Structural change of retail industry in the world and strategy of Japanese companies


Date April 12, 2019

presented by Gordon Brothers Japan Advisory Board Member Tsutomu Fujita

Structural change in the global retail industry intensifying

In the world, the growth rate of online retailers is overwhelmingly high. World Retail's stock market capitalization No. 1 is (hereinafter, Amazon), second is Alibaba Group Holding (hereinafter, Alibaba), and third is Walmart (at the end of 2018, the same). Among the top 10 companies, the number one increase in stock prices in the past 10 years is Amazon, and the second is Booking Holdings (hereinafter "Booking").
In terms of net income, the first place is Amazon 1.11 trillion yen (December 2018), the second place Wal-Mart 1.09 trillion yen (February 2018) and the third place Alibaba 1.07 trillion yen (April 2018). Wal-Mart has been on a downtrend since FY2016. Thus, e-commerce vendors occupy top market capitalization companies. Also, by country, there are many top companies in the United States, while Europe and Japan are decreasing.
Meanwhile, long-established retailers, such as Sears and Toys R Us, suffered from poor management. In the United States, as the word "death by Amazon" has been entered, the entry into e-commerce companies such as Amazon has caused many existing retailers to fall into a business crisis.

E- Commerce Evolving

Amazon has transformed from selling books to a global e-commerce company selling a wide range of goods and services. However, over the long term, Amazon has been in the red for e-commerce and has been at a very low level even if it has turned black. With profits earned from retail, Amazon has reinvested and has revolutionized the retail business model. While the surplus in the North American retail sector is increasing, the overseas sector is in the red.
The majority of Amazon's operating profit comes from Amazon Web Services (AWS, Public Cloud Services). Of Amazon's 1.4 trillion yen operating profit, AWS accounts for 59% and retail 41% (F2018). Amazon has a huge investment in IT infrastructure worldwide. The equipment cost is relatively low because of mass purchasing, and the sophisticated technology is being refined. The service that sells this to general companies outside is growing rapidly. Amazon (AWS) is the world's top with 51.8% share of public cloud service (IaaS) (source: Gartner in 2017).
Booking (US) is the world's largest online travel booking site (a business model close to Rakuten Travel). With a total market value of nearly 9 trillion yen, it greatly surpasses Japanese retailers such as Fast Retailing (hereinafter Uniqlo) and Seven & i. Hotel bookings in Europe are the main source of revenue, and 89% of sales in the fiscal year ending December 2018 is outside the United States (76% in the Netherlands). The real stores growing in the US are home-depot, Costco, Loews, home centers such as TJX, and housing related. These products are relatively unfamiliar to e-commerce, and are driven by strong housing construction in the United States. Meanwhile, European supermarkets such as Tesco and Carrefour are sluggish. In exceptional cases, fast retailing is growing, a specialized retail inditex (Spain) that is strong in retail manufacturing (SPA).

Current Status and Issues of Japan's retail industry

In Japan, UNIQLO and Nitori Holdings (hereinafter Nitori), which are strong in SPA, have high growth rates. Unik Ro and Seven & i Holding are growing profits overseas. The growth rate of online retailers such as Rakuten is not high, and there are no online operators that can be used worldwide. Although inbound demand is rising, the profit growth rate of department stores (Takashimaya, Mitsukoshi Isetan HD, H2O Retailing) is not high. Apparel such as Shimada and Aoyama has been sluggish.
In the past 10 years until FY 2017, the profit growth amount is 1st place Fast Retailing 111.3 billion yen, 2nd place Rakuten 87.3 billion yen, 3rd place Seven & i HD 50.5 billion yen (Rakuten only, FY 2018 period) . Compared with the world, Japan is characterized by growth conditions that satisfy conditions such as UNIQLO, Nitori, Pan Pacific International Holdings (Don Quixote's parent company), specialty products such as good product plans, SPA, and growth in Asia.
In Japan, although there are few major e-commerce companies, Rakuten is the most promising among them. Although it is a retail business, Rakuten has developed a wide range of businesses such as finance, sports, venture investment, and communications.
Rakuten is the online market Rakuten market is the parent business, FinTech business accounts for 44% of profits (FY 2017). The core business of financial business is Rakuten Card, Rakuten Bank, Rakuten Securities and Rakuten Life Insurance. Among these, the growth source is the payment business such as credit cards. With a strong retail brand and Rakuten Super Point, we are building a huge Rakuten currency area.
In particular, the growth source is the payment business such as credit card, and Rakuten card of credit card is the highest in volume in Japan. Rakuten Edy is the number of issued electronic money, and the number of usable stores is the first in the country. Going forward, Rakuten Pay will launch offensive in the fields of mobile payment and QR payment in anticipation of rapid expansion of cashless payment in Japan. In partnership with KDDI and the payment field, we plan to provide Rakuten Pay's payment platform and merchant network to KDDI.
Rakuten has repeatedly acquired small financial institutions and has succeeded in rapidly regenerating them and making them more powerful. For example, DLJ Direct · SFG Securities (Rakuten Securities) in 2003, Aozora Card (Rakuten Card) in 2004, Kokusai Shinko (KC Card) in 2005, EBANK (2009 Rakuten Bank), These include the 2010 Bit Wallet (Rakuten Edy) and the 2012 Airio Life (Rakuten Life).
The success of these acquisitions also seems to be largely due to Rakuten brand with overwhelming popularity. In particular, it is an advantage that we can cross-sell various financial services to Rakuten card customers. Thus, Rakuten quickly built a strong financial platform.
In Japan, although inbound demand will increase in the future, it can not grow significantly, but retailers, mainly department stores, will survive to some extent. However, with the exception of UNIQLO, Nitri, Don Quijote, and good product plans that have advanced into Asia, it is likely that domestic-oriented companies will continue to face severe business conditions. And even in Japan, companies with poor characteristics may be prey to "death by Amazon". In conclusion, in order for Japanese retailers to survive, they must either have the following strategies: (1) advance into Asia, (2) focus on inbound demand, or (3) develop a wide range of online businesses centered on e-commerce.