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September 27, 2007

Japanese c-store downturn prompts fresh thinking

After many years of bucking the downward trend in food retail sales, Japanese convenience stores have found themselves under increasing pressure over the past year or so. But, writes Michael Fitzpatrick, Japan’s powerful c-store chains are responding to the downturn with product and marketing innovation, notably a greater emphasis on fresh food.

After many years of bucking the downward trend in food retail sales, Japanese convenience stores have found themselves under increasing pressure over the past year or so. But, writes Michael Fitzpatrick, Japan’s powerful c-store chains are responding to the downturn with product and marketing innovation, notably a greater emphasis on fresh food.


With the exception of an upswing in 2003, total retail food sales in Japan have been falling over the past six years but one area of the market that has consistently bucked the trend is the convenience store sector, which enjoyed continuous growth over the same period.


Recently, however, even convenience stores have suffered. After decades in which their profit growth far outpaced that of other retailers, the c-store sector saw a fall in operating profit ratio in 2006-2007, according to a recent survey of major retailers by the Japanese business newspaper the Nikkei. Japan’s 40,000 convenience stores represent 15% of the market, with US$50.5bn in sales. In contrast, department stores have 6% of Japan’s total food and beverage retail business.


The pace of c-store store openings, rapid over previous years, has also slowed as the market in urban areas has reached saturation point. According to the Nikkei, the four leading companies – Seven-Eleven, Lawson, FamilyMart and Circle K Sunkus – opened a total of 2,425 outlets in the last fiscal year, about 320 fewer than initially planned. The net increase in the number of shops was down 27% from the previous year to 790.


Faced with this slowdown, chains have had to devise new strategies, shifting their focus away from young people to the middle-aged, the elderly, and homemakers. In particular, convenience store operators are placing greater emphasis on fresh food.


Indeed, the newest and hottest segment of the c-store market is the so-called fresh convenience store. Following the lead of the pioneering Shop 99, a number of fresh convenience store formats have been launched, including Lawson Store 100, AM/PM Food Style 98 and Three F Company’s Qs Mart. Consumers have taken to the new concept, attracted by the combination of 24/7 access and a supermarket-like line-up of fresh foods.


Convenience stores are also adapting their product range in a bid to attract new consumers, notably older people. “We are trying to revive with new products all the time,” says a Lawson spokesperson. “We released a new boxed food a little while back targeting older people. It has no fried food, and mainly consists of boiled food and grilled fish, which are favoured by older people. It is priced at JPY580 (US$5), which is slightly more expensive than a normal bento (a boxed ready meal), which costs about JPY500 at convenience stores. The premium Koshihikari variety of rice is used to enhance the bento’s quality and taste.”


Aiming at health- and beauty-conscious shoppers Lawson has also opened a chain of stores called Natural Lawson. The outlets are designed to appeal to women and feature a line of original products, such as 600-calorie boxed lunches and freshly baked bread. As of February 2006, there were 40 Natural Lawson outlets in the
metropolitan Tokyo and Kansai regions. Lawson plans to open several hundred more in the coming years as part of its strategy to combat the slowdown in the c-store sector.


Other tactics include targeting Japan’s extremely food safety-conscious homemakers. “Lawson stopped using artificial food colouring and preservatives in its own brand of products sold at its stores in Tokyo a few years ago,” says the Lawson spokesperson. This policy, first implemented by Seven-Eleven, is expected to be adopted by other convenience stores in response to rising consumer awareness of food safety and health issues.


While convenience store operators are clearly going to considerable lengths to revive their fortunes in the face of the current slowdown, market leader Seven-Eleven refutes the suggestion that the market has reached saturation point. “The market has yet to reach saturation,” said Tadahiko Ujiie, director and chief financial officer of Seven & i Holdings Co., which owns Seven-Eleven Japan, at a recent press conference. Ujiie added that the company plans to open a record number of more than 1,170 new franchised outlets in the 2007 fiscal year.


If the market leader is correct, and the c-store sector has not reached saturation point, it could be surmised that the recent downturn is a temporary glitch and the sector can look forward to better times in the coming few years. In any event, the innovation which the tougher times appear to be fostering can do no harm, and could take what has been an enduringly popular retail format among Japanese consumers into a new era.

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