Locondo 3558
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Summary
Locondo operates an e-commerce mall business that centers on LOCONDO.jp, an online shopping site that sells shoes and fashion goods.
Internet & Direct Marketing Retail
Key dates
2020-02-14
Coverage initiation
Executive summary
Business overview
Primary businesses: Locondo operates an e-commerce business that centers on LOCONDO.jp, an online shopping site that sells shoes and fashion goods. (The E-commerce business accounted for 79.9% of sales in FY02/22.) Much like Zappos.com LLC (currently a subsidiary of Amazon.com, Inc.) in the US and Zalando SE in Europe, Locondo focuses on footwear, which accounts for about 70% of gross merchandise value (GMV; as of January 2021). The company also runs the Platform business that leverages the IT and logistics infrastructures it built in the E-commerce business. In FY02/22, the company’s gross merchandise value (GMV) after returns was JPY21.2bn (+3.2% YoY), and sales (mostly commissions) were JPY9.9bn (-3.9% YoY).
Unique merchandise characteristics of shoes and the added value the company provides: Shoes pose unique and difficult inventory-related challenges. Sellers must maintain large inventories of different sizes in increments of 0.5cm, and inventory turnover is low, so rent and other fixed costs are higher than on apparel and other similar goods. Consequently, working capital and fixed costs tend to pose management issues for shoe vendors (brands). To address such industry issues, Locondo aims to raise inventory turnover by enlarging the online segment of the shoe market and having a centralized inventory that can be used by various sales channels. The company has been proposing this mechanism to shoe brands. Consignment sales account for about 85–90% (excluding D2C merchandise) of GMV in the E-commerce business. The company stores inventory for these sales in its own warehouses, but does not incur inventory risk.
Customers: Locondo’s customers can be separated into two broad categories: brands that utilize its platform to sell goods (or wholesale them to Locondo), and consumers who purchase goods. Women’s shoes, such as pumps and boots, make up a high proportion of sales, and women account for more than 90% of orders through LOCONDO.jp. Women aged 35–54 are a particularly large customer group, accounting for some 60% of orders. LOCONDO.jp allows customers to try on items and easily return them if they wish. The company says this feature is popular among women in dual-income households who are also raising children, as they have financial leeway but little time for shopping. D2C customers are primarily the younger demographic (under 30 years old), in contrast to the company’s traditional base. In FY02/21, the company acquired FASHION WALKER to strengthen its base of clients in their 20s and 30s.
Earnings structure: Reducing the level of GMV (after returns) required to break even means lowering the rate of merchandise returns, raising the contribution margin ratio, and reducing fixed costs. In FY02/23, the company projects that, when excluding impact from M&A, it can generate a return rate of around 20% (actual result in 2H FY02/22) and a contribution margin-to-GMV ratio of 15.6–16.0% (after returns; actual result in FY02/22 and the level the company projects over the long term) while maintaining fixed costs of approximately JPY2.8–2.9bn. Taking these factors into account, the company estimates it will require about JPY17.5–18.6bn in GMV (after returns) to achieve breakeven. According to data released by the company with full-year FY02/21 results, about 70–80% of orders by value since around 2015 were from repeat users (customers who had previously made at least one order through LOCONDO.jp). In addition, according to data disclosed when the company reported its year-end financial results for FY02/22, approximately 40% of buyers who made their first purchases on LOCONDO.jp during January through December 2020 made a second purchase within 18 months.
Growth drivers: The two long-term drivers of the company’s GMV growth are increasing penetration of online sales in Japan (from 19% to about 40%) and a growing market share of the Japanese online fashion market (from about 1.3% to 3%). Locondo also expects its product mix when it reaches GMV of JPY100bn to comprise about JPY50bn each for shoes and other merchandise.
Competitors and Locondo’s distinguishing features: The company has many competitors if we include e-commerce sites that deal in fashion merchandise broadly. Zozo, Inc. (TSE Prime: 3092) operates the Zozotown site, which sells both shoes and apparel. In FY03/21, Zozo’s GMV was around JPY419.4bn, about 20x Locondo’s (FY02/21). That said, Locondo says it distinguishes itself from competitors through its service offerings in the Platform business. Notably, these include third-party logistics (e-3PL), where it handles all logistics warehouse operations for its customers. Under the e-3PL arrangement, Locondo can use the inventory as consignment sale inventory for LOCONDO.jp as well, enabling it to extend the site’s merchandise lineup. For the customers, e-3PL not only centralizes the stock for an online shopping site (namely LOCONDO.jp) and the stock to replenish their offline stores, a common practice in third-party logistics, but it also allows customers to pool together their inventory for other online shopping sites, for department stores, and for wholesaling. For this reason, Locondo’s e-3PL raises inventory turnover rates more easily than the third-party logistics services offered by other companies.
Trends and outlook
FY02/02 results: GMV (after returns) was JPY21.2bn (+3.2% YoY), while sales amounted to JPY9.9bn (-3.9% YoY). GMV (after returns) reached 103.0% of its corresponding projection in the company's revised full-year forecast (released on January 14, 2022), while sales achieved 101.8%, operating profit 104.0%, recurring profit 104.0%, and net income attributable to owners of the parent 100.8%. SG&A expenses came to JPY7.0bn (+11.4% YoY), and EBITDA was JPY1.0bn (-33.2% YoY). Meanwhile, operating profit came in at JPY884mn (-38.6% YoY), while recurring profit finished at JPY853mn (-41.2% YoY), and net income attributable to owners of the parent JPY605mn (-53.3% YoY). The decline in operating profit was primarily due to downward impacts of JPY232mn from a decline in the volume of highly profitable D2C transactions and JPY264mn from cost growth associated with warehouse expansion. The company's full-year marginal profit ratio was 15.6% (versus 15.8% in its revised forecast).
FY02/23 forecast: The company's FY02/23 forecast calls for GMV of JPY25.5bn, up JPY4.3bn (20.2%) YoY on the premise of growth in existing businesses as well as an expected contribution of JPY2.5bn (after October 2022) from the inclusion of Reebok's Japan business under a recently signed license agreement. The FY02/23 forecast also calls for sales of JPY13.0bn, up JPY3.1bn (31.6%) YoY. Locondo forecasts operating profit of JPY900mn (up JPY17mn YoY), recurring profit of JPY870mn (up JPY18mn YoY), and net income attributable to owners of the parent of JPY610mn (up JPY6mn YoY), as it sees SG&A expenses increasing owing to a rise in rent costs accompanying warehouse space expansion and anticipates an increase in costs related to the Reebok business following the aforementioned license agreement.
Long-term vision: On April 20, 2021, Locondo, Inc. announced its long-term vision for FY02/31. It set a GMV target of JPY100bn (10-year CAGR of 17%) and an operating profit target of JPY10bn. The company forecasts operating profit of JPY10.0bn when GMV reaches JPY100bn. It expects a contribution margin of JPY16.0bn (contribution margin ratio of 16.0%) and fixed expenses of JPY6.0bn. As of April 14, 2022, Locondo was contemplating a large-scale M&A deal. The company maintains that it will announce the timing at which it will disclose its medium-term management plan once it has clarified whether or not this deal will be concluded.
Strengths and weaknesses
Shared Research has identified three strengths at Locondo: concentrated efforts in footwear sales (the combination of services, shoe category, price range, and customer base the company targets has helped to set it apart from competition); a mechanism where an increase in customer inventory in the Platform business bolsters the company’s consignment sale inventory in the E-commerce business; and accumulated expertise that enables collaboration with prominent influencers on the sale of direct-to-consumer (D2C) merchandise.
Shared Research also believes Locondo has three weaknesses: the sales pitch of “home try-ons and easy returns” that results in high return rates (around 20–25%); presence of many fashion goods shopping site operators with superior capital strength and brand awareness; and difficulty differentiating itself with the “easy returns” concept, which competitors can imitate. (See the “Strengths and weaknesses” section for more details.)
Key financial data
Note: Per-share data adjusted for stock splits.
Recent updates
New medium-term management plan
On May 18, 2022, Locondo, Inc. announced full-year FY02/23 company forecast and a new medium-term management plan.
FY02/23 full-year company forecast (out May 18, 2022)
Reasons for release of earnings forecast
At the beginning of the fiscal year, Locondo refrained from releasing a FY02/23 forecast because of the difficulty in reasonably predicting the prospect of concluding a license agreement with Itochu Corporation regarding operation of Reebok's business in Japan, and because this business would have a substantial impact on business performance. The company has now issued an earnings forecast, as its Board of Directors recently resolved to sign the aforementioned license agreement.
The company's FY02/23 forecast calls for GMV of JPY25.5bn, up JPY4.3bn (20.2%) YoY on the premise of growth in existing businesses as well as an expected contribution of JPY2.5bn (after October 2022) from the inclusion of Reebok's Japan business under a recently signed license agreement. The FY02/23 forecast also calls for sales of JPY13.0bn, up JPY3.1bn (31.6%) YoY. Locondo forecasts operating profit of JPY900mn (up JPY17mn YoY), recurring profit of JPY870mn (up JPY18mn YoY), and net income attributable to owners of the parent of JPY610mn (up JPY6mn YoY), as it sees SG&A expenses increasing owing to a rise in rent costs accompanying warehouse space expansion and anticipates an increase in costs related to the Reebok business following the aforementioned license agreement.
Medium-term Management Plan
Locondo released a new medium-term management plan on May 18, 2022. The three-year plan spanning FY02/23 through FY02/25 takes into consideration the licensing agreement and establishment of a joint venture with Itochu Corporation regarding operation of Reebok's business in Japan. The release of a new medium-term management plan, though, has not led to any changes in the company's long-term vision.
Overview of medium-term management plan
GMV
The new medium-term management plan targets GMV of JPY32.5bn in FY02/24 and JPY40.0bn in FY02/25, premised on organic growth in existing businesses (including via proactive investment), incorporation of Reebok's domestic business, and further M&A deals involving either e-commerce companies or D2C brands. Of the GMV target for FY02/25, the company expects approximately JPY8.0bn (around 20%) to come from Reebok's business in Japan. According to Locondo, GMV targets through FY02/24 are set at levels the company believes it can achieve even without proactive investment and M&A, but meeting the FY02/25 target will hinge not only on organic growth but also proactive investment and further M&A.
Proactive investment ensuring that ROE does not fall below 10%
If the company sees a need to step up investment, particularly in sales promotions (TV commercials, etc.), it will do so while ensuring that ROE does not fall below 10%. If it deems there is no need to step up investment or decides that it is important to secure funding for further M&A, the company will shift to a strategy of maximizing profit. As a consequence, Locondo targets an operating profit range of JPY1.0–1.8bn for FY02/24, and a range of JPY1.1–2.4bn for FY02/25.
Licensing agreement with Itochu Corporation regarding the operation of Reebok's domestic business and the establishment of a joint venture company
On May 12, 2022, Locondo, Inc. has announced the conclusion of a licensing agreement with Itochu Corporation regarding the operation of Reebok's domestic business and the establishment of a joint venture company.
Contents of agreement
On May 12, 2022, the company entered into a master licensing agreement regarding Reebok's Japan business with Authentic Brands Group and Itochu Corporation (TSE Prime, 8001), and concluded a sublicensing agreement with Itochu Corporation. Under this agreement, the company has acquired the exclusive right to sell Reebok shoes both online and offline, as well as the right to produce licensed products (shoes) bearing the Reebok brand, making use of the company's production background. In addition, the company reached a basic agreement on the establishment of a joint venture company with Itochu Corporation to promote Reebok's Japan business.
Overview of the joint venture company
The joint venture plans to promote Reebok's Japan business from October 1, 2022, including its e-commerce, brick-and-mortar stores, and wholesale business. The joint venture will become a consolidated subsidiary of the company, with Locondo maintaining an equity stake of 66% and Itochu Corporation of 34%. In addition, the joint venture will take over Reebok's domestic business from adidas Japan K.K.
Aim of the agreement
The signing of this agreement significantly strengthens the company's brand. In addition, the number of Reebok products the company group handles will increase significantly, including through the official Reebok domestic website (Reebok.jp), strengthening its e-commerce business. It also determined that it would make Reebok a flagship brand for its ALL IN ONE package, bolstering its platform business while showcasing the full array of its services. Itochu Corporation is one of the largest trading companies in Japan's fashion industry; with the signing of this agreement, the company will continue to consider further possibilities for working together to expand its business.
Outlook
In the near future, the company will disclose its annual plan and a new medium-term plan incorporating changes reflecting this agreement. As the start of business of the joint venture company as a consolidated subsidiary is scheduled for October 1, 2022, the company will transition to consolidated financial results from Q3 FY02/23.
Trends and outlook
Quarterly trends and results
Note: Figures may differ from company materials due to differences in rounding methods.
Seasonality
Unit prices for shoes, the company’s main merchandise, and apparel tend to be higher for winter lineups than for summer lineups. Consequently, GMV and sales tend to be stronger during Q3 and Q4, when the company handles winter items.
According to Locondo, seasonal items sell better when summers are hotter and winters colder, so more intense weather during these seasons has a positive effect on results.
Return rates tend to be low in summer and high in winter. This is because sandals and other summer merchandise are easier to fit than boots and other winter merchandise.
The company conducts inventory valuation at the end of Q2 and Q4, so the cost ratio rises insofar as it incurs inventory valuation losses.
Quarterly financial indicators
Variables affecting sales
The number of active members and the average annual customer spend are both variables that affect sales.
The number of active members (disclosed) can be broken down into the ratio of active members (can be inversely calculated) × the total member count (disclosed).
The (estimated) average customer spend can be broken down into average value per shipment (before returns [disclosed]) × (1– return rate [disclosed]) × order frequency (estimated). However, estimating average customer spend and order frequency from the outside requires making some assumptions. Consequently, average customer spend is perhaps best viewed as a reference for understanding trends.
The company does not necessarily position these metrics as key performance indicators (KPIs) for managing its businesses. According to Locondo, this is because it encountered difficulty incorporating sales management based on these metrics into its PDCA cycle. Employees are often unable to gain a solid sense of the short-term correlation between these metrics and the actions leading to improvement. Locondo says it is easier to understand the effects of these actions in relation to the changes in sales amounts at each brand the company handles.
Companywide figures
Note: Expense ratios and profit margins are percentages of GMV (after returns).
GMV
Locondo’s sales are affected by changes in the ratio of consignment sales and outright purchase arrangements in the E-commerce business, as the former generate commission revenue whereas in the latter case the company is selling merchandise it holds as inventory. Consequently, analyses based on GMV, which is not impacted by changes in consignment and outright purchase ratios, provide a better understanding of actual conditions.
The company does not include e-3PL shipments in the GMV it discloses, but includes corresponding costs under various expense items. It is important to note that a significant increase or decrease in e-3PL shipments will have an impact on GMV-based analyses.
GMV fell YoY in Q1 FY02/21 and Q2 FY02/22 on lower footwear demand as people stayed at home due to the COVID-19 pandemic.
Variable costs (advertising expenses)
Also included in variable costs (advertising expenses) are the incentives paid to D2C merchandise related influencers.
Variable costs (logistics costs) and fixed costs (personnel expenditures)
In FY02/22, the company increased bonuses for full-time employees and raised hourly wages for part-time employees. As a result, variable costs (logistics costs) and fixed costs (personnel expenditures) grew slightly. The company indicated that this increase in personnel expenditures serves to increase motivation among existing employees, and denies experiencing any difficulty in recruiting new part-time workers at its warehouses.
Fixed costs (rent)
In Q1 FY02/21, the company incurred JPY122mn in expenses associated with warehouse relocations (rent at two locations and moving costs), which temporarily reduced operating profit. The company made incremental additions to its warehouse capacity in Q1 FY02/20 and Q1 FY02/21.
Fixed costs (TV commercials)
In FY02/19, fixed costs for TV commercials increased sharply as the company ran television ads. In line with changes in advertising strategies, these had largely finished in 1H FY02/20, and the company is shifting to YouTube.
E-commerce business
Note: Expense ratios and profit margins are percentages of GMV (after returns). “Ratio of consignment sales items” for each quarter are based on cumulative figures up to the quarter in question.
The attributes of proprietary marketplace and external marketplace customers differ, so it is important to analyze the data of these two channels separately.
The ratio of consignment sales items declines when the GMV of D2C merchandise increases since D2C merchandise are outright purchase arrangements.
In Q2 FY02/20, the number of members rose substantially and the ratio of active members fell. This change was due to the merging of Mobacolle into LOCONDO.jp.
Thanks to D2C merchandise, the company gained 67,000 new active members in Q2 FY02/21. The decline in active users in Q2 FY02/22 can be attributed to the absence of this special factor and an extended replacement cycle for shoes during the state of emergency.
Return rates for its proprietary marketplace are affected by GMV of D2C merchandise. In Q2 FY02/21, thanks to the contribution from non-cancellable D2C brands, the rate of sales returns for the company’s proprietary marketplace improved to 18%, from 22% in Q1.
Figures for the acquired Fashionwalker Co., Ltd., have been included from Q3 FY02/21 onward. Only those customers who made purchases at the FASHIONWALKER website after Fashionwalker was consolidated in September 2020 are included in the active member count. For this reason, although the member count rose substantially at one point, the active member count is growing at a more gradual pace.
Platform business and Other business (retail stores, wholesale, etc.)
BOEM
Alpen account transactions were suspended in Q1 FY02/20 as GMV had continued to fall since Q3 FY02/19 due to changes in management policy at Alpen.
e-3PL
e-3PL traffic increases in March and September when brands start shipping new goods. e-3PL shipments are affected by seasonality, with the number of shipment pieces typically rising in Q1 and Q3.
In Q2 FY02/20, the number of shipments decreased due to an operational change affecting one major account (Ogitsu, Co., Ltd.). The change was made after discussions between Ogitsu and Locondo that were aimed at improving the balance between Ogitsu’s in-store and warehouse inventories and improving the efficiency of shipments to Ogitsu stores.
In Q1 FY02/21, shipment numbers declined YoY as brands curtailed their shipments to stores due to COVID-19.
The rate of growth in shipment numbers increased in Q3 and Q4 of FY02/22 thanks to impact from the ALL-IN-ONE package launched in August 2021.
Full-year FY02/22 results
Summary
GMV: GMV (after returns) was JPY21.2bn (+3.2% YoY), and sales were JPY9.9bn (-3.9% YoY). The company's full-year GMV growth rate was limited to 3.2% in part because, as in FY02/21, demand for footwear remained sluggish due to the COVID-19 pandemic and in part because D2C performance, which had been strong in FY02/21, was sluggish. GMV (after returns) reached 103.0% of its corresponding projection in the company's revised full-year forecast (released on January 14, 2022), while sales achieved 101.8%, operating profit 104.0%, recurring profit 104.0%, and net income attributable to owners of the parent 100.8%.
Profits/losses: SG&A expenses were JPY7.0bn (+11.4% YoY), and EBITDA was JPY1.0bn (-33.2% YoY). Operating profit amounted to JPY884mn (-38.6% YoY), while recurring profit came to JPY853mn (-41.2% YoY), and net income attributable to owners of the parent JPY605mn (-53.3% YoY). The decline in operating profit was primarily due to downward impacts of JPY232mn from a decline in the volume of highly profitable D2C transactions and JPY264mn from cost growth associated with warehouse expansion. Meanwhile, the company's full-year marginal profit ratio was 15.6% (versus 15.8% in its revised forecast). The ratio of advertising expenses to full-year transaction volume rose 0.5pp YoY to 6.4%. Due to warehouse expansion, the ratio of rent to full-year transaction volume grew 1.1pp YoY to 4.4%.
The company has decided not to issue a dividend of surplus (planned record date of February 28, 2022; undecided in previous forecast). To promote proactive business development, the company will prioritize further corporate growth and strive to increase shareholder value by utilizing the majority of its profits for business investment. At the same time, the company has stated that as long as it is able to secure funds necessary for growth, it may conduct a share buyback at a maximum share price of JPY2,000 per share. The company has one or more share buybacks in mind and is considering the acquisition of about 100,000 shares in total.
FY02/22 company forecast: The company has refrained from releasing a FY02/23 forecast, stating that as of April 14, 2022, formulating objective projections was prohibitively difficult because it was still considering the possibility of a large-scale D2C-related M&A deal. The company will disclose its forecast as soon as it is able to form objective earnings projections and maintains that it will be able to accomplish this before its General Meeting of Shareholders on May 27, 2022. In FY02/23, the company's Locoport 3 logistics facility will be fully operational, resulting in a JPY400–500mn increase in fixed costs compared to FY02/22. For details, please refer to the section below entitled "Company forecast for FY02/23."
Overview by business
E-commerce business
The company’s E-commerce business reported cumulative FY02/22 sales of JPY7.9bn (-7.6% YoY) on GMV (after returns) of JPY16.9bn (+1.2% YoY). Sales declined because the percentage of segment sales generated through D2C brands (purchased inventory) decreased.
In Q4, proprietary marketplace GMV (after returns) was down 4% YoY. Growth was sluggish in part because D2C performance abated following a previous surge. External marketplace GMV (after returns) also rose 14% YoY.
Cumulative shipment volume in FY02/22 reached 2.2mn units, while the number of brands with stores on Locondo’s shopping sites expanded steadily, rising to 4,182 (3,969 at end-Q3).
The company saw its active user count reach 1,164,000 (1,137,000 at end-Q3). Defined as users ordering at least once a year, the number of active users reached 809,000 for the proprietary marketplace (783,000 at end-Q3) and 355,000 for the external marketplace (349,000 at end-Q3).
In Q4, the average value per order was JPY10,600 at the proprietary marketplace (JPY10,800 in Q4 FY02/21) and JPY6,300 at the external marketplace (JPY6,500).
Average value per order at the proprietary marketplace was impacted by a decline in GMV for D2C brands, while average value per order at the external marketplace was impacted by an increased share of items with low unit prices.
In Q4, the return rate at the proprietary marketplace (excluding D2C brands) stood at 20% (20% in Q3) and at the external marketplace 6% (6% in Q3).
Platform business
In FY02/22, the platform business reported sales of JPY1.6bn (+36.6% YoY) on GMV (after returns) of JPY4.0bn (+19.5% YoY).
As of the end of Q4 FY02/22, the number of brands using BOEM was up to 34. Q4 BOEM GMV was up 11% YoY.
In Q4, e-3PL (note: not counted in GMV) shipments were up 46% YoY. This increase was due in part to upward impact from the ALL-IN-ONE package launched by the company in August 2021.
Other business (store, wholesale; formerly the Brand business)
The Other business reported sales of JPY358mn (-34.9% YoY) on GMV (after returns) of JPY358mn (-35.8% YoY).
Other topics
Reduction of capital stock
On April 20, 2022, the company announced that, pending approval of a corresponding resolution at its annual shareholders meeting, it will reduce its capital stock from JPY1.3bn to JPY50mn and transfer the difference to its other capital surplus account. The planned effective date for this move is July 29, 2022.
Company forecast for FY02/23
FY02/23 full-year company forecast (out May 18, 2022)
Reasons for release of earnings forecast
At the beginning of the fiscal year, Locondo refrained from releasing a FY02/23 forecast because of the difficulty in reasonably predicting the prospect of concluding a license agreement with Itochu Corporation regarding operation of Reebok's business in Japan, and because this business would have a substantial impact on business performance. The company has now issued an earnings forecast, as its Board of Directors recently resolved to sign the aforementioned license agreement.
The company's FY02/23 forecast calls for GMV of JPY25.5bn, up JPY4.3bn (20.2%) YoY on the premise of growth in existing businesses as well as an expected contribution of JPY2.5bn (after October 2022) from the inclusion of Reebok's Japan business under a recently signed license agreement. The FY02/23 forecast also calls for sales of JPY13.0bn, up JPY3.1bn (31.6%) YoY. Locondo forecasts operating profit of JPY900mn (up JPY17mn YoY), recurring profit of JPY870mn (up JPY18mn YoY), and net income attributable to owners of the parent of JPY610mn (up JPY6mn YoY), as it sees SG&A expenses increasing owing to a rise in rent costs accompanying warehouse space expansion and anticipates an increase in costs related to the Reebok business following the aforementioned license agreement.
When issuing its FY02/23 full-year forecast, the company also released a new medium-term management plan (FY02/23–FY02/25). For details, see the later section on Medium-term Management Plan.
Initial company forecast for FY02/22 (out April 14, 2022)
The company has refrained from releasing a FY02/23 forecast, stating that as of April 14, 2022, formulating objective projections was prohibitively difficult because it was still considering the possibility of a large-scale D2C-related M&A deal. The company will disclose its forecast as soon as it is able to form objective earnings projections and maintains that it will be able to accomplish this before its General Meeting of Shareholders on May 27, 2022.
Company projections excluding impact from M&A deals under consideration
The company's initial projections for FY02/23 (excluding impact from M&A deals under consideration) are included below.
GMV
With regard to its footwear supply, the company believes that lockdowns in China will reduce footwear production and projects that the war in Ukraine will lead to higher airfreight costs for shipments traveling from Europe to Japan. Although it anticipates that these conditions will have a negative short-term impact, the company does not believe that this impact will be prolonged.
Locondo believes that these supply issues will have a downward impact on footwear demand in the short term but anticipates a gradual recovery as impact from the COVID-19 pandemic dissipates. Recently, the yen has been weakening against the US dollar, and the company believes that this depreciation will lead to increases in production costs for footwear overseas and higher costs for the shipment of footwear from overseas locations to Japan. The company plans to pass on cost increases associated with its brands to customers through higher selling prices. Regardless, the company does not expect footwear demand to decline significantly as long as the scales of these price increases are acceptable to consumers.
Contribution margin ratio on GMV (after returns)
Locondo projects that its contribution margin ratio on GMV (after returns) will grow to about 16% (up from 15.6% in FY02/22). The company also forecasts that its marginal profit ratio will trend at the same level over the long term.
Fixed costs
In FY02/23, the company's Locoport 3 logistics facility will be fully operational, resulting in a JPY400–500mn increase in associated fixed costs compared to FY02/22. As a result, the company forecasts that fixed costs will rise to about JPY2.8–2.9bn. Locondo plans to use the additional floor space at Locoport 3 primarily for operations associated with LOCONDO.jp and e-3PL. However, it also expects to use some of this space in connection with large-scale M&A deals that are currently under consideration, assuming these deals are concluded.
Large M&A deals under consideration as of April 2022
As of April 2022, Locondo was negotiating a large M&A deal through which it and an outside partner would acquire shares in the target company directly (without utilizing Locondo's strategic D2C holding company) with Locondo retaining a majority stake in the target company. If concluded, the scale of this deal would exceed JPY1.0bn, although the company's cash reserves would be sufficient to cover associated acquisition costs. In its year-end financial results presentation for FY02/22, the company indicated that it categorizes brands with e-commerce ratios of at least 50% as D2C brands, even if they did not originate as e-commerce brands.
Long-term vision
On April 20, 2021, Locondo, Inc. announced its long-term vision for FY02/31. It set a GMV target of JPY100bn (nine-year CAGR of 19%) and an operating profit target of JPY10bn. As of April 14, 2022, Locondo was contemplating a large-scale M&A deal. The company maintains that it will announce the timing at which it will disclose its medium-term management plan once it has clarified whether or not this deal will be concluded.
Long-term growth drivers
GMV
The company’s long-term vision is to have 3% share of the Japanese e-commerce fashion market in 2030, and GMV of JPY100bn (nine-year CAGR of 19%) in FY02/31. The two long-term drivers of the company’s GMV growth are increasing penetration of online sales in Japan (from 19% to around 40%) and a growing market share of the Japanese online fashion market (from about 1.3% to 3%). Locondo also expects its product mix when it reaches GMV of JPY100bn to comprise about JPY50bn each for shoes and other merchandise.
Increasing penetration of online sales
The company thinks the share of fashion items sold online in Japan will rise from about 19% in 2020 (source: METI's “FY2020 Survey on International Economics pertaining to Domestic and International Collective Economic Growth Strategy Formulation [E-Commerce Market Survey]”) to about 40% in 2030 (company estimate based on the CAGR for the last five years in online sales penetration).
Changes in product sales mix
When it reaches GMV of JPY100bn, the company expects its product mix to comprise about JPY50bn for shoes and JPY50bn for other fashion merchandise. Locondo reasoned that the product mix for a similar company in Europe, Zalando SE (ZALG.DE), was about JPY50bn for shoes and JPY50bn for other merchandise when it reached GMV of JPY100bn.
Because shoes comprised about 70% of merchandise handled as of January 2021, the company is expecting a CAGR of about 14–15% for shoes and 25–26% for handbags and other fashion items beginning in FY02/23.
Growing share of Japanese online fashion market
The company estimated the FY2020 Japanese fashion market at JPY8.6tn (source: METI's Yearbook of the Current Survey of Commerce). It assumes that the market in FY2030 will be about the same size as it was in FY2020, and online penetration of about 40%, or JPY3.5tn. In FY02/22, Locondo’s GMV (after returns) was JPY21.2bn, meaning that it had a share of about 1.3% of the domestic online fashion market worth JPY1.6tn (JPY8.6tn x 19%). It aims to grow its market share by about 2.3x the FY02/21 levels to 3% in FY02/31.
The factors driving the company’s market share growth are unlikely to change. They are potential acquisitions aimed at business synergies and competitive advantages discussed later. Locondo’s GMV (after returns) grew at a CAGR of 22% over the five years to FY02/22, outpacing the market. The company said that it would be able to continue growing faster than the market and boost market share going forward.
Anticipated mix when GMV reaches JPY100.0bn
Locondo aims to reach GMV of JPY100.0bn in FY02/31, at which point it expects sales to break down as follows. The company assumes that its e-commerce sales weighting will double in that time. Of the average annual growth forecast for each category, it expects about 7% to come from growth in the broader market, with any increment above that figure attributable to expansion in the company's market share. The below figures are not actual numbers, but calculations used by the company in its explanation.
For LOCONDO.jp, the company assumes GMV of JPY36.0bn, for a CAGR of 13% from the GMV of JPY11.6bn reported for FY02/22.
For LOCOMALL, the company assumes GMV of JPY4.0bn, for a CAGR of 6% from the GMV of JPY2.4bn reported for FY02/22. The company also assumes GMV of JPY5.0bn for FASHIONWALKER, for a CAGR of 11% from JPY1.9bn in FY02/21, and JPY5.0bn for SPORTS WEB SHOPPERS, for average annual growth of 21% from JPY900mn.
Through M&A and PMI, the company also aims to have five websites that are targeted at niche markets and have GMV of around JPY5.0bn (one of them is waja acquired in January 2022). Unlike LOCONDO.jp, it envisions that these sites will have a relatively high weighting of merchandise other than shoes. However, it expects these sites to share systems and logistics with LOCONDO.jp.
The company anticipates GMV of JPY15.0bn for BOEM, for a CAGR of 16% from the GMV of JPY3.8bn reported for FY02/22. It aims to have 100 consignment sale sites, up from 34 at end-FY02/22.
For the Brand business, the company envisions GMV of JPY10.0bn, for average annual growth of 21% from JPY1.5bn in FY02/21. It aims to be handling 10 D2C or agency brands, each with GMV of around JPY1.0bn.
For e-3PL, which is not included in the above GMV, the company aims to grow shipments from 2.8mn units in FY02/22 to 10mn units in FY02/31, for a CAGR of 15%.
Operating profit
The company forecasts operating profit of JPY10.0bn when GMV reaches JPY100bn. It expects a contribution margin of JPY16.0bn (contribution margin ratio of 16.0%) and fixed expenses of JPY6.0bn.
Contribution margin ratio on GMV (after returns)
The company expects a contribution margin ratio of 16.0%, roughly in line with its normal scenario forecast for FY02/22. It expects to maintain the ratio at around 16% as an increase due to changed business mix and a decrease due to merchandise mix changes offset each other.
Contribution margin ratios are higher than the company average in the company’s focus area of e-commerce (proprietary marketplace) and BOEM. Accordingly, assuming no changes in merchandise mix, growth in these two areas would push up the contribution margin ratio for the company overall.
Meanwhile, Locondo expects the share of merchandise other than shoes to account for about 50% of GMV. There are many online competitors in apparel, and it is likely that the contribution margin ratio will decline below 16% in apparel due to competition. A growing share of merchandise other than shoes tend to push down the companywide contribution margin ratio.
Fixed expenses
The company forecasts fixed expenses of JPY6.0bn. The company projects that its GMV will rise to just under five times its level of JPY21.2bn in FY02/22 but expects to keep fixed costs under three times their FY02/22 level of JPY2.4bn.
Locoport 3 rental space will open in stages, starting in June 2021, and be fully operational by June 2022. Full operations in FY02/23 will increase fixed expenses by JPY400–500mn versus the FY02/22 forecast figure.
Locondo deems it unnecessary to expand warehouses further until FY02/26, and expects that a staged increase in floor space will be necessary from around FY02/27 when GMV reaches about JPY60bn (3x FY02/22 figures). It assumes the same warehouse efficiencies as when it put together its long-term vision.
The company expects fixed advertising and personnel expenses to gradually increase along with GMV.
Medium-term Management Plan
Locondo released a new medium-term management plan on May 18, 2022. The three-year plan spanning FY02/23 through FY02/25 takes into consideration the licensing agreement and establishment of a joint venture with Itochu Corporation regarding operation of Reebok's business in Japan. The release of a new medium-term management plan, though, has not led to any changes in the company's long-term vision.
Overview of medium-term management plan
GMV
The new medium-term management plan targets GMV of JPY32.5bn in FY02/24 and JPY40.0bn in FY02/25, premised on organic growth in existing businesses (including via proactive investment), incorporation of Reebok's domestic business, and further M&A deals involving either e-commerce companies or D2C brands. Of the GMV target for FY02/25, the company expects approximately JPY8.0bn (around 20%) to come from Reebok's business in Japan. According to Locondo, GMV targets through FY02/24 are set at levels the company believes it can achieve even without proactive investment and M&A, but meeting the FY02/25 target will hinge not only on organic growth but also proactive investment and further M&A.
Proactive investment ensuring that ROE does not fall below 10%
If the company sees a need to step up investment, particularly in sales promotions (TV commercials, etc.), it will do so while ensuring that ROE does not fall below 10%. If it deems there is no need to step up investment or decides that it is important to secure funding for further M&A, the company will shift to a strategy of maximizing profit. As a consequence, Locondo targets an operating profit range of JPY1.0–1.8bn for FY02/24, and a range of JPY1.1–2.4bn for FY02/25.
Locondo’s views on synergy between each of its businesses and competitive advantage
The factors driving the company’s market share growth are unlikely to change. In its core E-commerce business, it has a profile of being synonymous with try-at-home mail order services. The company thinks that this and its strong lineup of women's shoes give it competitive advantages. However, other companies are capable of imitating Locondo’s home try-on service, so the company does not believe that this service will give it a competitive advantage in the medium to long term. Furthermore, the company acknowledges that reaching its long-term vision targets using only its E-commerce business will be difficult as online marketplaces that focus on fashion are multiplying. Locondo views its Platform and Other (store, wholesale) businesses as a means to establish medium-to-long-term competitive advantage in the E-commerce business and secure high overall GMV and a generally stable earnings base.
The company thinks that its competitive advantage in its platform service stems from maintaining enough speed to ship on the same day, while still being able to handle department stores and wholesalers. It also enables small and medium-sized shoe retailers to manage all upstream and downstream processes digitally by using the company's logistics and systems, spanning the range of e-commerce, stores, and wholesale operations. Locondo intends to expand the platform service, not just to strengthen its Platform business, but to further enhance its overall business portfolio. To do so, it will boost the volume of inventory (mainly consignment sale inventory) it handles, taking advantage of the inventory sharing between its E-commerce and Platform businesses.
The company has implemented various initiatives, including efforts to raise brand recognition through television commercials in FY02/19 and FY02/20; the FY02/19 acquisition of Misuzu & Co., which provided production support; and the acquisition of Mobacolle in FY02/20, which strengthened the company’s base of young members. The respective benefits provided by these initiatives have made the full-scale expansion of the D2C business planned for FY02/21 possible.
Note: Brand business name was changed to Other (store, wholesale) business.
Establishment of a strategic D2C holding company and M&A policy
Locondo has announced that from FY02/23, it plans to substantially increase borrowings so long as it can maintain its financial health as it conducts M&A in the D2C area, where the market has grown even amid the pandemic. In specific, the company will borrow about JPY5.0bn on its own, and combining this with its cash in hand, which will amount to some JPY7.0bn, it will establish a holding company to carry out M&A in the D2C field. A partner company will invest approximately JPY3.0bn in the holding company, and using this along with the company's capital for a sum total of JPY10.0bn, the holding company will conduct M&A. With companies the holding company acquires, Locondo will aim to achieve profitability by utilizing its expertise in post-merger integration of systems and distribution warehouses it has accumulated thus far.
Large M&A deals under consideration as of April 2022
As of April 2022, Locondo was negotiating a large M&A deal through which it and an outside partner would acquire shares in the target company directly (without utilizing Locondo's strategic D2C holding company) with Locondo retaining a majority stake in the target company. If concluded, the scale of this deal would exceed JPY1.0bn, although the company's cash reserves would be sufficient to cover associated acquisition costs. In its year-end financial results presentation for FY02/22, the company indicated that it categorizes brands with e-commerce ratios of at least 50% as D2C brands, even if they did not originate as e-commerce brands.
Business
Business model
Locondo operates an e-commerce business centered on LOCONDO.jp, an online shopping site that specializes in shoes and other fashion items. True to its management philosophy of “innovation to the industry and freedom to the customer,” Locondo offers a system where customers can try on the merchandise they buy online in the comfort of their homes and return it with ease if they so wish. The company also runs a platform business that leverages the IT and logistics infrastructures it built in the e-commerce business, and a brand business through which it manages brands including their brick-and-mortar stores. The company also operates the Other (store, wholesale) business, which primarily uses inventory purchased by Locondo which it sells to brick-and-mortar stores and retailers.
The company has only one reportable segment, which covers sales, design, and procurement of fashion goods centering on shoes. It discloses financial indicators such as gross merchandise value (GMV) for each of its businesses (E-commerce, Platform, and Brand) on a quarterly basis.
The company’s customers can be separated into two broad categories: brands that utilize its platform to sell goods (or wholesale them to Locondo), and consumers who purchase goods. The former category usually comprises companies and the latter, individuals.
Locondo has a policy of conducting all processes, from receiving orders to shipment, internally. Many online retailers outsource operations such as telephone inquiry support, logistics, website development, and merchandise photography, but the company has aimed to expedite services by performing all of these operations in-house. Locondo emphasizes speed as a strategy for competing with major competitors.
As of FY02/22, the company has not expanded overseas, and all of its sales are generated within Japan.
Shoe categories
Shoes handled by Locondo can be broadly divided into women’s footwear, men’s footwear, and sneakers.
Women’s footwear: The company is strong in this category in which its business concepts deliver the most conspicuous advantages. Also, around the time of Locondo’s inception, shoes in the medium-to-high price range and targeting women aged 35–54 were the easiest for the company to secure inventory, and this played a part in the company’s strength in this category.
Men’s footwear: According to the company, men and women think about shoe consumption differently. For example, men tend to buy the same types of shoes over and over. Demonstrating the advantages of the company’s concept of “home try-ons and easy returns” is thus difficult in this category.
Sneakers: In this category, major sneaker brands do well and consumers tend to stick with their preferred brands. Consequently, it is difficult for the company to push its concept of “view many options, try on, then purchase.” Furthermore, the company faces difficulty raising its presence in this category because many brands already sell their goods through competitor Zozotown.
Nature of shoes as merchandise
Inventory
As merchandise, shoes pose unique and difficult inventory-related challenges. Sellers must maintain large inventories of different sizes in increments of 0.5 cm and inventory turnover is low, resulting in rent and other fixed costs that are higher than those generated by the handling of apparel. Consequently, shoe vendors (brands) tend to face difficulties managing working capital and fixed costs.
Return risk in online sales
Selling shoes online results in a large number of returns after customers try on their purchases (in the case of Locondo's e-commerce mall, around 20–25% of Locondo’s shoes are returned [except for D2C merchandise, which are non-returnable]). There is a period after shipment over which vendors are unable to determine whether their shoes will be returned. In the case of LOCONDO.jp, the period lasts 21 days following shipment. During this period, the shoes are considered “provisionally sold,” so vendors face a return risk and must retain a corresponding amount of funds in hand.
It is theoretically possible to lower the return rate by employing a shoe size measuring system instead of offering a trial fitting. However, the company does not believe that current initiatives in the industry such as using in-store scanners to measure foot sizes and creating corresponding insoles are particularly effective in terms of improving fit. It is said that foot size varies by about 0.5 cm between the morning and evening so the company does not consider it an easy task to measure the subtle consumer sensibilities on shoe fit using technology. Despite this, technological innovations that produce effective alternatives to Locondo’s trial-fitting method may have an impact on the company’s business in the future.
Seasonality
Although not as much as apparel, shoes are subject to seasonal factors. In Japan, temperatures can range from below freezing in the winter to as high as above 40˚C in the summer. Consequently, boots and other items with high unit prices hit the shelves in large numbers during the winter and large amounts of sandals and other goods with low unit prices can be found during the summer. According to Locondo, seasonal items sell better when summers are hotter and winters colder, so more intense weather during these seasons has a positive effect on results. Return rates tend to be low in summer and high in winter. This is because sandals and other summer merchandise are easier to fit than boots and other winter merchandise.
Financial structure
Key to GMV growth
Locondo describes the importance of investing at an equivalent pace in four elements of its E-commerce business: merchandise (inventory volume), websites, operations (warehouses), and advertising. It says unbalanced investment in these four elements will result in a bottleneck.
Up until now, the company has conducted inventory sharing (merchandise), endeavored to increase app downloads (websites), and expanded its warehouses (operations). In terms of advertising, it has attempted to perform balanced investment by running television commercials using funds procured through its IPO.
Earnings structure
To bring down the amount of GMV (after returns) it requires to break even, Locondo thinks it is important to lower the return rate, raise the contribution margin, and reduce fixed costs. In FY02/23, the company projects that, when excluding impact from M&A, it can generate a return rate of around 20% (actual result in 2H FY02/22) and a contribution margin-to-GMV ratio of 15.6–16.0% (after returns; actual result in FY02/2022 and the level the company projects over the long term) while maintaining fixed costs of approximately JPY2.8–2.9bn. Assuming these figures prove accurate, the company estimates it will require about JPY17.5–18.6bn in GMV (after returns) to achieve breakeven.
GMV and sales
Total sales change along with fluctuations in the sales mix of merchandise handled through a consignment arrangement and those that have been purchased outright by Locondo, as the former generate commission revenue whereas in the latter case the company is selling merchandise it holds as inventory. Consequently, analyses based on GMV, which is not impacted by changes in consignment and outright purchase ratios, provide a better understanding of actual conditions. For details of analyses based on GMV, please see the quarterly trends and results section.
Shoes as online merchandise generate a large number of returns. For this reason, Locondo keeps track of both GMV before returns and GMV after returns. If the return rate is too high, the company incurs logistics costs that hinder earnings and profitability, but a return rate that is too low indicates that the company is not adequately fulfilling its concept of allowing customers to try on their purchases at home and freely return them if they so wish. Locondo believes that a return rate of around 20–25% (except for D2C merchandise, which are non-returnable) is the appropriate level, and the roughly 20% achieved in 2H FY02/22 was near the lowest end of the appropriate range. The company has been able to reduce the return rate thanks to revisions to its return policy and innovations aimed at increasing the size matching probability. Three innovations the company implements are: 1) Clearly specifying appropriate foot size and width, 2) distributing its proprietary LOCOMEASURE tape measures to customers, making it easy for them to register their sizes, and 3) helping customers get an accurate idea of their shoe size by encouraging them to post their trial-fitting results with a reward points system.
Locondo determines its commission rates for consignment sales (recorded as sales) through negotiations with each brand, but we understand they are generally around 30–35% of the GMV (after returns). This level is roughly equivalent to the commission rates of Zozo, one of its competitors, and also comparable to the commissions received by department stores when they sell shoes on consignment, says the company. Meanwhile, Locondo bears an inventory risk when it purchases goods outright to sell retail, so the gross profit margin in this scenario (before inventory write-downs and disposal costs) is higher than its commission rates for consignment sales.
In the e-commerce business, initial registration takes some effort and is a hurdle for the user, but sales promotion via email and other means following registration stimulates a certain level of repeat demand, so acquisition of new active users is an important element in GMV growth. For LOCONDO.jp, according to data released by the company with year-end FY02/21 results, about 70–80% of orders by value since around 2015 were from repeat users (customers who had previously made at least one order through LOCONDO.jp). In addition, according to data disclosed when the company reported its year-end financial results for FY02/22, approximately 40% of buyers who made their first purchases on LOCONDO.jp during January through December 2020 made a second purchase within 18 months.
Variable and fixed costs
The company’s variable costs include cost of sales, logistics costs (shipping charges, personnel expenses at warehouses, packaging material costs, etc.), advertising costs excluding TV commercials (online advertising, coupon burdens for which the company is responsible, etc.), and payment collection fees (recorded as “other variable costs”). In FY02/22, the company's variable costs-to-GMV ratio was 21.5%, and its contribution margin-to-GMV ratio was 15.6%.
Locondo’s fixed costs include rent for distribution warehouses, personnel expenses (excluding expenses for warehouse personnel), television commercial expenses, and YouTuber contract and planning costs. Rent for distribution warehouses increases in steps every time the company expands its warehousing capacity. The company’s television commercial expenses vary along with its advertising policy. Fixed costs in FY02/23 are forecast at about JPY2.8–2.9bn (excluding potential impact from M&A deals under consideration as of April 2022). From June 2021, Locoport 3 (about 56,000sqm) will start operating in stages toward FY02/23, and the company expects a staged increase in fixed expenses. Locondo projects that its logistics warehouse rents will rise by about JPY400–500mn YoY in FY02/23.
Impact of e-3PL shipment increases on GMV and logistics costs
Shipments handled under the company’s e-3PL third-party logistics service in the Platform business (more below) are not included in the GMV disclosed by the company. However, corresponding logistics costs are included in the variable costs. It is important to note that, as a result, the logistics cost-to-GMV ratio appears to worsen when e-3PL shipments increase.
Thoughts behind advertising investment (variable cost)
As of April 2021, the company was regulating its advertising expenses (variable cost) by setting them at a certain percentage level of GMV, rather than as a percentage of cost per acquisition (CPA). As it conducts this investment, the company is continuously reviewing the content and placement of its advertising to maximize its effectiveness.
Working capital structure
Consignment sales (E-commerce business)
Under consignment sales, the company first collects the proceeds from sales made to customers, deducts sales commissions (recorded as sales) from them, and then pays the brands the difference. Working capital needs do not rise in tandem with increases in consignment sales. Locondo has a cash flow structure that allows for easy business expansion because it is able to utilize about 30–50 days’ worth of cash flows as working capital thanks to the time gap between its trade receivable and trade payable turnover.
For credit card purchases made in LOCONDO.jp, payments are remitted three times per month, and the company collects within a period of about ten days following sales. Trade receivables for purchases made through other online marketplaces are collected in about thirty days.
Trade payables are typically paid by the end of the month following the corresponding sales (In the case of outright purchases, by the end of the month following purchase).
Inventory under a consignment arrangement may be held by the company but the ownership belongs to the brand. Thus, changes in inventory volume have no impact on Locondo’s working capital.
Outright purchase for resale (E-commerce business) and the Other (store, wholesale) business
Unlike consignment sales, changes in inventory resulting from merchandise bought outright affect Locondo’s working capital. Most changes in working capital are due to changes in inventory in the Other (store, wholesale) business and due to outright purchases in the E-commerce business.
Company vision and past strategies
Company vision
Locondo has a vision of creating “innovation to the industry and freedom to the customer.”
Areas it aspires to realize include home try-ons and easy returns for consumers; inventory sharing (centralization); and seamless omni strategy. Locondo aims to become an “omni platformer” that can increase its own e-commerce sales while maximizing benefits for the brands.
Sales in the Japanese shoe industry have been shrinking due to falling unit prices and population decline. As a result, fixed costs such as labor and rent are posing a heavier burden, profitability is deteriorating, and cash flows are worsening, and companies have been forced to curtail their inventories. However, cutting back on inventory carries the risk of further reducing sales and market scale because shoes come in many different sizes and colors and must be tried on for a fitting before purchase.
In response to these issues, Locondo strives for new growth in the shoe industry through e-commerce by offering a system where brands can achieve higher inventory turnover by centralizing their inventory to enable sales through various channels.
The company seeks to provide brands a seamless omni platform under a freemium pricing strategy. “Freemium” refers to pricing that curbs initial payments and fixed costs while offering many free features. “Seamless” means that users can manage all operations over the platform without the need to link with other systems. “Omni platform” integrates inventories of brick-and-mortar stores and online outlets, as well as a wide variety of data (data concerning merchandise, inventory, sales, members, etc.), in real time. It is important to note that the company’s use of the word “omni platform” is different from “omni channel,” which commonly refers to enabling customers to enjoy the same shopping experience through all available channels.
Past strategies
Launch of e-commerce business
LOCONDO.jp (2011)
The company launched an online shopping business that allowed customers to try on items at home and return them free of charge (with some exceptions), but ran into the problem of both excess inventory and stockouts. Raising consignment inventory by improving inventory turnover for the consignors became a pressing challenge for the company.
Centralization of e-commerce inventory
Inventory sharing (2015)
In 2015, the company sought to first improve inventory turnover not by limiting the flow of goods to LOCONDO.jp (the company’s proprietary online marketplace), but sharing the warehouse inventory with other online channels including BOEM (brands’ official online stores) and LOCOMALL (Locondo shopping sites in online marketplaces operated by other companies). Although individual services were developed in response to individual client needs, we understand the company began making inventory centralization the principal axis of its strategy in the process of addressing such needs.
Integration with inventory for store stock replenishment
LOCOCHOC and e-3PL: mechanisms for sharing e-commerce inventory with brick-and-mortar stores (2016)
In 2016, the company established a system for sharing e-commerce inventory with brick-and-mortar stores through its e-3PL third party logistics service enabling shipment of warehouse inventory for online channels and to brick-and-mortar stores (street-level and department stores), and through LOCOCHOC, which allows offline shopping customers to order out-of-stock items online during their store visits.
Integration with inventory at physical stores
LOCOPOS allows inventory at brick-and-mortar stores to be sold through online channels (LOCONDO.jp, BOEM) in real time (2017)
In 2017, the company established LOCOPOS, a mechanism that allows items in stock at physical stores to be sold through online channels (LOCONDO.jp, BOEM) in real time. It also launched Locopay and Omnipoint, thereby developing an environment that enables the sharing of customer information and award points between offline and online channels. However, the integration with offline inventory only met one of the many needs of client brands, and did not spread as far as the company had initially projected.
Inventory sharing with other online fashion platforms (2018)
In 2018, the company began sharing inventory with other online fashion platforms, including Magaseek and d fashion, which are both services offered by Magaseek Corporation (a subsidiary of NTT Docomo). It refers to this arrangement as the MAGALO Alliance. However, both companies had different philosophies concerning the Magalo Alliance, and its impact was much less than the company’s initial estimate. Although the company had projected an overall GMV increase of JPY1.2bn (JPY600mn each at LOCONDO.jp and LOCOMALL), the actual increase was only JPY100mn in total. Furthermore, plans to conduct sales through d fashion were temporarily put on hold due to issues involving linked systems.
Digital transformation and omni strategy
Moving forward, the company will digitalize all of its operations (digital transformation) and consolidate a variety of information, including inventory data, between physical stores and online channels (omni strategy).
Wholesale coverage and the launch of LoCore, a system that manages wholesale operations (2019)
In 2019, the company made its internal warehouse management system (WMS) available externally with the goal of further promoting inventory sharing. Furthermore, it began wholesale support and launched LoCore Office, a core system that manages wholesale operations.
Full-scale expansion of the D2C business (2020)
The company has implemented various initiatives, including efforts to raise brand recognition through television commercials in FY02/19 and FY02/20; the FY02/19 acquisition of Misuzu & Co., which provided production support; and the acquisition of Mobacolle in FY02/20, which strengthened the company’s base of young members. The respective benefits provided by these initiatives have made the full-scale expansion of the D2C business planned for FY02/21 possible.
Overview by business
E-commerce business
In the E-commerce business, the company operates proprietary online marketplaces LOCONDO.jp, FASHIONWALKER (from 2H FY02/21), Sports Web Shoppers (from 2H FY02/22), and waja (from Q4 FY02/22). It also operates LOCOMALL, a shopping site that is accessed through online marketplaces run by other companies. In both channels, consumers can purchase merchandise offered by a variety of brands. LOCONDO.jp provides services such a same-day shipping; effectively free shipping (reimbursement of shipping charges with Locondo Points awards); free exchange of item sizes; and free shipping on returns (with some exceptions).
Fundamentally, the E-commerce business follows a non-recurring revenue model where income is generated per sale.
The E-commerce business can be broken down by sales channels (proprietary marketplace versus external marketplaces) and sales types (consignment versus outright purchase).
LOCONDO.jp and LOCOMALL mainly deal in footwear; FASHIONWALKER (from 2H FY02/21) mainly sells apparel; Sports Web Shoppers (from 2H FY02/22) specializes in sporting goods.
Sales channels
Locondo’s primary sales channels are the proprietary marketplaces LOCONDO.jp, FASHIONWALKER (from 2H FY02/21), Sports Web Shoppers (from 2H FY02/22), waja (from Q4 FY02/22), and the external marketplace LOCOMALL. The company views LOCOMALL as a sales channel that supplements areas in which LOCONDO.jp is weak.
LOCONDO.jp (proprietary marketplace)
When the company launched this service, it initially allowed returns for 99 days following merchandise shipment. However, the company discovered that few customers remained undecided for such an extended period of time and, as of April 2022, it shortened the term to up to 21 days following merchandise shipment. Locondo allows size exchanges for 14 days following merchandise shipment.
In FY02/19, 76% of LOCONDO.jp orders were shoe orders. The service is strong for items in the medium-to-high price range, which the company refers to as “affordable luxury” (non-designer, high-quality goods that are somewhat expensive but still purchasable; average unit price of about JPY6,000). The remainder of LOCONDO.jp orders mainly comprises orders for apparel and bags. Locondo aims for an even split between orders for shoes and orders for other goods in the future, taking note of product mix ratios at other companies in the same industry overseas.
Locondo is distinguished by its strength in women’s footwear, including pumps and boots. According to data gathered for one year ending in August 2018, at least 90% of LOCONDO.jp orders were from female members. Female customers between the ages of 35 and 54 were particularly numerous, and this group alone accounted for 60% of LOCONDO.jp orders (women aged 35–39 accounted for 12%, 40–44 16%, 45–49 17%, and 50–54 14%). D2C’s customer base is mainly young age group (under 30), and thus differs from the company’s traditional demographic of women aged 35–54. Analysis of the share of active users under 30 (not classified by gender) who had registered by end-March 2020, before the company launched D2C operations (defined as existing users), and those who registered from April 2020 onward after the launch (new users) showed that the younger demographic accounted for just 12% of existing users at LOCONDO.jp and 28% of new users. This shows that D2C is helping to rejuvenate the customer base, which was gradually aging.
Many customers of the site live in prefectures that contain large cities. Since LOCONDO.jp offers home try-ons and easy returns, it is particularly popular with women in dual-income households, who are raising children and working at the same time and have money to spare, but little time for shopping, says the company. On the other hand, the site draws few male customers. Ostensibly, this is because their consumption preferences tend to differ from those of female customers (tending to buy the same types of shoes over and over) and because they tend to find it difficult to identify with the site’s concept of “home try-ons and easy returns.”
About 30% of GMV is generated from site access via PC, 50% via mobile web browsers, and 20% via apps. The PC medium still accounts for 30% of GMV because many users of LOCONDO.jp are 40 years of age or older. And, because many users come to the website through searches for keywords that contain “particular brand name and Locondo,” the number of people drawn to the site naturally tends to increase as the company expands its product and brand lineup. The conversion rate of unique users who access the site via app is about 3.5x higher than the rate for those who use smartphone browsers. The conversion rate for apps was already high at the beginning of 2019 at about 2.5x the rate for smartphone browsers, but became even higher after the company improved the app’s search feature. No major changes were observed in the smartphone browser conversion rate throughout 2019.
According to data released by the company with FY02/21 results, about 70–80% of orders by value since around 2015 were from repeat users (customers who had previously made at least one order through LOCONDO.jp). In addition, according to data disclosed when the company reported its year-end financial results for FY02/22, approximately 40% of buyers who made their first purchases on LOCONDO.jp during January through December 2020 made a second purchase within 18 months. The company has not released specific figures but states that annual customer spend and number of items purchased tend to rise for long-time customers.
As of April 2022, the company was fully refunding shipping fees for purchases of JPY8,000 (including consumption tax, after returns) or more per order in the form of reward points.
FASHIONWALKER (proprietary marketplace, from 2H FY02/21)
The company wants to improve its apparel offerings. It purchased the e-commerce mall FASHIONWALKER as it perceived major synergies with LOCONDO.jp, and thought it could enhance its services and expand its customer base.
FASHIONWALKER is operated as a website separate from LOCONDO.jp and LOCOMALL, and has made re-registration of customers unnecessary. The company said it made this decision in light of its experience in integrating a previous acquisition, Mobacolle, with LOCONDO.jp. It said that seasonality for FASHIONWALKER was basically the same as LOCONDO.jp in terms of sales.
Although it has not disclosed specific figures, we understand there were over 100,000 active users prior to acquisition (the post-acquisition active user count includes only those users who have made purchases since the acquisition, so the count should gradually grow from Q3 FY02/21 onward). Users spend on average about JPY20,000–30,000 annually. A good deal of the merchandise is at somewhat high price points. The company said its GPM and contribution margin ratio were slightly below that of LOCONDO.jp.
The business is basically the same as LOCONDO.jp, so the company can curtail fixed costs by sharing Locondo’s warehouses and IT infrastructure. Inventory is managed together with LOCONDO.jp and other goods at the company’s warehouses. On a consolidated basis, the main extra fixed costs due to the acquisition are higher personnel expenses for additional permanent employees (about 10 in total). The company said that the FASHIONWALKER e-commerce business was in the black at the operating profit level before the acquisition.
While Fashionwalker will continue operating its online shopping websites, Locondo aims to achieve mutual sales growth by promoting cross-selling (selling LOCONDO.jp merchandise on FASHIONWALKER and vice versa). The company thinks there is considerable potential for cross-selling as FASHIONWALKER’s main customer base is women between ages 25–39 (50–60% of total). This lies between the demographics of the previously purchased Mobacolle (18–25) and LOCONDO.jp (35–54). The company said that FASHIONWALKER deals in some famous brands such as Gelato Pique, owned by MASH Holdings (unlisted). D2C’s customer base is mainly young age group (under 30). Looking at the share of under 30 (not classified by gender) in the company’s active users, those who registered by end-March 2020 when the company launched the D2C business (defined as existing) and those who joined from April 2020 onward after the launch (defined as new), young age group accounted for just 28% of existing users but 41% of new users at FASHIONWALKER.
The shipping charge at FASHIONWALKER is expected to be JPY298 (excluding tax), with express shipping available for JPY348. Returns will be allowed, and the company aims to provide exchanges for differently sized goods at no charge. However, FASHIONWALKER’s return policy is stricter than LOCONDO.jp’s, with the return period being just 14 days (versus 21 days at LOCONDO.jp) and return shipping paid by the customer (rather than by the company as at LOCONDO.jp). FASHIONWALKER’s return rate is lower than LOCONDO.jp’s, but this is not due to the fact that FASHIONWALKER deals mainly in apparel, but rather to the difference in return conditions between the two sites.
Regarding the FASHIONWALKER e-commerce mall business that the company acquired, only 48% of the total inventory at end-August 2020 was transferred to the company’s warehouse following discussions with former owner World Co., Ltd. (TSE Prime: 3612) and shops operating on FASHIONWALKER. When the acquisition agreement was reached, several frameworks were considered, but it was ultimately decided that the in-house e-commerce inventory provided by World would remain in World’s warehouses. According to the company's explanation, the contribution margin of FASHIONWALKER is slightly lower than LOCONDO.jp, and since it will make use of the company's systems and warehouses, no additional fixed costs will be incurred. Even based on a conservative outlook, it expects to recoup the invested JPY300mn in one year, and the company says that the purchase price was based on the risk that the inventory remaining at World would be higher than expected at the time of the company's Q1 results announcement.
Sports Web Shoppers (SWS) (proprietary marketplace, from 2H FY02/22)
Sports Web Shoppers is a proprietary marketplace specialized in sporting goods that will become a part of Locondo starting in 2H FY02/22. In addition to soccer and running, the company expects to add specialty stores for baseball and volleyball goods in May 2022.
The company announced that it would acquire all shares in Fairplay Co., Ltd., with July 15, 2021 as the share transfer date, and follow up with an absorption-type merger of Fairplay effective September 1, 2021. The acquisition will be reflected in Locondo’s income statements starting in Q3 FY02/22.
Fairplay operates Sports Web Shoppers (SWS), a soccer merchandise shopping site. SWS has been in business for more than 20 years and gained recognition as Japan’s largest store for soccer and futsal merchandise. It is a market leader in Japan in terms of sales, number of brands sold, and customer count. Locondo runs Locondo Sports as a category of LOCONDO.jp, but had concluded that it needed a mail-order site specializing in sports goods to expand the category. The company says it will aggressively develop its sports business by harnessing Fairplay’s extensive range of shoes and sports equipment merchandise and its position, expertise, and customer base (members) as a specialist sports site. By leveraging its post-merger integration expertise it has garnered through its acquisitions of companies such as Mobacolle and Fashionwalker, Locondo intends to integrate Fairplay and its systems, warehouses, and other assets into the company and improve overall profitability. After that, Locondo will set to work on the marketing front, using YouTube videos and other means to build up the SWS brand and move into new areas of sports equipment for sports other than soccer.
Overseas, there are companies such as Germany-based Signa Sports United GmbH, which has grown by operating e-commerce websites specializing in different sports while working behind the scenes to integrate the systems and warehouses. Websites specializing in individual sports trend to have advantages over general online sellers such as Amazon and Rakuten. This is because customers have specific requirements about sports equipment and these needs are not usually satisfied by the information and search functions available through general online sellers, and general online sellers also tend to compete on price as they handle similar products.
With respect to the market potential for sports equipment, the sporting goods market survey by the Yano Research Institute (dated June 1, 2021) put the value of domestic shipments of sporting goods in 2020 at JPY1.37tn (-10.8% YoY), with the domestic market for soccer and futsal equipment alone worth JPY44.9bn (-15.2% YoY).
In February 2022, the company switched SWS (SPORTS WEB SHOPPERS) over to its proprietary systems. Shipments and inventory management are outsourced, and as the company plans to maintain this arrangement, we do not expect any additional work integrating distribution facilities.
With Japanese sporting goods retailer Alpen Co., Ltd. (TSE Prime: 3028) already among the sellers using Locondo’s proprietary online marketplaces, the acquisition of Fairplay and its Sports Web Shoppers website will give Alpen another online sales channel, bringing benefits to Alpen as well.
waja (from Q4 FY02/22)
waja is an online shopping site handling a wide range of merchandise, including imported goods and items of rare brands that have not yet been launched in Japan and were purchased by overseas-based buyers; sale and outlet items of popular brands purchased directly from authorized distributors; and used items. In the case of the BUYMA e-commerce site operated by Enigmo Inc. (TSE Prime: 3665), buyers purchase inventory for sellers after orders are received, whereas according to the waja model, inventory is procured before orders are acquired.
On October 29, 2021, the company announced its plan to acquire waja, an online fashion shopping site operated by Defactostandard, Ltd. (a subsidiary of BEENOS Inc. [TSE Prime: 3328]) through a company split. The effective date of the acquisition is January 1, 2022. Locondo will pay JPY1.6mn for the acquisition.
Through the e-commerce business, the company aims to strengthen its apparel domain, and it expects its acquisition of waja to generate significant synergy with LOCONDO.jp. As with its previous acquisitions, the company plans to improve profitability of waja through systems and warehouse integration. In May 2022, the company will launch e-3PL Personal, a system that will allow waja buyers to ship products sold through other companies' websites from the company's distribution warehouses.
In FY09/20, waja generated a GMV of JPY779mn and sales of JPY255mn, mostly through consignment sales. As of end-September 2021, its assets amounted to JPY72mn while its liabilities were JPY64mn. As of October 27, 2021, it handled a total of 37,000 products.
LOCOMALL (external marketplace)
The LOCOMALL shopping site—provided through external online marketplaces—also carries merchandise from a variety of brands.
Compared to LOCONDO.jp, LOCOMALL’s sales mix for apparel, sporting goods, men’s goods, and low-end goods are higher. LOCOMALL also has a lower return rate and fewer average number of items per order. These differences exist primarily because LOCONDO.jp has many customers who wish to view and try on a variety of goods before making a purchase while many of LOCOMALL’s customers visit the site with a specific item in mind. The return policies of these services also differ.
Online marketplaces to which the company has rolled out LOCOMALL include Rakuten Ichiba run by Rakuten, Inc. (TSE Prime: 4755), and PayPal Mall operated by Z Holdings Corporation (TSE Prime: 4689), a subsidiary of SoftBank Group Corp. (TSE Prime: 9984). According to the company, most of LOCOMALL’s GMV as of April 2022 comprised sales made through Rakuten Ichiba. This is because Rakuten, Inc. has prepared a variety of promotion techniques for Rakuten Ichiba, making it an easy platform on which to rollout LOCOMALL.
Each brand has the right to decide whether to simultaneously offer its merchandise on both LOCONDO.jp and LOCOMALL, or only on LOCONDO.jp. This is because brand concepts may not be compatible with the ambience of other online marketplaces.
Like LOCONDO.jp, LOCOMALL fundamentally allows returns for 21 days following merchandise shipment. Size exchanges are permitted for 14 days following merchandise shipment. However, LOCOMALL’s return policy differs from LOCONDO.jp’s in that its customers must pay shipping fees for returns that the company is not responsible for.
As of April 2022, shipments of Rakuten Ichiba orders (which account for the majority of LOCOMALL sales) of JPY3,980 or more were free (consumption tax included; after returns).
The selling prices of items offered through both LOCONDO.jp and LOCOMALL sometime vary between the two platforms. This is because their return and shipping fee policies are different, and in the case of LOCOMALL, the company must pay commissions to operators of the external marketplaces.
Other services
The company uses LOCONDO.jp’s capacity for attracting customers, the strength of the brand, and its network with publishing companies and other external media to support online shops on LOCONDO.jp with their branding efforts. For example, the company places banner ads for its partner brands on LOCONDO.jp at the same timing fashion magazines aimed at the company’s main target group (women in their late 30s or 40s who live in inner-city areas) are published. Creation of brands’ feature articles that can be accessed from a link placed in these banner ads can help generate synergy with the E-commerce business. Ad placement fees collected from the brand partners are recorded as sales for this service.
Other sources of sales in the E-commerce business include fees for services such as gift wrapping and ad placement fees for leaflets included in merchandise shipments to customers.
Sales arrangements
Merchandise sales in the E-commerce business are categorized into consignment sales (no inventory risk) and sales through outright purchases (carries inventory risk), but the company makes no distinction between the two when managing GMV control or sales promotion measures. Consignment sales account for about 85–90% (excluding D2C merchandise) of GMV in the E-commerce business.
Consignment sales
Under this arrangement, brands open online stores on LOCONDO.jp as t