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This in-depth guide to Japan explores the key trends in grocery retail and the growth strategies of the leading retailers in the country.

The four largest grocery retailers in Asia are 7&i Holdings, FamilyMart UNY, Aeon and Lawson, we reviewed their five year growth forecasts, strategic priorities and latest developments.

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FamilyMart UNY has released a statement today to confirm a deeper partnership with Don Quijote in Japan.

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The three leading convenience store chains in Japan are facing increasing challenges to hiring staff for their stores. Labour shortages driven by the country's ageing population is deepening and retailers opening new stores require new workers.

Discounts and benefits for workers

The current approach for many convenience store operators is to incentivise workers with benefits and discounts. The average wage for convenience staff is around JPY1,000 an hour, but varies based on location in the country.

Seven & i Holdings, which operates over 20,600 7-Eleven stores in Japan, opened a day care centre for employees on the second floor of a store in the northern city of Sendai in July. In April 2017, it began offering workers discounts on hotels and travel services.

The second largest CVS chain in the country, FamilyMart, is partnering with Iris Ohyama to offer part-time workers nationwide discounts of up to 60% on rice cookers and other appliances. While Lawson, which operates more than 14,300 stores, offers its employees discounts on DVDs and books, serviced by the retailer's subsidiary companies.

Automation part of the solution

At an recent exhibition, Lawson launched an unstaffed store concept, featuring a robot that can prepare food as per customer preferences, e.g. cook gyoza dumplings. About a year and half ago, we covered how Japan's Ministry of Economy, Trade and Industry is backing the introduction of RFID technology in retail. Since then, we have seen Japanese retailers in different industries trial this technology. Retailers are now working harder to retain and attract new employees, but also promote automation to drive efficiencies in-store.

We have seen several retailers across Asia launch their own e-wallets recently, including AEON in Malaysia, and FamilyMart and Carrefour in Taiwan.

AEON launches its own e-wallet

Earlier this year, AEON introduced its e-wallet app. Available to download on Google Play and Apple App store, AEON's e-wallet allows shoppers to pay and earn points at participating AEON stores (AEON Big Hypermarkets, AEON MaxValu Prime and AEON Wellness) seamlessly. Users can pay by scanning the QR code at the point of sale and earn points for credit when making purchases with the app.

Users just need to add their credit card to the e-wallet and will then be able to monitor their balance and transaction history real-time. The app has a biometric login feature and multi-factor authentication to help reassure users any concerns about security.

AEON Asia Sdn Bhd.'s Managing Director, Shinobu Washizawa, said, "We realise that there is an increase in the use of mobile payments, thus the AEON e-wallet will not only provide our customers with convenience, but also a safe and secure payment system [...]."

Last year, the retailer announced plans to invest JPY500bn (US$4.4bn) in online operations over the next three years. It posted a robust set of H1 results earlier this month.

Other epayment solutions in Asia

The introduction of mobile payment services in Taiwan has been relatively slow despite high smartphone penetration. Many shoppers still prefer to purchase online and collect and pay in cash in-store. However, retailers are beginning to invest in more digital solutions, for example, FamilyMart (My FamiPay) and Carrefour (Carrefour Pay) have recently launched their own e-wallets in Taiwan. The latter allows users to add up to five credit cards in one app. Two of the most well-known epayment solutions in Asia are Alipay and WeChat pay.

Japan's four largest retailers, Seven & i Holdings, FamilyMart UNY, AEON and Lawson, have posted their results for the first half.

Seven & i Holdings: 8.2% total Group sales growth

Seven & i has recorded a 8.2% increase in total Group sales to JPY5,950bn, with operating profit rising 2.6% to JPY199,610bn year-on-year for the six months ending 31 August. 

Domestic convenience store operations recorded a 2.9% increase in revenue to JPY486,243m year-on-year (yoy). 7-Eleven Japan's key growth measure, existing store sales, increased 1.4% in the first half. In response to increase in demand for take-home meals, it continued to focus expanding sales space for frozen foods and launched, for example, Seven Premium snack series dedicated to easy meals. The retailer added 336 stores to its convenience network in Japan to reach 20,596 outlets.

Consolidated revenue for Seven & i's superstore operations was flat. The retailer ended the first half with 164 Ito-Yokado stores in Japan, the same number as the first quarter. However, it forecasts to operate six fewer stores by the end of FY2019, continuing to reform this part of the business.

Revenue from operations at 7-Eleven Inc (U.S and Canada) increased 41.8% to JPY1,357bn. This was largely driven by the effect of the Sunoco acquisition, but nonetheless existing store sales increased 1%. 7-Eleven continues to position itself for the future, partnering with Foodora in Canada for example, to launch a food delivery app that allows customers to order a range of snacks and everyday essentials from 48 7-Eleven locations in Toronto, Vancouver, Calgary and Edmonton.

The retailer's footprint across Asia continues to grow quickly. Through area licenses, for example, 7-Eleven is expanding into new cities in China. Last year, it entered Zhejiang, and during the first half the first 7-Eleven store opened in Jiangsu Province.

FamilyMart UNY: closer alliance with Don Quijote expected

FamilyMart UNY posted a 1.3% rise in operating revenue to JPY641.8bn, with operating profit up 18.9% to JPY49.9bn yoy. This was mainly driven by improved daily sales at converted c-stores and cost reductions following closure of unprofitable stores. The retailer ended the first half with a total network of 23,896 stores, down 106 from the reported number in the first quarter, as it continues to consolidate its operations in Japan.

FamilyMart UNY has continued to focus on brand conversion and integration. As of 31 August, FamilyMart had rebranded 4,746 stores, with both daily sales and customers numbers increasing in converted stores. It aims to complete the brand conversion by November 2018. In collaboration with Don Quijote, it also remodelled three convenience stores in June. Daily sales have increased by 30% in these stores, while customer numbers have increased 10%.

To sustain growth, the retailer has outlined three focus area; enhancing product competitiveness, improving store operating procedures and reinforcing store foundations.

FamilyMart's largest overseas market, Taiwan, continued to perform strongly with operating revenue up 8.5% to JPY32,550m in the first half. In the general merchandise store business, the retailer continued to adopt its 'New Uny' slogan. Sales at the six converted UNY stores (Mega Don Quijote UNY) have doubled since remodelling, and the retailer is set to deepen its partnership with Don Quijote.

AEON: robust profit and revenue

AEON has posted a 2.3% increase in operating revenue to JPY4,266bn, with operating profit rising 5.7% to JPY89.8bn for the first half yoy. Operating revenue at both its General Merchandise Store and Supermarket operations were largely flat at 0.7% and 0.4% respectively.

Operating revenue from operations in Japan increased 1.7% to JPY3,884bn. Growth was much stronger overseas, however, with revenue rising 11.7% to JPY182,252m and 11.9% to JPY139,718m for ASEAN business and China respectively.

AEON's Health & Wellness Business, which operates under Welcia Holdings Co., Ltd continued to perform strongly. Operating revenue increased 13.7% to JPY387,386m, supported by the addition of 80 new stores during the first half (total network 1,773). As the drugstore market leader in Japan, Welcia's strong half-yearly results highlights the growing demand and strength of this segment.

Lawson: revenue up 6.9%

Lawson recorded a 6.9% increase in operating revenue to JPY351.9bn, but a 11.5% yoy decline in operating profit to JPY34.4bn for the six months ending August 2018. The retailer is moving towards the end of its third and final year '1000-Day Action Plan' - investment to ensure sustainable growth in the future.

In the first half, existing-store-sales fell 0.8% yoy, partially driven by unprecedented rainfall in Western Japan in July. Store network expansion was mainly in Japan (348 stores net yoy including Save On and Three F brand changes) and China (493 net stores yoy), reaching a total network of 14,340 and 1,709 stores respectively.

To appeal to a more diverse set of shoppers in Japan, the retailer expanded its Lawson Fresh Pick service to approximately 700 metropolitan Lawson stores in August. The service allows customers to order fresh produce and meal kits via smart phone in the morning and pick up their order from a Lawson store in the evening. Lawson plans to extend coverage to approximately 2,000 urban stores by the end of the fiscal year. It also remains committed to upgrading its offer during the evening, ensuring range and food options are attractive as in the mornings and at lunchtimes.

Lawson was granted a licence from Japan's financial services in August to operate banking services. Lawson Bank launched today - Masashi Yamashita, President of Lawson Bank, said, "We want to be a bank closest to customers [...]” 

Our view

Bringing customers into store remains a challenge in Japan for the Big Four, with the average number of customers visiting falling. We expect all four retailers to search for new and more innovative ways to encourage higher value basket sizes to sustain future growth.

 

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FamilyMart UNY and Don Quijote are set to deepen their existing partnership in Japan.

The deal

Japanese discount retailer Don Quijote is planning to acquire the remaining 60% stake of UNY, after it had acquired 40% stake last year, to fully control the general merchandise store business. In exchange of UNY hypermarkets, FamilyMart UNY will acquire 20.2% stake in Don Quijote. The deal would add around 190 locations to Don Quijote's existing store network, surpassing its target for 500 stores by 2020. It currently operates more than 420 stores across Japan.

What to expect

Should the deal go ahead, we expect Don Quijote to gradually convert, rebrand and integrate some of the UNY stores into its own distinctive store layout, product range and design. Reports suggest a final decision on could be announced as early as this month. Further collaboration between the two is also likely, in both convenience and hypermarket formats.

Only in June, the two retailers opened a convenience store together in the outskirts of Tokyo. Don Quijote already operates six strong performing MEGA Don Quijote UNY stores, with sales doubling after the alliance. The announcement of a potential deal may have come earlier than expected, but as large format retailers continue to reinvent their stores, the two companies have acted early to stay competitive amidst rising competition from speciality stores and online businesses.

 

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