This month, Japanese department store operators Takashimaya and H2O Retailing Corporation scrapped plans to merge their operations by 2011.

The department store operators agreed to the merger in October 2008, following a series of negotiations. However, they concluded that the planned merger would offer insufficient synergies. “We each have different organisational structures and are running our day-to-day operations differently, so this has made it difficult for the two companies to unify different corporate governance styles,” H2O Retailing chairman Shunichi Sugioka said.

Meanwhile, the Japanese department store sector continues to struggle with excess floor space and outdated business models. Despite the cancelled merger, the sector will likely see much needed further consolidation and more flexible specialist fashion retailers such as Fast Retailing look set to benefit until that happens.

Aside from Millennium Retailing, which was established through the merger of Sogo & Seibu in June 2003, the reorganisation of the department store sector has accelerated since 2007 and all were principally designed to prop-up troubled businesses - J Front Retailing was established in September 2007 through a merger between Daimaru and Matsuzakaya, Hankyu Department Stores merged with Hanshin Department Stores to establish H2O Retailing in October 2007 and Mitsukoshi Isetan Holdings was created via the integration of Mitsukoshi and Isetan in April 2008.

Recent years have seen Japan’s department store sector suffer. Department store sales peaked at ¥9.71 trillion (£66.6bn) in 1991, but since then sales have declined, falling to ¥6.58 trillion (£45.1bn) in 2009; a 32% drop from its peak.

The decline has remained unchanged this year. According to the Japan Department Stores Association, February sales through 269 stores owned by 86 companies saw a 5.4% decrease on the previous year, a 24-month straight decline. In contrast, the total sales floor space has actually increased since 1991. In short, store development has not helped department store sales. This would seem to indicate that the department store business model does not fit with the times.

As a result Japan’s department store sector will need to establish new strategies to solve excess store space as well as establish new business model. With the cancellation of the merger, Takashimaya and H2O Retailing Corporation now face the same difficulties.

➤ Robert Gregory, research director, Planet Retail. For more information contact us on:

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