For many of Japan’s largest food retailers, the current fiscal year has become the stage for a tale of woe. The weakness in the Japanese economy has translated into declining consumer spending in what elsewhere in the world has proven a relatively resilient sector – food. Nevertheless, there are those who have been able to buck the trend. Katy Humphries reports.
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Japan’s two largest retailers, Seven & I Holdings and AEON, each unveiled dismal earnings reports for the first nine months of the year yesterday (8 January).
Seven & I, which operates the 7-Eleven convenience chain in Japan and the US, said net profit fell 32% on sales that were down almost 12%.
Meanwhile, Aeon saw sales drop 3.9% during the March-to-November period, although it did narrow its operating loss from a year earlier, when its results were depressed by tax-related expenses and other one-time costs.
Nevertheless, over the past nine months, Japanese food retailers have felt the adverse impact of a number of wider issues affecting the Japanese economy.
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By GlobalDataAccording to figures from Japan’s Ministry of Internal Affairs, the average family monthly income dropped 2.5% year-on-year in November, marking the eighteenth straight month that Japanese salaries have fallen.
Meanwhile, unemployment rose to 5.2% in November, up from 5.1% in October but falling short of the 5.8% peak recorded in July.
Concerns over falling wages and rising unemployment have battered consumer confidence and the average family expenditure fell 2.1% in the month, the government figures reveal.
Significantly, spending on food fell ahead of overall consumer spending, dipping 3% in the period.
While Japanese consumers are tightening their belts and reducing their expenditure on food, the fall in overall spending has also been prompted by the retailer-led response to wavering consumer confidence.
In a bid to win over consumers, Japan’s retailers have embarked on a series of aggressive price cuts and adjusted their sales mix with the expansion of cheaper own-label discount ranges.
While such measures have resulted in increasing volumes across key product categories at both Aeon and Seven & I, the price war has driven food deflation – which stood at -2.1% year-on-year in November.
Japan’s retail price war has dented margins and hit profitability, with the implicit threat that unsustainable pricing action could damage retailers’ long-term financial health.
Japanese retailers are also grappling with some long-term structural issues, such as the nation’s ageing population, which have resulted in declining supermarket sales in the market.
According to the Japan Chain Stores Association, supermarket sales in November fell for the 25th consecutive month. Indeed, the trend runs even deeper that: sales at Japanese supermarkets have fallen in 46 of the last 48 months, the industry body reveals.
While it seems that much of the sales decline at Aeon is in-line with wider market trends, Seven & I revenues have plummeted much faster than deflation and declining consumer spending combined – indicating that the group is likely losing market share.
The retailer that has benefited from the apparent turmoil at Seven & I also appeared to have been revealed yesterday when fellow c-store operator Lawson booked a 40% jump in sales for the nine-month period.
In its earnings release, Lawson said that much of the increased revenue has been reinvested in the business – with profits edging up to JPY44bn from JPY43.33bn last year.
Lawson’s revenues were boosted the company’s integration of the Ninety-nine Plus discount chain, which it acquired last summer.
Over the past nine months, Lawson has also focused on opening new stores in major metropolitan areas in the Kanto, Chubu and Kinki regions and the company intends to continue to drive the pace of expansion forward in the remainder of the year, with plans open a further 167 stores in the fourth quarter.
Lawson has developed its own-label offering, with a particular focus on the categories that it believes have a particular resonance with current consumption patterns.
“The company focused on product development in certain product categories during the current fiscal year, namely fried foods, desserts, and cooked noodles,” Lawson said.
“The company extended the Value Line series of private brand products, which have mainly been sold in Lawson Store100 stores, to regular Lawson stores. At the same time, we also continued to develop products offering a positive “surprise” to consumers with their high added-value relative to price,” the company revealed.
In a bid to counter the impact of falling domestic sales, many Japanese retailers – including Aeon, Lawson and Seven & I – have also looked to expand overseas.
The high-growth emerging market of China has proven an appealing prize for Japanese retailers, as well as the likes of Wal-Mart, Carrefour and Tesco.
However, in order to ensure profitable long-term growth, Japan’s retailers must ensure that their domestic operations remain sustainable.
As regional and smaller players come under pressure from declining consumer spending in an increasingly competitive market, it is likely that we will see further consolidation in Japanese retail. So far, the likes of Lawson who, are willing to invest in aggressive acquisitive expansion, have been the chief beneficiaries of such trends.
