Japan's retail industry was abuzz last week as news surfaced that two of the country's largest department store chains, Mitsukoshi and Isetan, are discussing whether to join forces. If such a partnership were to manifest, the resulting enterprise would become Japan's largest department store group—not only in terms of sales, which would exceed ¥1 trillion annually—but also in terms of number of locations (33), which is five more than those operated Millenium Retailing (Sogo+Seibu), the current sector leader.
Such a teaming up looks very attractive on paper. At present, Mitsukoshi and Isetan are ranked fourth and fifth, and joined together they would lead the industry. Location-wise, the two hardly overlap, which means minimal cannibalization in local markets, plus the brands serve clearly different customers. Mitsukoshi has a strong following amongst traditional, older consumers and the wealthy, and has a substantial base of corporate clients and VIP customers. Isetan’s trend-setting approach is much appreciated by fashion sensitive women and the company has in recent years been building a solid base of discerning male consumers, as well.
To some, a marriage of Mitsukoshi and Isetan would appear to be a no-brainer. Personally I’m still on the fence.
According to figures published by Nikkei, amongst Japan's seven largest department stores, Isetan is #1 in terms of profitability, and carries the least debt. It also boasts the highest sales per employee and is ranked second in terms of sales per square meter. In short, it's popular, profitable and highly efficient.
As for Mistukoshi?
It has the lowest profitability of the majors, is fourth in sales per sq. meter, and is in the bottom three when it comes to debt.
If you get out your spreadsheet and throw the most recent performance data of the two companies together, and compare the numbers to Japan's current top three department store groups (Millenium Retailing, J. Front Retailing, and Takashimaya), you’ll find that the results aren’t so impressive. Sure, "Mitsetan" would be first in sales and number of locations, but it would also be last in profitability, second in sales per sq. meter, and the next to the worst debt-wise.
But the challenges go beyond the numbers. Taking into account other critical areas, the companies may not share enough common ground to work well together.
First is the issue of reputation and power.
Mistukoshi is Japan's oldest department store, and for many (especially elderly) Japanese, it remains the pre-eminent brand in terms of status. Isetan was established in 1886, which makes it a mere upstart in the eyes of some—after all, Mistsukoshi has been around since 1673. If the two brands come together, who is going to be in charge? In terms of structure, I think most level-headed executives would agree that Isetan ought to be the senior partner. After all, it may not be quite as big as Mitsukoshi in terms of sales, but it clearly knows how to operate more efficiently and profitably—plus it's far more popular amongst Japan's next generation of consumers. But an Isetan-led group may be hard to swallow for some employees of Mitsukoshi, who would consider taking junior partner status as a loss of face—no small matter amongst those who value seniority and tradition. The question of “who’s in charge” has the potential to create a good deal of friction between the two organizations.
Next is the problem of personalities.
Isetan and Mitsukoshi are two very different creatures. Broadly speaking, Isetan is the smart, fast, cool kid on the block, while Mitsukoshi is the creaky, plodding traditionalist. In recent years Isetan has been making things happen, while Mitsukoshi has been happy to live off its reputation and a loyal, but diminishing customer base. Obviously, Mitsukoshi could benefit by adopting some of Isetan's practices, but are its managers and employees able to adapt? If push comes to shove, will Isetan be able to eliminate Mitsukoshi's dead wood?
Third is the issue of market segmentation, positioning and branding.
While Isetan has fairly broad appeal across age groups, Mitsukoshi's demographic is clearly skewed old. What does this mean? Should the brands merge or stay independent? If they're kept separate, can something be done to broaden Mitsukoshi's customer base? Does Isetan have the strategic wherewithal to determine which stores to close, and which to revamp? Which customers to woo, and which to turn away? Which aspects of Mitsukoshi's brand image can be leveraged, and which need to be jettisoned?
Tentatively speaking, I’d say both brands can be made to flourish as long a certain challenges are met. Their leaders must be determined to understand the market and themselves. They must be eager and intelligent enough to formulate feasible action plans, be willing to revamp their offerings, their stores and their brand images, and have the courage to implement ruthlessly, despite the heavy criticism they'll get from all quarters once they begin making radical changes.
In any case, the word on the street is that if this deal is going through, it will happen before the end of this month. Regardless of what goes down, consolidation in Japan's department store sector isn’t likely to slow anytime soon. The pressure from smarter and nimbler select shops, SPAs, and shopping centers is seeing to that.
