retailing.4 Merchandising: Refers to product composition planning and product commercialization planning in which products are controlledfrom manufacturing to in-store sales by systematically commercializing products factoring in quantity and cost based the brandconcept. 14 Mizuho Corporate Bank, Industry Research Division
  16. 16. FY2012 Japan Industry Outlook (Retail) among the first to enter the China market, in August 2011 announced the closure of two stores in Shanghai, illustrating once again the difficulty of an aggressive strategy in the China market. Given this, Japan’s drugstores are beginning to shift their attention to the ASEAN market, which has comparatively looser regulations compared to China. Tsuruha Holdings has established a joint venture company with the Saha Group, one of Thailand’s largest distributors of consumer goods, and plans to open its first store in Thailand in May 2012. Other drugstores are examining the possibility of entering other ASEAN markets in much the same way. As a result, going forward Japan’s drugstores will likely step up overseas expansion efforts in the region. [Fig. 20-16] Restrictions on the sale of pharmaceutical products in China A Chinese enterprise must hold a majority interest in any enterprise that has a network larger than 30 stores andInvestment stake that sells multiple drug brands ・Restriction on the number of stores may vary based on the floor area of the stores ・Enterprises founded in Hong Kong and Macau are able to invest independently [Related laws] Foreign Invested Enterprise Business Area Administration Law and “Catalog for the Guidance of Foreign Invested Enterprises” ・A business license must be obtained from the State Food and Drug Administration office located nearest to the Licenses enterprise’s office ・After the license has been obtained, an enterprise must be registered with the Administration for Industry & Commerce [Related laws] “Regulations for Implementation of the Drug Administration Law,” “Drug Business Approval License Administration Law,” and “Rules on the Administration of State Drug Related Sales under the Drug Distribution Administration Law” ・Non-drugs, such as cosmetics and pharmaceuticals, cannot be displayed separately on store shelvesParallel distribution ・Store staff must not introduce or sell non-drugs as drugs. ・Cosmetics and other products can be sold in separate displays if they are included in the business license. [Related law] “Notice Concerning related Problems to Strengthening the Business Administration of Drugstores” ・Restrictions have been placed on the distance between stores in each region in order to preventDistance between stores excessive competition in cities [Beijing] Stores must be located at least 350 meters (straight line distance) apart in the city. This restriction does not apply to Beijing’s suburbs [Shanghai] A company cannot open a drugstore within a 300 meter radius of one of its other drugstores. Source: Compiled by MHBK Business Solutions Department based on related laws and regulations enacted in China. 15 Mizuho Corporate Bank, Industry Research Division
  17. 17. FY2012 Japan Industry Outlook (Retail) (3) Electronics retail stores: The combination of in-store services and online sales channel to cover store costs is becoming more importantThe effects from a fall in Over the past several years consumer electronics retail stores, which are saiddemand due to the end of to account for some 60% of the consumer electronics market, have reapedgovernment assistancemeasures and the impact great rewards from special demand owing to government assistance measuresfrom exaggerated like the consumer electronics eco-point program and the complete changeoverdemand consuming to terrestrial digital broadcasting. On second thought, as 2012 will see thefuture demand will be feltin 2012 effects from a fall in demand due to the end of government assistance measures and the impact from exaggerated demand consuming future demand, the key for electronics retail stores will be how well can they reign in the negative impact on their profitability. In terms of business strategy, in which product procurement capabilities contribute to competitiveness, electronics retail stores will need to strengthen product procurement capabilities by boosting their market share, partner with non-electronics industries to develop new avenues of demand, increase their line ups and respond to the diversification seen in their sales channels. In terms of demand trends, attention should be heeded regarding (1) consumers’ heightened consciousness toward energy saving products and (2) changes in consumer purchasing behavior.Electronics retail stores Buoyed by consumers’ heightened consciousness toward energy savingwill need to respond to products following the earthquake, the consumer electronics industry canconsumers’ heightened expect to see new demand for environment-related products like photovoltaicconsciousness towardenergy saving products power generation devices as well as an increase in units from the shortenedand changes in replacement cycles of energy saving consumer electronics and higher unitconsumer purchasingbehavior prices from added product functions and features. Household appliances (white goods) have relatively fewer model changes compared to information appliances and are typically used for around a 10-year period, but with this period of time set to decrease on the back of consumers’ heighted consciousness toward energy saving products, attention will focus on manufacturers and their product development trends. Another noteworthy trend is changes in consumer purchasing channels. A look at the United States—a leader in the advancement of e-commerce—shows that long-term changes in consumer purchasing behavior should be a concern for Japan’s consumer electronics retail stores. Best Buy, which accounts for 30% of the United States’ 160 billion dollar consumer electronics retail market, has sought to combine services (customer service, installations, repairs, etc.) that leverage its store network with its online sales channel as part of its strategy to differentiate itself from online-focused electronics retailers. Going forward, it will become increasingly important for Japan’s consumer electronics retail stores to combine their in-store services and online sales channel in order to 16 Mizuho Corporate Bank, Industry Research Division

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