Aeon Co Ltd

TSE:8267

Q4-2025 Earnings Call

[江川 敬明, executive]

I'm Egawa, in charge of Finance and Business Management. Thank you very much for joining us today for Aeon's Fiscal Year 2024 Financial Results Briefing. I would like to begin by providing an overview of our fiscal year 2024 performance, followed by an update on the progress of our current medium-term management plan.

Let me begin with a summary of our consolidated results for fiscal year 2024, as shown on Page 1. Operating revenue reached JPY 10,134.8 billion, an increase of JPY 581.3 billion year-on-year. Despite growing consumer frugality, our focused efforts to stimulate demand proved effective, leading to resilient sales of daily essentials such as food and household goods. The reinforced promotion of TOPVALU also contributed significantly, enabling us to surpass the JPY 10 trillion mark for the first time. Operating profit came to JPY 237.7 billion, a year-on-year decline of JPY 13.0 billion.

In the first half, in particular, delays in responding to rising prices and changes in consumer behavior led to a decline in gross profit margin, falling short of expectations and resulting in lower profits compared to the previous year. In the second half, we strengthened our focus on BESTPRICE offerings to reinforce price appeal and secure gross profit. We also revised our SG&A expense plans and enhanced labor hour controls. These efforts contributed to improved gross profit and cost optimization, resulting in record high operating and ordinary income for the second half.

Net income attributable to owners of the parent company amounted to JPY 28.7 billion, a year-on-year decrease of JPY 15.9 billion. This was due to one-off losses related to fraudulent use in the Financial Services segment as well as impairment and closure-related losses associated with strategic reviews of Regional and Store Development plans in our operation in China, Shopping Center Development and the Health and Wellness Business. While these measures impacted short-term profits, they are positioned as steps towards strengthening our long-term earnings foundation.

Next, let me touch on our consolidated results for the fourth quarter. During this 3-month period, our pricing strategy and cost structure reforms delivered tangible results. Both the gross profit margin and the SG&A ratio improved year-on-year, leading to record high operating and ordinary income for the fourth quarter. We believe that the shift towards stronger price appealing strategies and tighter cost control since the fourth quarter in fiscal 2024 has produced clear results. In fiscal 2025, we will work to solidify this positive trajectory.

This slide shows the performance trends for the fourth quarter year-to-date over the past 6 years. Operating revenue reached a record high for the fourth consecutive year. Although operating profit and ordinary profit declined year-on-year, both remained at the second highest levels following the record set in the previous year. Profit attributable to owners of the parent company decreased by 35.6% compared to the previous year.

Next, let's look at the performance by segment. Operating revenue increased across all reportable segments. As for operating profit, the decline in the retail segments, including GMS, Supermarket and Health and Wellness was the main factor for the drop in profit. However, the results from the Financial Services, Shopping Center Development and Services and Specialty Store Business have somewhat offset the overall decrease. I will now explain the situation in each segment in more detail on the following slides.

In the GMS segment, while sales remained generally in line with the planned levels, operating profit was JPY 16.3 billion, representing a decrease of JPY 11.5 billion compared to the previous year. The decline in profit was mainly driven by the weak demand for autumn and winter apparel and home furnishing products due to the extreme heat and lingering summer temperatures as well as sluggish sales of seasonal items in food.

On the other hand, in the fixed amount tax reduction campaigns as well as the Black Friday and year-end New Year shopping seasons, apparel and home furnishing products performed well. By aligning with the customer attraction initiatives of Aeon Malls, we were able to leverage the strength of our general retail business. In the fourth quarter, sales floor reforms, optimized procurement and expense control measures were effectively implemented across the companies, leading to improvements in operating profit. We are steadily progressing with the development of new formats and the revitalizing of existing stores, keeping an eye on the upcoming fiscal years.

As shown in the graph in the top right, Aeon Kyushu saw an improvement in gross profit, primarily driven by food sales in the second half of the year. In addition, thorough management of labor hours helped secure both increased revenue and profit. Aeon Hokkaido achieved increased revenue, partly due to the contribution of the stores acquired from Seiyu. Moving forward, we will focus on driving efficient management by leveraging the scale benefits of post-merger and implementing strict cost controls to improve profitability.

Let's move on to the performance of Aeon Retail. For the full year, although gross operating profit increased, it was not enough to offset the rise in costs, leading to an operating profit of JPY 7.9 billion, a decrease of JPY 0.3 billion from the previous year. However, up until the third quarter, the company experienced a decline in profit. But starting from the second half of the year, efforts to reduce markdown losses and restructure expenses proved effective. As seen in the bottom left graph, operating profit in the fourth quarter reached JPY 24.2 billion, a year-on-year increase of JPY 5 billion.

In fiscal 2024, we focused on reforms such as the introduction of the latest sales floor merchandising in food and Health and Beauty Care, expanding the specialty store model for apparel and home furnishing products and the full-scale operation of the integrated production and sales model. We opened 7 new stores featuring these latest models and revitalized 60 existing stores. In addition, we promoted reforms in the checkout and back-office operations through digital transformation and reallocated labor to sales floor activities. As a result, as shown in the top right graph, in the fourth quarter, we reduced labor hours by 3.9% year-on-year, improving labor productivity by 6.1%.

Next, let's move on to the performance of the Supermarket business. In this business, operating profit amounted to JPY 32.9 billion, reflecting a decrease of JPY 8.9 billion compared to the previous year. In the first half, we faced headwinds stronger than anticipated, including the impact of the extreme heat and lingering summer temperatures, which resulted in poor performance for seasonal products. In particular, sales of key products such as fresh foods and delicatessen items struggled and the increase in markdown ratio fluctuations had an adverse effect on securing gross profit.

From the second half of the fiscal year, the sales of TOPVALU significantly grew, contributing to the improvement in gross profit. Additionally, the combination of strength in price competitiveness and operational efficiency led to a positive shift in productivity, resulting in a profit increase in the fourth quarter. For individual companies, as shown in the graph in the top right, USMH turned to a profit increase in the fourth quarter. At the end of November 2024, they integrated operations with Inageya, marking the beginning of the foundation to build a strong business base as the largest supermarket in the Greater Tokyo area.

Maxvalu Tokai and My Basket both achieved an increase in profits in both the fourth quarter and for the full year. In particular, My Basket turned to a profit increase in the fourth quarter due to its focus on affordability with TOPVALU products and the strengthening of its delicatessen offerings, utilizing a processing center named the Kraft Deli Funabashi. This year, My Basket opened 105 new stores, bringing the total number of stores to 1,204.

Let's shift focus to the performance of the discount store business. It recorded an operating profit of JPY 7.9 billion, a decrease of JPY 0.4 billion compared to the previous year. As shown in the graph in the center and lower parts, in the first half of the year, inadequate price adjustments led to a decline in the number of items purchased. However, in the second half, the strengthening of the pricing strategy led to a recovery in customer numbers and sales have steadily increased.

At AEON BIG, through the offering of BESTPRICE and exclusive private brand products for the discount store format, we focused on maintaining everyday low prices while also working to reduce costs in fresh food by consolidating suppliers and utilizing direct sourcing. Additionally, with the operation of the new process center, we reduced the burden of in-store operations and achieved both stable product supply and personnel reductions, ultimately securing a profit increase.

In the fourth quarter, however, the expansion of the original private brand products and TOPVALU products, along with actively capturing the demand for pharmaceuticals due to the flu season improved the gross profit margin. As a result, Welcia achieved its first increase in sales and profit in 6 quarters. Additionally, the number of stores with pharmacies reached 2,282, and the increase in prescription receipts led to a 5.6% year-on-year increase in combined sales from both merchandise and pharmaceuticals.

The Financial Services business recorded an operating profit of JPY 61.1 billion, an increase of JPY 9.9 billion compared to the previous year. In Japan, increased earnings from card operations and gains from financial income and securitization offset the negative impact from the transfer of Aeon Product Finance, engaged in consumer loans and credit guarantees. Although the fourth quarter saw a decline in profit due to increased bad debt costs associated with fraudulent card use, full year profit grew significantly, reaching 191% of the previous year's level.

Overseas, all regions achieved profit growth in the fourth quarter. In the Malay area, increased debt-related expenses in line with the expansion of the balance of receivables and the launch of a digital bank were offset by growth in transaction volume and balances of installment sales and personal loans, resulting in full year performance roughly on par with the previous year.

In the China and Mekong areas, full year profit increased. In the Mekong area, while building up the receivable balance remains a challenge due to prolonged economic stagnation, growth in transaction volume from new credit card and used car loan offerings contributed positively. On the other hand, during the second half, special losses were recorded due to increased compensation for customers affected by a surge in credit card fraud involving unconventional scam methods. Countermeasures have already been implemented and no further damage has been reported to date.

Moving forward, we will further strengthen internal risk management in response to increasingly unusual cybercrime and other illicit activities while enhancing collaboration with external organizations to share the latest information and implement timely countermeasures.

Operating profit in the Shopping Center Development business reached JPY 53.0 billion, up JPY 5.6 billion from the previous year. In Japan, revitalization efforts and initiatives to attract more customers led to a 5.4% year-on-year increase in Specialty Store sales, which drove a significant rise in performance-based rent income. This resulted in profit growth in both the fourth quarter and the full year. Inbound demand was particularly strong in malls located near tourist destinations and airports with duty-free sales nearly doubling compared to the previous year.

Outside Japan, Vietnam recorded strong growth with specialty store sales at existing malls increasing by 7.4% year-on-year. Full year revenue and profit also grew. In September, AEON MALL Hue, our seventh mall in Vietnam and the first in the Central region, opened its doors.

In China, however, operating profit declined. This was due to costs from newly opened malls and a drop in earnings from locations closed in the previous fiscal year. Although consumption of apparel and other merchandise weakened amid the economic slowdown, demand for dining and amusement category centered around time-based consumption remained steady. Looking ahead, the business will focus on enhancing revenue by strengthening tenant offerings and revitalization initiatives in both domestic and overseas markets while working to reinforce the earnings foundation through structural reforms.

In addition, based on the basic agreement signed on February 28 to make AEON Mall a wholly owned subsidiary, a share exchange agreement was concluded today. The Shopping Center Development business will continue to play a central role as a platform for the group. The Services and Specialty Store business recorded an operating profit of JPY 23.1 billion, an increase of JPY 5.3 billion compared to the previous year.

As shown in the upper right graph, AEON DELIGHT achieved profit growth. In addition to the expansion of new contract wins, the company actively secured orders for renovations and equipment replacement work at existing facilities, contributing to sales growth. Efforts were also made to stabilize the profit structure through joint procurement of related materials and control over outsourcing and labor costs.

In entertainment, while AEON Fantasy recorded a profit decline in the fourth quarter, domestic operations' drove overall performance, resulting in full year profit growth. Same-store sales remained strong and new formats such as playgrounds and crane game Specialty Stores exceeded sales expectations. In the Specialty Store, Mega Sports and Miraiya Shoten reduced full year losses by closing unprofitable stores. However, in companies where overhauls of sales floor layouts and product assortments were delayed, a shortfall in gross profit margin became apparent.

The International Business recorded an operating profit of JPY 9.4 billion, a decrease of JPY 800 million from the previous year. By region and country, as shown in the upper right graph, Malaysia recorded a decline in profit in the fourth quarter. However, for the full year, profit increased, thanks to active sales promotions, the expansion of private brand products, optimization of tenant mix and improved occupancy rates. In Vietnam, growth in both revenue and profit was achieved, supported by the effects of existing store renovations and solid demand for daily necessities. Store openings are being expanded not only in major metropolitan areas, but also in emerging development regions. In China, differences in regional economic growth rates are impacting the retail business.

In particular, Hong Kong recorded a decline in profit due to sluggish domestic consumption and segment average transaction value. While measures are underway to address cross-border consumption trends, where Hong Kong resident shop in Guangdong and Shenzhen, a full recovery in demand has yet to be seen, and the business environment remains challenging. On the other hand, AEON HUBEI returned to profitability in the fourth quarter, supported by improvements in gross profit through enhanced fresh food offerings and initiatives to attract customers as well as an increase in tenant income.

Next, I'd like to go over the actual impact of rising costs on our consolidated performance. Starting with utility costs due to extreme heat and lingering summer temperatures, combined with a surge in market-based electricity, procurement prices rose by JPY 11.7 billion year-on-year. Logistics costs increased by JPY 4.0 billion, in line with our initial forecast as group-wide efficiency initiatives progressed as planned.

Lastly, labor costs increased by JPY 45.3 billion, excluding the impact of newly consolidated entities. This figure was significantly lower than our initial expectations. While unit labor costs did rise, we were able to offset this through productivity gains from digital transformation initiatives and a review of staffing at the store level, resulting in a substantial reduction in total labor hours.

Moving on to the outlook for fiscal 2025. Although we recorded a year-on-year decline in profit for fiscal 2024, initiatives to improve labor productivity and strengthen cost control gained significant momentum in the second half. As a result, several segments reported operating profit above plan. As a whole, we are entering fiscal 2025 with a positive momentum. We project revenue of JPY 10.5 trillion, operating profit of JPY 270 billion, ordinary profit of JPY 250 billion and profit attributable to owners of the parent at JPY 40 billion.

We are moving forward with the full ownership of Aeon Mall and AEON DELIGHT and the consolidation of TSURUHA Holdings as a subsidiary. However, the impact of these initiatives is not included in the current forecast. If any revisions become necessary or if there are any matters that require public disclosure, we will make an announcement promptly.

Next, our capital investment plan. While total investment in fiscal 2024 fell short of our initial plan, we have set an ambitious investment target of JPY 600 billion for fiscal 2025. Our focus will be on establishing a foundation for sustainable long-term growth. For fiscal 2025, we plan to set the annual dividend at JPY 40 per share. While the JPY 2 commemorative dividend from fiscal 2024 will be removed, this will be offset by an increase in the ordinary dividend.

Lastly, let me provide an update on our medium-term management plan. The current plan launched in fiscal 2021 reaches its final year in fiscal 2025. At the start of the plan, we set key targets for fiscal 2025, operating revenue of JPY 11 trillion, operating profit of JPY 380 billion and ROE of 7%. However, prolonged impacts from the COVID-19 pandemic beyond what we initially expected, combined with higher-than-anticipated inflation and cost increases, particularly in wages and electricity, have resulted in over JPY 100 billion in negative impact on operating profit.

While the earnings forecast announced today fell short of those original KPIs, we are seeing steady improvements in gross profit and cost efficiency. In addition, with our announced moves to make certain group companies wholly owned subsidiaries, we aim to catch up quickly. That concludes my portion of the presentation on fiscal 2024 results and the outlook for fiscal 2025. We are dedicated to building a positive momentum from the second half of fiscal 2024 and delivering on our plans for 2025.

Thank you very much for your attention.

[Unknown Executive]

Let me start with a quick recap of fiscal year 2024. While we did see sales growth, unfortunately, that didn't translate in a profit. We struggled to absorb cost increases, and it took longer than expected to respond effectively. Looking back from April last year, we saw a clear shift in consumer behavior towards saving. This was reflected in economic indicators like household spending and the consumer sentiment index. Real wages remained flat. And just when price hikes seemed to settle down in fiscal 2023, they started climbing again.

On top of that, soaring vegetable prices and a historically weak yen only made things tougher. To respond, we launched various initiatives to drive demand and lift the top line. We did achieve some results, but the frugal mindset turned out to be much stronger than expected. In the end, we were too slow to revisit our pricing strategies and cost structure. That delay became a major factor behind the drop in profits, and we ended the first half with higher sales, but lower earnings.

Starting in the second half, we made a clear shift. We positioned BESTPRICE as a group-wide strategy to highlight value, work to secure gross profit and reviewed our SG&A plans. We also reinforced our focus on personnel management to improve productivity. Thanks to those efforts, BESTPRICE sales kept growing each month, productivity improved, and we ended the second half with both sales and profit growth. In fact, in the fourth quarter, we recorded the highest consolidated operating profit in our group's history.

We also booked some extraordinary losses this year. One was due to the fraudulent use of Aeon credit cards. The other was related to structural reforms in our China operations, Shopping Center Development Business and Health and Wellness Business meant to improve productivity and capital efficiency within the group. These measures did lower short-term profits, but we believe they'll lead to a stronger financial foundation in the mid- to long term. That's why we decided not to postpone them.

Looking ahead to fiscal 2025, we plan to build on the cost structure reforms we started in the second half of last year. We've already internalized cost controls across the organization, so we're ready to go further with pricing strategies to drive the top line.

Finally, I want to express our sincere apologies for the inconvenience caused by the unauthorized use of Aeon Cards. As Egawa mentioned earlier, we've seen almost no new incidents lately. We'll continue to enhance our security to ensure our customers can use our services with confidence.

Let me talk a little about our environmental outlook. This slide shows the environment that Aeon is facing. What I want to emphasize here is that while new companies that create new value propositions beyond the existing frameworks are emerging, the business models of existing businesses are peaking out. Not only the business format, but also the seamless integration is spreading across industries, marking a transformational period in the industrial structure itself.

We view this period of transformation as an opportunity for business expansion, and we aim to turn it into new growth. As a result, the consolidated results for the current period are as follows: operating revenue of JPY 9,553.5 billion, operating profit of JPY 250.8 billion, ordinary profit of JPY 237.4 billion and net income attributable to owners of the parent company of JPY 44.6 billion, which is more than double the previous year's figures.

Regarding future growth opportunities, I would like to talk about the areas we will focus on, especially in fiscal 2025. First, the product category of TOPVALU, considering the global imbalance of food supply and demand, geopolitical risks and prolonged yen depreciation leading to higher raw material prices, we expect the price increases of national brands to continue from this year onwards. Influenced by inflation, the yen depreciation and inbound tourism, some companies are achieving strong performance.

Meanwhile, on the consumer side, real wages continue to decline and the burden on daily life is increasing. These social issues are becoming more apparent. Aeon as a safety net for daily life and infrastructure is considering how to address these social issues through its business. We see this as an opportunity to balance responding to customers' demand for low prices and selective consumption with expanding our top line and improving gross profit margin. We will continue to focus on product reform centered around private brands.

This slide shows the domestic CPI, excluding fresh food and the year-on-year trend of TOPVALU. We believe that as national brand prices increase, TOPVALU is becoming a catch-all. Seeing the tough environment as an opportunity, TOPVALU has increased sales for 9 consecutive years since 2016. Last year, sales reached about JPY 1.1 trillion, representing 110% of the amount recorded the year before, and we feel that it has grown to a scale that is now recognized as a single brand.

Leading TOPVALU is BESTPRICE, which offers value through its pricing. A thorough company effort, including a review of product designs with up to 1,000 SKUs, improvements in delivery efficiency, changes in packaging materials and shifts in production locations has been a driving force behind competitive pricing and has enhanced price competitiveness through volume sales and product price reductions.

Private brand sales for fiscal 2024 are approximately JPY 1.6 trillion, and we are steadily progressing toward the target of JPY 2 trillion for fiscal 2025. To further expand, we will not only focus on product development, but also strengthen functional companies such as process centers and logistics and actively promote the vertical integration of our supply chain.

Now moving on to our digital strategy. The expansion of the e-commerce market is a well-known trend. We expect Japan's e-commerce penetration rate to reach about 30% in the next decade. In addition to this clear business opportunity, we see significant potential in terms of scalability. With strong capabilities in physical retail, Aeon operates a wide variety of formats and categories, both online and offline at a leading scale. To fully capture these opportunities and unlock our scalability, we are working to integrate customer IDs and product IDs across the group.

To that end, we will strategically integrate our group level ID platform, iAEON, which has 14 million users, our WAON POINT program with around 40 million active users and our payment services, which serve as a key driver of customer acquisition and connection. Specifically by June this year, we plan to integrate the e-money service, WAON with our QR-based payment platform, Aeon Pay, transforming it into a more convenient payment tool. This will significantly expand the iAEON membership base and strengthen our customer base. We've already initiated a project to unify product IDs within the group.

By combining customer IDs and product IDs, we will not only provide optimal suggestions to customers, but also enhance our negotiating power, making the most of our scale and contributing to the group's overall growth.

Now I would like to discuss our approach to the Discount Store business. The food retail sector is facing a sharp increase in factors that are eroding profitability, including price inflation, rising energy costs and higher labor expenses. However, this is not unique to Aeon, but is a trend across the industry, and we foresee a divide between companies that can transition to new growth formats and those that cannot. In the U.K., the Discount Store market has been expanding, and we expect a similar trend in Japan.

With this in mind, we have been strengthening our Discount Store strategy. Specifically, we are focusing on 2 key areas: scaling the Discount Store business with Aeon BIG as the core and developing exclusive products for discount stores by leveraging the expertise of TOPVALU. From 2020 to 2024, the operating profit of our Discount Store business has grown at an average annual rate of plus 15% and the private brand ratio has reached approximately 20%, showing steady expansion.

Moreover, we are not only focusing on the Discount Store business, but also applying the principles of discount stores to our supermarket operations. By eliminating inefficiencies and irrational practices, we are developing a new model that integrates elements of discount stores. This includes initiatives like store digital transformation and improving operational efficiency through material handling to reduce costs. These efforts are aimed at transforming our Supermarket business into one that is more resilient to cost pressures. Through applying these new models to existing supermarkets, we aim to improve efficiency and increase market share. This is particularly important as the rising costs make it harder to open new stores. So we are focusing on enhancing the profitability of our existing locations.

In Japan, the business environment is becoming more challenging due to trends such as the increase in single-person households and the ongoing population decline. Without strategic intervention, this could lead to a natural decline in sales. Additionally, the economic strength of local governments varies, and it has become increasingly important to implement a finely tuned area strategy that takes local consumer needs into account. To address these challenges, we have developed a multi-format approach in regional areas to better meet diverse local needs.

At the same time, urban areas, especially the Tokyo Metropolitan area, are seeing population growth and remain one of the few growth markets in the country. While these areas are highly attractive, they also face intense competition and achieving market share growth will require us to leverage strong business formats. In the Tokyo Metropolitan area, My Basket has expanded to 1,200 stores. Its appeal lies in proximity and affordability compared to convenience stores, which has helped it steadily grow its market share. The business has now evolved into a format that offers strong competitiveness against convenience stores and generate stable profits. We will continue to accelerate investment in My Basket, which holds significant growth potential and position it as one of our key growth pillars.

In addition, our online business in the Tokyo Metropolitan area, Green Beans, has steadily expanded with 500,000 members and an average basket size of around JPY 10,000. This year, we are targeting 800,000 members and a basket size of JPY 12,000 while also increasing the proportion of high loyalty customers to solidify our membership base.

Looking ahead, we envision building a powerful business model in the Tokyo Metropolitan area by combining a physical store network of 5,000 My Basket stores with the delivery capabilities of Green Beans and integrating this with our Supermarket business, USMH. By fully leveraging both physical and digital operations across the group, we aim to dramatically increase our share of the food market in the region.

Next, let me move on to the Discount Store business. In an environment where consumer spending continues to polarize, this segment benefited from favorable tailwinds. Operating profit reached JPY 8.4 billion, marking a significant increase of JPY 4.8 billion from the previous year. As price hikes and daily essentials continue and household budgets come under increasing pressure, we strengthened our value proposition through an everyday low price strategy, offering staple products and Discount Store exclusive private brands.

We also promoted case pack sales and value-sized items, which contributed to higher basket sizes. At the same time, we focused on establishing a low-cost operational model by reducing in-store labor and streamlining operations. In parallel, we enhanced customer convenience by actively promoting cashless payment options such as iAEON and AEON Pay despite operating within the Discount Store segment. In March 2024, we integrated AEON BIG and Maxvalu Minami Tohoku to further scale and strengthen earnings power. With inflation expected to persist and further deepen the polarization of consumption, we believe the Discount Store business holds strong growth potential and will remain a key focus area for the group moving forward.

Let's now turn our attention to the expansion of our International business. We recognize that strengthening our International business is essential for the group's growth. Considering population growth and GDP growth rates, our focus will continue to be on Vietnam. By 2030, the population is expected to exceed 110 million, with a demographic bonus continuing until around 2040. With a growing middle and affluent class and improving living standards, we aim to expand through a multi-format approach centered on General Merchandise Store business, Shopping Center Development business and Financial Service business, positioning this as a significant growth opportunity for the group.

In line with strengthening our Financial business, we acquired a local credit company and obtained a finance license in February. We plan to launch credit card services soon, and we'll continue building our customer base to create a more integrated daily living zone in Vietnam. Additionally, Aeon Entertainment established a joint venture with a local company in March this year and plans to open a cinema later this year, marking the beginning of our Service business expansion. The current number of General Merchandise Stores and Supermarkets stands at 46 with a target of expanding to 180 by 2030.

Thanks to proactive property acquisitions over the past 3 years, approximately 90 potential sites have already been identified. This pipeline will begin to take shape in 2025 with plans to open 16 stores, including 6 general merchandise stores and small format supermarkets and 10 supermarkets. By 2030, we will increase the feasibility of reaching our goal of JPY 500 billion in sales for the group.

Earlier, we shared our view that the business environment is undergoing a fundamental transformation. In fact, the number of M&A deals and capital alliances has doubled over the past decade, and cross-sector consolidation is accelerating across the board. We're seeing significant shifts in business models and competitive dynamics across industries. In the retail sector, for example, the scale of leading companies has expanded significantly. About 10 years ago, core players in the supermarket industry had sales of around JPY 300 billion and drugstores were at JPY 400 billion. Both have now surpassed the JPY 1 trillion mark. The rising prominence of discount formats through M&A also reflect this shift. We view this period of structural change as a key opportunity to further scale our operations.

By leveraging scale, we aim to better meet customer needs and reduce the burden on their daily lives. Scale allows for greater cost optimization and competitive strength across a wide range of areas from private brands, national brands and imported goods to infrastructure such as logistics, systems and back-office functions. The new drug store alliance formed by Tsuruha, Welcia and Aeon is part of this broader strategy.

Across the group, each company is expected to capitalize on scale benefits to lower costs, redirect management resources toward creating more value for customers and implement growth strategies both effectively and efficiently. The growth of individual business will, in turn, contribute to the group's overall expansion. We believe we are now in a position to solidify this positive growth cycle.

Another initiative we have advanced during the current medium-term management plan is the restructuring of our business portfolio. The goal is to allocate the group's resources effectively and efficiently under the leadership of the holdings company. We are focusing on 2 key aspects: the regrowth of existing businesses and the restructuring of unprofitable businesses.

Regarding the restructuring of unprofitable businesses, we will form a dedicated team comprising an executive officer and specialized departments to carry out reforms without exceptions. For each business, we will not only consider financial perspectives, but also evaluate its strategic significance for the group, determining the direction accordingly. Through this, we aim to channel the cash generated into growth areas, effectively and efficiently allocating resources to improve the quality of our portfolio.

Aeon strives to be a safety net in daily life and in infrastructure rooted in local communities. We aim to practice value-based management by not only pursuing profitability, but also contributing to the growth, development and problem solving of the communities we serve. By deepening our relationships not only with shareholders, employees and business partners, but also with local governments and the community, we believe that expanding both corporate profits and social issue resolution simultaneously through our business activities will make us an indispensable part of the community and lead to sustainable management.

That concludes my presentation.

[Unknown Analyst]

You mentioned the development of a low-cost model for food retailing. Could you share more details on the specific areas, future sales outlook, expected store count and which operating company will lead the initiative?

[Akio Yoshida, executive]

Thank you for your question. This is Yoshida. We will roll out a low-cost model not only to new stores, but also to existing ones. This includes implementing low-cost operations such as improved material handling and integrating work style reforms and digital transformation. Mr. Ride, who previously oversaw the GMS business, has now taken charge of the Supermarket business. The model we build needs to be adopted across all operating companies so we can improve profitability by reducing the cost burden at existing stores. Without these efforts, rising expenses such as labor costs could put pressure on each business model.

[Unknown Analyst]

Sustainable growth in domestic agriculture needs a certain degree of price stability on the higher end. Currently, there's a gap between actual consumer behavior and the prices of domestic agricultural products. As a retailer, how do you plan to bridge that gap?

[Akio Yoshida, executive]

This is Yoshida. Thank you for your question. Prices are ultimately determined by our customers. If we simply place products on the shelf at unreasonably high prices, customers won't support our stores. We believe that unless we offer products that truly reflect customer needs, the business cannot be sustainable. The real economy remains challenging and the angle coefficient has risen to nearly 30%. Even so, many customers are reluctant to cut back on spending for their hobbies. Instead, we see a trend where people save on everyday essentials but are willing to spend on special occasions or moments. That's exactly why it's so important for us to clearly present prices that customers feel are fair and worth supporting.

[Unknown Analyst]

We understand that structural reforms at Aeon Retail have progressed and led to improved profits in the fourth quarter. Could you elaborate on how these reforms are progressing in other areas?

[四方 基之, executive]

This is Shikata. Reforms at Aeon Retail are steadily moving forward. In the Food segment, we are expanding with Topvalu at the core of our strategy. In the Kanto region, we established the process center for Craft Delica Funabashi, which supplies delicatessen products from the central kitchen in addition to in-store preparation. This is part of our efforts to shift toward a more profitable model.

In the Apparel segment, we've been transitioning to a specialty store format since last year, and more than 10 stores have already made the switch. These stores are starting to show improved results. By steadily building on these initiatives, we aim to further advance the reform of Aeon Retail.

[Unknown Analyst]

How are you responding to consumers' increasing focus on low prices? Also, could you share your store expansion strategy for Aeon BIG, your discount store format?

[四方 基之, executive]

I, Shikata, will continue to respond. As announced last year, Aeon Big has integrated Maxvalu Minami Tohoku, thereby expanding its business scale. Our current focus is on developing private brand products, specifically for the discount store format. As the scale of our operations grows, the number of discount store exclusive private brand items is also increasing. We aim to build a solid profit model and further expand our network of DS format stores.

[Unknown Analyst]

With inflation continuing, what do you believe is drawing customers back to supermarkets?

[四方 基之, executive]

Yoshida will take this question.

[Akio Yoshida, executive]

Customers are placing importance on the balance between quality and price, and they make their purchasing decisions based on this balance. At the same time, we are seeing a growing polarization in consumer behavior. Products that are judged solely by price and items for special occasions, such as Christmas or New Year's goods are selling in very different ways. That's why we believe it is crucial to offer a product assortment that aligns with the perspective of our customers.

[Unknown Analyst]

In order for a business to be sustainable, it must generate profits. As a retailer, what is your approach to pricing?

[Akio Yoshida, executive]

I, Yoshida, will continue to respond. As mentioned earlier, our focus has been on private brands, and we believe they are the key to addressing the challenges we face. By leveraging scalability, we can reduce costs. There are various ways to reduce costs depending on the company. For example, when it comes to packaging, eliminating labels from box products or improving truckload efficiency are some of the ways to cut costs across the entire supply chain. Achieving cost reductions is difficult without scale. And once we have a certain level of volume, we can gain cooperation from our suppliers.

As a company, we believe the key is how effectively we can reduce costs. Without this, profits cannot be generated and sustainable management will not be possible. Simply lowering prices is not the solution.

[Unknown Analyst]

In your explanation, low prices are emphasized. While improving productivity and controlling costs are important, inflation is certainly driving up costs, which will continue to be a burden if left unchecked. The only way to absorb costs is either by increasing sales or improving margins. However, if you're not careful, focusing too much on low prices can lead to a deteriorated product mix. In the fourth quarter, the Retail business saw a significant improvement. But as we look toward the next fiscal year, do you have a clear strategy for recovery?

[Akio Yoshida, executive]

This is Yoshida. Thank you for your question. In October, we set key performance indicators, KPIs, for our business units, taking into account the current market trend that improving cost structures and gross margins alone would not be enough. We successfully achieved those KPIs. Additionally, we leveraged Topvalu to introduce initiatives aimed at acquiring repeat customers, and the results of those initiatives became visible in November. We're seeing similar trends in the preliminary figures for March, continuing from the fourth quarter. However, it's important not to rely solely on low-priced products. Product development capabilities and the ability to offer strong proposals are also critical. For private brands, it's most important to reflect customer feedback. By quickly turning requests from the field into products and placing them on the shelves, we can address customer needs in short cycles. For example, we have received many requests regarding baby food. And if we can develop products that respond to customer demands, they can be sold as higher-margin items.

Last year, we launched a project targeting Generation Z. And contrary to our initial expectations that the products might not sell, they did very well. This success can be attributed to our ability to capture the preferences of Generation Z, and this is a key factor in increasing the share of private brands in our product mix. However, simply trading off between private and national brands is not enough. I believe that enhancing the value of private brands is crucial.

[Unknown Analyst]

The operating profit target of JPY 270 billion for fiscal 2025 was originally set for fiscal 2024. This target seems to require a significant recovery in the Retail business to be achievable. Could you share the company's perspective on this?

[江川 敬明, executive]

Regarding the question, I, Egawa, will respond. While the figure is the same, JPY 270 billion, the specifics differ between fiscal 2024 and fiscal 2025. For sales, we had originally targeted a 4% increase over the previous year and a 0.5 point improvement in gross margin. However, this time, we are planning for a 0.3 point improvement in gross margin, focusing on expanding private brand offerings and improving sales mix as the main methods to achieve this. Costs will rise, but we were able to reduce costs more than expected in fiscal 2024. If we can implement similar cost-saving measures in fiscal 2025, we believe achieving JPY 270 billion is very much within reach.

[Unknown Analyst]

Regarding structural reform, there has been some market speculation that following the move to fully acquire Aeon Mall, similar actions might spread to other companies. The platform reform seems to be an unavoidable theme. And in order to structurally improve profitability, is further action required, not just for Aeon Mall, but across the group. Additionally, I've noticed changes in the group's leadership, such as the President of USMH being replaced by Executive Officer, Ide. Should we interpret this as a shift from the previous more gradual collaboration to a stronger, more direct management approach? Could you share your perspective?

[江川 敬明, executive]

Thank you for your question, and Yoshida will respond.

[Akio Yoshida, executive]

We have already been strengthening our grip on management, but I do understand the question in the context of platform reform. While there has been discussion about the potential delisting of both Aeon Mall and Aeon Delight, it's important to note that Aeon Mall plays a key role as the platform supporting the entire Aeon Group's operations. Within the mall, we have GMS operations, Aeon credit card usage, facility management by Aeon Delight and even Aeon Cinema establishments. Enhancing the mall's ability to attract customers is crucial for the entire group. That's why we focused resources on Aeon Mall and considered a more unified approach across the group.

The potential for a stronger influence resulting from privatization is something we may see, but I view it as a step to elevate the group as a whole. We have moved beyond the phase of expansion into multiple stores and are now at a plateau. From here, we are entering a stage of deepening and refining our operations. The business platform reform is central to Aeon's next phase of growth, and it's also necessary to clarify the direction for some subsidiaries that face profitability challenges. This will be another pillar of the reform.

[Unknown Analyst]

The fourth quarter shows an unprecedented level of alignment among the companies, which is reflected in the numbers. From the announcements made by each company, we get the same impression. What areas should we focus on going forward and in the longer term? Please include any areas where change has been insufficient and your sense of progress.

[Akio Yoshida, executive]

This is Yoshida. Today, we've mainly focused on products, but I believe we're currently in a transitional period. Every company handles private brands, but the key now is whether we can become the first brand that customers think of. Our goal is to elevate Topvalu to a level where customers can trust that if they choose it, they are making the right decision.

Another area to focus on is the ASEAN market. While the Japanese market is important, we cannot ride the growth wave in the future unless we establish a strong foundation in ASEAN. This is the right time for us to grow alongside ASEAN countries, and we especially want to focus on strengthening our foundation in Vietnam.

[Unknown Analyst]

Private brands have traditionally been focused on GMS, but recently, the handling of private brands has increased across various business units, including Maxvalu. Will you be focusing on expanding the overall scale of private brands? Or will the emphasis be on strengthening the promotion of Topvalu? Please share your thoughts on this.

[Akio Yoshida, executive]

This is Yoshida. When the private brand sales scale was JPY 700 billion, it was mainly driven by Aeon Retail and Maxvalu. However, now we are seeing strong interest from other group companies in handling private brand products. This is partly due to the positive response and impact confirmed through television exposure. As a result, business units other than Maxvalu have expressed a desire to handle private brand products as well.

To address this, we have established a dedicated new forum for discussing private brand matters, bringing together top executives from across the group. In these meetings, we hold tastings and discuss how much each company will handle. We are gradually putting in place a system to elevate private brands across the group. And internally, Vice President, Tsuchiya, is leading active efforts on this front.

[Unknown Analyst]

In the pursuit of economies of scale, Aeon has long had a top-class retail scale. However, why do you think this scale has not been fully leveraged until now? I would like to hear your reflections on this. What were the challenges in the past? And considering that individual stores were competitive, what do you think should change going forward? Please share your thoughts on the future direction.

[Akio Yoshida, executive]

Good question. I, Yoshida, believe that to fully leverage our scale, we need a dual approach, one that leverages scale nationally across Japan and another that tailors to local needs. This distinction also applies to private brands and services. In the past, there was a strong desire from each company to develop private brand products independently, which prevented us from aligning efforts and fully utilizing the scale benefits. Even though the theoretical scale could be as large as JPY 7 trillion to JPY 8 trillion, individual companies only had between JPY 0.5 trillion and JPY 1 trillion in scale, which made it difficult to consolidate.

One of the challenges has been the organization within the group. The vertically siloed structure has hindered horizontal collaboration. Many companies were formed through M&A or joint ventures, which led to delays in collaboration. However, recently, with Topvalu surpassing JPY 1 trillion in scale, we've been able to implement horizontal integration, which has boosted our product development capabilities. As a result, other companies are now also eager to handle Topvalu products.

In terms of costs, for example, we can reduce expenses by making cross-company bulk purchases such as with fixtures. In the current inflationary environment, such efforts are essential to improving profitability. Initial investments in DX also require a certain scale to be feasible. As consolidation progresses domestically, horizontal collaboration will be key to successfully developing private brand products and investing in DX. Given the ample resources available within the group, I believe we have now entered a phase where we can fully leverage these capabilities.

[Unknown Analyst]

There are concerns about a potential economic downturn due to the increase in U.S. tariffs. Could you share your outlook on consumer spending and how you plan to respond?

[Unknown Executive]

Yoshida will continue to respond.

[Akio Yoshida, executive]

While there have been reports that the U.S. will suspend tariff hikes for 90 days, talk of reciprocal tariffs immediately brought to mind regions in Japan that export heavily to the U.S., such as Ota in Guma, Toyota in Aichi and Hiroshima. We've seen strong sales in those areas due to favorable economic conditions, particularly in the Nagoya region. But now there are growing concerns that sales could decline. Although it's too early to draw any definitive conclusions, we recognize this as an important issue that we, as a retailer, must be prepared to address.

[Unknown Analyst]

You mentioned business restructuring earlier. In reallocating resources and talent to more optimal areas, it's likely that some capital will also need to be withdrawn from existing businesses. Does this imply that business divestitures are being considered?

[Akio Yoshida, executive]

This is Yoshida. Business divestitures are certainly one possibility, but there are also various other approaches we could take. Given the large number of companies within the group, we are carefully assessing the long-term viability of businesses that are not currently generating sufficient returns. If we find that a particular business is underperforming with limited prospects, we will consider the most appropriate response. To accelerate structural reforms, we've also created a new leadership position that did not exist previously, with Shikata now serving as an executive officer to lead these efforts in a focused and strategic manner.