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Rakuten and Seiyu will deliver products from the Seiyu LIVIN Yokosuka Store in Yokosuka City, Kanagawa Prefecture, to visitors in Sarushima via drones.

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Costco saw its third quarter net sales increase 7.4% to $34.0bn, with comparable club sales up 5.6%. We look at the drivers behind its continued strong performance and the outlook at it gets set to open its first club in China.

Ecommerce sales up 20.0%

The momentum in Costco’s sales performance was supported by its fast-growing ecommerce business, with comp sales up 19.5%. This excludes its grocery ecommerce delivery business via Instacart, with sales for this reflected in its core club operations. During the quarter it completed the roll-out of six regional grocery distribution centres for its two-day grocery shipping programme. This operation was initially run out of its Business Centres but has been relocated to dedicated space within its existing distribution centres. The retailer is also in the process of rolling-out pickup lockers, for smaller non-food items, to 100 additional clubs. Costco will expand its ecommerce model to Japan this summer and Australia later in the year.

Source: IGD Research

Aiming to mitigate impact of tariffs

Despite its solid performance in the quarter, the prospect of higher, additional tariffs on products sourced from China is creating some uncertainty. These could impact product pricing and margins. Where possible, it is bringing in products early, it is working with suppliers to reduce costs and is looking at alternative country sourcing. One of the key factors for Costco is the risk attached to the ongoing discussions and the potential for the product list to be expanded to include electronics and clothing.

Getting ready to open first club in China

The most notable event in the final quarter for Costco will be the opening of its first physical club in China. This is due to open in Shanghai in August. The retailer first entered the market in 2014 through a partnership with Alibaba, selling private brand products into the market. Two years ago, it built on this partnership by launching a flagship store on Alibaba’s Tmall shopping site. While Costco is likely to take a methodical approach to the Chinese market, expanding at a relatively slow pace, it holds significant long-term potential for the business.

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Amazon and Life supermarket are partnering to sell fresh foods online in parts of Tokyo starting later this year.

Access to a greater range of products

Under the new partnership, Life will supply a range of products to members of Amazon Japan’s Prime Now service. While Amazon Japan will process payments and handle delivery.

The tie-up means that Amazon will be able to quickly offer a greater range, while Life hopes to reach a younger customer demographic and people who live in areas without its stores.

Amazon has partnered with bricks-and-mortar retailers in other markets, e.g. Morrisons (UK), Casino (France), Dia (Spain). We expect a similar approach in Australia and India in the future.

More about Amazon Japan

In April 2017, Amazon Fresh food service was launched, delivering orders to Amazon Prime members in Tokyo as fast as four hours. The platform carries 17,000 fresh produce items, as well as household goods, pet and personal care.

However, shopper trust and brand perception remain challenges for the retailer. Its latest agreement with Life should help boost its credibility, as it looks to cater to growing demand from the elderly and those who have difficulty getting to physical stores, which will also include busy professionals.

More about Life supermarket

Life supermarket already operates an online service giving customers access to approximately 6,000 products. However, its delivery area only covers around half of the Tokyo metropolitan region. Profitability also remains a challenge due to high operating costs. The partnership with Amazon will make the last mile shorter and therefore more efficient.  

Want to know more?

Hear directly from the Amazon UK leadership team and learn about how you can grow your business with them at IGD Amazon Vendor Leadership Day in London on 10 September 2019. Find more information on the event amd book your tickets here.

We round up the latest trading updates and news for Japan's four largest retailers, Seven & i Holdings, FamilyMart UNY, Lawson and AEON.

Seven & i posts 12.5% increase in revenue

Seven & i Holdings has released a strong set of annual results (ending 28 February 2019), posting a 12.5% increase in operating revenue to JPY6,791.2bn (US$60.7bn), with operating income up 5.1% to JPY411.5bn (US$3.7bn).

Revenue from its domestic CVS operations grew modestly at 2.9%, with existing stores rising for the eighth consecutive year at 1.3%. Strong growth categories were frozen food, rice products and sandwiches. Seven-Eleven Japan continues to focus on expanding counter, refrigerators and frozen food sales area. Network expansion slowed compared to recent years, adding net 616 stores to reach 20,876 nationwide. It is also set to enter Okinawa on 11th July, the only Japanese prefecture where the retailer's presence is missing. The retailer plans to open 50 new stores next fiscal year and reach 250 by 2024.

Sales at the retailer's main supermarket banner, Ito Yokado, was flat at 0.1% YoY. It ended the fiscal year with 159 stores across Japan, five fewer than the previous year. Further closures are expected, with the retailer forecasting to end FY2020 with 157 stores as it continues to reform and restructure the business. While total convenience store sales in the U.S. for the fiscal year ending 31 December 2018 increased 27.4% to JPY3,993.2bn (US$35.7bn), thanks to the acquisition of Sunoco stores. Gasoline sales was up 47%, and existing store sales increased 1.9%.

Seven & i continues to bring new initiatives to its stores to offer shoppers greater convenience. In July, it plans to add a payment function to SEJ APP. A 7pay app is set to launch in October for external participating stores. As part of the retailer's digital strategy, it plans to develop the function further by integrating the payment app among Group companies' applications by Spring next year.

FamilyMart UNY: revenue falls but income rises 23.7%

FamilyMart UNY posted a 3.1% fall in gross operating revenue to JPY617.7bn (US$5.5bn), but core operating income increased 23.7% to JPY51.5bn (US$460.2m) (mainly attributed to the sale of UNY hypermarket business). More profitable operations and post-merger activities in Japan have been key focus areas rather than opening new stores. Newly converted FamilyMart stores recorded higher daily sales, as well as stronger customer footfall than pre-conversion. FamilyMart UNY ended the fiscal year with 16,430 stores in Japan, 802 fewer stores than last year. The retailer's overseas network grew steadily, with 189 new stores to reach 3,357 in Taiwan and 372 new stores in China to reach 2,569. 

Hypermarket operations in Japan are classified as a discontinued business, after Pan Pacific International Holdings Corporation (PPHI) (Don Quijote) completed full acquisition of UNY on 4th January. The retailer has also released a statement outlining the merger of FamilyMart UNY Holdings Co., Ltd. and FamilyMart Co., Ltd. This will change the retailer's trade name to FamilyMart Co., Ltd effective from September 1, 2019.

FamilyMart UNY has outlined four key areas of focus: enhancing support for franchised stores, strengthening store profitability, moving forward with the shift to digital and promoting business collaboration with Pan Pacific International Holdings Corporation (PPHI) (Don Quijote).

Under the enhancing support for franchised stores strategy, it will focus on store investment to drive efficiencies in-store. There are approx. 1,000 FamilyMart stores in Japan equipped with self-checkout registers in response to increasing labour shortages. It is also beginning to test different business operating hours for its stores. For its moving forward with the shift to digital strategy, the retailer will launch a FamiPay smartphone app in July. The FamiPay app will allow customers to make transactions using the retailer's "FamiPay" digital currency. The app will look to improve customer convenience by offering discounts and coupons exclusively to app users.

Lawson posts 6.2% increase in sales

Lawson continues to be the fastest growing retailer amongst the big four in Japan. It recorded a 6.2% increase in net convenience stores sales to JPY2,424.5bn (US$21.7bn), and 6.6% rise in operating revenue to JPY700.6bn (US$6.3bn). This was mainly driven by new store openings, with a net increase of 667 stores to reach 14,659 convenience outlets across Japan. Existing-store sales in Japan (excluding ticket and gift-card sales etc.) declined by 0.5% YoY as customer numbers declined. However, average customer spend increased, with strong sales of rice balls and boxed meals, and growth in night-time food options where the retailer has been upgrading.

Operating profit fell 7.7% YoY to JPY60.8bn (US$543.4m) following investment in new POS cash registers into all stores to drive efficiencies to in-store cash management, plus costs relating to the launch of Lawson Bank. Store numbers overseas increased by a net 614 to 2,171 stores, with expansion mainly coming from China, where it operates in Shanghai, Chongqing, Dalian, Beijing, Wuhan and Hefei. 

Lawson is looking to establish a more profitably model across its international operations, targeting 5,000 stores by FY2021. In China, it plans to build scale through regional and franchise agreements, while in Southeast Asia, it hope to develop win-win partner relationships to expand its store network.

Transforming its products is a key priority for Lawson. It is changing nutritional and information labelling, e.g. low salt and low-carb logos, and is also reducing food waste and the use of plastics. Furthermore, it will have a stricter new store opening criteria ongoing to drive stronger profitability. The retailer plans to open 700 new stores next fiscal year but close the same number in Japan. This will be a significant change to the last five years, having averaged a net 668 new stores YoY.

Lawson plans to use digital technologies to boost store efficiency, particularly with rising costs and labour shortages. In July, Lawson will test unstaffed stores during the early hours. In FY2019, Lawson will use its new POS registers to enable customers to self-checkout by reading product barcodes. This system is expected be rolled-out to all stores by the end of 2019. Lawson plans to introduce its own mobile payment service, “Lawson smartphone cash register” to allow customers to pay by mobile app.

AEON posts 1.5% increase in revenue

AEON has posted a 1.5% increase in operating revenue to JPY8,518.2bn (US$76.1bn), with operating income rising 0.9% to JPY212.3bn (US$1.9bn). The performance of the retailer's GMS Business was flat, posting operating revenue of JPY3,080.6bn (US$27.5bn). Operating revenue from its Supermarket Business, which includes Maxvalu and Ministop convenience chain, fell 0.2% YoY. The retailer's International Business, which includes operations in Malaysia and Hong Kong, recorded robust revenue growth of 4.5% to JPY437.5bn (US$3.9bn).

AEON's Health & Wellness Business, which operates under Welcia Holdings Co., Ltd continued to perform strongly, highlighting growing demand in this segment. Operating revenue increased 11.7% to JPY793.9bn (US$6.6bn) YoY, with a net 426 new stores to reach 4,964 across the business. The retailer ended the fiscal year with 1,878 and 2,050 Welcia and Tsuruha stores respectively.  

 

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Presentations

17/06/2019
We review Seven & i Holdings current performance, its growth forecasts for the next five years, plus progress against key strategic objectives.
07/06/2019
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