Expert on Japan Retail and Consumer Markets, JapanConsuming

Michael Causton

Expert on Japan Retail and Consumer Markets

Real Insight on Japanese Consumer Markets

JapanConsuming

JapanConsuming is a specialist research firm producing intelligence on Japanese retail and consumer markets. Founded in 2000, JapanConsuming has become the leading provider of insights on Japanese retailers and consumer trends to retailers, brands, government agencies and investors. As well as a highly regarded monthly report on the market, JapanConsuming produces in-depth reports on retail sectors, seminars on key trends and telephone consulting to investors on trends and retailers.

JapanConsuming was founded by Michael Causton and Roy Larke. 

Equity Bottom-Up

Facing stagnation, the three big convenience store chains continue to dream up more new ideas designed to drive footfall, including new hybrid formats, encroaching on drugstore and supermarket territory, and even bookstores.
In Familymart’s case, the shift is being driven by parent Itochu as it strengthens its control of the CVS chain, and integrates it with its huge food wholesale interests.
The growing integration between Itochu's wholesale and retail operations is providing positive net results in sales and profit for Familymart Uny, Nippon Access, and Itochu Shokuhin.

Facing stagnation, the three big convenience store chains continue to dream up more new ideas designed to drive footfall, including new hybrid formats, encroaching on drugstore and supermarket territory, and even bookstores.
In Familymart’s case, the shift is being driven by parent Itochu as it strengthens its control of the CVS chain, and integrates it with its huge food wholesale interests.
The growing integration between Itochu's wholesale and retail operations is providing positive net results in sales and profit for Familymart Uny, Nippon Access, and Itochu Shokuhin. 

Familymart Leads Break Out from Conbini Market

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

ja research

ja research is an independent research platform focused exclusively on Japanese equities. Leveraging data and graphic analysis provided by Japan Analytics, we provide insights on small and medium-sized companies that have been ignored by the sell-side as well as challenging conventional wisdom on larger companies. We also offer analyst and corporate access, the latter with translation if required. 

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/061/034/original/2018-08-16_19-07-34.png?1534672507" class="editor-image img-responsive" data-smartkarma-image-id="61034"></figure><div class="content-caption">Source: Japan Analytics</div>A GOOD QUARTER - The Composite Results Score has now declined for seven months in a row and is implying a slowing of the upward momentum in earnings.  However, the score has only declined by 31 basis points since last quarter showing a degree of 'stability' seen only in 2011 in recent years.  The aggregate Forecast/Revision score has also continued to decline and is now lower for the fourth straight month. As would be expected, this score is a reliable leading indicator for the Results Score and suggests further weakening in the rate of earnings growth in the months ahead.  Neither score is, as yet, suggesting a decline in earnings before the end of the fiscal year.YEN CORRELATION WEAKENING - This quarter's earnings' stability was surprising given the relative strength of the Yen compared to a year ago. In the past and even as recently as 2016, a 5 per cent year-on-year decline has resulted in negative Results Scores. The year-on-year change in now positive so any negative impact will dissipate over the next two quarters.MARKET FOLLOWS MOMENTUM LOWER - The All Market Composite peaked on 23rd January and has since fallen by 11% despite a continuation of the Bank of Japan's ETF purchasing programme. Weakening earnings momentum and the overvaluation of many of the leading stocks, as in our '<a href="https://www.smartkarma.com/insights/japan-most-overbought-most-oversold-the-relative-price-score" target="_blank" data-smartkarma-citation="insights:21149">Nifty 50</a>' portfolio, have been contributing factors. With prospects for a much weaker Yen limited by the current trade negotiations between Japan and the United States, and with global growth slowing, we expect both Results and Revision Scores to trend lower, but to end the fiscal year in positive territory. Historically, the market has not risen during periods when both the Results and Forecast/Revision Scores have been trending down.<div class="content-highlight">MARKET RECOMMENDATION - Within a global portfolio, we would market-weight Japanese equities with a bias towards domestic sectors and not hedge the currency exposure.</div>SECTOR RESULTS SCORES -The good news is that only one sector, (Multi-Industry - 75% of which is <a href="https://www.smartkarma.com/entities/359" target="_blank" data-smartkarma-citation="entities:359:1">Japan Post [6178 JP</a>]) has a negative score - and its score is less negative than last quarter. Both the Media and Consumer Services sectors' scores turned positive and each increased by more than two points.  On the other hand, over half of our 29 sectors saw declining scores, although the number was lower than last quarter.  The top sectors in terms of quarter-on-quarter change were Energy, Consumer Services, Media, Information Technology and Other Commercial Products while the laggards were Non-Bank Finance, Chemicals, Construction, Machinery and Utilities. SECTOR REVISION SCORES - Five sectors have negative Forecast/Revision Scores with Utilities now joining Media, Multi-Industry, Autos and Banks from last quarter. The highest scores are in the Energy, Technology Hardware, Electrical Equipment, Retail and Information Technology sectors. Improvements of greater than one point were seen in Energy, Media and Machinery while Food, Beverages &amp; Tobacco, Chemicals, Utilities, Other Materials and Technology Hardware all lost more than one point. Overall eighteen sectors saw declines.REVISION V. RESULTS SCORES - The difference between the Results and Revision Scores is a good indicator of corporate expectations compared with the trailing-twelve-month reality. In some cases (e.g. Restaurants) the 'optimism' is due to a failure to revise forecasts in the light of weaker results. In others, such as Telecommunications, there is scope for upward revisions in the coming quarters.<div class="content-highlight">
THE OPTIMISTS
Restaurants • Other Materials • Electrical Equipment • Technology Hardware • Retail
THE PESSIMISTS
Banks • Autos • Telecommunications • Utilities • Media • Chemicals
</div>SECTOR PERFORMANCE - Over the last three months, our Japan Market Composite declined by 5.8%. Only four sectors saw an increase in value led by Telecommunications, Energy, Commercial Services and Information Technology. The largest declines were in the Building Materials, Metals, Real Estate Construction and Machinery sectors. Nine sectors are now negative over one year led by Building Materials, Metals and Food, Beverages &amp; Tobacco and only eight are up in double-digits led by Services and Information Technology. For the time being, Domestic Non-Manufacturing sectors 'rules the roost' and Domestic Cyclical sectors have taken over from Global Cyclicals in the 'doghouse'.'.<div class="content-highlight">
SECTOR RECOMMENDATIONS
Our most-preferred sectors are currently Energy, Healthcare, Telecommunications, Other Commercial Products and Information Technology.
Least-preferred sectors are Metals, Chemicals, Machinery, Autos, Construction, Real Estate, Building Materials, Food Beverages &amp; Tobacco and Utilities.
</div>TOP 5 LARGER PEER GROUPS - The top five Peer Groups capitalised at over ¥1 trillion are Machine Tools &amp; Presses, PC &amp; Computer Peripherals, Oil &amp; Gas Refining &amp; Marketing, Telecom Distribution Services and Sporting &amp; Outdoor Goods. The top twenty larger Peer Groups have gained 16% over one year but have declined by 4% on average the last three months.BOTTOM 5 LARGER PEER GROUPS - The bottom five Peer Groups capitalised at over ¥1 trillion are Audio/Visual Content, LCD/LED Materials &amp; Equipment, Electrical Engineering, General Contractors and Real Estate - Leasing. The bottom twenty larger Peer Groups have lost 2% over one year and 9% over the last three months. Only Security Services and Tobacco have risen since May.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/061/038/original/2018-08-19_19-33-03.png?1534674804" class="editor-image img-responsive" data-smartkarma-image-id="61038"></figure>

Source: Japan AnalyticsA GOOD QUARTER - The Composite Results Score has now declined for seven months in a row and is implying a slowing of the upward momentum in earnings.  However, the score has only declined by 31 basis points since last quarter showing a degree of 'stability' seen only in 2011 in recent years.  The aggregate Forecast/Revision score has also continued to decline and is now lower for the fourth straight month. As would be expected, this score is a reliable leading indicator for the Results Score and suggests further weakening in the rate of earnings growth in the months ahead.  Neither score is, as yet, suggesting a decline in earnings before the end of the fiscal year.YEN CORRELATION WEAKENING - This quarter's earnings' stability was surprising given the relative strength of the Yen compared to a year ago. In the past and even as recently as 2016, a 5 per cent year-on-year decline has resulted in negative Results Scores. The year-on-year change in now positive so any negative impact will dissipate over the next two quarters.MARKET FOLLOWS MOMENTUM LOWER - The All Market Composite peaked on 23rd January and has since fallen by 11% despite a continuation of the Bank of Japan's ETF purchasing programme. Weakening earnings momentum and the overvaluation of many of the leading stocks, as in our 'Nifty 50' portfolio, have been contributing factors. With prospects for a much weaker Yen limited by the current trade negotiations between Japan and the United States, and with global growth slowing, we expect both Results and Revision Scores to trend lower, but to end the fiscal year in positive territory. Historically, the market has not risen during periods when both the Results and Forecast/Revision Scores have been trending down.MARKET RECOMMENDATION - Within a global portfolio, we would market-weight Japanese equities with a bias towards domestic sectors and not hedge the currency exposure.SECTOR RESULTS SCORES -The good news is that only one sector, (Multi-Industry - 75% of which is Japan Post [6178 JP]) has a negative score - and its score is less negative than last quarter. Both the Media and Consumer Services sectors' scores turned positive and each increased by more than two points.  On the other hand, over half of our 29 sectors saw declining scores, although the number was lower than last quarter.  The top sectors in terms of quarter-on-quarter change were Energy, Consumer Services, Media, Information Technology and Other Commercial Products while the laggards were Non-Bank Finance, Chemicals, Construction, Machinery and Utilities. SECTOR REVISION SCORES - Five sectors have negative Forecast/Revision Scores with Utilities now joining Media, Multi-Industry, Autos and Banks from last quarter. The highest scores are in the Energy, Technology Hardware, Electrical Equipment, Retail and Information Technology sectors. Improvements of greater than one point were seen in Energy, Media and Machinery while Food, Beverages &amp; Tobacco, Chemicals, Utilities, Other Materials and Technology Hardware all lost more than one point. Overall eighteen sectors saw declines.REVISION V. RESULTS SCORES - The difference between the Results and Revision Scores is a good indicator of corporate expectations compared with the trailing-twelve-month reality. In some cases (e.g. Restaurants) the 'optimism' is due to a failure to revise forecasts in the light of weaker results. In others, such as Telecommunications, there is scope for upward revisions in the coming quarters.
THE OPTIMISTS
Restaurants • Other Materials • Electrical Equipment • Technology Hardware • Retail
THE PESSIMISTS
Banks • Autos • Telecommunications • Utilities • Media • Chemicals
SECTOR PERFORMANCE - Over the last three months, our Japan Market Composite declined by 5.8%. Only four sectors saw an increase in value led by Telecommunications, Energy, Commercial Services and Information Technology. The largest declines were in the Building Materials, Metals, Real Estate Construction and Machinery sectors. Nine sectors are now negative over one year led by Building Materials, Metals and Food, Beverages &amp; Tobacco and only eight are up in double-digits led by Services and Information Technology. For the time being, Domestic Non-Manufacturing sectors 'rules the roost' and Domestic Cyclical sectors have taken over from Global Cyclicals in the 'doghouse'.'.
SECTOR RECOMMENDATIONS
Our most-preferred sectors are currently Energy, Healthcare, Telecommunications, Other Commercial Products and Information Technology.
Least-preferred sectors are Metals, Chemicals, Machinery, Autos, Construction, Real Estate, Building Materials, Food Beverages &amp; Tobacco and Utilities.
TOP 5 LARGER PEER GROUPS - The top five Peer Groups capitalised at over ¥1 trillion are Machine Tools &amp; Presses, PC &amp; Computer Peripherals, Oil &amp; Gas Refining &amp; Marketing, Telecom Distribution Services and Sporting &amp; Outdoor Goods. The top twenty larger Peer Groups have gained 16% over one year but have declined by 4% on average the last three months.BOTTOM 5 LARGER PEER GROUPS - The bottom five Peer Groups capitalised at over ¥1 trillion are Audio/Visual Content, LCD/LED Materials &amp; Equipment, Electrical Engineering, General Contractors and Real Estate - Leasing. The bottom twenty larger Peer Groups have lost 2% over one year and 9% over the last three months. Only Security Services and Tobacco have risen since May.

Japan: Results & Revision Scores Summer 2018 Update - Market Composite, Sectors & Peer Groups

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<a href="https://www.smartkarma.com/entities/18448" target="_blank" data-smartkarma-citation="entities:18448:1">Itochu Corp (8001 JP) </a>and the BOJ bought ~9.6% of shares out and 25% of float of <a href="https://www.smartkarma.com/entities/320" target="_blank" data-smartkarma-citation="entities:320:1">Familymart Uny Holdings (8028 JP)</a> shares in the 13 months prior to Itochu's Partial Tender Offer. The result was a very low float stock.Now Itochu has bought 8.6% of shares out in the Partial Tender soaking up even more of the float.  What was a very strange dynamic prior to the Tender Offer has created an even weirder one post-event. Real World Float could either rise or fall in the next three months, depending on who tendered. And concluding now whether float will fall sharply, or rise slightly, will require one have an opinion of the pre-existing short position and new short position.The Tender Offer results have been announced. Settlement "starts" (and almost always finishes same day for institutional investors) on 23 August 2018. That's when cash or returned shares will hit investors' accounts. That means investors can sell T+3 on Monday.<h2>The Tender Offer Results</h2>Shareholders tendered 28,527,349 shares and Itochu purchased the planned 10,880,400 shares.That means...<ol>
<li>Itochu holds 50.1% of shares (ex-Treasury share holdings) and won't be buying any more near-term.</li>
<li>Pro-Ration was 38.14%, which will surprise a lot of people. <ul><li>The first evidence of that was the block trading done immediately after the results were announced. In the next hour, several hundred thousand shares crossed in ToSTNeT trades at levels 5-7% below the closing price. This is indicative of people hitting the bid to get out of risk, and would (in my experience) be arbitrageurs selling because they had estimated pro-ration to be higher. If someone had hedged at 60%, for every 100k shares tendered they would have needed to sell out 21,860 shares to get flat.</li></ul>
</li>
<li>The "post-deal" positioning and trading may be a bit messy.</li>
</ol><div class="content-highlight">
Depending significantly on whether the corporate cross-holders tendered, the situation sees very aggressive position-change dynamics in the next few months.
Like the ex-ante situation, the ex-post situation is also REALLY, REALLY COMPLICATED.
Over the next 3.5 months, FamilyMart's REAL FREE FLOAT (compared to pre-tender) either drops by ~8mm shares, or increases slightly.
The highlight boxes (like this one) below discuss the key points.
</div>

Itochu Corp (8001 JP) and the BOJ bought ~9.6% of shares out and 25% of float of Familymart Uny Holdings (8028 JP) shares in the 13 months prior to Itochu's Partial Tender Offer. The result was a very low float stock.Now Itochu has bought 8.6% of shares out in the Partial Tender soaking up even more of the float.  What was a very strange dynamic prior to the Tender Offer has created an even weirder one post-event. Real World Float could either rise or fall in the next three months, depending on who tendered. And concluding now whether float will fall sharply, or rise slightly, will require one have an opinion of the pre-existing short position and new short position.The Tender Offer results have been announced. Settlement "starts" (and almost always finishes same day for institutional investors) on 23 August 2018. That's when cash or returned shares will hit investors' accounts. That means investors can sell T+3 on Monday.The Tender Offer ResultsShareholders tendered 28,527,349 shares and Itochu purchased the planned 10,880,400 shares.That means...
Itochu holds 50.1% of shares (ex-Treasury share holdings) and won't be buying any more near-term.
Pro-Ration was 38.14%, which will surprise a lot of people. The first evidence of that was the block trading done immediately after the results were announced. In the next hour, several hundred thousand shares crossed in ToSTNeT trades at levels 5-7% below the closing price. This is indicative of people hitting the bid to get out of risk, and would (in my experience) be arbitrageurs selling because they had estimated pro-ration to be higher. If someone had hedged at 60%, for every 100k shares tendered they would have needed to sell out 21,860 shares to get flat.

The "post-deal" positioning and trading may be a bit messy.

Depending significantly on whether the corporate cross-holders tendered, the situation sees very aggressive position-change dynamics in the next few months.
Like the ex-ante situation, the ex-post situation is also REALLY, REALLY COMPLICATED.
Over the next 3.5 months, FamilyMart's REAL FREE FLOAT (compared to pre-tender) either drops by ~8mm shares, or increases slightly.
The highlight boxes (like this one) below discuss the key points.


FamilyMart Tender Done - Proration Results In - What Next?

Last week in <a href="https://www.smartkarma.com/insights/japan-passive-boj-heading-for-trouble-with-nikkei-225" target="_blank" data-smartkarma-citation="insights:21980">JAPAN PASSIVE:  BOJ Heading For Trouble with Nikkei 225</a> I discussed the BOJ's past and current ETF purchasing selection, ownership, and the expected impact from its purchases going forward. <h2>NOT, MAYBE, and LIKELY Problems</h2>NOT A PROBLEM: The fact that the BOJ owned 80.7% of the ETFs outstanding at the end of June.MAYBE A PROBLEM: The fact that BOJ-owned ETFs own 15% or more of 6 names on a look-through basis and more than 10% of 30+ names looks a bit odd.LIKELY A PROBLEM: Based on June month-end prices and the existing program of purchasing ¥5.7 trillion/year of ETFs under the 'regular index' Asset Purchase Plan (ETFs tracking TOPIX, the Nikkei 225, and JPX-Nikkei400 as discussed in the <a href="https://www.smartkarma.com/insights/japan-passive-boj-heading-for-trouble-with-nikkei-225" target="_blank">previous insight</a>), over the next 12 months the BOJ would purchase 16-18% of the remaining real float in Fast Retailing, and even more of <a href="https://www.smartkarma.com/entities/320" target="_blank" data-smartkarma-citation="entities:320:1">FamilyMart UNY Holdings Co Ltd (8028 JP)</a>, as well as more than 5% of the remaining float of a half dozen other names in its ETF ownership universe.<h2>What To Do?</h2>The previous insight proposed possible changes to the BOJ's buying patterns and possible changes to the Nikkei 225. This insight delves into the risk metrics of a Nikkei-related trade in greater detail. That's a good start. If the BOJ or Nikkei makes changes, there is probably A LOT more to go.

Last week in JAPAN PASSIVE:  BOJ Heading For Trouble with Nikkei 225 I discussed the BOJ's past and current ETF purchasing selection, ownership, and the expected impact from its purchases going forward. NOT, MAYBE, and LIKELY ProblemsNOT A PROBLEM: The fact that the BOJ owned 80.7% of the ETFs outstanding at the end of June.MAYBE A PROBLEM: The fact that BOJ-owned ETFs own 15% or more of 6 names on a look-through basis and more than 10% of 30+ names looks a bit odd.LIKELY A PROBLEM: Based on June month-end prices and the existing program of purchasing ¥5.7 trillion/year of ETFs under the 'regular index' Asset Purchase Plan (ETFs tracking TOPIX, the Nikkei 225, and JPX-Nikkei400 as discussed in the previous insight), over the next 12 months the BOJ would purchase 16-18% of the remaining real float in Fast Retailing, and even more of FamilyMart UNY Holdings Co Ltd (8028 JP), as well as more than 5% of the remaining float of a half dozen other names in its ETF ownership universe.What To Do?The previous insight proposed possible changes to the BOJ's buying patterns and possible changes to the Nikkei 225. This insight delves into the risk metrics of a Nikkei-related trade in greater detail. That's a good start. If the BOJ or Nikkei makes changes, there is probably A LOT more to go.

JAPAN PASSIVE:  The Nikkei 225 Baskets if BOJ Changes

When your home country population is shrinking, and the number of active consumers falling even faster, there are just four options to expand:
<ol>
<li>Take over your competitors</li>
<li>Move into new business sectors</li>
<li>Build a new market overseas.</li>
<li>Innovation.</li>
</ol>
Japan’s biggest players in consumer distribution are doing the first three, and some the fourth. Tracking this activity provides an insight into where the growth markets are, and where to expect the greatest amount of M&amp;A activity in future.
Over many years it also becomes clear which firms are good at this work – all of these activities require skills that are not innate to local retailers and wholesalers, and for every success story there is a failure too.
<div class="content-highlight">
The net result is clear to see: Japan’s trading companies, along with a couple of retail conglomerates, are the masters of the maze, building powerful consumer distribution groups that will grow further in influence.
</div>
The following is a long read, and probably takes even longer to digest, but we think it provides the background to much of the movement in consumer goods distribution that will happen over the next 5 years, particularly in M&amp;A and growth sectors.

When your home country population is shrinking, and the number of active consumers falling even faster, there are just four options to expand:

Take over your competitors
Move into new business sectors
Build a new market overseas.
Innovation.

Japan’s biggest players in consumer distribution are doing the first three, and some the fourth. Tracking this activity provides an insight into where the growth markets are, and where to expect the greatest amount of M&amp;A activity in future.
Over many years it also becomes clear which firms are good at this work – all of these activities require skills that are not innate to local retailers and wholesalers, and for every success story there is a failure too.

The net result is clear to see: Japan’s trading companies, along with a couple of retail conglomerates, are the masters of the maze, building powerful consumer distribution groups that will grow further in influence.

The following is a long read, and probably takes even longer to digest, but we think it provides the background to much of the movement in consumer goods distribution that will happen over the next 5 years, particularly in M&amp;A and growth sectors. 

Japan Retail: Who Owns Who in 2018: Never Have so Many Been Owned by so Few

Japan

Seven & i Holdings Co., Ltd. is a holding company which was established through the merger of Ito-Yokado Co., Seven Eleven Japan Co., and Denny's Japan. The Company plans, manages, and operates mainly convenience stores, supermarkets, and department stores.

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Seven & I Holdings (3382 JP)

Familymart Leads Break Out from Conbini Market

Facing stagnation, the three big convenience store chains continue to dream up more new ideas designed to drive footfall, including new hybrid...

Michael Causton

Japan: Results & Revision Scores Summer 2018 Update - Market Composite, Sectors & Peer Groups

A GOOD QUARTER - The Composite Results Score has now declined for seven months in a row and is implying a slowing of the upward momentum in...

Campbell Gunn

FamilyMart Tender Done - Proration Results In - What Next?

Itochu Corp (8001 JP) and the BOJ bought ~9.6% of shares out and 25% of float of Familymart Uny Holdings (8028 JP) shares in the 13 months prior...

Travis Lundy

JAPAN PASSIVE: The Nikkei 225 Baskets if BOJ Changes

Last week in JAPAN PASSIVE: BOJ Heading For Trouble with Nikkei 225 I discussed the BOJ's past and current ETF purchasing selection, ownership,...

Travis Lundy

Japan Retail: Who Owns Who in 2018: Never Have so Many Been Owned by so Few

When your home country population is shrinking, and the number of active consumers falling even faster, there are just four options to...

Michael Causton

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