Japans major retailers are looking abroad for growth

Japan's major retailers are looking abroad for growth

Japan's major grocery retailers are looking to their Asian neigbours for expansion, as their home country's bleak economic landscape has stymied growth in recent years. Petah Marian investigates Japan's economy and which countries these retail giants are looking to conquer.

Japan's major grocery retailers have been struggling over recent years, hurt by continued low consumer confidence, deflation, increasing channel saturation and a stagnant economy.

Earlier this month, Japan's cabinet office again reported a worsening in consumer sentiment, with the consumer confidence index falling to 41.2, down from 42.4, deteriorating for the third straight month. A reading below 50 suggests consumer pessimism.

"Japan's economy is recovering from the recession, but is very much hindered by the very strong yen, making exports not as competitive as they should be, and is also impacted by low consumer confidence, particularly as the fear of unemployment weighs heavily on them," says Euromonitor International retailing analyst Raphael Moreau.

Additionally, consumer behaviour has shifted in the last couple of years, with shoppers becoming accustomed to the deflationary environment, becoming more interested in bargain hunting, and, Moreau says, "more likely to look to pay less for products, where in the past they would not believe a product was of high quality if they paid less".

Moreau paints a mixed picture of the retail sector in Japan. He says the industry is struggling due to "low margins" but explains that performance is quite a varied, with convenience stores remaining "quite resilient" with many continuing to expand. This comes, Moreau says, despite the Japanese retail sector being highly competitive and a "very mature market".

In recent quarters Japan's major grocery operators have largely managed to maintain profit growth through cost cutting as sales remain lacklustre.

In Aeon's first-half results, for example, sales fell by 0.9% yet the company managed to book a 75.2% increase in operating income, which it largely attributed to its efforts to "revise selling, general and administrative expenses".

Meanwhile, Seven & I Holdings, parent of the 7-Eleven c-store network, posted a 42.9% increase in net profit for the first half despite just a 0.5% increase in revenue, which it attributed to lower SG&A expenses.

The picture was bleaker for Lawson, with net profit declining 22% in the first half due to a number of one-off losses. Despite the one-off charges, revenue did still fall 2.4% over the period.

FamilyMart was the one retailer buck the trend. Like Seven & I, it already has a broad international footprint, and saw net profit climb 15% during the first half while revenue grew 14%.

Cutting costs to bolster profits is not a sustainable long term strategy. While synergies are important, and reduced overheads are always welcome, there are only so many costs that can be cut.

With the bleak consumer landscape in Japan showing no immediate signs of improvement, and the high retail saturation levels in the country's major cities, aggressive international expansion seems like the only way to drive long-term growth.

"All the convenience store operators now have major ambitions outside Japan, because competition in Japan is too strong for margins to increase," says Moreau.

In recent weeks there has been a spate of announcements by Japan's major retailers of aggressive expansion growth across Asia.

This week, reports emerged that Aeon plans to nearly double its operating profit in three years through expanding in Asia. It plans to invest JPY800bn (US$9.91bn) in new stores; a quarter of that money has been earmarked for countries such as Indonesia and Thailand. Today (29 October), Aeon held the opening ceremony for a large mall in the major Chinese city of Tianjin.

Two weeks ago, Japanese retailer Uny and Taiwan-based Ting Hsin established a joint venture to operate stores in China. The companies plan to invest US$33.1m in the venture with the first outlet to open in Shanghai in 2012.

Earlier this month, reports emerged that President Chain Store, a 7-Eleven franchisee in China, plans to double the number of stores by the end of the year to reach 100 outlets, and hopes to reach 300 stores in five years.

Moreau sees convenience operators' shifts towards international franchising as a great opportunity to help them expand quickly. "It's fairly new for some of the convenience store operators in other markets than Japan, and it's the same story in Japan to some extent, because they see that they can grow that way. By encouraging more franchised stores, they can continue to expand in Japan, but even more so in places llike Malaysia and Thailand."

While China seems to be the most promising of Japan's neighbours, Moreau says Japan's convenience operators should not necessarily see China becoming their biggest market in Asia.

"For example, we see Seven & I seeing long-term potential for 3,000 stores in Malaysia and 200 stores for 2010," he says. "In Thailand, they managed to open around 50 stores in 2009 to reach about 500. In Thailand the proportion of franchised stores was about 45% at the end of 2009 and 7-Eleven thinks they can raise this proportion to 60% in five years."

FamilyMart is also focused on Thai expansion, and is working to build strategic alliances in the country, Moreau says. "It currently has about 70 planned company-owned outlets in 2010. That will be the first step towards having a strong presence in the country and then they will move on to work on building franchised stores in the country."

However, Moreau was quick to pour cold water on these retailers' aggressive expansion plans. "Whether they will achieve those goals remains debatable, as some of them are too ambitious," he says.