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Business

Aeon posts record profit despite rudderless strategy

Japanese retail giant's core businesses struggle

Aeon Retail President Soichi Okazaki, right, speaks to reporters on Oct. 4 as Shinya Wako, Aeon executive vice president, looks on.

TOKYO -- While Aeon is pulling in record earnings, the Japanese big-box retailer has yet to fully explain how it will adapt to a shrinking domestic population and the rise of digital rivals, a void that is giving investors pause.

Aeon on Wednesday reported a group operating profit of 85 billion yen ($753 million) for the six months ended in August, up 18% from a year earlier and a new high for the period. For the full year, the Chiba-based company is forecasting a 200 billion yen profit, which would also be a record.

"At this stage, we are satisfied," Shinya Wako, executive vice president, told reporters at the earnings briefing.

For more than a year, Aeon has been debating which direction the company should take. Back in April, it released a three-year plan through the fiscal year ending February 2020. The document is long on flowery phrases -- such as "groupwide structural reforms" and "reform of the business foundation" -- but short on details. The retailer will announce its medium- to long-term business plan in November.

At a shareholders meeting in May, Aeon set a 290 billion yen operating profit goal for fiscal 2019. But the company didn't say how it plans to meet that target, nor offer a vision for the future.

Aeon "may have left the impression of uncertainty on stockholders and investors," said a company insider. But now that first-half operating profit was the first record in 11 years, the group has found some breathing room to settle on a course of action.

"We are solidifying a major [policy] direction," said Wako.

Mixed results

A closer look at Wednesday's earnings report will reveal some disconcerting details -- one being declining profitability. Aeon projects operating revenue of 8.3 trillion yen for the current fiscal year, up 70% from 11 years earlier. But operating profit would trace a V-shaped trajectory from the previous record of 198.6 billion yen in fiscal 2011.

More alarming is the performance of two core businesses -- general merchandise stores and supermarkets. The general merchandise store segment suffered a 10.4 billion yen operating loss in the first half. Operating profit in the supermarket segment, meanwhile, tumbled 31%.

Those two operations account for three-quarters of overall sales. Aeon was bailed out by the financial, real estate and drugstore businesses, which earned a combined 70.3 billion yen.

A lumbering giant?

Aeon oversees about 300 consolidated subsidiaries, including 24 listed companies. Businesses range from convenience stores and drugstores to eateries and online sales. The group is so expansive and diversified it is considered a microcosm of the Japanese retail sector.

The conglomerate is also facing many of the same issues plaguing the wider industry, namely a labor shortage, the digitization of retail, and retail competition. In addition, Aeon is involved in ancillary businesses like logistics and product development. It all adds up to an exceedingly complicated corporate structure in need of drastic overhaul.

But Aeon has been known to dither on implementing strategic changes. Three years ago, President Motoya Okada announced plans to place the Aeon and Daiei supermarkets under one brand. After converting Daiei into a fully owned subsidiary in 2015, the group remodeled about 60 Daiei locations. Out of that number, less than a third have actually had their names changed to Aeon.

Now, Aeon cannot afford to wait. In the U.S., Amazon.com has bought out the Whole Foods Market grocery chain in a bid to upend the distribution industry.

Okada has said he wants to transform Aeon into "a distribution business deemed necessary by the next generation." Hopefully the coming business plan will provide a clear road map toward that objective, and not more of the same.

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