Aeon: On the move in Asia
Elsevier Food International Vol.8, No.1, February 2005 Margit Kranenburg
Even though 2004 was a bad year for Japan's biggest retailer, Aeon's president Motoya Okada is more than optimistic for the future. Okada has big dreams for expansion in China in the near future. "In two or three years we should have a hundred stores in China."
''Look at the coastline from China all the way to Bangkok and even further.'' Motoya Okada grabs an atlas and points with bright enthusiasm at places and areas in Asia. The president of the biggest Japanese retail company has ambitions and is not afraid of showing them. He sums up the cities he is dreaming of expanding and with a twinkle in his eye he explains why a large part of South-East Asia could be within his reach.
In 2001, his company changed its name from Jusco, still the name of the biggest banner among the stores, to Aeon. The new name means 'eternity' in Latin and according to the company it defines the mission of the company as 'creating a future of limitless promise'. As the founder's son and with more than twenty years experience in the company, Okada wants to lead Aeon to such a future.
Aeon transformed itself into a holding company and adapting to new developments in the Japanese retail market. At the same time, the Japanese economy has only just begun to recover from more than a decade of recession. How is your company doing?
"The Japanese market is suffering and we are suffering as well. It is not easy to make profits. I can be candid, the year 2004 was a bad year for us, a bottom year. The development of new stores has been liberalised as a result of the scrapping of retail laws in 2000. Competition was intensified and therefore very few companies are profitable today.
At the same time, we had a deflation trend. As a result, the prices continuously dropped and retailers suffered losses. The manufacturers on the other hand did not suffer that much. Today there are still too many retailers in the Japanese market while you can see monopolistic trends are making a progress among the manufacturers and wholesalers."
What is Aeon's biggest challenge these days?
"The most difficult thing is changing the mindset of the people who work in our General Merchandise Stores. The GMS was the most successful format in the sixties, seventies and eighties and many workers are still obsessed with the success stories from the past. But the surroundings have changed, so we have to adapt ourselves to the new environment."
The General Merchandise Stores account for 74 per cent of the revenues but only for 36 per cent of the profits. How do you deal with that?
"In GMS and service businesses, the difference of sales to profit is great. There are the related segments that bring us profits in our group companies. For example, with one GMS opened, our credit card company attracts at least 30,000 credit card holders. In GMS operations, we just got started streamlining supply chain management, but we are on track."
Aeon increasingly tries to operate without wholesalers, without middlemen. That is quite a break with Japanese business culture.
"In the past we depended wholly on the wholesalers, now we decided to stop that and we are trying to work on our own but it is difficult. We are not experienced yet, not accustomed to this kind of work, so the efficiency is not as high as we wanted it to be. And the manufacturers in principle are of course very opposed to our new approach."
Are you big enough for successful direct sourcing?
"Basically we would like to obtain about ten per cent of the market share of each manufacturer that we are dealing with. If we ensure that kind of sales out of the total sales of the factories, then they will listen to us. So far, we have succeeded in that with about forty companies. With those companies we would like to have frequent exchanges of information so we can see improved efficiency regarding the supply chain."
Do foreign retailers currently have any chance to enter Japan?
"It is a well-known fact that Japanese people have a very keen interest in so-called top end brand products. Any kind of such brand companies, whether it be Dunhill or Louis Vuitton, one third to forty per cent of the revenues are generated here in Japan. But less-known brands already withdrew from the Japanese market, like the British pharmacy company Boots. Supermarkets mainly focus on mass produced products and everyday products. In that field, foreign companies have less competitive advantages. They need to find an area to differentiate themselves from Japanese retailers and they have to start from scratch, so it's not so advantageous to enter the Japanese market."
What especially makes Japan difficult?
"Japan is not such a large country, however the population, please think about that, is half that of the United States. And within Japan, each small district has its own characteristics and preference. You have to have knowledge about locality, including the history and the specific requirements of consumers of the particular regions. That takes time.
The cost of developing real estate is relatively high, that gives a kind of handicap to the foreign retailers opening their own stores. On the other hand, deregulation is making progress in Japan. For example, in 2006, the Japanese commercial law will be revised. As a result foreign companies can easily buy Japanese companies via the Stock Exchange and then they can buy existing stores. Of course, I am concerned about what Wal-Mart will do, it is the cash-richest company. But not only Wal-Mart, also other companies will mean a threat."
You want Aeon to be in the global top ten by 2010, you have said earlier. At the moment Aeon ranks number 17. Is the top ten within reach?
"I think we can achieve that, our supermarkets, our credit cards and other services-related businesses have growth potential. But it means not only revenues, we also need profitability. The year 2004 is a turning point; in terms of numbers, we have experienced a setback. But from 2005 until 2008 we will reinforce our growth strategies. In order to achieve this we need to reorganise our apparel business. The Japanese people are already very demanding about food. But the same applies very much to fashion, the Japanese have high demands concerning trends and quality."
Why are you so eager to be in the top ten?
"Still today, Japanese retail business is considered a local or domestic business. But such thinking is obsolete, those days are over now, today's retailers cannot be exempted from globalisation. And I would like to be the winner in such a new age. For retail, I do not want to see the so-called Wimbledon phenomenon in Japan where the Japanese will be the host but where all the winners will be foreign. Compared with the market size of France, the UK and Germany together we still have a larger market. Therefore it is quite natural that at least one global retailer based in Japan should appear. If there is no such global retailer in Japan, it is not right. Without growth, the retail market will await the same fate as the Japanese financial institutions. I am not against foreign players entering the Japanese market but I would rather go out in the world. But first we have to grow in Japan."
What is your domestic growth strategy?
"We focus both on organic growth and on acquisitions. I say both because we continuously have to develop new stores, replacing the old, obsolete stores. As of today we open 50 to 60 supermarkets every year and over the coming five years this rate of new stores opening will continue. We would like to pursue organic growth in a combined manner with mergers and acquisitions. In the rural areas, there are so many small local chains stores. We are very keen on buying them. We already acquired several retailers, like Mycal, and they are doing well now, better than expected."
How is the market position of these local chains developing?
"Most of the local chains were established about thirty years ago. In the past, there were four elements that supported them. There was a very closed political and economic community that stood up jointly against outside players. Secondly, there were the supportive regional banks. Thirdly, there was the very local market of fresh goods and finally there was the presence of the local wholesalers. Today all four groups of players are exposed to major changes. The regional banks will face major restructuring. In Japan, the mega-banks have already completed a process of restructuring. When it is the turn of the regional banks, many small retail chains will collapse."
Are you planning to keep using different banners for the supermarkets?
"The supermarkets today remain local operations, but sometime in the future we would like to consolidate and integrate them as one company. Ten years ago, there were about twenty companies. Now we have reduced them to six and in three or four years it will be one. But the computer system is already one system."
Are you also interested in Daiei, your big, struggling competitor?
"We are interested. Because of our experience with Mycal and Yaohan, we think we have accumulated expertise to acquire and integrate the company. But Daiei is a difficult case. Daiei is now under the management control of the Industrial Revitalisation Corporation of Japan. At the moment, it is not exactly clear what role this IRCJ will play. Because of the large scale of Daiei, the result will of course impact the Japanese retail market. But the situation is very much politicised."
Are you frustrated by the backing that Daiei receives from the state?
"You could say that. We hear voices from quite a few Japanese retailers, competitors of Daiei, saying 'why just Daiei, why are they receiving help from the government?' Maybe it had more transparency if the company had been subjected to normal rehabilitation procedures. Because of the sheer size of Daiei and because of public opinion, the government two years ago decided that such a procedure would put too much adverse impact on the Japanese economy as a whole."
What can you tell about your foreign ambitions?
"In order to meet our ultimate target we need growth in China. By 2010, a quarter and hopefully one third of our sales will be generated from our overseas operations, mainly from China. Now it is about five per cent. So, within two or three years we must have a hundred stores in China. Nobody can deny the growing numbers of middle class consumers in China.
In 1996, we opened our first store in China, and in 1998 we opened a big mall in the suburb of Xingtao, with a car park for a thousand cars. That was a good decision because of the speed of the motorisation in China such a US type of store has good perspectives. Of course, Carrefour and Wal-Mart are operating in China as well but my impression is that the development of our General Merchandising Store format is appreciated more than the discount format.
We have to act now. The Chinese government is making an effort. It opened the doors for foreign companies but it also selected around 25 to 30 local retailers. They are to be developed into capitalised retailers. So, it is quite possible that by 2010 a large number of Japanese retailers could be Chinese. They can also buy our local chains.
When I think about the political relations between Japan and China, they are not in the best shape at the moment. That is difficult for us, but the Chinese people highly appreciate the Japanese products."
What about other Asian countries?
"There are many possibilities. Look at the coastline from China all the way to Bangkok and even further. The backyard of all the big cities on the coast used to be dark, a black box. But today it is open. As for our geographical limit, we have no concrete plans yet but the next to look at is of course India."
Profile
Since June 1997, Motoya Okada (53) has been president of Aeon, the leading Japanese retailer, which was called Jusco before August 2001. After receiving his MBA degree in December 1978 from Babson College (USA), Okada joined Jusco in March 1979. Since that time he has held several senior management positions before taking over the helm of the company in June 1997.
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