Prerequisites for Japanese Retailers to Survive

1. Prerequisites for Japanese Retailers to Survive Executive Summary 8. June. 2006 Nomura Research Institute. Ken-ichi Kudo, Tadashi Tsuji

2. Conclusion: Task for Japanese retailers to survive • Japanese population started to decrease in 2005: Therefore age composition and household composition will be fragmented. In such situations, Japanese retailers need to make strategies to survive. • Japan’s strategies to survive are different from United States’, where population will increase for a while. Japanese retailers need to find their own strategies other than to copy United States’. • It is necessary to understand consumers’ behavioral change at all time and to continue to find out who will be customers and when and where they purchase. • Consumer behavior is always changing. Japanese retailers need to catch the changes agilely, and to sustain flexibly appeals and freshness of their store layouts, assortments and prices as contact points with customers, in each hierarchy of format, region, store and department. • Japanese retailers need to design and operate such internal functions that don’t lose efficiency even if contact points with customers flexibly change.

3. Content Fact Analysis 1. Back ground and Objectives 2. Consumption structure in Japan to 2020. 3. Retail formats with consumers behavior in present-day Japan 4. Trend of major retail formats Proposal 5. Prerequisites for Japanese retailers to survive in 2010 6. Conclusion Proposalto the future Fact up to date NRI’s view point

4. Back ground and objectives1) Aging society with a falling birthrate • Japanese population started to decrease in 2005, since then aging society with a falling birthrate has started seriously. • Population decrease and saturation of retail market will become selection pressure for innovation to survive. Japanese Population 出所: 国立社会保障・人口問題研究所

5. Back ground and objectives2) Objectives • Quantitative data of consumer market in Japanese aging society with a falling birthrate to 2020. • Analysis for prerequisites to survive in such situations.

6. 2. Consumption structure in Japan to 2020. • In a period of population decrease, the amount of real consumption expenditure will stop growing. Information strategy to compete for fragmental potentials of consumers attribution, item, and area will become a matter of business survival. • ‘”particular” consumer’, ‘smart consumer’, ‘safety-oriented consumer’ will arm with information and express their will by selecting items and formats. Companies which ensure information disclosure and obtain loyalty from consumers will survive. 1) Fragmental consumption potential 2) Consumers arming with information Area Increase of “particular”consumers Item Increase of smart consumers Increase of safety-oriented consumers Consumers attribution

7. 2. Consumption structure in Japan to 2020.1) Fragmental consumption potential • Japan will not have a real consumption growth. • Although Japanese population will decrease, the number of household will not decrease. • Aging people whose real consumption per household is large will increase, but the growth of real consumption expenditure is estimated to stop as a whole. Forecast of real consumption expenditure in Japan （兆円） 350 →推計値 300 250 エクセル：「都道府県支出年齢階層別」に掲載 200 150 100 出所実績値：ＳＮＡ　内閣府推計値：人口問題研究所世帯数の推移をもとにＮＲＩ推計 推計値 50 実績値 0 85年 90年 95年 00年 05年 10年 15年 20年

8. 2,000 1,500 1,000 500 0 -500 -1,000 -1,500 -2,000 30～34歳 35～39歳 40～44歳 45～49歳 50～54歳 55～59歳 60～64歳 65～69歳 70～74歳 25～29歳 75歳以上 25歳未満 2. Consumption structure in Japan to 2020.1) Fragmental consumption potential • Widen the gap each age segment, the consumers attribution will be fragmented. • Possible to overlook a growth target in case sticking to their past target. • The amount of consumption expenditure in 50s (baby boomer) decreases by 2.5 trillion yen. • In 70s, it increases 1.6 trillion yen. Increase and Decrease of house hold from 2005 to 2010 ( more than one member of family) （10億円） （出所）ＮＲＩ

9. 2. Consumption structure in Japan to 2020.1) Fragmental consumption potential • Items will be fragmented with increase of single household and aging household. • ‘food’ and ’housing’ will increase slightly and ‘clothing’ will decrease slightly. 商品分類別支出の増減額 商品分類別支出の変化率 （兆円/年） （％） （出所）ＮＲＩ

10. ：1.05～ ：1.00～1.05 ：0.95～1.00 ：～0.95 2. Consumption structure in Japan to 2020.1) Fragmental consumption potential • Differentials in rapidity of population decrease and age composition by region will be wider, and area distribution will be fragmented. • Widened differentials between increase (red) and decrease (blue) more than 5% Changing rate of consumption expenditure （2005 to 2020） （出所）ＮＲＩ

11. Otaru (7) Muroran (1) Hakodate (2) Kushiro (3) Changing rate of consumption potential in 2020（Top10／Worst10） Asaka (5) Hikone(10) Hachioji (6) Kusatsu (1) Ohtsu (8) Tsukuba (４) Sanda (2) Shimonoseki(10) Kariya (7) Ohmuta (4) Nagasaki (8) ※ランキングは2000年の人口が10万人以上　　の都市を対象に実施。※青箱はトップ10、赤箱はワースト10を示す※市町村名の後の数字は順位を示す Kadoma (6) Kasuga (9) Moriguchi (5) Niihama (9) Urasoe(3) 2. Consumption structure in Japan to 2020.1) Fragmental consumption potential • Urban edge in Kansai (around Osaka) will become a growth area in 2020. （出所）ＮＲＩ

12. 52.4 choose cost-quality 58.5 performance of items 50.2 choose most inexpensive items 46.9 choose quality items 40.0 40.9 excluding the price 32.9 choose brand items 34.1 22.9 choose items that is 31.2 best for my lifestyle 22.3 gathering advanced information 28.4 2000 2000 年 年 choose expensive items 16.1 2003 2003 年 年 17.9 even save money 9.2 （％） following the trends 12.8 0 20 40 60 2. Consumption structure in Japan to 20201) Consumers arming with information • Increase of "particular" consumers --"particular" in quality and lifestyle. • “Particular" consumers increase such as ‘choose cost-quality performance of items’, ’choose items that are best for my lifestyle’. 　（source）NRI 「１万人アンケート」 Change in consumption values （出所）「1万人アンケート」　野村総合研究所

13. 2. Consumption structure in Japan to 20201) Consumers arming with information • Smart consumers –gathering detailed information in advance • Consumers gather information from internet or the like in advance. • Smart consumers increase due to disruption of information asymmetry between consumers and retailers. Information sources for shopping Status of gathering advanced information Q: information in advance to confirm cost-quality performance （％） （出所）「1万人アンケート」　野村総合研究所 出所　「ｲﾝﾀｰﾈｯﾄ白書2005」　Ｉｍｐｒｅｓｓ

14. 2. Consumption structure in Japan to 20201) Consumers arming with information • Increase of safety-oriented consumers -- reconsider corporate ethics and customer orientation • Several major food companies lost the trust from customers due to milk product poisoning and false labeling of beef. • Consumers who need precise labels increase with increase of allergic patients. • Health promoting food is also accepted by females and middle ages as a fashion trend. Ratio of allergic patients Market scale of food for specified health use （出所）財団法人日本健康・栄養食品協会 （出所）京都大学医学研究科白川・渡邉

15. 3. Retail formats with consumers’ behavior in present-day Japan. • Clarified inter-area competition, inter-format competition, and blank space without competition asa result of repositioning retail formats based on consumers behavior. [Questionnaire Survey] • Target　：20s to 40s of Female, 50s and 60s of Male and Female. • 3500 in 6 Prefectures, Tohoku region, 500 in Tokyo. • Method　：internet questionnaire （reference）aging people are mainly active seniors. [Group Interview Survey] • Target　：3 groups （housewife in 20s 、30s～40s、and 50s～60s） • Place　： Izumi-ku, Sendai city, Miyagi Prefecture

16. 3. Retail formats with consumers’ behavior in present-day Japan. 1) Inter-area competition beyond prefectures • Japanese consumers’ behavior is beyond prefectures. • Department stores in Miyagi take demands out of Yamagata, Fukushima and south Iwate. Department store users beyond prefectures 4 regional groups regarding purchase behavior（Tohoku region＋Tokyo） 州都１次圏：宮城 州都２次圏：山形、福島 州都３次圏：青森、岩手、秋田 大都市　　：東京23区 ２．６％ ８．６％ ５．６％ NRI「お買い物に関するアンケート」(2005)

17. High Dpt Dpt Dpt Dpt slightly high CVS CVS CVS small store 一般商店 small store Pricing image small store GMS GMS GMS Catalog/E-retail GMS SuC Normal SuC SM SuC DgS DgS SM DgS Catalog/E-retail HC HC SM DgS Category killer Variety store Variety store Category killer Variety store slightly low Low Consumerelectronics Interior Fashion Food (short) Food (long) Staple Drug 3. Retail formats with consumers’ behavior in present-day Japan. 2) Inter-format competition and blank space format map : Tokyo NRI「お買い物に関するアンケート」(2005) Hopeful market 1 Hopeful market 4 Hopeful market 3

18. High Dpt Dpt Dpt CVS CVS slightly high CVS Pricing image GMS GMS GMS GMS Normal SuC SuC SM Specialty SuC Catalog/E-retail SM HC HC SM DgS DgS HC Category Killer DgS DgS Variety store Category killer Variety store slightly low Low Consumerelectronics Interior Fashion Food (short) Food (long) Staple Drug 3. Retail formats with consumers' behavior in present-day Japan. 2) Inter-format competition and blank space format map : Tohoku NRI「お買い物に関するアンケート」(2005) Hopeful market 1 Hopeful market 2 Hopeful market 4 Hopeful market 3

19. 4. Trend of major retail formats1) Latest topics • GMS in a tough game. Industrial Revitalization Corporation Japan is revitalizing Daiei. Apparel innovation of Ito Yokado is in a difficult voyage. Aeon changes its policy from GMS to Shopping Center and large-scale food SM. • Shopping Center is increasing. Law is being revised to regulate stores larger than 10,000m2. • Super Center is not distinguished from SM or GMS. SuC retailers can not sell national brands at lower prices so sell unpopular private brands at low prices. • Sales of Department Stores re-increase by “particular” consumers. Some Dpt stores are redecorated with clear targets and amenity. • The merger of 7 Eleven, Ito Yokado, Seibu dpt and Sogo dpt bore a conglomerate 7&i group. • Perishable CVS, selling vegetables and fish at 99 yen in 24 hours, is rapidly increasing. • Category Killers of electronics are rapidly increasing. • Small format of Specialty food SM is located in rail stations • Drug Store starts selling daily food, and actually changes to combo store.

20. 4. Trend of major retail formats 2) Format share • High share of GMS and Department store in Japan. Both sell much food unlike ones in USA. • CVS grew into the 3rd rank format in Japan. Japan Retailing Center, NRI, Rocky Iwashima, Top 107, 2005 Top 100, 2004

21. 4. Trend of major retail formats 3) Top retailers ranking Top 31, 2005 • At the end of December 2005, 7&i Holdings, including 7 Eleven and Ito Yokado merged with Millennium group, including Seibu Department and Sogo Department, and a mega retailer with sales of 6 trillion yen was born. • Daiei in bankruptcy is still the 3rd rank retailer. • At the head of Yamada Denki at rank 5, many Category Killers rank in the list. Japan Retailing Center, Nikkei, NRI

22. 5. Prerequisites of Japanese retailers to survive in 2010 • Clarify adaptivestrategies to survive. • Fragmental targeting based on consumer behavior. • Maintain appeals of contact point with consumers and hierarchical flexibilities. • Construct scalable modular operation Competitor Population Income Technology Regulation Environmental Change Selection Pressure（affection） retailers（format） Internal function Target Contact point 1.Adaptive strategies Customer Scene Location Assortment Price Store layout Innovation Strategy of retailers 2. Fragmental targeting 4. Scalable modular operation 3. Hierarchical flexibility

23. 5. Prerequisites of Japanese retailers or survival in 2010supplement) hierarchical flexibility • Maintaining appeals and hierarchical flexibilities will become key points to survive. • Only testing hypotheses in whole hierarchy enables retailers to maintain their appeals. It is possible that whole lower hierarchy would be removed from market if even a class freezes. Advance marketable, Remove Unmarketable by area/format unit Control Head office/ Holding company Advance marketable, Remove unmarketable by store unit Area/format ※depend on strategies Advance marketable, Remove unmarketable by department unit Store Advance marketable, Remove unmarketable by SKU department

24. 6. Conclusion • Fragmentation of area, item, and consumer attribution is rapidly progressed. • Market area expands from prefecture to “state” with deep motorization. • General format is difficult to survive because consumers select different formats depending on their life scene. • Less differentials in department store, GMS, large scale SM, SC and SuC in countryside in Japan. • Blank space without competition for potential newcomers. • Flexibility in each hierarchy of department, store, format and area is required. • Shopping Center is an answer for large market area. However, the format of shopping center is not static. It has to continue to change and hierarchize.

25. Thank you! t-tsuji@nri.co.jp k-kudou@nri.co.jp