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JAPAN’S TOP MALL LANDLORD IS ALSO A BIG TENANT

AEON OWNS AND OPERATES ABOUT 1,260 STORES AND ALMOST 20 PERCENT OF JAPAN’S MALLS

By Joel Groover

A hypothetical merger between the likes of Simon Property Group and Wal-Mart, or perhaps Tesco and Westfield, hints at the power Aeon Corp. now wields in Japan. But even these admittedly improbable scenarios fail to convey the true heft of this Tokyo-based conglomerate. To borrow a more homegrown image, then, Aeon towers above the competition like Godzilla. Not only is Aeon the dominant mall developer in Japan, it is also one of the country’s top owners of small-format neighborhood and power centers. As of February, total revenues stood at $40.2 billion. “There are 2,700 shopping centers in Japan, and Aeon operates 518 of them, which makes our share 19.2 percent,” said Akira Inomata, general manager of leasing. “Our share of full-scale regional malls is 75 percent.”

In retail, too, Aeon looms. Its Aeon Welcia drugstores, Jusco general merchandise stores, MaxValu supermarkets and Ministop convenience stores blanket the country. Its specialty store business boasts domestic names Tsuruya Shoe Store and Petcity as well as joint ventures with such foreign chains as The Body Shop, Claire’s, Laura Ashley and The Sports Authority.

“It has 360-plus general merchandise stores, most of which are now anchors within larger shopping centers, and it has just over 900 food-only or predominantly food stores,” said Roy Larke, a business professor at Tokyo’s Rikkyo University and editor of JapanConsuming.com, which provides analyses of Japanese consumer markets. “Aeon is now the dominant player here.”

The reach of its retail and development operations, however, extends well beyond Japan’s shores. Aeon bought Talbots Inc., which operates some 1,400 Talbots and J. Jill stores worldwide, in 1988. The fast-growing conglomerate also owns 21 Jusco $10 Plaza stores in Hong Kong, where it opened its first store in 1987.

Today Aeon is laying the groundwork to bring 100 new stores to China’s burgeoning markets over the next five years, according to spokeswoman Mariko Sasaki. It will do so through yet another subsidiary, Beijing Aeon Co. Aeon also plans to ramp up its shopping center development program in China. Its first Chinese mall, a 1.6 million-square- foot, Jusco-anchored property in Beijing, opens in the summer of 2008.

Though Aeon traces its roots back over a century, the company’s modern history began just after World War II, with the supermarket operation founded by Takuya Okada, who remains honorary chairman and who has a reputation for skill at strategic business relationships. Through a series of acquisitions over a 20-year period, Okada built the regional supermarket chain into the nucleus of today’s conglomerate, says Larke. “By the early 1990s, the group, which at the time was just called Jusco, was about the fourth- or fifth-largest retailer in Japan,” he said. “Then, with the economic downturn of the 1990s, they began to be more strategic and to have clearer aims and goals for the company.”

That strategic focus sharpened further in 1997 when Okada’s son, Motoya, took the reins as president. The younger Okada, educated at Babson College, in Babson Park, Mass., no doubt immersed himself in American approaches to the retail business in general, and to Wal-Mart’s meteoric rise in particular, says Larke. Indeed, Aeon’s strategic direction since 1997 reads like a chapter out of a Sam Walton biography. Using economies of scale and operating efficiencies to drive down costs, for example, is a central focus at Aeon. So is standing up to those who stand in the way of that strategy — namely entrenched Japanese manufacturers who insist upon supplying stores themselves (and in some cases, even stocking shelves themselves), rather than allowing retailers to control their own supply chains.

“Aeon is trying to move away from that so that they’ll have control of everything within their own business,” Larke said. “They’ve spent billions and built hundreds of thousands of square meters of logistics platforms. … This has been going on for 10 years now, and it has probably been the most difficult part of their whole project.”

And that may be one reason Aeon has started to buck a longstanding tradition in Japanese retail. Not long after it gobbled up rival retail conglomerate Daiei, last December, Aeon began overtly trumpeting its market share. It was an unheard-of thing to do in a business climate where being demure about such matters is the norm, says Larke. “They consider it almost ‘game over,’ if you like,” he said. “The message they are now strongly putting across is, ‘We are now so big that it is advantageous for manufacturers to deal with Aeon in the way Aeon wants to be dealt with.” Forcing manufacturers to play ball is, of course, Wal-Mart 101.

On the development front, Aeon has a robust pipeline. It opened eight regional malls and nine small-format centers last year, Inomata said, and has plans to build a total of 15 centers by year-end. The company aims to open 10 regional malls next year and the year after. Dainichi Shopping Center, which opened last September, typifies Aeon’s approach to regional malls, says Inomata. Located three miles from Osaka’s central business district, the 1.6 million-square-foot, Jusco-anchored mall is projected to rack up $1.1 billion in sales its first year of operation. The property is connected to a monorail and a subway station, but it also contains a 2,300-space parking structure. Its 169 tenants include an eight-screen multiplex and such draws as Cheesecake Forest, a themed eatery that Aeon created in partnership with the Namco amusement company and which sells 200 types of cheesecake.

As of February, Aeon’s portfolio totaled some 20.8 million square feet of gross leasable area, with 11,450 tenants. “Our future challenge is discovering more new tenants and developing new formats with business partners inside and outside of the country,” Inomata said. But though Aeon is sending out invitations to foreign retailers interested in coming to Japan, it is not doing so as a result of any vacancy problems, Larke says.

In recent years, Japan’s retail economy, long dominated by large general merchandise operations, has seen an explosion of new specialty stores. “There are a lot of new companies that are very good at what they do — well-branded, well-marketed — that operate small-format stores that fit ideally into these new malls,” Larke said. “It has come together at just the right time for Aeon, which is producing more and more space for these brands even as the brands themselves are getting better and better.”

Meanwhile, as noted by Deloitte in its Global Powers in Retailing report for 2007, Japan’s economic recovery is well under way. “Japan is poised to experience consumer-driven growth rather than relying almost solely on exports,” says the report. “Japan’s outlook seems better today than at anytime in the last two decades.”

The same might be said of Aeon itself. One knock against the company, often repeated by competitors, is that its stores have shown far less profitability than its development business. But Larke is betting that Aeon’s decade long campaign to bulk up, boost efficiency and be more innovative with its retail brands will eventually bear fruit. “They are seriously big,” he said, “and they’re getting better at what they do.”