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News Release

Business Formats, Cities and Shopping District Compete for Custom in a Climate of Limited Consumption Demand

April 24, 2007

Overview

Thanks to the economic upturn, the employment and wages situation is improving and, as a whole, the conditions surrounding consumer spending are heading towards recovery, but business sentiment in consumption-related industries is generally low as compared to other industries.

The retail sector is the largest consumption-related industry, but the growth of consumption spending on the kind of products handled by the retail sector has been slow and market conditions as a whole are harsh. Retail sales value has fallen, from ¥151.8 trillion in fiscal 1993 to ¥133.3 trillion in fiscal 2003. With the overall market shrinking, competition between business formats and commercial districts to attract custom and secure sales has intensified. By business format, specialty stores, semi-specialty stores and department stores have been confronted with a decrease of sales value and a decline in a market share over the past decade, while specialty supermarkets, convenience stores and drugstores have succeeded in enlarging sales value and gaining a market share.

A breakdown of the overall retail market (¥133.3 trillion) by region reveals that the largest bloc is the Kanto Region, at ¥43.8 trillion, followed by the Kansai Region at ¥21.5 trillion and the Chubu Region at ¥15.8 trillion. The main factor behind the differences in scale of retail market between regions is size of population, and a comparison of areas encompassing the range over which consumers will travel to shop suggests that the scale of the retail market in each region is roughly proportional to its population.

A further breakdown within each area reveals that, because the districts in which consumers live and engage in consumption spending are not necessarily the same, the scale of the retail market is not necessarily proportional to the permanent population. Because the purchasing power of residents of the surrounding area tends to gravitate towards the 23 Wards of metropolitan Tokyo in the Kanto Region, the city of Nagoya in the Chubu Region and the cities of Osaka, Kyoto and Kobe in the Kansai Region, the per capita value of retail sales in these major cities is greater than the regional average.

Within the 23 Wards of metropolitan Tokyo and the city of Osaka, where per capita retail sales value is high, the major city-center commercial districts that are the main generators of retail sales are special commercial areas with the greatest ability to attract custom. The competition to attract custom among city-center commercial districts is unceasing.

In the Kansai Region, the anticipated increase in sales floor area in department stores in Osaka is expected to lead to a further intensification of the competition for custom between commercial districts. It is highly likely that the impact will not be limited to the city of Osaka and Osaka Prefecture, but will be felt in commercial areas in Kyoto and Kobe, and throughout the Kansai Region. By business format, it is thought that the competition for custom will not be limited to competition between department stores, and that other retail formats, including general supermarkets, specialty supermarkets, specialty stores, and semi-specialty stores, will be unable to stay out of the contest.

If, over the 5 years from 2006 to 2011, the Kansai Region is successful in its attempts to attract companies and other initiatives, and is able to increase its population by approximately 2%, as the Kanto and Chubu regions have done over the past 5 years, the value of the Kansai Region's retail market should increase by approximately ¥400-500 billion and this may help to attenuate the intensification of competition between commercial districts to redevelop and the competition between business formats to establish new stores and expand sales floor area. If, however, the population remains at more or less the same level, there is little hope of growth in the value of the retail market of the Kansai Region as a whole, and there is a risk that the competition between commercial districts and business formats to attract custom will become a zero-sum game.

For more information on the content of this report, please contact Kiyoshi Yoshimoto , the Japan Research Institute, Limited.

Tel: 06-6534-5204

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