Retail sector
COMMENT
China trip: last major market remaining;
looking at companies' growth strategies
■ In the last week of February, our retail team visited nine stores run by eight
Japanese retailers in three major Chinese cities: Beijing, Chengdu and Shanghai.
■ The Japanese retail industry is facing shrinking demand and burgeoning supply,
due to the low birth rate and the aging of society. Thus, it is difficult to expect much
long-term growth in the domestic market. When evaluating long-term growth
potential at Japan’s major retailers, we expect to see increasing importance
attached to industrial restructuring and weeding out weaker competitors at home,
and a successful overseas strategy, particularly in Asia, including China.
■ The recent visits confirmed four important points concerning the macroeconomic
situation in China: (1) there is still major growth potential in the Chinese market,
and local managers are confident the market will continue to expand; (2) actual
personal income levels could be higher than indicated by official data, and this is
leading to a strong propensity to consume which should support considerable
development potential within the Chinese retail industry; (3) under the current
policies of “Socialism with Chinese characteristics”, we expect incentives to
business activity to continue as regional governments compete with each other;
and (4) we expect a further liberalization which will benefit overseas-owned
retailers, since the regulatory authorities appear to want locally owned and
foreign enterprises to grow as a result of a process of mutual competition.
■ The most noteworthy points in connection with individual companies to emerge
from the visits were: (1) the strong sales performance and firm earnings growth
at Ito-Yokado (GMS) in Chengdu and Beijing, (2) progress with preparations for
Seven Eleven’s franchise chain convenience store package in Beijing, and (3)
the strong earnings and return of confidence at some specialty store operations
such as Fast Retailing.
■ The importance of speaking Chinese and building up a strong local network of
connections means that most of the local managers in Japanese-owned retail
operations have been stationed in China for a considerable time (five-10 years) and
they are invariably specialists in the Chinese market. Since these operations are a long
way from head office, authority and responsibility are almost completely delegated, and
we were impressed by the unexpected eagerness and independence and frankness of
the managements at the Chinese operations. This also constituted a positive surprise.
■ However, there are still a number of risks attached to the Chinese strategies of the
Japanese retailers. On the macroeconomic front, these include: (1) a rise in
commodities prices and reduction in asset prices, leading to concerns of an economic
slowdown and (2) in the mid- to long-term, the structural problem of increasing
inequality between rich and poor, leading to potential problems with social unrest, while
in the sector itself there are potential problems with intensifying competition between
different retailers and concerns that this will lead to excess competition.
■ In the near future, we believe it will be essential for retailers to demonstrate that
they have to ensure they have sufficient management strength, information
access and executive power to expand the scale of their businesses while
continuing to develop and respond to new consumer needs.

Table of contents
Impressions and overview 3
Macro environment and retail industry 4
China macro economic trends 4
Retail industry in China 5
Requirements for success of Japan-affiliated retailers 5
Risks and points to watch 7
Individual companies 8
China strategies for broadline retailers and apparel makers 8
Ito-Yokado 10
Seven-Eleven 12
Aeon 14
Isetan 16
Onward Holdings 17
Overview of China strategies at the specialty retailers 19
Fast Retailing (China) 21
Honeys: Shanghai Clothing and Accessories Co. (Super Brand Mall store) 24
Shanghai Saizeriya 24
Reference data 26