In the past month or so, Japan's domestic demand-related sectors have been performing well and some ...
In the past month or so, Japan's domestic demand-related sectors have been performing well and some good results have been posted. This is largely due to restructuring efforts that are proving effective and the apparent robustness of the Japanese economy. Outlook for the retail sector has also vastly improved.
It is easy to construct an argument against Japan's retail sector. It is among the worst performing sectors in the Topix in the year to date, as consumption has remained depressed despite a pick up in economic growth and upward revisions to GDP forecasts. Increasing competition within the sector has led to severe pricing pressure, and deregulation of store sizes has crowded the market place further, and allowed foreigners such as Carrefour to enter the general merchandising market.
However, the sector is changing. Restructuring among the most traditional retailers, the department stores, has been going on for nearly two years. This has focussed on profitability, return on assets, spinning off non-core assets and cutting costs, including early retirement programmes to cut wage costs.
It is the firms that are willing to change from traditional retailing methods to newer practices of distribution and information technology that have a better chance of success in this competitive industry.
One of the Japanese stocks that we like is Yamada Denki. It is a leading mass merchandiser of consumer electronics. Its sales of PCs have been particularly strong this fiscal year, which has helped it grow its sales by 38% and net profit by 32%.
Yamada Denki's distribution system highlights a key change in the retail operating environment. Traditionally, manufacturers deliver through numerous distribution channels indirectly to the retailers' stores. However, Yamada Denki has its own distribution centre, which delivers to its stores in a single process.
As a way of improving gross profit margins, more companies are beginning to procure inventory direct from manufacturers. The potential downside is that this system can lead to an increase in inventory risk. However, while this risk is a concern, the use of information technology, such as point-of-sales systems, has helped control this exposure and should help increase inventory turnover rates.
With the economy continuing to expand and income and bonus payments rising, consumption is likely to improve. However, for some financially distressed retailers the increasing competitive environment will lead to their liquidation, as it did with Sogo department store.
Polarisation will continue in the sector, further separating the winners from the losers, and dictating that long-term investments should be made high up the quality curve, and in companies that are adopting more efficient retailing strategies.
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