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Retail

Japan's convenience chains see ray of hope despite COVID

Companies adapt to changes in consumer behavior brought on by pandemic

Seven and i Holdings on Thursday revised its estimate for 2020 full-year earnings upward to 138.5 billion yen, from its prediction of 120 billion yen in July. (Photo by Keiichiro Sato)

TOKYO -- Japanese retailers are seeing a rebound in business as the government tries to balance keeping coronavirus under control with stoking the economy. 

"We believe that the impact of the new coronavirus has subsided... We want to move ahead with our efforts at an even faster speed," Takashi Sawada, president of convenience store operator Family Mart told reporters in a teleconference on Wednesday.

In its last press conference as a listed company, Family Mart reported a net loss of 10.7 billion yen ($101 million) for the March to August period. Family Mart will soon be taken private by conglomerate Itochu which recently made a bid to buy the convenience store chain. 

Operating profit for the June-August quarter was 23.2 billion yen, up substantially from the 9 billion yen reported for the March-May quarter. Family Mart sees this as "a significant improvement in earning power," as daily same-store sales recover.

Family Mart is far from alone in the retail sector experiencing a rebound from the severe business environment in the first quarter. Rival convenience store operators Seven & i Holdings and Lawson also saw an improvement in operating profit for the second quarter from the first, though their earnings remain lackluster compared with previous years.

Family Mart has seen a significant improvement in sales in the June-to-August quarter compared with the preceding. (Photo by Manami Yamada)

Seven & i Holding on Thursday revised up its earnings forecast for fiscal 2020 to 138.5 billion yen from 120 billion yen it predicted in July. Its operating profit in the second quarter rose to 108.3 billion yen from 71.3 billion yen in the first quarter.

Lawson's consolidated operating profit for the June-August quarter was 14 billion yen, rising from the 2.6 billion yen reported in the first quarter.

During the June-August quarter, Japan saw a second wave of coronavirus infections, with many more cases than during the first. However, the government did not declare a state of emergency, like it did earlier, as it did not want to damage the economy further. 

It has also led a "Go To Travel" campaign aimed at encouraging domestic travel to help boost the economy. Tokyo research company MS&Consulting said that the number of respondents in a survey it conducted who said they were "extremely anxious" about the virus fell to 18% in July from 44% in April.

While store sales in office districts and near train stations remain weak, sales in the residential areas and tourist destinations are rising, said Sawada of Family Mart.

Japan's Cabinet Office said "private consumption is picking up, while weakness can be seen in some sectors," in its monthly economic report issued in September, slightly less optimistic than its statement in August that "private consumption is picking up recently." 

This weakness is still being felt in department stores, which are struggling to turn around their fortunes. Department store operator Takashimaya is expected to post a consolidated operating loss of around 5 billion yen in the June-August quarter as sales for high-value items and cosmetics dropped sharply. Unlike supermarkets and convenience stores, they tend to rely on foreign tourists for sales.

Convenience store operators, however, are better positioned to adjust to new consumer behavior amid the pandemic. One change they have made is to increase their range of frozen foods and prepared foods. This has also contributed to a rise in average spending per customer.

Seven has also changed its shelf layout to boost sales. "The new layout is designed to allow customers to see liquor, sweets and chilled beverages all at once," said Ryuichi Isaka, president of Seven & i Holdings.

"Consumers' behavior is significantly changing, with more people coming to shop online or in their neighborhood and consume at home. This new normal is likely to take root," said Nozomi Moriya, a retail analyst at UBS Securities. "Convenience stores must respond to the changes in demand by changing the assortment of products and operations." 

Customers are also reluctant to travel far to buy daily necessities during the pandemic. Sadanobu Takemasu, president of Lawson, said that the number of customers within a 354-meter radius of each store has increased, especially in the evening.

"Hygiene products, frozen foods, condiments, desserts, and fresh produce have been selling well," he said. "This shows exactly the current consumer behavior." 

As a result of such changing consumer behavior, Takemasu said he sees more reason to open stores in residential areas.

As Japan gradually reopens for business travel, companies are hoping that resumption of economic activities will accelerate. Japan's infection rate remains relatively low compared with other countries and this is good reason for foreign businesses to invest in the country. If consumption recovers at a faster pace, foreign investors could see opportunity to enter the market, analysts said. 

Yet, some worries remain for the rest of the year.

Aeon says consumers have become more price-sensitive. (Photo by Jun Hashimoto)

Akio Yoshida, pesident of Japan's top retailer Aeon which also operates convenience store chain Ministop, expressed concerns about the decline in purchasing power due to job losses and poor employment prospects.

"We expect our customers to be more price-sensitive. We will offer products with more competitive prices," said Yoshida. Lawson's Takemasu has also said he sees more price-sensitive customers.

Yoshida added that the potential for a third wave of infections could further decimate business. "Japan has sought the compatibility of economy and epidemic prevention and eased restrictions accordingly... We hope that Japan does not suffer from the next wave of infections like other European countries which are already experiencing that," Yoshida said.

The company on Wednesday reported a net loss of 57.5 billion yen for the March-August period. But, operating profit for the June-August quarter rose to 46.4 billion yen from a loss of 12.5 billion yen in the March-May quarter. "It's significantly improving," he added.

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