Tsuruha Holdings, established in 1929 in Asahikawa, Hokkaido, operates a nationwide chain of drugstores. As of FY2020, Tsuruha led Japan’s drugstore industry by store count (2,420 stores) and operating profit (JPY48.4bn) and placed second to Welcia Holdings (TSE1: 3141) in terms of sales (JPY919.3bn). In FY05/20, the sales mix was 21.1% pharmaceuticals, 14.5% cosmetics, 28.3% daily goods, 23.1% food products, and 12.6% other items. While pharmaceutical products are the company’s core offering, it sells a wide range of products that cater to varying regional demand. GPM is 42.2% for pharmaceuticals, 33.3% for cosmetics, 26.9% for daily goods, and 14.4% for food products. The company maintains its high industry ranking through merchandising initiatives that encourage planned purchases (pharmaceuticals and cosmetics) and measures that boost shopping frequency (daily goods and food products).
The company has expanded by aggressively opening stores following an area-dominance strategy. As of end-FY05/21, the number of directly operated stores in Japan was 2,420. The company also had four domestic franchise stores and 22 overseas stores outside the scope of consolidation. The company explains that its strategy of dominating local markets has three advantages: 1) information about potential store locations grows easier to obtain, 2) consumers feel a greater sense of closeness to the company as recognition grows, and 3) administrative costs decrease, boosting profitability. The company tailors stores to regional characteristics. In areas with declining populations, it opens large stores with a wide range of products, including food products and everyday lifestyle items. In metropolitan areas, the company opens smaller shops focused on pharmaceuticals, cosmetics, and daily goods. Business is weighted toward outlying regions: the company derived 16.8% of sales from the Kanto Koshinetsu region and 18.0% from the Chubu and Kansai regions in FY05/21, while the sales share was 17.1% in Hokkaido, 19.7% in Tohoku, and 14.6% in Chugoku.
Major store brands are Tsuruha Drug, Kusurinofukutaro, Drugstore Wellness, Wants, Lady Drug Store, Kyorindo Super Drugstore, B&D Drugstore, and Drug Eleven. These brands reflect the company’s approach of acquiring community-based drugstore chains that are growing and making them subsidiaries. Tsuruha shares its business philosophy of “making life better for our customers” across the group. Once drugstore chains become Tsuruha subsidiaries, they usually continue to operate stores under their own brands and maintain a certain degree of management freedom. At the same time, new subsidiaries benefit from the Tsuruha group’s purchasing power and ability to negotiate prices. As a result, subsidiaries’ sales and profitability increase after joining the group. To date, acquisitions have been a growth driver for Tsuruha.
OTC and prescription drugs are core offerings in the drugstore industry (sales of JPY8.0tn in FY2020). By expanding offerings to include cosmetics, daily goods, and food products, the industry has succeeded in expanding, taking market share from department stores (JPY4.5tn in FY2020) and supermarkets (JPY15.1tn in FY2020). The company will continue working to take market share from dispensing pharmacies (JPY7.5tn in FY2018), especially from those located next to hospitals (and therefore highly dependent on specific medical institutions). It can also benefit from a shift in demand from other business categories in the retail industry. The drugstore industry has been restructuring, with large drugstore chains absorbing small and medium-sized ones. This trend is now extending to large companies as well. Examples include management integration between Matsumotokiyoshi Holdings (TSE1: 3088) and Cocokara Fine (TSE1: 3098) scheduled for October 2021.
For FY05/21, the company reported full-year consolidated sales of JPY919.3bn (+9.3% YoY), operating profit of JPY48.4bn (+7.5% YoY), and net income of JPY26.3bn (-5.8% YoY). The annual dividend payment of JPY167 per share for FY05/21 represents a dividend payout ratio of 30.8%. The rise in sales and operating profit reflected a combination of rising sales at existing stores (+1.1% YoY), restrained spending at the SG&A expense level, and the acquisition of JR Kyushu Drug Eleven. In the wake of the pandemic, Tsuruha stayed with its traditional counseling-based approach to customer service while undertaking initiatives to better accommodate the changes in consumer lifestyles. On the merchandising front, it worked to enhance private brand offerings and to build out sales channels, this effort including makeovers and extensions of its new private brands. With respect to the impact of the pandemic on sales, the company indicated that it was a mixed bag. On the positive side, its stores saw a rise in demand for infection control products and also higher demand for daily necessities, consumables, and food products as people limited their trips outside home in response to state of emergency declarations. Negative impacts included drops in demand from foreign tourists and for products such as cosmetics, and a downturn for demand for seasonal products (mainly cold medicines) during 2H. On the store development front, the company continued to concentrate store openings within certain regions in accordance with its area-dominance strategy and conducted "scrap-and-build" store development on existing stores, opening a total of 138 new stores during the course of the year while closing 75 stores. With the acquisition of JR Kyushu Drug Eleven in May 2020, stores operated by group subsidiaries added another 207 stores to the store count, bringing the total number of group stores under direct management to 2,420 as of end-FY05/21. The company reported a total of 22 group stores in Thailand at end-FY05/21, having opened two new stores and closed an equal number.
For FY05/22, the company projects full-year consolidated sales of JPY956.0bn, operating profit of JPY51.2bn, recurring profit of JPY51.4bn, and net income of JPY28.3bn. The company did not indicate the YoY change represented by these figures due to the application of the Accounting Standard for Revenue Recognition at the start of FY05/22. Under the same revenue recognition standard as FY05/21, the company sees full-year consolidated sales coming in at JPY975.7bn (+6.1% YoY) and operating profit at JPY51.2bn (+5.8% YoY). The company said that there is still uncertainty going forward with the COVID-19 situation, but that it will continue working to enhance its counseling-based approach and make its stores more convenient to shoppers by offering affordable, quality products including private brand offerings. To better meet the changes in consumer lifestyles, the company also plans to continue its efforts to create a one-stop shopping environment at its stores with the addition of product categories such as meat and fresh produce and uniform pricing (JPY100). It will make good use of ID-POS data gathered from its industry-leading drug store chain when putting together marketing initiatives, and will continue to open new dispensing pharmacies, the majority of which will be attached to drug stores. The company said that it plans to open a total of 158 new stores during FY05/22 in locations that will reinforce its regional market dominance, while expanding into new areas. The company expects to pay a dividend of JPY167 per share for the year (representing a dividend payout ratio of 28.6% on projected earnings).
Tsuruha’s medium-term targets are a store count of 3,000 and sales of JPY1.0tn by FY05/24. Its four core strategies call for 1) pursuing specialization and convenience, 2) opening stores based on an area-dominance strategy, 3) increasing private-brand product offerings and heightening their product appeal, and 4) strengthening group organizational capabilities and boosting profitability. Tsuruha’s long-term growth vision is a global store count of 20,000 and sales of JPY6.0tn. The company plans to unveil its new medium-term plan that spans five years from FY05/23 to FY05/27 when announcing FY05/22 results. Shared Research does not expect a major change in its strategic direction, assuming that the new plan will include targets not only for sales and number of stores, but also profit/loss (including operating profit), financial indicators, overseas expansion, and share of dispensing pharmacies.
Shared Research believes Tsuruha’s strengths are 1) an ability to increase market share through products and stores tailored to their locations, 2) growth that leverages acquisitions, and 3) a large scale of business that leads to economies of scale in procurement.
We think its weaknesses include 1) room for improvement in private brands, which can serve as a differentiator and boost profitability, 2) sacrificing demand opportunities by being slow to use cutting-edge technology to leverage customer data, and 3) low recognition of the “Tsuruha” brand. (See the “Strengths and weaknesses” section for details.)
|Gross profit margin||28.4%||28.2%||28.2%||28.3%||28.7%||28.6%||28.6%||29.0%||29.0%||30.0%|
|Operating profit margin||6.4%||6.2%||6.1%||5.9%||6.1%||6.0%||5.3%||5.4%||5.3%||5.4%|
|Recurring profit margin||6.9%||6.5%||6.4%||6.2%||6.4%||6.2%||5.5%||5.5%||5.2%||5.4%|
|Per-share data (split-adjusted; JPY)|
|Shares outstanding (ex. treasury shares; year-end; mn)||47.6||47.8||47.4||47.8||48.0||48.2||48.4||48.4||48.5||-|
|EPS (fully diluted; JPY)||281.9||301.6||358.3||401.1||505.4||511.4||511.7||574.8||539.9||-|
|Dividend per share (JPY)||65.0||70.5||88.0||108.0||140.0||146.0||148.0||167.0||167.0||167.0|
|Book value per share (JPY)||2,176||1,218||2,766||3,171||3,567||3,959||4,238||4,821||5,210.9||-|
|Balance sheet (JPYmn)|
|Cash and cash equivalents||41,609||32,338||35,977||69,347||54,516||44,262||43,833||57,069||116,531|
|Total current assets||102,376||111,362||118,892||174,991||159,278||166,771||184,830||211,776||309,782|
|Tangible fixed assets||13,185||20,514||23,171||35,595||38,326||53,365||61,254||66,810||77,050|
|Investments and other assets||36,952||45,123||54,211||64,573||68,286||88,362||89,403||102,158||109,794|
|Total current liabilities||52,396||64,848||71,762||119,370||94,262||112,321||126,783||136,274||210,216|
|Total fixed liabilities||6,174||8,581||10,301||18,881||17,407||21,439||25,296||26,794||50,282|
|Total net assets||104,138||120,056||131,791||155,290||170,342||203,989||220,214||250,934||276,528|
|Total interest-bearing debt||934||776||468||8,709||7,279||8,802||14,275||11,615||38,737|
|Cash flow statement (JPYmn)|
|Cash flows from operating activities||14,134||13,691||23,790||49,118||3,700||27,199||33,701||40,636||76,459|
|Cash flows from investing activities||-18,874||-4,390||-13,549||-6,768||-24,365||-17,028||-24,990||-16,927||-30,204|
|Cash flows from financing activities||-1,783||-8,567||-7,613||-2,982||-6,160||-8,538||-9,136||-10,473||13,207|
Tsuruha Holdings Inc. announced monthly sales data for October 2021; see the monthly trends section for details.
|(JPYmn)||Q1||Q1–Q2||Q1–Q3||Q1–Q4||Q1||Q1–Q2||Q1–Q3||Q1–Q4||Q1||Q1–Q2||Q1–Q3||Q1–Q4||% of 1H||FY Est.|
|Gross profit margin||28.6%||28.7%||28.9%||29.0%||29.0%||29.0%||29.0%||29.0%||29.3%||-||30.0%|
|Operating profit margin||6.0%||5.7%||5.8%||5.4%||6.7%||6.2%||5.8%||5.3%||5.5%||-||5.4%|
|Recurring profit margin||6.2%||5.9%||6.0%||5.5%||6.8%||6.2%||5.8%||5.2%||5.5%||-||5.4%|
|Gross profit margin||28.6%||28.8%||29.2%||29.5%||29.0%||29.1%||28.8%||29.2%||29.3%|
|Operating profit margin||6.0%||5.4%||6.1%||3.9%||6.7%||5.6%||5.1%||3.7%||5.5%|
|Recurring profit margin||6.2%||5.6%||6.2%||4.1%||6.8%||5.7%||4.8%||3.5%||5.5%|
|Performance by product||FY05/20||FY05/21||FY05/22||FY05/22|
|Quarterly (JPYmn)||Q1||Q2||Q3||Q4||Q1||Q2||Q3||Q4||Q1||Q2||Q3||Q4||% of 1H||FY Est.|
|Gross profit margin||28.6%||28.8%||29.2%||29.5%||29.0%||29.1%||28.8%||29.2%||29.3%||-||-|
|Gross profit margin||28.6%||28.6%||29.2%||29.2%||28.9%||28.9%||28.6%||29.2%||29.2%||-||-|
|Gross profit margin||41.6%||41.4%||40.9%||43.7%||41.6%||43.3%||41.3%||42.5%||41.0%||-||-|
|Gross profit margin||37.2%||36.8%||34.6%||39.3%||37.5%||42.1%||37.9%||38.5%||36.3%||-||-|
|Gross profit margin||45.3%||45.3%||46.3%||47.8%||45.2%||44.4%||44.6%||46.3%||45.6%||-||-|
|Gross profit margin||33.0%||33.0%||33.6%||32.7%||33.8%||32.8%||33.0%||33.6%||32.2%||-||-|
|Gross profit margin||25.6%||24.2%||26.1%||26.8%||27.3%||26.9%||27.1%||26.3%||28.9%||-||-|
|Gross profit margin||15.0%||17.2%||12.7%||16.1%||14.9%||14.1%||13.9%||14.7%||15.7%||-||-|
|Gross profit margin||31.0%||31.8%||37.1%||34.7%||32.8%||32.2%||33.4%||32.8%||32.6%||-||-|
|Dispensing fees (JPYmn)||20,525||21,401||21,619||22,052||21,090||22,836||23,878||25,225||24,296|
|Gross profit (JPYmn)||7,635||7,877||7,491||8,668||7,909||9,618||9,053||9,702||8,819|
|Gross profit margin||37.2%||36.8%||34.6%||39.3%||37.5%||42.1%||37.9%||38.5%||36.3%|
|No. of prescriptions ('000)||2,065||2,114||2,128||1,945||1,939||2,179||2,172||2,360||2,328|
|Price per prescription (JPY)||9,939||10,123||10,159||11,338||10,877||10,480||10,994||10,689||10,436|
|No. of dispensing pharmacies||576||590||594||615||623||661||669||683||696|
|Private brand (PB) products||FY05/20||FY05/21||FY05/22|
|Total PB products||14,208||14,274||16,048||15,587||16,178||15,411||16,880||15,522||18,589|
|M's one, Medis' one||6,628||5,085||4,271||5,880||4,680||4,773||4,397||3,217||2,539|
|Total PB products||6,607||6,438||7,662||7,188||7,167||6,859||7,204||6,735||8,105|
|Gross profit margin||46.5%||45.1%||47.7%||46.1%||44.3%||44.5%||42.7%||43.4%||43.6%|
|Number of SKUs|
|Total PB products||1,958||-||-||-||2,664||2,632||2,601||2,583||3,083|
|Store count by group company||FY05/20||FY05/21||FY05/22||FY05/22|
|Store count (incl. dispensing pharmacies)|
|Tsuruha Group Drug & Pharmacy Nishinihon||285||285||283||286||286||285||288||298||302||320|
|Lady Drug Store||216||226||226||228||228||228||229||228||229||238|
|Kyorindo Group Holdings||82||83||83||84||86||87||86||87||88||91|
|Tsuruha Group Merchandising||1||1||1||1||1||1||1||1||1||1|
|Tsuruha Group Drug & Pharmacy Nishinihon||1||2||2||2||3||1||3||10||5||25|
|Lady Drug Store||2||11||1||2||3||2||1||2||1||12|
|Kyorindo Group Holdings||1||1||1||1||2||1||1||1||1||4|
|Tsuruha Group Merchandising||-||-||-||-||-||-||-||-||-||-|
|Tsuruha Group Drug & Pharmacy Nishinihon||2||2||4||-||3||2||1||-||1||3|
|Lady Drug Store||2||1||1||-||3||2||-||3||-||2|
|Kyorindo Group Holdings||-||-||1||-||-||-||2||-||-||-|
|Tsuruha Group Merchandising||-||-||-||-||-||-||-||-||-||-|
|Kanto and Koshinetsu||2.4%||3.0%||2.8%||4.0%||3.7%||1.9%||1.2%||-0.4%||-4.2%|
|Chubu and Kansai||0.0%||1.8%||1.5%||1.3%||1.0%||-0.8%||-0.6%||-2.2%||-1.2%|
|Kyushu and Okinawa||12.4%||19.5%||24.0%||23.6%||11.5%||12.8%||10.3%||8.7%||10.5%|
|Store count by region||FY05/20||FY05/21||FY05/22||FY05/22|
|Kanto and Koshinetsu||449||459||464||473||477||486||488||493||498||524|
|Chubu and Kansai||226||227||228||233||231||235||231||237||234||247|
|Kyushu and Okinawa||23||23||22||23||20||219||216||216||213||220|
|Kanto and Koshinetsu||4||13||7||11||7||11||4||13||10||38|
|Chubu and Kansai||4||2||3||5||3||4||4||6||1||15|
|Kyushu and Okinawa||-||-||-||-||-||2||1||4||-||14|
|Kanto and Koshinetsu||11||3||2||2||3||5||2||8||5||7|
|Chubu and Kansai||1||1||2||-||5||-||8||-||4||5|
|Kyushu and Okinawa||-||-||1||-||3||5||4||4||3||10|
Sales: JPY235.7bn (+4.9% YoY)
Operating profit: JPY12.9bn (-15.0% YoY)
Recurring profit: JPY12.9bn (-15.6% YoY)
Net income attributable to owners of the parent: JPY7.5bn (-17.5% YoY)
The company adopted the Accounting Standard for Revenue Recognition (Accounting Standards Board of Japan [ASBJ] Statement No. 29, March 31, 2020) from Q1 FY05/22. Under the new standard, accounting methods for reward points awarded to customers in connection with product sales and consignment transactions will change. The adoption of the new standard depressed Q1 sales by 2.6% YoY and gross profit by 2.0% YoY, while reducing SG&A expenses by 2.7% YoY.
Sales were up 4.9% YoY (up 2.2% under the previous accounting standard, excluding sales contributions from Drug Eleven). Despite a 2.1% YoY decline in comparable store sales due to a falloff in stay-at-home demand and special demand for masks and disinfectants seen in Q1 FY05/21, sales grew YoY owing to the consolidation of Drug Eleven, increases in store count (opened 29, closed 19), and contributions from stores opened in FY05/21.
Gross profit was JPY69.1bn (+6.2% YoY), and gross profit margin was 29.3% (+0.3pp YoY). The increases in gross profit and GPM were attributed to improved product mix on an increase in high-margin prescription drug sales.
SG&A expenses were JPY56.2bn (+12.7% YoY) and the SG&A expense-to-sales ratio was 23.9% (+1.7pp YoY). SG&A expenses rose due to the consolidation of new subsidiary Drug Eleven and increased store count, but were still below plan. Travel and transportation expenses declined as the company curtailed business trips and online meetings took root within the group. Further, the company reduced the scale of store opening and other sales events. These factors helped the company keep SG&A expenses under control.
Personnel expenses were JPY29.1bn (+13.7% YoY), accounting for 12.3% of sales (+0.9pp YoY). Personnel expenses increased as a result of having made Drug Eleven a subsidiary among other factors, but they were still below budget. The introduction of a shift scheduling system led to a decline in overtime work and working hours of part-time employees, contributing to greater-than-expected cuts to personnel expenses.
Sales promotion expenses were JPY913mn (-56.6% YoY), accounting for 0.4% of sales (-0.5pp YoY). The decline was attributed to the change in accounting standards. Under the previous accounting standard, the amount equivalent to reward points awarded to customers at the time of product sales were booked as provisions for points under SG&A expenses. However, after the adoption of the new standard in Q1, the amount equivalent to reward points awarded were subtracted from the sales amount, causing sales promotion expenses to fall YoY. Note that if the previous standard had been applied, sales promotion expenses in Q1 would have been flat YoY.
Other expenses were JPY13.9bn (+27.0% YoY), accounting for 5.9% of sales (+1.0pp YoY). The cost of COVID-19-related items, such as masks distributed to employees and hand sanitizers provided in-store, expanded. The company also saw a rise in commissions paid to card companies as more customers opted for cashless payments.
As a result of the above, operating profit came to JPY12.9bn (-15.0% YoY), recurring profit JPY12.9bn (-15.6% YoY), and net income attributable to owners of the parent JPY7.5bn (-17.5% YoY).
Versus the company's full-year forecast for FY05/22, Q1 sales were 24.7% (24.4% of full-year results in Q1 FY05/21), operating profit was 25.2% (31.3%), recurring profit was 25.2% (32.1%), and net income attributable to owners of the parent was 26.6% (34.8%). Store openings and closures and comparable store sales were in line with plan, and Q1 sales were largely as expected. Operating profit exceeded the plan owing to greater-than-expected reductions to SG&A expenses.
The FY05/22 forecast assumes increases in sales and profits in 2H. The company expects consumers to return to pre-pandemic lifestyles as more people get vaccinated against COVID-19 in autumn and onward, and hence anticipates higher sales of cold medicines and prescription drugs, as well as cosmetics. The company has factored into its forecast the effect of ongoing shelter-in-place demand, but it does not expect recovery in inbound demand from foreign tourists to Japan during the fiscal year. The external environment remains unpredictable due to uncertainties surrounding the progress of COVID-19 vaccination programs as well as the possibility of a sixth wave of infections and subsequent state of emergency declarations.
On the store development front, the company made progress largely as planned in concentrating store openings and rebuilding existing stores in the Tohoku and Kanto Koshinetsu region based on its area-dominance strategy. The company opened 19 dispensing pharmacies in Q1. It plans to open 91 stores in FY05/22, a greater number of openings than in previous fiscal years, and is making progress according to the plan. The company remodeled 77 stores, mainly for the purpose of changing in-store layouts to introduce meat and fresh produce and products priced at JPY100.
Comparable store sales were down YoY, but were largely as expected. In Q1 FY05/21, many customers visited the company stores to only purchase infection prevention products, such as masks and disinfectants, amid the COVID-19 crisis and did not purchase other items; as a result, while customer traffic rose, customer spend fell. In Q1 FY05/22, however, in reaction to the trend a year ago, customer traffic declined but customer spend increased. Number of items per purchase increased on enhanced lineup of food products and increased product offerings under new categories such as products uniformly priced at JPY100. This has also led to growth in customer spend in recent years.
In addition to increased demand for infection control products due to the COVID-19 pandemic, demand for daily goods and food products increased as consumers spent more time at home as they refrained from unnecessary outings. Meanwhile, demand for cosmetics declined.
Pharmaceuticals: JPY47.2bn (+5.3% YoY)
OTC drugs: JPY23.4bn (-1.3% YoY)
Demand for antipyretic analgesics increased as more people received COVID-19 vaccinations, but sales of seasonal products including topical skin products (e.g., insect bite relief products and athelet's foot treatments) were sluggish, resulting in a YoY decline in OTC drugs sales. Sales of cold medicines and liquid medicines, which had been slow since the beginning of the pandemic, began to recover.
Prescription drugs: JPY23.7bn (+12.6% YoY), number of prescriptions filled: 2.3mn (+16.2% YoY), unit price: JPY10,538 (-3.1% YoY)
In Q1 FY05/21, the number of prescriptions filled declined due to restrictions on outpatient visits in the wake of the COVID-19 pandemic, but the unit price per prescription rose as more prescriptions covered longer terms. In Q1 FY05/22, however, the unit price fell as restrictions on outpatient visits were relaxed, but overall sales of prescription drugs rose owing to an increase in the number of prescriptions filled. Gross profit margin for prescription drugs was down to 36.3% (versus 37.5% in Q1 FY05/21), but this was a tentative figure which took into account the effects of drug price revisions. The company expects price negotiations to come to an end in November 2021, and plans to retroactively adjust the GPM based on the newly agreed upon drug prices; it expects the GPM to rise.
Cosmetics: JPY32.3bn (-0.5% YoY)
Sales were dull, hurt by consumers staying at home and wearing masks, and the disappearance of inbound tourist demand. While demand is recovering, the pace of recovery is slower than initially expected. Sales of cosmetics sold by beauty advisors—salespersons from cosmetics manufacturers that directly market their company's products in retail stores—were largely flat YoY. While cosmetics sales at the company fared better compared to competitors due to efforts to strengthen counseling and digitize cosmetics ledger, sales were below initial expectations. Sales of general cosmetics were back to the year-ago level supported by favorable performance of Korean beauty ("K-beauty") products and seasonal products, such as deodorants and sunscreens, driven in part by heat waves.
Daily goods: JPY65.8bn (+1.3% YoY)
Sales of cleaning products, kitchen detergents, and haircare products continued to grow supported by stay-at-home demand. In Q1 FY05/21, sales were up 15.1% YoY due to the stay-at-home demand, but in Q1 FY05/22, sales were even higher YoY. As time spent at home increased due to restrictions on travel and eating out, consumers tended to opt for quality products, despite these products carrying higher price tags. In response to this shift in consumer demand, the company enhanced its lineup of quality, high-priced items and volume products, rolled out aggressive sales promotions, and adjusted shelf space allocation, which led to higher sales. The company expects to see similar trends in the daily goods category from Q2 onward.
Food products: JPY56.2bn (+6.1% YoY)
Sales were up versus Q1 FY05/21, when sales grew 12.3% YoY on the back of stay-at-home demand. Sales of frozen foods, alcoholic beverages, and snacks continued to grow. The number of stores selling meat and fresh produce increased. At these stores, there was a knock-on effect of higher sales of processed foods as well, which saw a 10–20% YoY rise in sales.
Other items: JPY28.3bn (-0.5% YoY)
Sales of medical supplies, such as masks, disinfectants, and thermometers, and infection control products (hand soaps, etc.) fell in reaction to a surge seen in Q1 FY05/21.
Tsuruha worked to streamline store operations and increase opportunities to interact with customers through introducing and utilizing digital tools.
The company digitized its cosmetics ledgers which had previously been managed using paper at each store. The shift contributed to enhanced sales promotions, enabling the company to efficiently send direct mails to loyal customers and link its service with smartphone apps to send coupons around the time customers would require refills or replacements. Because less time is required to manage digital ledgers than paper-based ledgers, employees now have more time to interact with customers. In the longer term, the company looks to utilize big data, and plans to build infrastructure to this end. Only a few drug store chains have undertaken digitization of cosmetics ledgers as the company has done, and the company thinks this will serve to differentiate itself from competitors in the future.
The company installed a staffing support system. Previously, store managers created shift schedules based on their experience and judgement. However, with the introduction of the system, it became possible to optimize staff allocation while taking into consideration sales projections and other factors, increasing the efficiency of store managing operations. The company introduced the system at all Tsuruha stores in FY05/21. It estimates the optimization of shift schedules for regular and part-time employees will have a positive impact equivalent to some JPY300mn annually. The company is working to introduce the system at its subsidiaries one by one, and in October 2021, plans to introduce the system at all Lady Drug Stores and pilot test the system at Kusurinofukutaro stores.
To expand customer contact points, the company focused on attracting app members. The number of app members reached 4.0mn at end-August 2021. The company sent coupons and product recommendations to app members and rolled out other initiatives aimed at realizing one-on-one marketing.
Tsuruha intends to respond to changes in consumer behaviors by increasing the convenience of one-stop shopping, utilizing the strength of its brick-and-mortal stores.
At end-Q1 FY05/22, the company had 637 stores offering meat and fresh produce. The GPM on meat and fresh produce is lower than the average for all food products because they are sold on commission. However, stores that sell meat and fresh produce contribute to a net increase in gross profit and higher sales of other products because customers visit more frequently and buy multiple items at these stores offering a one-stop shopping service. The company targets 900 stores selling meat and fresh produce by the end of FY05/22, and aims for an annual net increase of 100 such stores thereafter.
The company stepped up its efforts to introduce products uniformly priced at JPY100. The introduction of these products has led to about a 10% increase in customer traffic. The company will introduce JPY100 products to large stores only since they require a certain floor space.
Kanto Shipping Center, a new distribution base for handling e-commerce products, is slated to commence operations in November 2021. Currently, the company is outsourcing shipping operations for products ordered online to Wolt and foodpanda. The company expects that by bringing product delivery operations in-house, it will be able to strengthen its shipping capabilities and lower shipping costs.
The company is working to enhance its in-store pick up service for items ordered online. In March 2021, in collaboration with Yamato Transport, Ltd., the company introduced its in-store pick up service for items ordered online at 386 locations of Tsuruha Drug stores in Hokkaido. In September 2021, the company installed Amazon Hub Lockers, lockers dedicated for picking up packages from Amazon, at some Tsuruha Drug stores.
Drug Eleven appears to need a greater turnaround than the company initially thought. Sales at Drug Eleven is on a downtrend as the subsidiary continues to close unprofitable stores, but gross profit margin is improving due to the introduction of the Tsuruha group's private-brand products and a decline in procurement costs following supplier integration. Drug Eleven has many small stores that have not been remodeled for many years, and also has a large proportion of suburban stores (75% of the total; the other 25% are near railway stations). The company is expanding floor space at the suburban stores by remodeling and full renovation, converting them to the Tsuruha format, and increasing the sales area for food products including fresh meat and produce. Drug Eleven has a high level of customer service and its ability to sell cosmetics and other products. In addition, the management team is responding to PMI with speed. Once store renovations including changes in store formats and scrap-and-build projects are complete, the subsidiary is expected to contribute to consolidated earnings.
The company is strengthening its development and sales for private-brand products. The company group's new Kurashi Rhythm/Kurashi Rhythm Medical series of private-brand products are high in quality yet affordable, and as a result are well received by customers. The company targets 850 SKUs by end-FY05/22 (versus 757 SKUs at end-Q1), and aims to bolster product development with a focus on food products. The gross profit margin on private-brand products is expected to fall as a result of a rise in the share of food products in the sales mix, but overall GPM for all products, including new-brand products, is expected to increase.
In response to the heightened interest among investors in ESG and sustainability, the company defined its key issues as the following: 1) "making life better for our customers"; 2) creating a comfortable and rewarding work environment for all employees; 3) addressing environmental issues for next generation; 4) collaborating with partners; and 5) promoting governance. The company plans to disclose KPIs related to these issues going forward.
|(JPYmn)||1H||2H||FY||1H Act.||2H Act.||FY||1H Est.||2H Est.||FY Est.|
|Cost of sales||296,852||299,922||596,774||321,859||330,723||652,581||331,700||337,800||669,500|
|Gross profit margin||28.7%||29.4%||29.0%||29.0%||29.0%||29.0%||29.7%||30.2%||30.0%|
|Operating profit margin||5.7%||5.0%||5.4%||6.2%||5.0%||5.3%||5.2%||5.5%||5.4%|
|Recurring profit margin||5.9%||5.1%||5.5%||6.2%||4.9%||5.2%||5.2%||5.5%||5.4%|
The company did not indicate the YoY change represented by these figures due to the application of the Accounting Standard for Revenue Recognition at the start of FY05/22. The main impact of the change in accounting standard is that the net amount of commission will be recorded as sales for outsourced transactions, and loyalty points will be deducted from sales revenue when the points are issued (previously loyalty points were deducted from sales when the points are used).
The company will continue to take an area-dominant approach to opening new stores. The company plans to open a record 158 stores in FY05/22 (versus 138 in FY05/21 and 129 in FY05/20). The new stores will mainly be to strengthen its area-dominant strategy and increase market share in Hokkaido, Tohoku, northern Kanto, Chugoku, and Shikoku areas. Competitors such as Cosmos Pharmaceutical and Kusuri no Aoki are accelerating the opening of new stores, mainly in suburban areas, leading to a loss of market share for Tsuruha in some areas, where the company will go on the offensive. That being said, the company will not open stores just for the sake of gaining market share. The company will decide on where to open new stores on the basis of each store being profitable, and the profit expected in each area, ensuring that its stores do not compete against each other in the same area.
The company plans to open 91 dispensing pharmacies that are part of drugstores (net increase of 68 stores in FY05/21), which is a high level compared to past store openings. Drugstores with dispensing pharmacies account for 28% of the total, far below the target 50%. The company plans to open dispensing pharmacies in drugstores that are likely to attract a large number of prescriptions. In addition to securing the number of prescriptions by promoting on-site advice for patients, such as visiting nursing care facilities to fill prescriptions, the company will improve profitability by introducing dispensing equipment and enhancing operational efficiency through systemization, and will open new stores in locations that it has not been able to open in the past. In terms of the number of pharmacists, the company has been hiring steadily so there are little obstacles to opening new stores.
The company forecasts a 2.3% YoY increase (+0.4% YoY in 1H and +4.3% YoY in 2H) in comparable-store sales (comparison based on sales before the application of the Accounting Standard for Revenue Recognition).
The company assumes that the economic climate will remain unstable in 1H because of the lasting impact of COVID-19, as well as a reactionary slump in sales of COVID-19-related products such as masks, disinfectants, and hand soap. However, it expects a recovery in sales of cosmetics, whose decline appears to have run its course.
Sales were weak overall in 2H FY05/21. The surge in demand for COVID-19-related products subsided, while sales of products such as cosmetics declined due to the disappearance of inbound tourist demand. Sales of cold remedies were also weak, because consumers stepped up their infection prevention measures. In 2H FY05/22, the company forecasts a rebound from the year-ago slump, with the economy recovering as a result of progress with COVID-19 vaccinations, and a rise in per-customer spending on daily goods as the company increases its range of high quality, large-volume product offerings.
Remodeling is planned at 290 stores with a total budget of around JPY5.0bn. The company remodeled 200 stores in FY05/21 at a cost of JPY3.0bn, on par with previous years.
The company forecasts GPM of 29.5%, a 0.5pp YoY rise based on the calculation before the adjustment of the Accounting Standard for Revenue Recognition. This assumption factors in the improved product mix from a recovery in demand for cosmetics and dispensing, which have a high GPM, and synergy in procurement with JR Kyushu Drug Eleven.
The company forecasts SG&A expense ratio of 24.2%, a 0.5pp YoY rise (on a basis prior to the application of the Accounting Standard for Revenue Recognition).
The company expects an increase in depreciation associated with capex, because it is stepping up the opening of new stores and store remodeling, as well as higher personnel expenses from increasing its work force. The trend of customers preferring cashless payments is likely to continue, which will increase fees paid to card companies. A 2–3% increase in the share of cashless payments adds an estimated several hundred million yen in fees, which will have a considerable impact on earnings. The company is also factoring in the cost of infection-prevention measures such as supplying masks to employees and providing hand sanitizer for customers through 1H. The company has also budgeted the expected rise in the minimum wage.
The company plans to install the shift management and other systems deployed at Tsuruha stores in FY05/21 to its subsidiary stores. Tsuruha recorded gains of JPY200–300mn from staffing optimization in FY05/21. The company expects the system to have a positive effect on its subsidiary stores and it to be further utilized by Tsuruha stores.
The company said that there is still uncertainty going forward with the COVID-19 situation seemingly changing day by day, but that it will continue working to enhance its counseling-based approach and make its stores more convenient to shoppers by offering affordable, quality products including private brand offerings. To better meet the changes in consumer lifestyles, the company also plans to continue its efforts to create a one-stop shopping environment at its stores with the addition of product categories such as meat and fresh produce and uniform pricing (JPY100). It will make good use of ID-POS data gathered from its industry-leading drug store chain when putting together marketing initiatives, and will continue to open new dispensing pharmacies, the majority of which will be attached to drug stores. In FY05/20, the company explored ways to make its stores and services more responsive to changes in lifestyle and consumption amid the prolonged pandemic.
The company will adopt and utilize digital tools to simplify in-store operation, gain customer service opportunities, and streamline administrative processes.
Increase number of app members: The company is focused on increasing the number of app members. As of end-FY05/21, the company had 3.5mn app members, now aiming to double this figure to 7.0mn by end-FY05/22. There is data to suggest that app members visit stores 50% more and spend 10% more than conventional loyalty card members. The company plans to gather customer data and categorize customers into 30 or more categories based on how often they visit stores and trends in products that they purchase. This will allow the company to engage in optimized, specific sales promotions depending on customer attributes. This policy will be at an experimental stage in FY05/22. The company expects it to make a positive contribution from FY05/23.
Digitalization of in-store operation: The new shift management system adopted by Tsuruha stores will be adopted by other group business companies. Digitalizing the customer record for cosmetics (which has been managed manually) is also expected to streamline store operations.
Tsuruha formed a business alliance with delivery service company, Wolt Japan. Tsuruha began a product delivery service in FY05/21 at seven stores in Hokkaido and plans to expand the service in other areas in stages.
The company will continue PMI of JR Kyushu Drug Eleven. It aims to increase customer traffic by selling fresh meat and produce at stores. Also, it will increase sales of its private brand Kurashi Rhythm products, revitalizing existing stores by remodeling and aim to improve GPM by centralized purchasing. Full remodeling is scheduled for 10 stores and scrap-and-build for seven stores in FY05/22. In three fiscal years (FY05/22–FY05/24), the company targets 60–70 stores for remodeling/scrap-and-build. Although Tsuruha forecasts flat earnings at JR Kyushu Drug Eleven for one or two fiscal years, it is starting to see signs of earnings recovery on the refurbished stores.
The company is expanding the range of products sold at stores to increase customer traffic and number of items per purchase. Fresh meat and produce will be sold at 740 stores. The company plans to launch a range of items priced at JPY100 at stores with large-floor space. Sales at subsidiary B&D is steady, and wide range of products will be sold at other subsidiaries stores going forward.
The company targets private brand product sales of JPY70.0bn (+8% YoY), which will represent 8.5% of sales in FY05/22. It will pay particular emphasis on sales of its quality private brand Kurashi Rhythm series, with a target of 850SKU (+14% YoY) by the end of FY05/22.
|Store count by group company||FY05/12||FY05/13||FY05/14||FY05/15||FY05/16||FY05/17||FY05/18||FY05/19||FY05/20||FY05/21||FY05/22|
|Store count (incl. dispensing pharmacies)|
|Tsuruha Group Drug & Pharmacy Nishinihon||44||56||200||220||233||255||266||286||286||298||320|
|Lady Drug Store||-||-||-||-||209||207||217||216||228||228||238|
|Kyorindo Group Holdings||-||-||-||-||-||-||80||81||84||87||91|
|JR Kyushu Drug Eleven||-||-||-||-||-||-||-||-||-||199||195|
|Tsuruha Group Merchandising||1||1||1||1||1||1||1||1||1||1||1|
|Tsuruha Group Drug & Pharmacy Nishinihon||7||12||11||20||22||24||20||25||7||17||25|
|Lady Drug Store||-||-||-||-||6||12||18||14||16||8||12|
|Kyorindo Group Holdings||-||-||-||-||-||-||3||1||4||5||4|
|JR Kyushu Drug Eleven||-||6||7|
|Tsuruha Group Merchandising||-||-||-||-||-||-||-||-||-||-||-|
|Tsuruha Group Drug & Pharmacy Nishinihon||-||-||9||5||9||2||9||7||8||6||3|
|Lady Drug Store||-||-||-||-||6||14||8||15||4||8||2|
|Kyorindo Group Holdings||-||-||-||-||-||-||1||-||1||2||-|
|JR Kyushu Drug Eleven||-||-||-||-||-||-||-||-||-||13||11|
|Tsuruha Group Merchandising||-||-||-||-||-||-||-||-||-||-||-|
|Tsuruha Group Drug & Pharmacy Nishinihon||-||-||-||-||-||-||-||84||92||103||-|
|Lady Drug Store||-||-||-||-||-||-||-||50||54||55||-|
|Kyorindo Group Holdings||-||-||-||-||-||-||-||60||67||67||-|
|JR Kyushu Drug Eleven||-||-||-||-||-||-||-||-||-||20||-|
|Results vs. Initial Est.||FY05/12||FY05/13||FY05/14||FY05/15||FY05/16||FY05/17||FY05/18||FY05/19||FY05/20||FY05/21|
|Revenue (Initial Est.)||313,823||339,600||362,000||441,000||462,900||583,000||600,000||743,600||820,000||860,000|
|Results vs. Initial Est.||2.3%||1.0%||7.3%||-0.1%||14.0%||-1.0%||12.2%||5.2%||2.6%||6.9%|
|Operating profit (Initial Est.)||16,552||20,380||23,500||28,000||29,200||37,100||39,000||41,800||43,700||45,200|
|Operating profit (Results)||19,067||22,001||24,101||26,905||31,342||35,284||40,236||41,826||45,013||48,377|
|Results vs. Initial Est.||15.2%||8.0%||2.6%||-3.9%||7.3%||-4.9%||3.2%||0.1%||3.0%||7.0%|
|Recurring profit (Initial Est.)||17,308||21,167||24,311||28,900||30,060||37,900||40,340||43,190||42,500||46,484|
|Recurring profit (Results)||19,948||23,821||25,321||27,985||32,623||36,841||41,610||43,313||46,298||47,688|
|Results vs. Initial Est.||15.3%||12.5%||4.2%||-3.2%||8.5%||-2.8%||3.1%||0.3%||8.9%||2.6%|
|Net income (Initial Est.)||8,921||11,587||13,728||16,570||17,750||23,460||24,740||25,380||26,100||27,000|
|Net income (Results)||10,594||13,461||14,563||17,210||19,323||23,232||24,798||24,824||27,899||26,283|
|Results vs. Initial Est.||18.8%||16.2%||6.1%||3.9%||8.9%||-1.0%||0.2%||-2.2%||6.9%||-2.7%|
|Store count (incl. dispensing pharmacies)||1,931||2,082||2,150||2,420||3,000||7.6%|
At its FY05/18 results briefing in June 2018, the company announced its current medium-term plan. Targets to be achieved by FY05/24 are a store count of 3,000 (CAGR of 7.6% over six years) and sales of JPY1.0tn (6.8%).
The company plans to announce a new five-year medium-term plan (FY05/23–FY05/27) at its FY05/22 results briefing, due in part to the outlook for achieving its JPY1tn sales target earlier than expected after posting sales of JPY919.3bn in FY05/21. We do not expect a major change in its strategic direction, assuming that the new plan will include targets not only for sales and number of stores, but also profit/loss (including operating profit), financial indicators, and business strategy targets such as overseas expansion and share of dispensing pharmacies.
By end-FY05/21, the company’s store count was 2,420 (directly operated stores in Japan). The company will need to achieve a net increase of 580 stores from FY05/22 to achieve a store count of 3,000 by FY05/24. The company plans to open 158 new stores in FY05/22, bringing the total store count to 2,578 at end-FY05/22. As well as opening new stores every year, the company is considering acquisitions (“when they make sense”) . Jun Tsuruha, who became company president in June 2020, indicated that the company is expanding its M&A options and will not limit its M&A activities to drug stores; the company will also consider acquiring supermarkets and other businesses from different industries.
Acquisitions of Kyorindo (September 2017), B&D (May 2018), and JR Kyushu Drug Eleven (May 2020) increased the company’s likelihood of reaching its JPY1tn sales target earlier than initially planned. Notably, by meeting regional demand for food products and having spacious stores, Kyorindo delivers substantially higher average per-store sales than other stores in the group: JPY1.3bn (FY05/21), which is far higher than the group average of JPY380mn.
The company has not set any explicit profit or ROE targets. Shared Research understands the company intends to maintain GPM of around 30% and OPM of 6.0% or more (in FY05/21, GPM was 29.0% and OPM was 5.3%).
The company has outlined four policies for meeting its goals. The first, pursuing specialization and convenience, involves stepping up counseling surrounding such core areas as pharmaceutical products, cosmetics, and dispensing, as well as tailoring stores to small commercial areas. The second policy is opening stores based on an area-dominance strategy. Here, the company intends to roll out group stores and increase store numbers through acquisitions. The third policy involves increasing private-brand product offerings and heightening their product appeal. Under this policy, the company intends to raise brand value by developing quality private-brand products. Fourth, Tsuruha aims to strengthen group organizational capabilities and boost profitability. Mainly, this means increasing economies of scale and maximizing group synergies.
By pursuing specialization, Tsuruha has in mind increasing sales of pharmaceutical products and cosmetics and raising margins. The company plans to increase the number of prescriptions it handles by raising the number of drugstores with dispensaries and hiring more pharmacists. It aims to boost sales by taking market share from pharmacies located next to hospitals (monzen pharmacies), which fill a high percentage of prescriptions from specific medical institutions. In OTC drugs, Tsuruha aims to put in place a structure for providing employee training to augment the product knowledge of people in charge of sales and increase counseling capabilities, giving customers peace of mind when purchasing private-brand products. In cosmetics, the company aims to boost product knowledge centering on products offered through manufacturer tie-ups. Through these measures, Tsuruha aims to increase groupwide sales and increase profitability.
For food products, Tsuruha intends to strengthen product lineups to match the characteristics of regions where its stores are located. Rather than increasing the number of product items, the company plans to focus product portfolios on daily lifestyle essentials, as well as frozen and other processed foods. These moves aim to heighten convenience by reducing shopping frequency, i.e., eliminating the need to shop at multiple stores, and the amount of time spent purchasing necessary items. We understand that Tsuruha aims to minimize offerings of products that require diligent quality control, such as fresh seafood and prepared foods. Even in areas with low population density, the company aims to cultivate demand by offering food products (and thus taking market share away from other types of businesses in the retail industry), ensuring sufficient profits even at stores in small communities.
Under its current framework, Tsuruha plans to add around 100 net stores each year. It intends to use an area-dominance strategy when selecting new-store areas. Of the regions the company operates in, there are cities where the company has over 50% market share, made possible by concentrated opening of multiple stores in those areas. The company explains that these regions generate higher profitability. Its medium-term plan outlines the company’s plans to focus on an area-dominance strategy when opening new stores. The company also says it “intends to pursue acquisitions when they make sense.” So far, Tsuruha has mostly acquired medium-sized drugstore chains with high market share in a given region and converted them to subsidiaries. In this sense, the company has been following an area-dominance strategy in M&A as well.
The company has a history of strengthening private-brand products, but its private-brand strategy is now at the restructuring stage. Tsuruha says some of its private-brand products are items not available at other companies or those offering higher quality than national-brand products. At the same time, some products, due to their various backgrounds, had become positioned as “low-price, low-quality products.” (Some products had less appeal than the private brands of subsidized chains). In 2018, the company launched Kurashi Rhythm/Kurashi Rhythm Medical as a new series of its private-brand products. Tsuruha has winnowed down this series into products that offer higher quality than national brands, or those that are of comparable quality to national brands but offered at a lower price. The company aims to achieve economies of scale by selling the products groupwide.
When it purchases private-brand products, cosmetics, OTC drugs, and daily goods (particularly shampoo and other toiletries) in quantity, Tsuruha can expect manufacturer rebates, sales promotion support, and lower prices. By leveraging the economies of scale available even to new members of the group, the company plans to maximize M&A synergies and strengthen profitability.
In addition to a medium-term plan, the company has a long-term vision of “20,000 stores around the world and sales of JPY6.0tn.” This vision has been in place since around 2012, when the company met the targets in a former long-term vision that was set in 1985 (which called for “1,000 stores in Japan and sales of JPY200bn.”). The company makes no provisions indicating how to achieve the targets in the long-term vision. Instead, the vision is meant to demonstrate that rather than being content with the status quo, the company will innovate repeatedly until it nears its goals.
In 1975, when the company had five stores (four in Asahikawa and one in Sapporo), it set the target of having “100 stores in Hokkaido.” In 1985, when it had 50 stores and sales of JPY8.5bn, the company raised its targets to “1,000 stores in Japan and sales of JPY200.0bn.” Stated differently, the company has made a practice of setting targets that are 20x present figures and achieved them thus far.