Daiei - Company History

As a legal entity Daiei began in April 1957 as Daiei Pharmaceutical Industries, a tiny drug wholesaler in Nagata Ward, Kobe, supplying the Kansai region. Five months later, on 23 September 1957, its founder Nakauchi Isao opened the first store — “Housewives’ Store Daiei Pharmacy” — in the Senbayashi shopping arcade in Osaka. The slogan was “good goods, ever cheaper”: buy drugs, cosmetics and household staples in bulk, and sell them cheap. A second store in Kobe’s Sannomiya district followed in December 1958, and from there the company committed to running a chain, renaming itself Shufu-no-Mise in 1959 and Shufu-no-Mise Daiei in 1962.

What made it more than a discounter was the target it chose. In the Japan of the day, manufacturers set the list price and retailers sold at it; Nakauchi attacked that arrangement directly and made lowering prices the reason for the business to exist. Beef selling at the going rate of ¥100 per 100 grams was cut to ¥39, and the counters were mobbed. He called this “price destruction” — moving the right to set prices from the maker to the consumer — and it worked because food pulled shoppers in who then bought clothing and household goods as well: in the year to February 1971, food was 40.9% of ¥78.2 billion in parent sales, clothing 27.5%. The other lever was private label. Managing director Kako Toyohiko argued that a chain holding a tenth of a category’s volume could dictate to its suppliers; by 1971 own-brand goods were 75% of clothing and 42% of household goods, and he wanted half of everything.

Expansion ran through regional sales companies — Fukuoka Daiei in 1963 for Kyushu, the 1964 purchase of Ittoku to break into the Tokyo region, Shikoku Daiei in the same year — with acquisition, rather than organic growth, the preferred way into a big consumer market. The three were absorbed into the parent in August 1969. Daiei then went to the capital markets, listing on the Osaka Stock Exchange’s second section in March 1971, moving to the first section in January 1972 and adding a Tokyo listing that March, with 75 stores and 11,715 employees. In 1972 it passed Mitsukoshi to become Japan’s largest retailer — a fifteen-year-old discounter overtaking a department house descended from an Edo-period draper, and a sign that the centre of Japanese consumption had moved from the wealthy few to the ordinary household. The financing behind it was already lopsided: borrowings rose from ¥25.5 billion in February 1970 to ¥42.3 billion a year later against ¥7.5 billion of equity, an equity ratio near 10%, with roughly ¥20 billion of annual capital spending funded almost entirely by banks.

Having reached the top, Daiei kept opening stores through the 1970s, and in the year to February 1980 parent sales hit ¥1,006.9 billion — the first Japanese retailer past $4.3B (¥1tn) in a single year. Among companies founded after the war only Daiei and Honda had reached that mark, and Daiei got there nine years earlier. Nakauchi had named the figure as a target years before. The vehicle was the general merchandise store, selling food, clothing and appliances under one roof with own-brand goods priced under the national brands. Against accelerating inflation he set a rule that Daiei should own half the land at each new site: if land only ever rose, buying property with borrowed money produced unrealized gains that justified borrowing again. The friction that came with it — big stores against local shopping streets, and the Large-Scale Retail Stores Law that grew out of that friction — slowed the rollout without changing its direction.

Kako had forecast as early as 1971 that the physical build-out into Japan’s major cities would be finished by about 1975, and named convenience stores and leisure as what should come next. Daiei followed the map. Daiei Lawson was set up with an American partner in April 1975 and opened its first store in Toyonaka that June, eventually becoming the convenience chain Lawson. A 1983 tie-up with the credit house Maruko put consumer finance on top of the store network; Orange Page, a household magazine launched in June 1985, put publishing there too. In November 1988 Daiei bought the Nankai Hawks baseball club, renamed it the Fukuoka Daiei Hawks and moved it to Fukuoka the next year, opening the Fukuoka Dome in 1993 as the centre of a stadium-and-retail development that amounted to city-building — high on visibility, very slow to repay. In May 1992 it went further from retail still, paying $355.3M (¥45bn) for 33.9% of Recruit from its founder Ezoe Hiromasa and others; Recruit was then carrying bad property at its Cosmos subsidiary and bad loans at its finance arm, and the 1993 rescue that had it absorb ¥360 billion of apartments and land and ¥600 billion of liabilities pushed its own debt to ¥1.4 trillion.

The last act of expansion was consolidation at home: in March 1994 Daiei merged in Chujitsuya, Uniiid Daiei and Dainaha, completing a national network that now included food supermarkets. The acquisitions of the late 1980s had been a race to secure selling space before rivals did, and they were paid for with bank debt; the small, low-productivity stores that came with them also made the chain harder to standardize. Authority, meanwhile, had concentrated to a single point — by 1975 any commitment over ¥100,000 required the president’s seal, and executives had been reduced, in one contemporary account, to carrier pigeons. When land stopped rising after the bubble, the unrealized gains that had underwritten twenty years of borrowing disappeared, and what remained on the balance sheet was the borrowing.

In January 1995 the Great Hanshin earthquake devastated Kobe, where Daiei had moved its head office in 1984 and where it ran many of its stores. The company won praise for keeping goods flowing into the disaster area, but the cost of rebuilding and the stalled local economy weighed on results for years. The deeper problem was that the premise underneath the whole model had failed: post-bubble land prices kept falling, and the unrealized gains on property bought with debt were gone. Group sales still reached about ¥3.2 trillion in the year to February 1996, but by then the general merchandise store was being beaten on both price and assortment by specialty chains and discounters — Uniqlo, Matsumotokiyoshi and the roadside formats — doing, as Nakauchi later conceded, exactly what Daiei used to do. In the year to February 1998 Daiei reported its first ordinary loss since listing, ¥25.8 billion, with a parent operating loss of ¥16.9 billion and 145 of its 378 stores losing money.

Group interest-bearing debt had reached $21.5B (¥2.6tn). In December 1997 a pure holding company, Daiei Holding Corporation, was created to take the non-retail businesses, and Daiei announced it would cut ¥1 trillion of group debt by February 2002; commercial paper outstanding stood at ¥170 billion at the end of February 1998. In January 1999 Nakauchi gave up the presidency for the chairman-and-CEO role and handed the company to Toba Tadasu, a former president of Ajinomoto whom he had recruited himself to run the financial restructuring. It ended badly. The July 2000 flotation of Lawson brought in ¥108 billion less than planned, and the “Phoenix Plan” Toba wrote to close the gap reached into the founding family’s own companies under the holding structure — 75% of which was held by Sakae, itself owned in equal quarters by Nakauchi’s three children. On 10 October 2000 Toba was demoted to ordinary director over an alleged share dealing, and Nakauchi moved to retake control as representative director and senior adviser, only to surrender the representative authority three days later under pressure from the market and the press. The shares fell below ¥200 on 17 October. In March 2001 Nakauchi resigned, and Takagi Kunio took over the rescue.

The numbers by then were unambiguous. For the year to February 2002 Daiei reported a consolidated net loss of ¥332.5 billion and negative net assets of ¥297.4 billion — insolvent, with an equity ratio of −11.6% — on total assets of ¥2,558.6 billion consisting largely of property bought with debt. In March 2002 the company applied under the Industrial Revitalization Law and was certified in April, and a three-year plan built on debt forgiveness and debt-equity swaps from its three main banks cut non-financial interest-bearing debt from ¥1,664.0 billion to ¥1,235.5 billion; the two rounds of support in 2001 and 2002 came to roughly ¥520 billion. That the government made Daiei its model case for over-indebted companies, and stood up a Development Bank of Japan fund behind it, showed how far the retailer had become too big to fail. The bank-led rescue did not restore the business. On 30 July 2004 Takagi took a fresh plan worth some ¥300 billion to the three banks; on 3 August the financial services minister, Takenaka Heizo, said publicly that a plan which merely deferred the problem was no solution; on 10 August UFJ Bank told the company the banks would use the Industrial Revitalization Corporation of Japan. With the auditors refusing to sign off without support, Takagi decided on 13 October to ask the IRCJ in, and on 28 December 2004 it was settled: about $3.7B (¥405bn) of debt written off and a heavy capital reduction.

Under the IRCJ the write-downs came all at once rather than by instalments: for the year to February 2005 Daiei booked a consolidated net loss of ¥511.2 billion on the disposal of unprofitable stores and assets, leaving negative net assets of ¥412.1 billion on sales of ¥1,592.7 billion. In March 2005 the agency brought in the trading house Marubeni as sponsor to run the recovery as an operating shareholder. Management was handed to outsiders for the first time — Higuchi Yasuyuki, previously president of Hewlett-Packard Japan, as president and CEO, and Hayashi Fumiko as chairman and CEO — ending both founder-owner and career-insider rule. Nakauchi died in September 2005, aged 83, without seeing how it ended. Debt forgiveness turned the following year’s result into a consolidated net profit of ¥413.2 billion and restored positive net assets, and in November 2006 Higuchi announced a new store logo under the banner of a break with the past.

The two-CEO experiment did not survive its differences with the sponsor: Higuchi and Hayashi soon left, and in October 2006 Nishimi Toru, from Marubeni, became president. In March 2007 Daiei signed a capital and business tie-up with Aeon and Marubeni, with Aeon buying Daiei shares from Marubeni to become a leading shareholder. In 2008 the credit-card subsidiary OMC Card was sold and deconsolidated — the most conspicuous piece of the old diversification unwound, and resources pulled back to retailing. Kuwahara Michio, a former Marubeni vice-president, took over as president in May 2010. Through these years Daiei closed unprofitable general merchandise stores and shifted toward smaller food supermarkets, and the business shrank with them: consolidated sales fell from $14.5B (¥1.59tn) in the year to February 2005 to $7.1B (¥757bn) in the year to February 2014, less than half in under a decade. Marubeni’s own supply of goods to Daiei fell from ¥110 billion in fiscal 2009 to ¥76 billion in fiscal 2011, leaving it ¥1–2 billion of annual profit for its trouble.

The last obstacle was that no one owned the outcome. With a chairman from Aeon and a president from Marubeni, a sponsor pressing for fixed-cost cuts and a partner wanting the assets used, the recovery had two heads and one set of results. Capital settled it. In May 2013 Murai Shohei, from Aeon, became president with Aeon appointees holding a majority of the board; that August Aeon bought roughly 24% of the shares from Marubeni for about $133.2M (¥13bn), took its voting rights past 44% and consolidated Daiei — the register moving from Aeon 19.85% and Marubeni 18.41% in February 2011 to Aeon 44.15% and Marubeni 4.99% three years later. Murai’s verdict on what he inherited was blunt: there was no mechanism for making money by selling cheaply, only price cuts taken out of profit. Fiscal 2013 brought an operating loss of ¥7.4 billion, ¥12.0 billion of impairments and a net loss of ¥24.3 billion — a sixth consecutive year in the red. Aeon announced a share exchange on 24 September 2014; Daiei was delisted on 26 December 2014 and became a wholly owned subsidiary on 1 January 2015, ending the relationship with the capital markets that had begun in 1971. Aeon’s president, Okada Motoya, said at the announcement that the Daiei name would be gone by around 2018.