Sector Report

Japan retail – Wish fulfilment

by Oliver Matthew / Apr 15, 2019

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Japan retail remains a significant market, clocking in at around US$1tn in 2018. However, with overall growth limited by challenging demographics and strict immigration policies, it is hard to get enthralled about the outlook. Still, within different segments, plenty of changes are taking wing in consumers, technology, channels, payments and profitability that create money-making opportunities. It is imperative for investors to be able to differentiate a genie in a bottle from a dud to make their dreams come true.

Subdued domestic consumption
Indeed, in the past few years, domestic consumption in Japan, while certainly improved from the pre-Abenomics period, has hardly been exciting. Yet, from 2014 to the present, the share price of discounter Pan Pacific (aka Don Quijote) has zoomed from ¥2,700 to over ¥7,000 and furnishing specialist Nitori broke from sub-¥5,000 levels to breach ¥19,000. Meanwhile, department store Isetan Mitsukoshi has slumped from ¥1,250 to ¥1,100.

Ecommerce drives revenue
There is no doubt that ecommerce is still the revenue story of retail in Japan; yet panning for ecommerce gold is not so easy as it might seem from a “structural” point of view. Rakuten’s shares were ¥1,250 in 2014 and are around ¥1,000 now. Yahoo Japan’s ecommerce revolution has yet to bring profits, and its shares, which stood at ¥460 in 2014, have retreated below ¥300. A big user base and technology innovation do not necessarily deliver either: Line came to market at ¥4,345 in 2016 and three years later is below ¥4,000.

Pricing power
There are further considerations as ecommerce grows. One key issue to consider is whether delivery companies can get pricing power. Logistics leader Yamato’s shares were ¥2,000 in 2014 and peaked near ¥3,500 in 2018 on price hikes.

Digital media competition heats up
The next five years in the Japanese retail space will challenge physical retailers in ways they have not been before. Marketing budgets will move towards digital media, while the rollout of 5G and higher smartphone penetration will further accelerate ecommerce. Competition is intense in a fragmented market. In our CLSA U Blue Book, Wish fulfilment, we help identify some attractive niches to
consider and arm you with the right questions to ask as you consider Japan as an investment destination beyond 2020.

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