Aeon, setting its sights on the Global Top 10

In recent years the Japanese retailer Aeon has embarked on a resolute process of self-reform. New government legislation on the sitting of large retail stores, the market entry of foreign retailers and B2B e-commerce triggered this process, and now Aeon has set itself an ambitious goal: by 2010 the company wants to belong to the global retail top 10.
Elsevier Food International, Vol. 5, Number 2, May 2002
Pascal Kuipers

'Our challenge: becoming a Global Player' is the board of directors' message to shareholders in Aeon's 2001 annual report. And Aeon's top executives have attached targets to this goal: consolidated revenues of at least € 5 trillion (US$ 43 billion), consolidated net income in excess of € 100 billion (US$ 862 million) and ROE of at least 15 per cent. "Our bold challenge is to make the Group one of the world's top ten retail groups in the next decade", the board asserts.
For its fiscal year ending February 2001, Aeon's revenues totalled € 2,741 billion (US$ 23.6 bn), net income was € 9,201 million (US$ 79 million) and Aeon's ratio of net income to average shareholder's equity (ROE) was 2.9 per cent. It's still got a long way to go before it reaches its targets. In ten years' time, revenues will need to have increased by 82 per cent and net income by more than tenfold.

Justco is Aeon's banner in general merchandise, both in Japan and abroad.

Aeon's core business comprises four areas: general merchandise stores (GMS), supermarkets, drugstores and financial services. By 2003 Aeon wants to complete the restructuring of its organisation around these four core activities. By the end of February 2001, GMS accounted for revenues of € 1.6 trillion (US$ 13.5 billion) via 311 outlets under the Jusco banner. These are mostly in Japan billion (US$ 3.2 billion) supermarket business still a domestic operation, with MaxValu as the main banner. It's Aeon's goal to build a national MaxValu supermarket chain with revenues of € 1 trillion (US$ 8.6 billion). In drugstores Aeon has similar aims with its Welcia banner. Financial services are based 01 the Aeon Credit Service with its credit card Aeon Card. Last year, some nine million Aeon Cards were issued in Japan and this number will increase to ten million when other Aeon Group cards - such as the Jusco Card - are integrated into it.
Other business segments include shopping centre (SC) development, convenience stores and specialty stores. SC development is a profitable business, accounting for one per cent of total revenues but nine per cent of operating profits. In its restructuring, Aeon will separau its retail business from its SC development activities. Here, too, concentration is the name of the game, as Aeon will integrate three subsidiaries (Aeon Mall, Diamond city and Lock Development) that develop and operate shopping centres throughout Japan into one major developer group. Ministop is Aeon's c-store banner. Currently there are some 1,500outlets in Japan. 45 per cent of Aeon's US$ 3 billion specialty store business is in the US, where Aeon owns the majority of apparel retailer Talbots.

Growth opportunities
Not only when, but where Aeon plans to reach 'Global 10' is interesting. Looking at Aeon's geographical revenues split-up, its domestic market is of major importance. Japan accounts for some 90 per cent of Aeon's revenues and this domestic dominance will further increase with Aeon's acquisition of the chain store Mycal (November 2001) and supermarket retailer Kotobukiya (February 2002).
As far as organic growth is concerned, it's Aeon's strategy to open large stores in the more remote regions of Japan, where land costs are low. A new law on large retail stores offers new opportunities for store openings. A former law was aimed at protecting medium and small retailers but the new law focuses on environmental issues and the quality of life in areas where large scale stores are located. "From a retailers' viewpoint, the new law offers advantages such as shorter time required for opening new stores, flexibility of the regulations on stores' total surface, which allows larger scales than before, and simplification of the administrative procedures to open a store," an Aeon spokesperson comments.
Looking at the bottom line, Japan also offers growth perspectives because both Mycal and
c., Kotobukiya were loss making retailers that in the short term won't be beneficial to Aeon's return on revenues. In the financial year ending February 20m, Aeon's competitors Ito Yokado and Daiei had a far better revenues/income ratio than Aeon. Focusing on cost control and efficiency on the one hand and benefiting from its bigger buying clout on the other (its consolidation zeal made Aeon Japan's largest retailer), Aeon's profitability may well increase despite the tough business climate in Japan. Compared to its competitors Aeon performed well in the year up to February 2001 with an above average increase in revenues and a staggering 49 per cent increase in net income. Expansion should also provide Aeon with the growth opportunities needed to position itself within the ranks of the global retail elite. North America is Aeon's largest market abroad, but its majority share in apparel retailer Talbots does not belong to Aeon's core business. Despite impressive results, Talbots has shown in 2000 and 2001 that core business growth is needed. Abroad, Aeon is represented by its Jusco stores in the Asian markets of China, Malaysia, Thailand and Taiwan. These markets together account for four per cent of Aeon's business, and clearly Asia is Aeon's targeted growth sector.

Efficiency
Aeon's process of self-reform began in 1997, when it decided to focus on quality products and merchandising within a cost efficient EDLP strategy. This included implementing state of the art IT and logistics, and breaking with domestic business traditions. Historically wholesalers hold an important position in Japan's grocery supply chain, and manufacturers are reluctant to jeopardise their relations with wholesalers. Aeon challenges the wholesalers' power base, however, by sourcing large volumes directly from manufacturers.
The same holds true for Aeon's B2B e-commerce activities, which are aimed at reducing procurement costs and increasing collaboration and knowledge exchange among the members of WWRE, to which Aeon belongs. "In the digital world, vague or uncommitted transactions are not allowed," a company spokesperson comments. "The conditions or requirements for each transaction are openly disclosed and all suppliers are standing on equal basis. There is no longer room for the old commercial practises, like rebates for example. Everything is more transparent and rational."
Efficiency also drives Aeon's plans to restructure itself around its four core activities, something that will be implemented next year. This includes focusing on its core retail brands Jusco (GMS), MaxValu (supermarkets) and Welcia (drugstores). The supermarket business will be decentralised, with Aeon becoming a holding company to its regional MaxValu subsidiaries. According to M + M Planet Retail, this allows Aeon to " ... maximise efficiencies and synergies across the business. By building a unified brand name the company will be in a better position to generate savings in marketing, particularly in the development of private label products, which is a core element of the renewal strategy." Aeon's private label Topvalu - introduced in March 2000 - is intended to drive the retailers' profitability. Last year Topvalu accounted for five per cent of sales and Aeon says it aims to reach a 25 per cent revenues share with TopValu in the years to come.
M + M Planet Retail, however, predicts an uphill struggle for Aeon when it tries to manage its decentralised supermarket network, while unifying the supermarkets (which range in size from some 500 to 3,000 square metres) under one brand name. "If experience in Western Europe is anything to go by, this type of operation will flounder against a more tightly run, integrated company," says M + M Planet Retail.

Expansion
"In the GMS, supermarket and financial service segments, we have built a solid foundation of success in Southeast Asia and China," Aeon's Board comments in the 2001 annual report. "Through our activities in these countries, we have gained considerable experience of competition with giant retailers from Europe and North America."
Up to now Aeon has gone abroad with the Jusco banner, and the Jusco Superstores face increasing levels of international competition both in Japan and in Malaysia, Thailand, Taiwan (where at the end of this year the first Jusco stores will be opened) and China. In the years to come, Aeon is going to accelerate its expansion in Southeast Asia because increasingly global retailers from Europe and the US are flocking together in the region's emerging markets.
Carrefour and Dutch owned C&C retailer SHV Makro compete in all of Aeon's foreign markets, as does Aeon's domestic rival Ito Yokado. Tesco (UK) is represented in Taiwan, Thailand and Malaysia and plans entry into China. Dairy Farm (Hong Kong) is active in China, Taiwan and Malaysia. In two countries Aeon meets competition from large retailers such as the French retailers Auchan (China and Taiwan) and Casino (Taiwan and Thailand) as well as the Dutch retailer Ahold (Thailand and Malaysia).
In China, Aeon faces competition from Wal-Mart and US warehouse club retailers Costco and PriceSmart setting up shop in Taiwan and China respectively.
In Malaysia, Aeon plans to open five more Jusco outlets over the coming years, bringing its total number of stores to 13 in 2005. Aeon develops its outlets in association with shopping centres, which will have the Jusco store as its main traffic builder.
In Taiwan, Aeon wants to set up a chain of ten GMS stores by 2007. The first Jusco store is expected to open in December 2002, in a shopping centre in northern Taiwan.
In Thailand, Aeon has reviewed its strategy and decided to focus on supermarkets in order to compete better with the price aggressive hypermarkets. The ten Jusco Superstores that Aeon already has in Thailand will be renovated and upgraded, emphasising higher margin fresh and ready-to-eat food. By 2006 Aeon expects to have added ten supermarkets to its store base. These are stores of 1,200 to 2,000 square metres that will be leased rather than owned, and that are mostly located in busy communities. According to M + M Planet Retail, this smaller format enables Aeon to expand its supermarket format across the country, thereby differentiating itself from the hyper markets. In China, Aeon has subsidiaries in Hong Kong and in the provinces of Guandong and Shandong, which operate a total of 12 stores. In 2006 Aeon wants to increase its Chinese store number to 70, the majority to be opened in Guandong and Hong Kong in the south. A spokesperson says that Aeon is ready to take advantage once the regulations and controls for the opening of new stores become more relaxed. Penetration in the Chinese market may be difficult, but it is worthwhile, as Aeon expects growth of the Chinese consumers' market as a consequence of the country's accession to the World Trade Organisation.