The Japanese retail sector is a two-tier market, divided between old-fashioned, underperforming reta...
The Japanese retail sector is a two-tier market, divided between old-fashioned, underperforming retailers such as department stores and promising, young specialist retailers.
Fund managers agree that old-style department stores face a number of significant structural problems. Mark Urquhart, fund manager, Japan, at Baillie Gifford, says department stores have large debts because they expanded too fast in the bubble era of the late 1980s early 1990s and took out bank loans against their property values; the property values subsequently collapsed and they were left with the loans. Japanese banks are becoming increasingly aggressive in collecting debts, he says.
Japanese retailers are overstaffed compared with the West, which depresses their average operating margins to 1% to 2%, Urquhart says.
Department stores have also been hit by the growing trend for young people with a disposable income to shop at more specialist retailers, he adds. Young Japanese consumers find specialist retailers such as Fast Retailing attractive.
Urquhart says: "Fast Retailing is very much like The Gap, focusing on casual wear and quite simple ranges but it does them quite effectively. It sources its goods from China, which gives it a substantial cost advantage, Chinese wages being a sixth or seventh of Japan's. It is therefore able to price its wares more aggressively, which is unusual in Japan.
"The Japanese are used to paying around a third more than in Europe or the US, according to a recent study. Also, after many years of a depressed economy, consumers are more price sensitive: companies doing well are those that play to that."
According to John Paul Temperley, investment manager at Martin Currie, the Japanese retail sector is volatile and therefore certain stocks present good value. He favours specialist retailers over department stores.
Temperley says: "The Japanese retail sector is a major play on consumption. Until recently consumption was weak because of low wages and bonuses, and therefore disposable income. July saw the first rise in bonuses in more than two years, which we expect to feed into the consumption side of the economy. Consumption accounts for around 60% of the Japanese economy, which until now has been depressed."
Urquhart says: "The consumption backdrop in Japan is difficult but there are some opportunities available although these are all in the speciality retail area."
Baillie Gifford likes electrical retailer Yamada Denki, which competes with department stores but has lower prices and better inventory management.
Martin Currie does not have a position in Fast Retailing because, while specialist retailers can have up to five years of success, they are susceptible to changes in fashion.
Temperley says: "The previous star was Ryohin Keikao, which was the darling of the sector for several years. This year has seen its share price decline by 75% in yen terms in under 12 months and Fast took over as the place to shop. Fast's share price has doubled in the past 12 months, which shows the volatility of the sector."
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