Hankyu Department Stores, Inc

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Hankyu Department Stores, Inc.

8-7 Kakuda-cho
Kita-ku
Osaka 530-8350
Japan
Telephone: (+06) 361 1381
Fax: (+06) 367 2943
Web site: http://www.hankyu-dept.co.jp

Public Company
Incorporated: 1947
Employees: 6,501
Sales: ¥395 billion ($3.68 billion) (2003)
Stock Exchanges: Tokyo
Ticker Symbol: 8242
NAIC: 452110 Department Stores

Hankyu Department Stores, Inc. is one of Japan's leading department store chains. The company's stores can be found in the Japanese cities of Osaka, Toyonaka, Kawanishi, Kyoto, Kobe, Takarazuka, Tokyo, and Yokohama. Hankyu and its peers in the retail industry were hit hard by Japan's sluggish economy and drop-off in consumer spending during the 1990s. The company launched a major restructuring effort in 2000 that included selling off subsidiaries, cutting costs, and developing a new management system in order to bolster sales and profits.

Early History

Although the first Hankyu Department Store did not open until 1929, the history of the company dates back to 1907, when Japanese entrepreneur Ichizo Kobayashi helped found the Mino-Arima Electric Railway Company, the forerunner to the Hankyu Corporation. To promote the use of the railway, Kobayashi developed a number of leisure facilities at sites along the track. The foremost of these was the Takarazuka Resort, famous for its Girl's Revue, an all-women theater troupe whose international reputation gained the company much valuable publicity. In 1918, Kobayashi attempted to expand the Mino-Arima railway company to run trains from Mino-Arima to Kobe. Unable to acquire permission to do so, he had to settle for a line from Osaka to Kobe. It was at this time that the company changed its name to Hankyu Corporation. The name Hankyu derived from a combination of the Chinese characters for Osaka, which can be read as the words "Han" and "Kyu," the latter of which means express.

To promote the use of the railway further, Kobayashi opened the first Hankyu department store at Umeda railway station in the city of Osaka in 1929. It became the first railway terminal department store, designed to serve several hundred thousand daily commuters, and as such heralded a new movement among Japanese retailers. This movement was characterized by the opening of department stores by railroad companies on prime sites along the railway lines, in particular at important terminals and main interchange stations, using capital from their parent companies. The railway lines often originated within the stores themselves.

Hankyu Department Stores opened its second store in 1936 in Kobe, but growth soon came to a virtual standstill because of World War II. During the war, the company was enlisted to help the cause of the Japanese army. It donated money, and the escalators and lifts of the stores were stripped to provide the army with much-needed metal. During World War II, the department stores also became focal points for control and distribution of all consumer goods by the government. The store in Osaka was damaged by an Allied bombing raid.

Postwar Growth

After the war, the American forces who were now occupying Japan also used Hankyu and other department stores as distribution points for food and clothing, which were in short supply. In 1947, the Hankyu Corporation was reorganized into two smaller companies on the instructions of the U.S. occupying forces who were looking to reduce the power of Japan's big conglomerates in the wake of the war. The transport group became Hankyu Corporation and the retail business became Hankyu Department Stores, Inc. This breakup was seen to be in Hankyu Department Stores' favor, as the transport side of the company was facing a series of strikes by railwaymen demanding better conditions. This industrial action might have affected the department stores had they remained within the same group.

It was not until Japan's postwar boom years that Hankyu Department Stores really began to prosper. This was a time when Japan was experiencing rapid growth in income levels, personal consumption, and its general standard of living. Together with the system of floating exchange rates and the resultant appreciation of the yen, which made imported goods cheaper and therefore more competitive, Japan's retail industry expanded, opening it to a wider variety of consumer goods, including imports. Between 1953 and 1959, Hankyu Department Stores opened three more stores: Tokyo Oi in 1953, Sukiyabashi Hankyu in 1956, and, in the United States, Los Angeles Hankyu in 1967.

The Tokyo Oi store was a landmark in the company's development, taking the reputation of Hankyu Department Stores out of the suburbs and placing it firmly in the city. This standing was enhanced by the opening of a second Tokyo store in 1956.

Los Angeles Hankyu was originally a retail store, but because of the appreciation of the yen it became too expensive to maintain import goods from Japan. Los Angeles Hankyu therefore became a buying center for the Japanese stores and remained as such. The next boom in Hankyu Department Stores' history took place in the 1970s, when additional stores were opened: Senri Hankyu in Senri, a satellite town of Osaka, in 1970 and Shijo-Kawaramachi Hankyu in Kyoto in 1976.

Each store Hankyu Department Stores opened exploited its strategic location. The Umeda Main Store was situated in the commercial area which surrounds Umeda, in the city of Osaka. Umeda was one of the largest railway terminals in Japan, and Hankyu Department Stores expected good sales growth from this store as Osaka became one of the nation's major international cities with the completion of Kansai International Airport.

Expansion in the 1980s and Early 1990s

Senri Hankyu was created to cater to families in the nearby housing development district, providing locally oriented goods and services. It was also the pioneer store in the metropolitan suburbs. The store in the international port of Kobe was conveniently located for the users of Sannomiya terminal station. The Kyoto and Sukiyabashi stores both targeted young Japanese women who were starting to enjoy an increase in status and jobs. The early 1980s, however, saw a downturn in sales due to the worldwide recession, and in fiscal year 1983 the Japan Economic Journal reported that sales by Japan's 200 leading retailers rose by only 5.3 percent. The department stores' slowed growth was also due in part to changing lifestyles in Japan. Despite Japanese women's greater disposable income, they began to look more toward convenience stores and supermarkets, which grew rapidly. Department stores responded to this switch by implementing a range of measures designed to woo back consumers. They commissioned market research to discover what consumers wanted, and they extended shopping hours so that working women could shop after work. Hankyu Department Stores and other department store retailers transformed their shops, making them not only places to shop but also entertainment and cultural centers encompassing restaurants, recreational areas for children, golf ranges and tennis courts, educational facilities, theaters, and art exhibitions. They also invested in sponsoring events. Hankyu Department Stores regularly sponsored cultural events. The company put particular emphasis on introducing the traditional crafts and cultures of foreign countries, illustrated by its "British Fair" and "French Fair," as well as its "Wonders of China" and "9,000 year-old Art and Culture of Jordan" exhibitions. Hankyu Department Stores also supported Japanese baseball and was one of the many major retailers that owned a team, Hankyu's being the Hankyu Braves.

Hankyu Department Stores continued to expand, opening another two stores, Yurakucho in 1984 and Kawanishi Hankyu in 1989. Meanwhile, the company responded to the increasing popularity of the Western-style department store by adopting the decoration, fittings, and look of the modern department stores of the United States and Europe. In the Ginza shopping area, which catered to 200,000 shoppers per day, the company used this theme in its Yurakucho store, complementing the more traditional-style store, Sukibayashi Hankyu.

In 1988, the company's pretax profits rose by 14.3 percent thanks to the longer shopping hours and increased sales in high-profit items, including accessories, handbags, and imported clothes such as American jeans. Imported products, or those seen to have a Western flavor, were particularly popular with Japanese consumers, and Hankyu Department Stores responded to this by developing its own brand of children's clothing, Potato Chips, which was highly successful and was even sold in other major department stores. In its Yurakucho store in central Tokyo, the company exclusively stocked overseas labels.

During this time period, the company was also known for its high quality foodstuffs. It responded to changes in eating habits, especially the trend toward gourmet food, by introducing a wide assortment of value-added products and more ready-to-serve products.

In 1989, the success of Hankyu Department Stores attracted the interest of the American retailer Bloomingdale's, and in November of that year the company approached Hankyu Department Stores with an invitation to participate in a buy-out of the chain. Hankyu Department Stores' president Shoji Fukumitsu met with Bloomingdale's chairman Marvin Traub but turned down a reported financing of $250 million out of the $1.2 billion to $1.3 billion needed for the buy-out.

Profitability of department stores throughout Japan and for Hankyu Department Store fell as a result of the Japanese government's introduction of a consumption tax on April 1, 1989. A large increase in sales volume in March 1989, just prior to the introduction of the tax, was followed by a slump in April. The slump was short lived, however, mainly due to the fact that the tax only had a slight impact on commodity prices. Consumer spending recovered soon after.

Company Perspectives:

The company's business philosophy can be seen as a way of enriching life and contributing to the development of community through business.

In the early 1990s, Hankyu Department Stores appeared to be entering one of its strongest periods of growth, with a large number of developments planned for the next few years. However, Hankyu, like other Japanese department stores, faced a challenge from the relaxation of legal limitations on large-scale retail stores, triggered by Japan-U.S. Structural Impediments Initiative talks. This led to intensified competition in Japan's distribution and retail industries in the coming years.

In preparation, the company looked to develop a variety of management measures, including entering new markets and expanding its business base. The company set plans in motion to open a store in Kobe Harbor Land, one of Japan's largest waterfront development projects. The new store had a sales floor of approximately 30,000 square meters and opened to the public in 1992. Adjoining the store was a restaurant comparable in size.

Further expansion included plans to open a new store in Takarazuka, a place of symbolic significance for the Hankyu and Toho Group because of its associations with the first store. The company hoped to deepen its market through the formation of a store network encompassing a large part of the commercial sphere in northern Hanshin (Osaka-Kobe) area at sites centered on the Hankyu Railways' service area. Takarazuka Hankyu opened in 1993.

A new affiliated merchandising company, Hankyu Ings Company, Ltd., was also established and was separate from the merchandising function of Hankyu Main Store (Umeda). There was a strong emphasis on further product development of attractive, economical overseas brands and materials which the company saw as essential if it was to survive the retail wars of the future.

The company expanded overseas with the development of a food business in Bangkok, Thailand, through a joint venture with Central Department Store, the leading local operator. The new company, Central Hankyu Ltd., had a capital of 20 million bahts, 51 percent provided by Central and 49 percent by Hankyu. Hankyu occupied one floor of the Thai store, selling foodstuffs.

Facing Problems in the 1990s and Beyond

Hankyu began to face distinct challenges as Japan's economy bottomed out in the 1990s. In 1993, the company reported a decline in sales and recurring profit for the first time in its history. Net profit fell by 76.5 percent over the previous year's results. As the company struggled to regain its footing, disaster struck. The January 1995 Kobe earthquake caused significant damage, leaving Hankyu with estimated costs totaling over ¥2.3 billion. The firm was forced to start making serious changes to its operating strategy and announced that it would cut nearly 60 percent of its managerial staff—approximately 1,000 jobs. It also began to promote and give salaries based on merit rather than seniority. This was a fairly new practice for Japanese companies as business culture traditionally held seniority high above other factors.

Hankyu was dealt another blow in April 1997 when Japan raised its consumption tax from 3 to 5 percent. This tax increase, along with the crisis in Asia's financial sector, weakened consumer confidence. Sure enough, the company reported its first ever after-tax loss during fiscal 1998. Department stores across Japan began to feel the crunch as sales continued to dwindle. Many of these companies had expanded significantly during the 1980s and early 1990s and were now left with too much floor space. According to a 1999 Nikkei Weekly report, sales per square meter of floor space declined by more than 30 percent from 1990 to 1999.

Hankyu and its competitors continued to face problems in the early years of the new century. A May 2000 Nikkei Weekly article reported, "Not only have operators been hemmed in by a stagnant market amid depressed personal consumption, but they have been forced to compete with new segments of retail commerce such as a growing number of suburban shopping malls, the rise of a new breed of vendors such as so-called 'category killers,' and domestic and foreign discount retailers." In response to these industry conditions, Hankyu launched a major restructuring effort that including selling off unprofitable subsidiaries, cost cutting measures, and the launching of a new management system designed to respond more efficiently to trends in the marketplace.

Overall, Hankyu fared better than many of its peers during this time period. The company opened its tenth department store in Tsuzuki, Yokohama in 2000. By fiscal 2003, it reported a profit of $73 million, in contrast to a loss the previous year. Restructuring efforts appeared to have paid off for the company, leaving it able to focus on an intense marketing strategy in hopes of shoring up store sales. While Hankyu's future remained dependent on an economic turnaround in Japan, it stood well positioned to battle the problems that may come its way.

Principal Subsidiaries

Kobe Hankyu Company Ltd.; Takarazuka Hankyu Company Ltd.; Hankyu Tomonokai Company Ltd.; Tasukara Company Ltd.; Hankyu Department Stores Europe B.V. (Netherlands); Hankyu Seisakusho Company Ltd.

Principal Competitors

The Daimaru Inc.; Seibu Department Stores Ltd.; Takashimaya Company Ltd.; Mitsukoshi Ltd.

Key Dates:

1907:: Ichizo Kobayashi helps to establish the Mino-Arima Electric Railway Company.
1929:: The first Hankyu Department Store opens.
1936:: The company opens its second store.
1947:: The firm is reorganized as Hankyu Department Stores Inc.
1953:: The Tokyo Oi store opens.
1970:: Senri Hankyu is established.
1976:: A store is launched in Kyoto.
1989:: The Japanese government introduces the consumption tax.
2000:: The company opens its tenth department store.