Executive summary

Business overview

Edion Corporation is the fourth-largest home electronics mass retailer in Japan in terms of sales. The company was established in 2002 through a merger between Deodeo Corporation (based in the Chugoku region) and Eiden Co., Ltd. (based in the Chubu region). In FY03/21, Edion posted sales of JPY768.1bn, with CAGR of 3.8% over the past three years. This was equivalent to 14.5% of the JPY5.1tn total sales for the six largest home electronics retailers (FY03/20). For FY03/21 by product, home electronics (mainly "white goods," such as air conditioners) comprised 55.9% of sales, information appliances (such as computers) 23.0%, and other products 21.1%. Edion has the top market share in terms of directly operated store sales in eight prefectures, including 54.7% in Hiroshima, 55.3% in Shimane, 53.4% in Tottori, 43.5% in Ehime, and 30.7% in Aichi (based on Shared Research’s estimates).

The company’s business model is based on regional dominance achieved by opening stores so densely as to block the entry of competitors. Edion opens one directly operated store per commercial area of 200,000 residents and in the Chugoku region establishes one franchise store per square kilometer. At end-FY03/21, the company had 437 directly operated stores and 750 franchise stores for a total of 1,187 stores nationwide. Shared Research estimates that in the five prefectures of the Chugoku region, Edion’s household coverage rate per store (including franchise chain stores)/sqkm (the smaller the number, the higher the market dominance) was 0.3 households per store/sqkm, followed by 1.6 for Yamada-Denki Co., Ltd. (TSE1: 9831), and 7.6 for K’s Holdings Corporation (TSE1: 8282). Similarly, in the six prefectures in the Chubu region, Edion’s household coverage rate per store/sqkm was 0.7, with Yamada Denki and K’s Holdings lagging behind at an estimated 1.0 and 1.4, respectively. In other words, Edion has greater market dominance than its competitors in these regions.

Edion’s customers tend to be in their late 40s and above, and many are seniors. A focus on customer contact and repair and delivery services for home electronics (with same-day service available) supported by regional dominance leads to strong value recognition among customers. So-called "white goods" (home appliances) are the company’s mainstay products, especially air conditioners. Contributions from original product sales keep GPM for air conditioners (including installation fee revenue) high at roughly 40%, and they generate approximately 30% of overall profit. Edion also focuses on its home improvement business, which sells replacement products for bathrooms, toilets, and kitchens and undertakes renovation work. In FY03/21, home improvement business sales were roughly JPY52bn (including ELS business), placing the company ninth overall in the home improvement market (which includes house builders, specialist home improvement companies, and retailers). The company’s home improvement strategy focuses on plumbing renovations (for bathrooms, toilets, and kitchens). Selling small renovation packages for JPY1mn and under has improved price transparency and led to a large number of home improvement orders. Dense store placement backed by the regional dominance strategy has increased points of contact with customers, regularly exposing them to the idea of renovating their homes. From FY03/22, the company plans to enter in earnest into the big-ticket home improvement market (products and services with a unit price of JPY5mn or more).

Company sales are determined by three factors: the number of register customers, spend per customer, and the number of purchases (where the number of register customers is a function of store visitors and the conversion rate, and spend per customer is a function of the number of purchased items and unit price). Edion says its average customer spend is above industry peers. In FY03/21 the company’s gross profit margin was 29.4% (+0.7pp YoY; average of the six large home electronics retailers was 28.4%), and its inventory turnover ratio was 8.1x (versus 7.8x in FY03/20; 6.9x). These figures factor into its high turn-earn index (GPM x inventory turnover ratio) of 238.5% (average of the six large companies was 195.5%). This suggests that the company has achieved high efficiency in managing inventory and sales. However, Edion's cost structure emphasizes spending on delivery and repair services, which makes it easy for the company's delivery and personnel expenses to rise compared to competitors. The SG&A-to-sales ratio in FY03/21 was 25.9% (27.0% in FY3/20), higher than 24.4% average for the six major industry players.

Edion’s management strategy focuses on expanding the home improvement business to increase sales while cutting expenses, primarily by reducing sales division and back-office personnel at its head office. The company plans to continue strengthening the exterior wall painting business, which tends to have high order unit prices, and begin offering this service at all stores including franchise stores. It expects cost reductions to bring the SG&A-to-sales ratio down by 3.0pp from 27.0% in FY03/20. The current store opening strategy focuses on urban areas. Specifically, Edion places importance on 1) expanding market share in Osaka and Nara Prefectures, 2) entering Kyoto and Fukuoka Prefectures, and urban markets in Nagoya (Aichi Prefecture), and 3) increasing market share in the urban areas of Shizuoka and Kanagawa Prefectures. Shared Research agrees that these are strategically sound expansion targets considering Edion’s market share by prefecture. Regarding the e-commerce business, while promoting the interactive use of its brick-and-mortal stores and e-commerce site, the company intends to focus on expanding the range of items handled and improving delivery services at the e-commerce site.

Trends and outlook

In FY03/22, sales were JPY713.8bn (-7.1% YoY), operating profit was JPY18.8bn (-29.8%), recurring profit was JPY21.6bn (-22.4%), and net income attributable to owners of the parent was JPY13.1bn (-21.2% YoY). GPM was flat YoY at 29.4% and OPM fell 0.9pp YoY to 2.6%. Mobile phones, home fixtures, washing machines/vacuum cleaners, and other household appliances performed well. However, seasonal home appliances such as air conditioners were weak due to the impact of unseasonable summer weather, in addition to a reactionary decline from the absence of factors in FY03/21 such as the government’s Special Cash Payment program and booming stay-at-home and teleworking demand.

For FY03/23, the company forecasts sales of JPY736.0bn (+3.1% YoY), operating profit of JPY22.5bn (+19.7% YoY), recurring profit of JPY22.5bn (+4.2% YoY), and net income attributable to owners of the parent of JPY14.0bn (+6.8% YoY). The company recognizes that the situation will remain unpredictable due to the impact of the COVID-19 pandemic, Russia's invasion of Ukraine, and the economic impact of high global crude oil prices. On the other hand, the company noted that there is latent demand in the home electronics market for replacement purchases, and anticipates an upturn in sales as the external environment improves.

On May 10, 2022, the company disclosed its medium-term vision in conjunction with the announcement of its financial results for FY03/22. As medium-term performance targets to be reached by FY03/26, the company aims for sales of JPY810.0bn, recurring profit of JPY41.0bn (recurring profit margin of 5%), net income attributable to owners of the parent of JPY25.0bn, ROE of over 10%, and ROIC of over 10%.

Strengths and weaknesses

Shared Research sees Edion’s strengths as 1) over 50% market share in the Chugoku and Chubu regions, which presents a considerable barrier to entry for competitors, 2) strength in customer services that promote lasting customer relationships such as same-day delivery, on-site repairs, and long-term warranties, and 3) the home improvement business, which has achieved market differentiation and is emerging as a new earnings pillar.

We see the company’s weaknesses as 1) vulnerability to population decline due to high dominance in the Chugoku and Shikoku regions (areas with shrinking populations), 2) little experience with operating urban stores, with the success of future urban store openings hinging on the creation of an integrated logistics platform, and 3) the fact that the company needs to expand its relatively small share of the growing e-commerce market.

Key financial data

Recent updates

Monthly sales results for April; telephone conference

On May 6, 2022, Edion Corporation announced monthly sales results for March and held a telephone conference.

April sales (based on POS data; includes orders): All-store sales were 103.0% YoY, directly operated store sales were 102.6% YoY, and same store sales were 101.2% YoY.

Sales of white goods such as air conditioners, refrigerators and washing machines were steady due to demand for new lifestyles. 

Home improvement-related inquiries were strong due to electricity and gas price hikes, with the ELS business performed well at 132.7% YoY as a whole.

Company announces capital and business alliance with Nitori Holdings Co., Ltd.

On April 27, 2022, Edion Corporation announced that it was entering into a capital and business alliance with Nitori Holdings Co., Ltd. as detailed below.

At a meeting of the company's board of directors held on April 27, 2022, the board resolved to enter into a capital and business alliance agreement with Nitori Holdings Co., Ltd.

Plans call for the capital alliance to be formed by sale of all Edion common shares currently held by LIXIL Corporation to Nitori. While this would mean LIXIL would no longer hold a capital stake in Edion after the sale, the company said its business partnership agreement with LIXIL would remain in place.

Regarding the impact of the capital and business alliance with Nitori on its outlook for consolidated results in FY03/23, Edion said it had yet to pin down any specific figures.

Outline of planned business alliance

1. Work together on store development
2. Expand product lineup and number of products carried by both chains
3. Work together to generate synergies on the e-commerce front
4. Mutual utilization of logistics network, installation service and after-sales service network
   
5. Work together to generate synergies in the areas of home remodeling and corporate business
   

Outline of capital alliance

Plans call for the capital alliance to be formed by the sale of all Edion shares currently held by LIXIL to Nitori. LIXIL currently holds 8,961,000 shares of Edion common stock, (8.6% of total shares issued (excluding treasury stock) as of September 30, 2021).

Signing date of contract covering share sale: April 27, 2022

Date of actual share sale under the contract:  May 13, 2022 (scheduled)

Nitori also plans to acquire an additional 1,463,900 shares of Edion common stock via an off-market negotiated transaction or through market purchase. (1.4% of total shares issued (excluding treasury stock) as of September 30, 2021) This purchase of additional shares from LIXIL would boost Nitori's stake in Edion up to 10.0%, making it Edion's largest shareholder. 

Monthly sales results for March; telephone conference

On April 5, 2022, Edion Corporation announced monthly sales results for March and held a telephone conference.

March sales (based on POS data; includes orders): All-store sales were 99.8% YoY, directly operated store sales were 100.0% YoY, and same store sales were 97.9% YoY.

Sales of white goods such as air conditioners, refrigerators and washing machines were strong due to demand for new lifestyles. 

Home improvement-related inquiries were strong due to electricity and gas price hikes, with the ELS business performed well at 118.2% YoY as a whole.

Monthly sales results for February; telephone conference

On March 4, 2022, Edion Corporation announced monthly sales results for February and held a telephone conference.

February sales (based on POS data; includes orders): All-store sales were down 2.1% YoY, directly operated store sales were down 2.2% YoY, and same store sales were down 5.2% YoY.

Combined with the clearout of older models, sales of energy-efficient model air conditioners were up 10.2% YoY. The company's efforts to generate year-round sales of air conditioners are proving to be successful.

Home improvement-related inquiries were strong due to electricity and gas price hikes, with the ELS business seeing firm performance overall.

Trends and outlook

Quarterly trends and results

Full-year FY03/22 results

Summary

• Sales: JPY713.8bn (-7.1% YoY; 99.8% of the revised full-year forecast)
  
• Gross profit: JPY209.7bn (-7.1% YoY)
• Operating profit: JPY18.8bn (-29.8%; 99.4%)
• Recurring profit: JPY21.6bn (-22.4%; 102.8%)
• Net income: JPY13.1bn (-21.2%; 104.9%)

Key points of earnings

In full-year FY03/22, sales were down JPY54.3bn YoY (-7.1%) to 713.8bn. Sales were in line with expectations, reaching 99.8% of the revised full-year forecast. Edion began applying the Accounting Standard for Revenue Recognition in FY03/22, which resulted in sales JPY23.6bn lower than what they would have been without applying the standard (JPY737.4bn, or a 4.0% decrease YoY).

Operating profit decreased by JPY8.0bn YoY (-29.8%) to JPY18.8bn. The company achieved 99.4% of its revised full-year forecast. Cost of sales was down JPY38.4bn YoY, and SG&A expenses were down JPY8.0bn YoY, but this was not enough to offset the significant JPY54.3bn decline in sales. Operating profit was also affected by opening expenses for new stores, such as the Kyoto Shijo-Kawaramachi store. Operating profit was also apparently lower owing to the application of the Accounting Standard for Revenue Recognition. Operating profit after application of the standard was JPY18.8bn, JPY611mn lower than what it would have been without this factor (JPY19.4bn, or a 27.5% decrease YoY).

Disclosure of medium-term vision: The company aims for FY03/26 sales of JPY810.0bn, recurring profit of JPY41.0bn (recurring profit margin of 5%), net income of JPY25.0bn, ROE of 10% or higher, and ROIC of 10% or higher.

Sales by product category

Mobile phones, home fixtures, washing machines/vacuum cleaners, and other household appliances performed well. However, seasonal home appliances such as air conditioners were weak due to the impact of unseasonable summer weather, in addition to a reactionary decline from the absence of factors in FY03/21 such as the government’s Special Cash Payment program and booming stay-at-home and teleworking demand. Sales were strong at 101.7% (POS basis) of FY03/19 levels, a period when there was no impact from the consumption tax hike or COVID-19 pandemic (versus FY03/19: TVs up 19.9%, "white goods" up 4.8%, air conditioners down 10.4%, PCs up 2.5%, mobile phones up 19.4%, home improvement up 18.2%).

Gross profit margin

In cumulative Q3 FY03/22, gross profit margin was 29.4%, flat YoY. GPMs of TVs, refrigerators, air conditioners, and other mainstay products improved.

Store count

Edion established 14 directly operated home electronics stores, relocated three, and closed two. The company also established two directly operated non-home electronics stores, and closed two. The number of franchises stores saw a net increase of three stores. As of end-March 2022, the company had a total of 1,202 stores (449 directly operated stores and 753 franchise stores).

Topics

Capital and business alliance with Nitori Holdings

On April 27, 2022, the company concluded a capital and business alliance agreement with Nitori Holdings. Nitori Holdings will acquire 8,961,000 common shares of Edion stock from LIXIL (8.60% of outstanding shares [excluding treasury stock] as of September 30, 2021). While this would mean LIXIL would no longer hold a capital stake in Edion after the sale, the company said its business partnership agreement with LIXIL would remain in place. The business alliance includes the following.

1. Work together on store development
2. Expand product lineup and number of products carried by both chains
3. Work together to generate synergies on the e-commerce front
4. Mutual utilization of logistics network, installation service and after-sales service network
5. Work together to generate synergies in the areas of home remodeling and corporate business

Company forecast for FY03/23

Numerical targets

For FY03/23, the company forecasts sales of JPY736.0bn (+3.1% YoY), operating profit of JPY22.5bn (+19.7% YoY), recurring profit of JPY22.5bn (+4.2% YoY), and net income attributable to owners of the parent of JPY14.0bn (+6.8% YoY). The company recognizes that the situation will remain unpredictable due to the impact of the COVID-19 pandemic, Russia's invasion of Ukraine, and the economic impact of high global crude oil prices. On the other hand, the company noted that there is latent demand in the home electronics market for replacement purchases, and anticipates an upturn in sales as the external environment improves.

The company plans to open five new stores in FY03/23. At existing stores, the company plans to promote thematic product proposals and launch new services for cardholders, as well as expand home improvement offerings and improve the product lineup on the e-commerce site.

The following statements are as of the beginning of FY03/22. We will update this section following interviews with the company.

Edion's thinking behind initial forecast (for reference)

The forecast factors in downward pressure on sales brought about by the government’s declaration of a third state of emergency on April 25, 2021, given that some stores will temporarily close or shorten business hours and customer volume will contract. However, the company thinks there is latent demand in the home electronics market, primarily for replacement purchases, and anticipates an upturn in sales after the pandemic subsides.

Key initiatives

(1) Addressing new lifestyles

Edion will address the rise in demand for TVs, games and entertainment, and cooking appliances driven by customers spending more time at home as well as the demand for air safety products and anti-virus products such as air purifiers backed by growing security and safety awareness among consumers. Additionally, it plans to capture demand for PCs and peripherals as teleworking continues while strengthening efforts to sell home workspace products. This is a measure the company started in FY03/21, but Shared Research understands that it is ongoing. 

(2) Expanding e-commerce sales 

The company will expand the selection of home electronics products it offers in the Edion Net Shop online store and enhance collaborative efforts with Forest. In addition to meeting the demand for non-home electronics products such as daily necessities, stationery, clothing, alcoholic beverages, leisure goods, and corporate office supplies, the company aims to improve service quality and reduce logistics costs by optimizing e-commerce logistics. Furthermore, it is considering handling large products through its own supply chain with aims to reduce costs and improve convenience, such as by shortening delivery times. This is a measure the company started in FY03/21, but Shared Research understands that it is ongoing.

(3) Digital transformation initiatives

The company intends to build a system framework and infrastructure through Hampstead, a subsidiary of PTN, which Edion acquired in FY03/21. It will roll out electronic pricing at stores to improve store operational and cost efficiency. Only 30% of stores currently use electronic pricing; the company hopes to extend this to all stores over the next two years. 

(4) Targeting the big-ticket home improvement market

Until now, the company’s mainstay home improvement products and services have been relatively small-ticket, such as fixture replacements (Petit de Refo), plumbing renovation, and exterior wall and roofing renovation. Going forward, while fortifying the capabilities of subsidiary EDION HOUSE SYSTEM, the company said it will increase its presence in full-scale renovation and big-ticket home improvement areas (at the company’s FY03/21 results briefing). This indicates products and services with a unit price of JPY5mn or more. 

(5) Green growth strategy to realize a carbon-free society

The company has focused on generating orders in its ELS (eco/living/solar) business, but will gradually step up its focus on solar projects in particular, retraining sales staff and developing proposals for customers. 

Targets/KPIs

The company expects GPM to be flat YoY (29.4% in FY03/21). Shared Research thinks the company is maintaining its basic stance of placing an emphasis on seasonal and lifestyle products in order to bolster the margin mix.

The company said its aims to keep ROE at around 8% (8.9% in FY03/21).

Medium- to long-term strategy

Medium- to long-term vision

Numerical targets

On May 10, 2022, the company disclosed its medium-term vision in conjunction with the announcement of its financial results for FY03/22. As medium-term performance targets to be reached by FY03/26, the company aims for sales of JPY810.0bn, recurring profit of JPY41.0bn (recurring profit margin of 5%), net income attributable to owners of the parent of JPY25.0bn, ROE of 10% or higher, and ROIC of 10% or higher.

The following statements are as of the beginning of FY03/22. We will update this section following interviews with the company.

Edion is maintaining a close eye on how the COVID-19 pandemic impacts society and consumer behavior. Taking this impact into account and reflecting its expectations for the group based on a provisional management vision, the company has established its “four pillars of growth.” The company’s key strategies include: 1) developing new home electronics markets in the 5G and IoT era; 2) strengthening its dominance and opening flagship stores in urban areas; 3) expanding sales to corporate clients and the e-commerce businesses; 4) further strengthening the home improvement business; 5) developing on a nationwide basis the logistics services business and taking on consigned work from other companies; and 6) developing new businesses, such as the education business. Edion is continuing to consider M&A and alliances with other companies in new businesses, logistics services, the home improvement business, and the e-commerce business. 

Four pillars of growth

The company intends to develop its business over the medium to long term focusing on the following four pillars of growth: home appliances, home improvement, logistics, and education. The key points for each business area are as follows. According to the company, if its target for each pillar is assumed to be 100%, its rate of progress so far is 80% for home appliances, 70% for home improvement, 60% for logistics and 30% for education.

Home electronics

The core strategy is to scale back home video appliances and TVs while boosting sales of higher margin air conditioners. In the medium term, the company is stepping up its focus on new products such as 5G/IoT home electronics. It also intends to strengthen its dominance and open flagship stores in urban areas, and expand its e-commerce and corporate sales businesses.

The company as a general rule aims for newly opened stores to turn a profit within three years and for investment on these stores to be recovered within 10 years. This also applies to stores acquired through business investment and M&A. However, for stores that are opened in areas that are considered extremely important in the company’s strategy for dominance and stores where the company is experimenting in a new format, the company estimates that recovery on investment may take a little longer.

Home improvement

The company expects the home improvement market to remain stable and is aiming for sales of JPY100bn in this business over the medium to long term. The company is aiming to boost sales through quality customer service by increasing personnel, adding new exterior wall painting products and services, utilizing local high-quality contractors, and growing home improvement and renovation orders. It also plans to develop new products. The company is gearing up to enter in earnest into the big-ticket home improvement market (products and services with a unit price of JPY5mn or more).

Logistics

The company’s key objectives are to strengthen its peak-time delivery system.

collaborate with other companies in delivery services, take on consigned work from other companies.

leverage Jtop’s delivery network.

Education

The company aims to take advantage of the fact that programming education is compulsory in elementary schools in 2020. 

Edion aims to utilize its assets and know-how in “Robo-Done” to become Japan’s largest robot programming school. 

It is focusing on the Edion Robot Academy business and acquired Youmemiru to help foster children’s creative thinking abilities through independent learning in addition to supporting their acquisition of knowledge and skills. The company also places an importance on making social contributions, including fostering the development of human resources qualified to work internationally, expanding online classes to correct for regional disparities in IT education, and assisting in efforts to adapt to the post-COVID-19 environment. By 2025, the company aims to increase enrollment, including online students, to 100,000.

Operating portfolio strategy

In principle, the company does not engage in businesses operating below the cost of capital.

(1) With the aim of strengthening and expanding high margin businesses, Edion is focused on continually bolstering the home electronics business, where gross profit margins are particularly strong. While profit margins in the e-commerce business are currently rather low, the company is developing the business based on its synergistic effects, including e-commerce customers being directed to the company’s brick-and-mortar stores.

(2) When deciding whether to support or liquidate a low-margin business, the company focuses on whether that business contributes to an improvement in the lives and convenience of customers visiting its stores and whether the business could generate synergies with stores focused on home electronics. As an example of this, the home improvement business was once a low-margin business, but thanks to continued assistance and an ongoing expansion, not only did the business become profitable, but it is now one of the top ten home improvement businesses in Japan. On the other hand, the company in recent years has sold off some businesses, including a regional home center business and a home furniture catalogue sales business, that did not at the time align well with the company’s mainstay business. In regard to solar power generation systems and the home electronics recycling business, the company faces a tough operating environment, but as the company looks at sales of home electronics from the perspective of creating a recycling-based society, it understands that these businesses are essential to customers and accordingly intends to continue operating and supporting them.

(3) When looking at new business candidates, the company focuses not only on profit margins and returns on investment, but also on potential synergies with the home electronics business.

Reducing costs

Edion plans to reduce the number of employees in sales and back-office roles at its head office by 30% (from a total of approximately 1,000 employees), including through relocation. The head office personnel structure has not been overhauled since the 2002 merger that formed the company. Edion aims to reduce the SG&A-to-sales ratio by about 3.0pp from the FY03/20 level of 27.0% in the medium term by promoting back-office productivity and deploying robotic process automation (RPA). The company aims to pare down the SG&A-to-sales ratio to around 24% over the medium term. It thinks it can boost consolidated OPM (3.5% in FY03/21) to 5% in the medium term by improving operational efficiency, primarily at its head office, while leveraging digital platforms to streamline sales promotion activities, and enhancing its operating framework by realigning logistics and investing in IT.

Strategies for improving ROE

In FY03/21, Edion recorded a consolidated ROE of 8.9%. For the time being, the company’s baseline strategy is to maintain stability in its gross profit margin, and to focus on improving profit margins through SG&A spending reductions. 

Dominance strategy

According to the company, the basic store opening strategy is to achieve even greater dominance in areas where it has a strong presence and expand into urban areas. Edion plans to open large stores in the range of 10,000–13,000sqm when entering urban areas. Normally 3,500sqm of floor space is enough to maximize sales of home electronics. The company aims to gain the top share in the Kinki region. Regional strategies include 1) strengthening regional dominance in the Kinki region, centered on Osaka, 2) expanding into urban areas in Kyoto and Fukuoka Prefectures, as well as in Aichi Prefecture, which formed the base of Eiden (one of the companies from which Edion was formed), and 3) increasing share in the Kanto area, especially in Kanagawa Prefecture.

To gain a better perspective on the above strategy, Shared Research confirmed the market shares held by the company and its competitors by prefecture (estimated by sales based on the number of directly operated stores; market shares in the tables below are Shared Research estimates). At 1,482, the countrywide Herfindahl-Hirschman Index (HHI) of the home electronics mass retailer industry is relatively competitive. However, competition differs by prefecture: Niigata, Saitama, Kyoto, Osaka, Chiba, and Aichi Prefectures have relatively high levels of competition, while HHIs for other prefectures fall within the 2,100 to just over 6,600 range, indicating increasingly oligopolistic markets in these areas.

Improving dominance in the Kinki region, especially in Osaka

Joshin Denki Co., Ltd. has the largest market share in Osaka Prefecture at 30.5%, compared to 22.2% for Edion. Joshin Denki also has a 41.7% market share in Nara Prefecture. The company will have to compete with Joshin Denki to strengthen regional dominance in the Kinki region, especially in Osaka Prefecture. If Edion can secure a presence along the route from Osaka to Nara, it will be able to connect to Mie Prefecture (Chubu region), where it has the largest market share. The opening of Edion Namba in June 2019 makes sense in light of this possibility. Starting in Namba (Osaka), the company can harness the route along the Nankai Electric railway to access Wakayama Prefecture, and the Kintetsu railway to access Nara and ultimately secure a path to Mie.

Entering urban areas in Aichi Prefecture, where Eiden was based (one of the companies from which Edion was formed)

Aichi Prefecture gave birth to Eiden, one of the companies that formed Edion in the 2002 merger. Eiden has opened many stores in Aichi Prefecture, mainly in suburban areas, and has many loyal customers. However, its network of stores in the urban area surrounding JR Nagoya Station is thin. In 2003, three years after the opening of the JR Central Towers complex in 2000, Bic Camera (TSE1: 3048) opened a 15,000sqm store (Nagoya Station West) in front of Nagoya Station. Also, in 2011, Yamada Denki opened its LABI Nagoya store in Meitetsu Department Store’s former Young Building, also near Nagoya Station.

Nagoya Station is a terminal station where JR lines (Tokaido Shinkansen and conventional lines), the Higashiyama and Sakuradori subway lines, and the Meitetsu (Nagoya Railway) and Kintetsu Nagoya lines converge. The linear Chuo Shinkansen between Tokyo and Nagoya is scheduled to open in 2027. JR Nagoya Station is located on the border of Nishi and Nakamura wards, which have a combined population of 286,000, in line with the company’s target of 200,000. Pushing into Nagoya city center will create head-to-head competition with other urban mass retailers (for differences between urban mass retailers and suburban mass retailers, see “Market and value chain” below), but the company considers the area essential to strengthening its regional dominance in the medium term.

Increasing share in the Kanto region, especially in Kanagawa Prefecture

If Edion can increase its market share in urban Nagoya, it will be able to connect its network in the area to Shizuoka Prefecture, where it has the top market share. Extending east from Nagoya is a string of three major cities, Hamamatsu (pop. 792,000), Shizuoka (691,000), and Fuji (245,000). Pressing through to Kanagawa, the number of municipalities with populations over 200,000 begins to increase. These include Atsugi (225,000), Yamato (237,000), Chigasaki (242,000), Hiratsuka (258,000), Yokosuka (394,000), Fujisawa (435,000), Sagamihara (723,000), Kawasaki (1,530,000) and Yokohama (3,748,000). (Population estimates as of January 1, 2020).

M&A potential

The table below shows the market shares of competing home electronics mass retailers by prefecture, alongside sums of the market shares each M&A scenario would yield. While the potential for mergers remains, it should be noted that the size of the HHI after business integration could bring the legality of a deal into question vis-à-vis the Antimonopoly Act. In fact, Yamada Denki's 2012 consolidation of Best Denki was permitted on condition that the company transfer five stores in the Kyushu region to Edion. In other words, if Edion pursues consolidation with individual competitors, it may benefit a third-party competitor, depending on the combined regional market shares.

Business

Overview and business model

Background

Establishment

Edion was founded in 2002 as a holding company of Deodeo Corporation in the Chugoku region and Eiden Corporation in the Chubu region. Edion is the third-largest suburban home electronics mass retailer in terms of sales after Yamada Denki and Bic Camera. (For definitions of suburban and urban home electronics mass retailers, see “Market and value chain” below.)

In 2005, the company made Midori Denka Co., Ltd., based in the Kinki region, a subsidiary. In 2007, it converted Ishimaru Electric Co., Ltd., which had been based in the Kanto region (mainly Akihabara), into a consolidated subsidiary. In 2009, the subsidiaries were reorganized into Edion West and Edion East before merging in 2010.

Corporate philosophy

The company’s corporate philosophy is “achieving long-lasting customer satisfaction through outstanding products and reliable service.” According to Edion, to sell “outstanding products” means to focus on the value products provide rather than simply selling products detached from an understanding of their long-term value. Of course, a product’s value drops to zero if it breaks. This is where the company’s commitment to “reliable service” comes into play. Edion places an emphasis on promptly repairing products that become defective so that customers can use them in optimal condition until they reach the end of their product life. In fact, one of Edion’s origin companies, Deodeo, had promoted speedy on-site repairs as far back as the 1960s when it went by the name Daiichi. Daiichi used Japan’s first radio-mounted service car to drive around Hiroshima gathering customer information and keeping a detailed customer ledger, giving rise to the catchphrase “Daiichi responds faster than a police car.”

Home electronics mass retailers

A home electronics mass retailer is a home electronics store that purchases products in huge quantities from manufacturers so that it can employ unique pricing schemes and customer services. The format is one of the main sales channels in the industry’s distribution web, with e-commerce specialist companies constituting another main channel. Wholesalers are also present in the market, but they are often subsidiaries of manufacturers. We have omitted mention of independent retailers in this report due to their small size. The six major home electronics mass retailers have a 70% share of the market (see “Market and value chain” below).

Business overview

As of March 2021, the group comprised Edion Co., Ltd., 13 consolidated subsidiaries, and two equity-method affiliates (see “Consolidated subsidiaries and equity-method affiliates” below). Edion’s main business is selling home electronics, and it operates home electronics retail stores across the nation from Hokkaido to Okinawa. The company does not disclose results or forecasts by segment.

Edion sells home electronics through directly operated stores (including consolidated subsidiary SANKYU Co., Ltd.), franchise stores, and e-commerce site Edion Net Shop. It also offers delivery and repair services at its directly operated stores and franchise stores. As of end-FY03/21, the company had 437 directly operated stores (including 36 non-appliance stores) and 750 franchise stores for a total of 1,187.

Other businesses include the internet service provider business. Subsidiary EDION HOUSE SYSTEM Corporation (wholly owned) handles sales and installation of solar power generation system and home improvement services, and consolidated subsidiary Forest Co., Ltd. sells office supplies and daily necessities through its e-commerce website. Consolidated subsidiary e-Logi Corporation provides delivery/installation services and warehouse management. To further expand the business, Edion acquired Jtop Co., Ltd., an operator of print ad distribution business and logistics services in November 2019, and acquired Youmemiru Corporation, a robot programming education business operator, in December.

In FY03/21, sales were JPY768.1bn (+4.7% YoY), operating profit was JPY26.8bn (+118.0% YoY), recurring profit was JPY27.8bn (+108.1% YoY), and net income was JPY16.6bn (+51.5% YoY).

Business model

Customers

Edion’s customer base is comprised of general consumers concentrated in the Chugoku region (mainly Hiroshima Prefecture; the base of the former Deodeo) and the Chubu region (especially Aichi Prefecture; the base of the former Eiden), and also in Shikoku, Kyushu, and Hokkaido. The company has the top industry share in the following nine prefectures: Hiroshima (54.9%), Tottori (52.5%), Shimane (54.0%), Ehime (43.1%), Fukui (36.6%), Gifu (40.9%), Mie (28.0%), Aichi (30.4%), and Okayama (43.6%) (SR estimates; directly operated stores only). Typical customers have an annual income of at least JPY5.0mn and most are over 45 years old, with seniors comprising a large percentage. Awareness of the Edion brand is beginning to grow among inbound tourists, especially among those coming to Japan on package tours.

Product mix

Looking at the company’s sales in FY03/21 (see table below), home electronics accounted for 55.9% of sales, information appliances for 23.0%, and other products for 21.1%. Home electronics are divided into audio and video products such as TVs and home appliances such as refrigerators, with the latter accounting for 43.2% of sales. Other products include games, toys, and home fixtures.

Products in descending order of sales composition are: 1) washing machines/vacuum cleaners, 2) air conditioners, 3) mobile phones, 4) TVs, and 5) refrigerators. The so-called “white goods” (e.g., 1, 2, and 5) comprise a large part of Edion’s product mix. The company is focusing on the home improvement business, and home renovations accounted for 6.4% of total sales, coming in just after computers.

Edion has been focusing on selling original products for some time. It defines original products as those to which an additional function has been added. More than 90% of the company’s air conditioners are original products, and original products are well represented in other product categories as well. The company also sells private brand products (e angle), which it designs and manufactures in-house.

Number of items handled

The company handles approximately 20,000 items at its directly operated stores of approximately 2,600sqm (regular size), and handles approximately 150,000 products in its e-commerce business.