IDOM 7599
IDOM
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JP Tower 26F, 2-7-2, Marunouchi, Chiyoda-ku, Tokyo, Japan 100-7026
Summary
With strengths in its own Gulliver brand of used car buying network, IDOM buys and conducts wholesale and retail sales of used cars. The company is one of Japan’s largest used car buyer and retail dealer.
Specialty Retail
Key dates
2014-03-25
Coverage initiation
Executive summary
Business overview
Having first established itself as one of Japan’s largest buyers of used cars, IDOM Inc. is now one of Japan’s largest used car sellers as well. Gulliver is the company’s mainstay brand through which it buys used cars from consumers. The used cars the company buys are then resold through its own network of used car dealers, which go under a number of different names including Gulliver, Outlet, and Liberala. The company has also been involved in the car wholesaling business, selling used cars at auction to third-party commercial buyers. In FY02/22, it sold some 140,000 used cars at the retail level (+2.0% YoY) and 97,000 at the wholesale level (+18.0% YoY) and bought a total of 246,000 cars (+9.2% YoY) through its domestic group operations; its domestic chain had a total of 510 outlets (-17 YoY), of which 445 (-15 YoY) were under direct management.
When initially structuring its used car buying operations, the company followed the example of the restaurant chains that operate central kitchens. That is, it let individual outlets handle only those tasks that had to be done on-site (such as customer reception, vehicle inspections, negotiations, and contract signing) while using its head office staff to handle all other tasks (such as marketing, vehicle appraisals, inventory control, transportation, and wholesaling). The company also brought transparency to used car pricing where there had been none previously, establishing fair prices by taking into consideration the auction prices that would have been paid for the same vehicle in open bidding between commercial dealers. With this new business model, the company was able to quickly expand operations, increase its name recognition, and grow earnings.
Since FY02/15, the company has been working to shift from its previous business model of buying used cars primarily for wholesaling to a business model (retail model) in which it increases its retailing ratio. It aimed to maximize its gross profit per vehicle sold by selling cars to consumers (B2C) at higher prices than could be realized through auction sales to other dealers (B2B). However, the company was unable to achieve stable profit growth in the five years from FY02/15 to FY02/19. Thereafter, it implemented measures to address issues encountered during that five-year period, resulting in YoY sales and profit growth from FY02/20 to FY02/22. During those three years, the company boosted sales and profit by replacing medium-sized stores and opening larger ones as it moving to the retail model. Its growth strategy includes opening large stores and entering the maintenance business.
In addition to its existing business models, the company is also actively experimenting with new business models, establishing new businesses such as Gulliver Flea Market (a C2C platform that acts as a broker for used car sales between individuals), NOREL (a subscription car service aimed at the generation of consumers who are not fixated on owning their own car), and Go2Go (a car-sharing service aimed at individuals who own cars). In FY02/22, it added maintenance shops to its large stores and began providing maintenance.
Earnings trends
In FY02/22, sales were JPY459.5bn (+20.8% YoY), operating profit was JPY18.5bn (+74.9% YoY), and net income attributable to owners of the parent was JPY10.8bn (+627.0% YoY). In the Japan segment, retail sales volume at directly managed stores reached a record high, mainly reflecting the operation of large, capital-efficient stores. In the Australia segment, the company achieved a record high profit thanks to an increase in new car sales and continued strong used car sales. The YoY growth rate of net income attributable to owners of the parent outpaced that of recurring profit. The company booked extraordinary loss of JPY6.9bn in FY02/21, which included impairment losses on goodwill of an Australian subsidiary and directly managed stores, as well as pandemic-related losses, while in FY02/22 it booked extraordinary loss of JPY1.9bn, including head office relocation expenses and loss on the sale of shares of subsidiaries and associates.
The company's full-year FY02/23 earnings forecast calls for sales of JPY366.8bn (-20.2% YoY), operating profit of JPY15.5bn (-16.1% YoY), recurring profit of JPY14.8bn (-15.7% YoY), and net income attributable to owners of the parent of JPY11.6bn (+7.5% YoY). The company expects sales, operating profit, and recurring profit to fall YoY as a result of the transfer of all shares in its Australian dealership subsidiaries in FY02/23, which is aimed at improving capital efficiency. A temporary surge in used car prices declined profitability in FY02/22 and changes to the revenue recognition standard are expected to have a negative impact on profits in FY02/23. Even so, the company expects operating profit to rise JPY1.9bn YoY.
In April 2022, the company announced a new medium-term management plan (FY02/23 to FY02/27). Key strategies are to open 50 large stores and 50 stores with maintenance shops. During the plan’s period, the company expects an increase in retail sales volume (170,000 units), growth in operating profit (JPY21.0bn), higher OPM (5.0% or more), stable or higher ROIC (10% or more), and targets FCF generation (of around JPY30.0bn over the five years).
Strengths and weaknesses
Shared Research sees the company as having three main strengths: 1) its position as one of the largest used car buyers in Japan, 2) its strong retail sales network for used cars, and 3) its willingness to experiment with new business models. Major weaknesses include 1) its heavy dependence on the used car market in Japan, which will most likely shrink over time, 2) its vulnerability to potential competitors copying its business model, and 3) the financial stress its business model puts on its balance sheet. (For further details, see the Strengths and Weaknesses section later in this report.)
Key financial data
Note: The company initiated a 10-for-1 stock split on May 1, 2013. Per share data calculated as though the split occurred at the beginning of FY02/14.
Recent updates
Announcement of the transfer of shares in its consplidatee subsidiaries and the recording of an extroadinary profit.
On April 14, 2022, IDOM Inc. announced the transfer of shares in its consolidated subsidiaries and the recording of an extraordinary profit.
The company has decided to transfer all shares of its consolidated subsidiaries, IDOM Automotive Group Pty Ltd. and Gulliver Australia Pty Ltd. IDOM Automotive Group Pty Ltd. controls and manages operating companies in Australia and Gulliver Australia Pty Ltd. sells new and used cars and conducts related business in Victoria, Australia.
Reasons for the sale
The company makes management decisions on priority investments or withdrawals from each business using a business portfolio that emphasizes capital efficiency (ROIC) and growth potential. The company plans to concentrate management resources on its retail business (with maintenance shops) through large shops in Japan over the medium to long term, as the business has a track record of delivering high capital efficiency and the company believes it has strong potential for future growth.
Based on this belief, the company withdrew from the domestic new car dealer business for BMW and Mini in September 2021. It has also decided to withdraw from the new car dealer business in Australia.
Operating results and financial position for the most recent three years of the subsidiaries to be transferred
Overview of the transferee
Number of shares to be sold, sale price and status of shares held before and after sale
IDOM Automotive Group Pty Ltd.
Gulliver Australia Pty Ltd.
Schedule
Outlook
The business results of IDOM Automotive Group Pty Ltd. and Gulliver Australia Pty Ltd. spanning from March to the following February of the following year are included in the company’s consolidated results. Although the date of share transfer is yet to be determined, based on the assumption that it takes place at the end of June 2022, the earnings forecast for FY02/23 takes into account earnings for the four-month period from March 2022 to June 2022.
The sale would negatively affect both sales and profits, and the company projects sales to fall by JPY85.0bn, operating profit by JPY3.0bn, and recurring profit by JPY2.8bn YoY in FY02/23. With the sale, the company expects to record an extraordinary gain of about JPY800mn on a consolidated basis and about JPY2.9bn on a non consolidated basis on the sale of shares in affiliated companies in Q2 FY02/23 (June–August 2022). It also expects capital efficiency (ROIC and other indicators) to improve.
These estimates are based on current calculations and are subject to change depending on the exchange rate of the Australian dollar and other factors.
With regard to business developments in Australia, the company will continue to leverage the know-how and network it has accumulated through the management of new car dealerships. The company intends to continue its business in Australia through its wholly owned subsidiary, IDOM Innovations Pty Ltd, which has been operating in Australia since 2020. The company will continue to pursue transparency and fairness in automobile transactions through new technologies and innovations, and continue its platform business to help auto dealers solve their issues. The company plans to invest in this new business within a certain scope with a set maximum amount.
Trends and outlook
Monthly trends
Note: Total vehicle sales at directly managed stores = the sum of direct retail sales to customers and wholesale sales at auctions
Note: Retail sales at directly managed stores = direct retail sales to customers, only
Quarterly trends and results
Note: Retail units sold per directly managed store is the number of vehicles sold at retail by directly managed stores ÷ store count (average of the number of stores at the beginning and end of the fiscal year)
Note: Sales (parent) per vehicle sold are parent company sales ÷ number of vehicles sold by directly managed stores
Note: Gross profit (parent) per vehicle sold is parent company gross profit ÷ number of vehicles sold by directly managed stores
Full-year FY02/22 results (out April 14, 2022)
In FY02/22, sales grew YoY. In Japan, the number of customers visiting stores grew as a result of the operation of large stores opened in FY02/21 and FY02/22, which led to higher retail sales volume. The Australian subsidiary recorded sales volume growth of new and used cars.
Profit items from the operating level and below rose YoY because of higher sales. SG&A expenses increased due to the yen depreciation in addition to lower SG&A expenses in FY02/21 when the company booked pandemic-related losses under extraordinary losses rather than as part of SG&A expenses. Meanwhile, advertising expenses fell due to more efficient use of the internet to attract customers, even as retail sales volume at directly managed stores in Japan reached record highs.
In addition to the rise in operating profit and recurring profit, a decline in extraordinary losses was behind the sharp increase in net income attributable to owners of the parent. In FY02/21, the company recorded extraordinary losses of JPY6.9bn, which included JPY4.0bn in impairment losses on business in Australia. In FY02/22, extraordinary losses came to JPY1.9bn.
Q4 FY02/22 results (December 2021–February 2022)
In Q4 (December 2021–February 2022), sales were JPY114.9bn (+16.7% YoY), operating profit was JPY3.7bn (+90.5% YoY), recurring profit was JPY3.5bn (+96.0% YoY), and net income attributable to owners of the parent was JPY2.1bn (loss of JPY3.7bn in Q4 FY02/21).
In the Japan segment, sales were JPY78.3bn (+6.1% YoY) and operating profit was JPY2.4bn (+145.3% YoY). Sales grew, reflecting higher sales volume. Higher parent company sales drove up sales YoY on a consolidated basis. Income rose, at both the parent and subsidiaries.
The parent company generated sales of JPY77.2bn (+13.2% YoY) and operating profit of JPY2.1bn (+61.7%). Sales grew due to a rise in wholesale sales. A lower percentage of retail sales (which has a relatively high gross margin) caused parent-company GPM to fall YoY, but gross profit grew to JPY15.6bn (+10.2% YoY), owing to higher sales. Parent-company SG&A expenses increased to JPY13.5bn (+5.1% YoY), mainly because a rise in performance-linked incentives caused personnel expenses to increase. Despite the higher SG&A expenses, operating profit rose thanks to the growth in gross profit.
Disparities between performance in the Japan segment and at the parent company were JPY1.1bn for sales (-80.5% YoY) and JPY349mn for operating profit (operating loss of JPY302mn in Q4 FY02/21). As the company sold subsidiary new car dealers in Japan that sell BMW and MINI models, this business was excluded from the scope of consolidation, leading to lower sales YoY. Profitability improved, however, from an operating loss in Q4 FY02/21.
In the Australia segment, sales were JPY36.2bn (+49.0% YoY) and operating profit was JPY1.4bn (+20.4% YoY). Higher sales volume of new and used vehicles contributed to the rise in sales and profit..
Progress vs. company forecast
The company announced revisions to its full-year FY02/22 forecast along with Q3 results. The revised full-year forecast calls for sales of JPY450.0bn (+18.2% YoY), operating profit of JPY17.0bn (+41.9% YoY), and net income attributable to owners of the parent of JPY9.2bn (+519.6% YoY).
Versus the previous forecast (announced October 2021), targets have been revised up by JPY44.6bn for sales, JPY2.0bn for operating profit, JPY2.0bn for recurring profit, and JPY1.2bn for net income attributable to owners of the parent. This reflects the fact that actual results for cumulative Q3 FY02/22 have progressed beyond the previous forecast assumption. Specifically, wholesale vehicle sales volume at directly managed stores in Japan, new car sales volume at Australian subsidiaries, and the depreciation of the yen against the Australian dollar were factors in the revision.
The company achieved 102.1% of its revised FY02/22 forecast figure for sales and 108.7% for operating profit. Higher iron ore prices pushed up the new car sales volume at Australian subsidiaries, exceeding forecasts. In addition, the yen weakened against the Australian dollar, and profit on domestic operations was higher than expected.
Segment results
Results by segment were as follows.
Japan
Sales were JPY318.1bn (+9.5% YoY), and segment profit (operating profit) was JPY13.8bn (+65.6% YoY).
The Japan segment mainly consists of the parent company's used car sales and ancillary businesses. Other subsidiaries include Gulliver Insurance Co., Ltd. and Tokyo My Car Co., Ltd., a used car dealership.
Parent company results
The parent company reported sales of JPY306.7bn (+11.3% YoY), gross profit of JPY61.0bn (+8.2% YoY), and operating profit of JPY11.9bn (+51.5% YoY). Directly managed stores sold 237,489 vehicles (+8.0% YoY), comprising 140,119 at the retail level (+2.0% YoY), and 97,370 at the wholesale level (+18.0% YoY). Retail vehicle sales volume increased thanks to the new large stores that opened in FY02/22, as well as a rise in the number of customers visiting existing stores. A higher retail sales volume pushed up trade-ins, which in turn boosted sales volume at the wholesale level, as well as the number of vehicles purchased.
Store count
During FY02/22, the company opened five new stores and closed 13 stores, bringing the total number of directly managed stores to 455 (down 3.3% or eight stores YoY). Even as the store count fell, the volume of vehicles sold at retail and volume purchased both grew. IDOM’s efficiency-focused store strategy involves closing medium-sized stores with low sales efficiency and opening large ones in favorable locations with prospects of good sales efficiency.
IDOM’s strategy involves opening large stores with sophisticated designs that are roughly 8,260sqm in area (or three times that of regular stores). They are capable of displaying some 300 used cars (as opposed to about 100 in regular stores), giving customers more options and improving the company’s sales efficiency. In FY02/22, the company opened five large stores and added maintenance shops to eight. This makes 29 large stores, and 8 maintenance shops of its 445 directly managed stores shops.
Number of vehicles sold
The number of vehicles sold rose 8.0% YoY, with retail sales volume up 2.0% YoY and wholesale sales volume up 18.0% YoY.
Retail sales volume grew as store visitors increased thanks to the recovering used car market, large stores opened in the previous fiscal year and FY02/22 started operating. Directly managed stores in Japan sold 140,119 vehicles (+2.0% YoY), a record high.
According to the Japan Automobile Dealers Association, 3,214,000 used (passenger) cars (-3.8% YoY) were registered from March 2021 to February 2022. During the same period, growth in the number of vehicles sold at retail by IDOM’s directly managed stores indicated an increase in the company’s market share.
The parent company moved fewer vehicles through wholesale than the previous year from April through June 2020, but performance was strong afterward. In FY02/22, a higher retail sales volume pushed up the number of trade-ins. Accordingly, the number of vehicles purchased grew versus the pandemic-affected FY02/21, and wholesale sales volume also rose YoY.
Gross profit
Gross profit came to JPY61.1bn (+8.2% YoY), and GPM was 19.9% (-0.6pp YoY).
GPM fell 0.6pp YoY. The percentage of the volume of retail vehicle sales, which has a relatively high GPM, declined to 59.0% (62.5% in FY02/21), as the percentage of wholesale vehicle sales volume increased.
Average gross profit per vehicle was JPY257,000 (+0.2% YoY). As noted above, GPM was down YoY, but sales per vehicle increased 3.0% YoY to JPY1.3mn as used car prices rose. In Q1 FY02/22, a semiconductor shortage suppressed new-car production. This caused a spike in used-car auction prices and increased the unit sales price for the company. In addition to rising market prices, higher gross profit from ancillary services such as insurance, warranties, and auto loans also contributed to an increase in gross profit per unit.
SG&A expenses
Parent company SG&A expenses came to JPY49.2bn (+1.2% YoY), comprising personnel expenses of JPY20.6bn (+5.7% YoY), advertising expenses of JPY6.0bn (-11.0% YoY), rents of JPY10.2bn (+2.4% YoY), and other expenses of JPY5.9bn (+1.9% YoY).
The parent company reclassified about JPY389mn in personnel expenses as extraordinary losses when stores were closed during the state of emergency in 1H FY02/21, but booked them as SG&A expenses in FY02/22. Performance-linked incentives also pushed up expenses.
Advertising expenses fell YoY despite the rise in vehicle sales volume, and the decline in advertising expenses has continued since FY02/2021. This was partly due to an increase in large stores leading to streamlined advertising costs; larger stores have a larger site area than smaller stores, and the stores themselves tend to receive more publicity and naturally attract customers, making them more efficient from an advertising standpoint. The company is analyzing, verifying, and improving the response effect of advertising to attract customers online more efficiently.
An increase in store site area led to higher cost of rent. The number of stores decreased YoY, but the opening of large stores led to an increase in store site area. The large store has a sophisticated store design, a site area of around 8,260sqm, or three times the area of regular stores. They are also capable of displaying some 300 used cars (as opposed to about 100 at conventional stores), giving customers more choices and improving the company's sales efficiency.
Operating profit
The parent reported operating profit of JPY11.9bn (+51.5% YoY).
Difference between the Japan segment and the parent
The differences between the Japan segment and the parent were JPY11.4bn (-23.2% YoY) in sales and JPY1.9bn (+307.0% YoY) in operating profit. The performance of new car dealer subsidiaries recovered. In cumulative Q3 FY02/22, performance at subsidiary new car dealers in Japan that sell BMW and MINI models recovered to previous-year levels. In Q4, the company sold these subsidiaries, excluding the business from the scope of consolidation and leading to lower sales YoY. Profitability improved, however, from an operating loss in Q4 FY02/21.
Australia
Sales were JPY139.4bn (+57.8% YoY), and segment profit (operating profit) was JPY4.9bn (+64.6% YoY).
In Australia, the company has a 67% stake in Buick Holdings Pty Ltd, which operates multibrand new car dealerships in Perth, Western Australia, and a 100% stake in the Andrews & Wallis Motor Group (AMW, five companies), which operates new car dealerships in Melbourne. Buick Holdings Pty Ltd accounts for about 70% of the units sold in Australia, while the AWM Group accounts for about 30%. The units sold by Buick Holdings Pty Ltd are half used and half new, while the AWM Group sells primarily new cars.
Buick Holdings Pty Ltd achieved higher sales and profits, as a buoyant economy (helped by higher iron ore prices) pushed up as sales volume. Used car sales, which the company has been working to strengthen, also increased. Sales and profits also increased at the AWM Group.
The Australian dollar appreciated against the yen YoY, adding currency translation gains from subsidiaries.
In April 2022, the company made the decision to sell all its shares in new-car-dealing subsidiaries in Australia and withdraw from this business. The company plans to sell IDOM Automotive Group Pty Ltd. and Gulliver Australia Pty Ltd. in June 2022, so the business in Australia will be included in the consolidated accounts for a four-month period in FY02/23.
Company forecast for FY02/23
The company's full-year FY02/23 earnings forecast calls for sales of JPY366.8bn (-20.2% YoY), operating profit of JPY15.5bn (-16.1% YoY), recurring profit of JPY14.8bn (-15.7% YoY), and net income attributable to owners of the parent of JPY11.6bn (+7.5% YoY).
The company expects sales to decline YoY. This is due in part to a withdrawal from the business of operating new car dealers in Australia (described later), which will lower revenue by approximately JPY85.0bn. In addition, in September 2021 subsidiary new car dealers in Japan that sell BMW and MINI models were excluded from the scope of consolidation, reducing revenue by a further JPY10.0bn. The company expects revenue to increase in its mainstay domestic used car business.
The company forecasts a JPY3.0bn YoY decline in operating profit. Withdrawing from the business of operating new car dealers in Australia will have a JPY3.0bn downward impact. In addition, the easing of a spike in used-car auction prices in Q1 FY02/22 is expected to have a JPY1.0bn negative impact, and a change in revenue recognition standards is expected to lower profit by a further JPY900mn. Offsetting this combined JPY4.9bn in negative factors, the company anticipates JPY1.9bn in positive factors. Specifically, the company anticipates an increase in unit car sales due to the opening of large stores (five in FY02/22 and seven in FY02/23).
The company expects net income attributable to owners of the parent to rise YoY, due to a gain on the sales of shares in subsidiaries operating new car dealers in Australia and a decrease in taxes owing to tax-effect accounting.
In April 2022, the company decided to transfer all shares of its consolidated subsidiaries, IDOM Automotive Group Pty Ltd. and Gulliver Australia Pty Ltd. As a result of the transfer, the company projects sales to fall by JPY85.0bn, operating profit by JPY3.0bn, and recurring profit by JPY2.8bn YoY in FY02/23.
Parent company forecast
The full-year forecast for the parent company calls for sales of JPY309.0bn (+0.7% YoY) and operating profit of JPY12.0bn (+0.8% YoY).
Main KPIs
Assumptions for main KPIs are that retail and wholesale sales volume will rise YoY, while gross profit per unit is expected to fall YoY. Higher sales volume will be the driver behind increased sales and gross profit. The company expects operating profit to be essentially flat, while SG&A expenses rise.
In Q1 FY02/22, a semiconductor shortage suppressed new-car production. This caused a spike in used-car auction prices and have a JPY1.0bn negative impact on operating profit in FY 02/23. A change in revenue recognition standards will cause sales of warranty services to be divided into periods, lowering profit by a further JPY900mn. The company forecasts that, excluding these temporary negative factors, operating profit would be up JPY2.0bn YoY.
Retail sales volume
The company expects to sell 244,000 cars (+2.7% YoY), with retail accounting for 144,000 units (+2.8% YoY), and wholesale accounting for 100,000 (+2.7% YoY). The company aims to maintain the number of directly managed stores at the previous year’s level of 445, but to close medium-sized stores and open large ones, leading a rise in sales volume. The company plans to open seven large stores (29 large stores as of end-FY02/22). In line with its medium-term growth strategy for the domestic business, the company plans to open maintenance shops at seven large stores (eight as of end-FY02/22).
IDOM’s strategy for stores involves closing medium-sized stores that have low sales efficiency and opening large stores in favorable locations it believes will have good sales efficiency. These large stores are roughly 8,260sqm, or three times the area of regular stores. They feature refined designs and are capable of displaying some 300 used cars (as opposed to about 100 in regular stores), giving customers more options and improving the company’s sales efficiency. As of end-FY02/22, 29 of its 445 directly managed stores use the large format.
Due to an increase in the number of large stores, from FY02/19 to FY02/21 the number of directly managed stores declined from 519 to 460 (-59 stores), but display space grew from 106,000sqm to 165,000sqm (+59,000sqm), while rents rose only slightly from JPY9.8bn to JPY10.0bn. However, the number of vehicles sold at retail grew from 124,527 to 137,382 (+12,855 vehicles, +10.3%).
The company anticipates sales per vehicle of JPY1.3mn (-1.9% YoY). This decrease is the result of the spike in used-car prices at auction in Q1 FY02/22, described above, which will disappear in FY02/23.
IDOM forecasts gross profit per vehicle of JPY254,000 (-1.2% YoY), with the gross profit margin rising while sales per vehicle falls.
Projected parent company gross profit
As a result of the aforementioned factors, the parent company expects gross profit of JPY62.0bn (+1.5% YoY) and GPM of 20.1% (+0.2pp YoY).
Projected parent company SG&A expenses
The parent company projects SG&A expenses of JPY50.0bn (+1.7% YoY). As it opens large-format stores and maintenance shops, the company expects personnel expenses and rents to increase.
Despite an increase in SG&A expenses, higher gross profit should more than compensate, so the company expects operating profit to rise by 0.8% or JPY93mn YoY.
Difference between consolidated and non-consolidated projections
Core domestic business
In core domestic business (the parent company, Gulliver Insurance, and Tokyo My Car), the company forecasts sales of JPY308.0bn (flat YoY) and operating profit of JPY13.5bn (flat YoY). It also expects the difference in operating profit between the parent company and the core domestic business to be flat YoY.
Australia segment
For this segment, the company forecasts sales of approximately JPY5.4bn (-61% YoY) and operating profit of around JPY1.9bn (-61% YoY). (These figures are Shared Research estimates, based on disclosure materials.)
As is described above, in April 2022 the company made the decision to sell all its shares in new-car-dealing subsidiaries in Australia (IDOM Automotive Group Pty Ltd. and Gulliver Australia Pty Ltd.) and withdraw from this business. The company plans to sell these companies in June 2022, so the business in Australia will be included in the consolidated accounts for a four-month period in FY02/23 (March–June 2022). The company expects this move to reduce sales by around JPY85.0bn in FY02/23, lower operating profit by approximately JPY3.0bn, and decrease recurring profit by some JPY2.8bn.
IDOM plans to put the expertise and networks it has built up by managing new car dealers in Australia to use in further business developments in the country. The company plans to maintain its business in Australia through IDOM Innovations Pty Ltd., a wholly owned subsidiary it established in 2020. IDOM plans to build platform businesses (such as a used car inventory management solution) to support automobile sales, applying new technologies and innovations to promote transparency and fairness in used car transactions. The company will set an investment ceiling for new business investment in Australia. IDOM plans to invest up to JPY1.0bn over a two- to three-year period from FY02/23. In the future, the company says it will consider business development in Asia, Europe, and the United States.
Dividends
The company’s policy is to pay total dividends equal to 30% of the previous fiscal year’s net income, so FY02/23 dividends are based on FY02/22 net income attributable to owners of the parent. The projected FY02/23 dividend is therefore JPY32.4 per share (versus JPY4.6 in FY02/22).
Medium- to long-term outlook
The company had not announced a new medium-term plan since April 2016 when it announced its previous medium-term plan (FY02/17–FY02/20). However, in April 2022 the company unveiled a new plan covering the period from FY02/23 to FY02/27.
Since FY02/15, IDOM has been working to shift from its previous business model of buying used cars simply for wholesaling to a business model (retail model) in which it increases its retailing ratio. However, it was unable to achieve stable profit growth in the five years from FY02/15 to FY02/19.
Thereafter, it implemented measures to address issues encountered during the five-year period, resulting in YoY sales and profit growth during the three years from FY02/20 to FY02/22. Based on these results, the company says it has transitioned from a buyback retail model to a retail model. The company has decided to completely exit the new car dealer business (both in Japan and Australia).
One of the key strategies of the medium-term management plan from FY02/23 is to open large stores and stores with maintenance shops in Japan. During the plan’s period, the company expects an increase in retail sales volume (170,000 units), growth in operating profit (JPY21.0bn), higher OPM (5.0% or more), stable or higher ROIC (10% or more), and targets FCF generation (of around JPY30.0bn over the five years).
State of the used-car market
Used car retail market is large with potential for growth and room for IDOM to expand its market share further
According to a Yano Research Institute report, Automotive Aftermarket 2018, the used car retail market in Japan has a value of approximately JPY3.7tn. IDOM believes the market is likely to expand even further, based on the fact that the sales ratio of new cars to used cars is 3:7 in the US, but 7:3 in Japan, and Japanese people are becoming less reluctant to buy used cars.
The company conducted online surveys of 1,000 consumers in December 2020 and March 2022, asking about their reluctance to purchase used cars compared with the past (from 10 years ago to a few years ago). The percentage of respondents who answered that their reluctance has decreased or who never were reluctant rose from 61.4% in December 2020 to 65.2% in March 2022. From these results, the company deduces that consumer resistance to used cars is waning and that the number of consumers who choose used cars may increase in the future.
The company’s share of the retail market for used cars rose from 1% in FY02/12 to 5% in FY02/22. Even though IDOM counts as one of the largest companies in Japan in terms of used car retailing, it still has a market share of only 5%, suggesting it has ample room for growth.
Impact of increasing EV prevalence
The Tokyo Metropolitan Government has set a goal of increasing the ratio of zero-emission vehicles to total new vehicle sales in Tokyo to 50% by 2030.
IDOM buys and sells used cars, which is part of the car ownership cycle, and believes that more and more people will replace their cars as electric vehicles become more popular, creating business opportunities. In addition, the company’s rule of thumb is to hold inventory for no more than two weeks, so Shared Research believes that it will not be particularly vulnerable to reductions in the value of combustion engine vehicle inventory as the popularity of electric vehicles increases.
Initiatives from establishment in 1994 to FY02/22
Evolution of the company’s business model breaks down roughly into three phases. During the first phase, from establishment in 1994 to FY02/14, the company adopted a wholesale model. It moved to a buyback-retail model from FY02/15 to FY02/19. The third phase, from FY02/20 to FY02/22, was characterized by a retail model.
Establishment and move from wholesale model to buyback-retail model
Founded in 1994, the company built a business model specializing in car buying under the Gulliver brand. This business model enabled the company to achieve earnings growth in the 2000s, and in FY02/07 it achieved record operating profit of JPY11.1bn.
However, thereafter, a growing number of competitors and intensifying price competition made further earnings growth difficult. Until 2014 or so, the company continued to use the business model of buying and wholesaling used cars, while also shifting to a buyback-retail model in which it put the cars it purchased on display at stores and sold them to retail customers. From about 2015, it began working on a full-scale move to the buyback-retail model.
FY02/15 to FY02/19 (shift to the buyback-retail model)
During the five years from FY02/15 to FY02/19, IDOM opened more stores in Japan, aiming to grow profits by increasing retail sales volume. As a result, the store count grew from 354 in FY02/15 to 519 in FY02/19, and the number of vehicles sold at retail more than doubled from 52,000 to 124,000. However, despite the increases in store count and retail sales volume, FY02/19 operating profit was just JPY3.4bn, less than the JPY5.3bn it had recorded in FY02/15. In FY02/19, the company curtailed vehicle profits, and aimed to grow profit by cross-selling ancillary services (car insurance and loans), but the salesforce had trouble keeping up with the sudden changes in the business model, selling volume declined, and GPM also fell. Profit also fluctuated wildly during that period, and the company was unable to achieve stable profit growth.
Initiatives to address challenges from FY02/20 to FY02/22 (transition to the retail model)
From FY02/20 to FY02/22, IDOM implemented improvement measures to address challenges identified during the previous five-year period, resulting in three consecutive years of increased sales and profits.
Specific challenges from FY02/15 to FY02/19 were establishing a strategy for store openings and attracting customers online. The company implemented the following initiatives in regard to these challenges.
Establishing a strategy for store openings, opening large format stores
IDOM opened many stores in five-year period from FY02/15 to FY02/19, with the store count growing from 354 in FY02/15 to 519 in FY02/19. As a result of its multichannel store development (including stores specializing in low prices, in minicars, and in minivans), the company became its own competition in some regions.
In response, starting in FY02/20, it reviewed its criteria for opening and closing stores and made them stricter, and ranked its stores in terms of profits and capital efficiency. Previously, it would close stores operating in the red, but now, based on the ranking, it will close stores deemed inefficient, even if they are operating in the black. It also became stricter in selecting regions and specific locations for opening stores.
In addition, the company began opening large stores based on profit and capital-efficiency criteria. As it moved toward the large-store format, store areas increased and store retail volumes increased. (Large stores are described later.) As it moved from a buyback-retail model (retailing the vehicles it purchased from customers) to also purchasing used cars at auction, the company transitioned to a retail model, in which retail sales of used cars became the major source of earnings. As of April 2022, in addition to the retail model the company was working to increase earnings by expanding ancillary services.
Initiatives for attracting customers online
During the five years from FY02/15 to FY02/19, IDOM was unable to effectively attract customers online. Such customers tend to choose stores based on price. The ineffective online efforts resulted in an upward trend in customer acquisition costs.
To deal with this issue, whereas retail prices were previously set uniformly by the head office, the company assigned a merchandising department to each business unit and established a system by which prices can be set by taking into account competition and other local factors. As a result of these initiatives, it was able to reduce its advertising expenses, mainly by reducing its online ad spending as retail sales volume expanded. (On a non-consolidated basis, FY02/22 advertising expenses were down 27% versus FY02/19.)
Medium-term management plan (FY02/23 to FY02/27)
Company announces medium-term management plan
Target business portfolio over the medium to long term
When deciding where to prioritize investment and which businesses to withdraw from, the company emphasizes capital efficiency and growth potential (honing its focus toward businesses that are strong in both criteria). In FY02/22, the company’s business portfolio included large stores in Japan, medium-sized stores in Japan, small stores in Japan (purchasing outlets), new car sales in Australia, new car sales in Japan, and new business. Among large, medium-sized, and small stores in Japan, large stores have the highest capital efficiency and offer good growth potential. Accordingly, the company has decided to concentrate its management resources on large stores for the five years of the medium-term management plan. Determining that capital efficiency and growth potential is relatively low for new car sales in Japan and Australia, in September 2021 the company withdrew from the business of managing new car dealers in Japan that sell BMW and MINI models. In April 2022, it also decided to move out of (sell) the business of operating new car dealers in Australia.
Medium-term plan concentrates on a growth strategy focused on capital efficiency (opening large stores that have maintenance shops)
As already described, IDOM implemented improvement measures from FY02/20 to FY02/22 to address challenges identified during the previous five years and achieved three consecutive years of increased sales and profits. Based on these results, the company determined that opening large stores would be an effective way to increase profits and maintain or increase capital efficiency over the medium to long term. From FY02/23, the company will leverage the Gulliver brand's ability to attract customers and concentrate on a growth strategy focused on capital efficiency (opening large stores that have maintenance shops).
KPIs of the medium-term management plan
As the table below indicates, the new plan targets an increase in retail sales volume (170,000 units), growth in operating profit (JPY21.0bn), higher OPM (5.0% or more), stable or higher ROIC (10% or more), and targets FCF generation (of around JPY30.0bn over the five years).
Notes: ROIC is calculated as operating profit times (1 - effective tax rate) / (weighted average at the beginning and end of the period of inventory + fixed assets).
Operating profit for FY02/22 includes JPY4.9bn in operating profit of businesses in Australia that are scheduled for sale in June 2022.
Free cash flow (FCF) is the sum of cash flows from operating and investing activities.
Cash allocation from FY02/23 to FY02/27
From FY02/23 to FY02/27, the company plans to invest JPY20.0bn to open 50 large stores and 50 stores with maintenance shops (capital investment of JPY200mn per large store and JPY200mn per maintenance shop). The company also expects to invest JPY2.0bn in IT, with DX and AI investments aimed at promoting efficiency.
Over the five-year period, the company anticipates free cash flow of around JPY30.0bn, which it will use to pay dividends and repay borrowings. By repaying borrowings, the company expects to improve its financial soundness.
Dividends are linked to results. The company aims to maintain a payout ratio of 30% of the previous year’s net income attributable to owners of the parent.
Themes of the medium-term management plan
The medium-term management plan’s themes are to increase the value provided to customers, leverage the brand, and contribute toward a sustainable society. By working toward these themes, the company plans to achieve the KPIs mentioned above.
Increasing the value provided to customers
To increase the value provided to customers, during the five years from FY02/23 to FY02/27, the company plans to open 50 large stores and 50 stores with maintenance shops, increasing the total number of large stores to 80 (29 large stores and eight with maintenance shops as of end-FY02/22). IDOM will maintain its store count by replacing medium-sized stores with new ones, but the larger showroom space at larger stores will allow it to display more used cars, which it expects to raise retail sales volume per store. By opening maintenance shops within stores, the number of stores able to provide inspections, maintenance, and repairs will increase, providing greater opportunities to earn revenue from ancillary services.
Aiming to increase retail sales volume and grow market share by using a large-store format
The company has traditionally expanded its business using a multichannel store development scheme targeting certain customer bases by offering different vehicle categories (stores have included Gulliver and other branded stores specializing in low prices, in minicars, and in minivans). However, it now plans to make the most of the Gulliver brand (Gulliver and Gulliver Outlet), which enjoys good brand recognition and a reliable ability to draw customers.
The large stores will have 3x the area of its conventional (medium-sized) stores, allowing them to have more vehicles on display. Capital investment will be about JPY200mn, and the company believes it can recoup its investment in three years. It began using the large format in FY02/20, and as of end-FY02/22, 29 of its 445 directly managed stores employ the large format. IDOM says that as a result of the increase in large stores, comparing FY02/19 and FY02/21, the number of directly managed stores fell from 519 to 460 (-59 stores), but display space increased from 106,000sqm to 165,000sqm (+59,000sqm), while rents rose only slightly from JPY9.8bn to JPY10.0bn. However, the number of vehicles sold at retail grew from 124,527 to 137,382 (+12,855 vehicles, +10.3%).
Large stores tend to concentrate on retail sales, which have a relatively high gross profit margin. Because retail unit sales per store are high but the company holds down the percentage of fixed costs, SG&A ratios are low. Consequently, opening more large stores should raise the operating profit margin.
Entering the maintenance business
It cites four reasons for entering the maintenance business: the large scale of the market, its wish to maximize customer lifetime value (LTV), its aim to improve efficiency by bringing more operations in-house, its goal of differentiating itself from the competition.
Maintenance market scale: According to Automotive Aftermarket 2018 (Yano Research Institute), Japan’s auto maintenance market is worth JPY5.4tn, making it even bigger than the used car retail market.
Maximum customer LTV: By entering the maintenance business, IDOM will be able to complete its transaction menu in the used car retail business to include used car retailing, warranty, auto insurance, vehicle inspection and maintenance, and purchasing. In doing this, the company’s aim is to increase points of contact with customers, attract repeat customers, and turn them into lifelong customers, thus maximizing customer LTV. In addition, having lost out on earnings opportunities from inspections and maintenance in the past because its stores did not have maintenance facilities, the company now hopes to take advantage of such opportunities by entering the maintenance business itself.
Efficiency achieved by bringing maintenance in-house: IDOM has established partnerships with maintenance shops throughout Japan, creating a network to which it outsourced maintenance and inspection operations. The company says it sells some 140,000 cars at retail each year, for a cumulative total of well over a million cars, and there have been customers who purchased a used car from Gulliver and then later requested maintenance or inspection services. By bringing maintenance and inspection functions in-house using its own maintenance shops, the company says it can generate earnings as soon as the shops are in place, and can improve the cost efficiency of its outsourcing (regarding pre-delivery maintenance and inspections).
Differentiation: With legal revisions that came into effect in April 2020, maintenance shops are required to make new capital investments. By entering the maintenance business in FY02/22, IDOM believes it will be able to differentiate itself from existing maintenance providers with the most up-to-date capital investments under the new legal system.
Capital investment for maintenance shops will come to about JPY200mn and, as with the large stores, the company expects to recoup its investment in about three years.
The company is recruiting and training mechanics, and says it is having no difficulties with recruitment. Draws for jobseekers include the name recognition of the company's Gulliver brand and state-of-the-art facilities. The company has expertise to train mechanics, as it operates Kanto Shohinka (commercialization) Center where it has been performing pre-delivery vehicle maintenance for stores in Kanto region since 2011.
Lineup of ancillary services
In addition to increasing retail sales volume by opening large stores and maintenance shops, the company plans to boost earnings from ancillary services. These include services the company has offered to date—such as warranties (available for up to 10 years as a paid option), auto loans, and insurance—as well as post-purchase services (inspections, maintenance, and repairs).
Leverage the brand
The company believes that its brand is its strongest asset. According to a brand awareness survey the company carried out, 94.9% of consumers said they recognized the Gulliver brand. During the period of the medium-term management plan, the company plans to leverage the power of the Gulliver brand to attract more customers.
Brand integration: The company aims to attract customers efficiently and without advertising by bringing stores under the Gulliver brand umbrella.
Enhance owned media: The company plans to enhance its website to attract more customers on its own and boost profitability (by reducing advertising expenses).
Contribute toward a sustainable society
The company believes that by buying used cars at reasonable prices, it can help consumers maintain the asset value of their cars, thereby providing the funds need to replace them with EVs. By buying and selling used EVs, the company will help to create a market for used EVs. Thus, by facilitating the circulation of used cars, the company believes it can encourage replacement with more environmentally friendly vehicles and contribute toward a carbon-neutral society.
Other: A platform business to support vehicle sales in Australia
In April 2022, the company made the decision to sell all its shares in new-car-dealing subsidiaries in Australia and withdraw from this business. IDOM plans to put the expertise and networks it has built up by managing new car dealers in Australia to use in further business developments in the country. The company plans to maintain its business in Australia through IDOM Innovations Pty Ltd., a wholly owned subsidiary it established in 2020. IDOM plans to build platform businesses (such as a used car inventory management solution) to support automobile sales, applying new technologies and innovations to promote transparency and fairness in used car transactions.
The company will set an investment ceiling for new business investment in Australia. IDOM plans to invest up to JPY1.0bn over a two- to three-year period from FY02/23. In the future, the company says it will consider business development in Asia, Europe, and the United States. The medium-term management plan does not factor in any contribution from new business in Australia.
Business
Used car seller backed by Japan’s largest used car buying network
Having first established itself as one of Japan’s largest buyers of used cars, IDOM is now one of Japan’s largest used car sellers as well. Gulliver is the company’s mainstay brand through which it buys used cars from consumers. The cars that are bought from consumers by Gulliver are resold through its own network of used car dealers, which go under a number of different names including Outlet, Liberala, and Gulliver Minikuru. The company has also been involved in the car wholesaling business, selling used cars at auction to third-party commercial buyers. In FY02/21, it sold some 137,000 used cars at the retail level (+3.3% YoY) and 83,000 at the wholesale level (+0.0% YoY) and bought a total of 225,000 cars (-0.2% YoY) through its domestic group operations. Its domestic chain had a total of 527 outlets (-19 YoY), of which 460 (-20 YoY) were under direct management.
Shift in business model
Evolution of the company’s business model breaks down roughly into three phases. During the first phase, from establishment in 1994 to FY02/14, the company adopted a wholesale model. It moved to a buyback-retail model from FY02/15 to FY02/19. The third phase, from FY02/20 to FY02/22, was characterized by a retail model.
Phase 1: Concentrate management resources on purchasing used cars to capture upstream (purchasing) segment
When IDOM was established back in 1994, the used car market in Japan was distinguished by the absence of any national chains. Multistore operators ran four to five stores at most, and nearly all lacked a dedicated sales staff. Against this backdrop, IDOM first set out to capture the upstream segment of the market and, toward this end, concentrated its management resources on purchasing and building up its used car inventory. Resolving not to stray from this objective (into areas unrelated to the purchasing of used cars) for ten years, the company’s initial objective was to get its market share up to 10% of the vehicles put up for sale by car owners.
When initially structuring its used car buying operations, the company followed the example of the restaurant chains that operate central kitchens. That is, it let individual outlets handle only those tasks that had to be done on-site (vehicle inspections, sales negotiations, etc.) while using head office staff to handle all other tasks (such as how and when the car would be resold, establishing the purchase price, inventory management, etc.). With this new business model the company was able to quickly expand, growing its operations to 500 outlets (including franchising) by 1999, or within four years and nine months of its founding; it followed this with a listing on the stock exchange in the year 2000 (earning the distinction of being fastest-listed company in Japan at that time), and reached the USD1.0bn mark for sales within ten years of its founding, thereby becoming Japan’s first “hyper-growth” company. On its strategic roadmap, the company has designated this period of infrastructure building as Phase 1.
Inventory management
As the company expanded its used car purchasing operations, the issue of inventory management grew in importance. Under Japanese tax law, automobiles are deemed to have a useful life of six years and therefore are considered to have no value as an asset from year seven. In actual practice, though, on the used car auction market the prices bid for the exact same model will differ even if the age of the car differs by as little as one month. This means the value of used cars held in inventory decline very quickly. Another issue is the large amount of money tied up in used car inventories, for even though they are less expensive than new cars, used cars are still expensive. To maintain strict control of inventories, the company decided early on to establish what it calls its “ironclad rule” of holding no car in inventory for more than two weeks—a rule that it continues to observe to this day.
Phase 2: Using used car purchasing operations to build up used car retail sales business
The company moved into what it calls its Phase 2 growth stage in 2014 with its decision to start building up its used car retail sales operations. In contrast to its previous practice of buying used cars at auction and holding them in inventory at its “pool center” until they were resold (in less than two weeks), after entering Phase 2 the company started holding its inventories on the lots of its used car retail outlets. Moving the cars that were formerly held in inventory at its “pool center” to the showrooms of its used car dealers did not change the company’s inventory burden; rather, it merely shifted inventories around to where they could be sold more quickly and at higher prices. The switch to this business model was only possible because the company had first created a strong brand, having established itself as one of the largest used car buyers in Japan and built up strong name recognition.
The company’s move into used car retailing offered the benefit of being able to realize the higher gross margins earned by used car retailers without slowing inventory turnover and increasing its inventory holding period. As a general rule, used cars that are bought from consumers and then resold on the auction market are said to generate some JPY100,000 to JPY150,000 in gross profit per vehicle for the wholesaler. In contrast, by buying used cars at the auction price and then reselling them through its network of used car retailers, IDOM typically earns between JPY150,000 and JPY200,000 in gross profit per vehicle (with the amount varying depending on the type of car and other factors). To facilitate its move into used car retailing, the company began aggressively opening up used car showrooms in 2014 with the expectation that the additional gross profit generated from selling used cars at the retail level would easily allow it to recoup the cost of opening the new showrooms and cover the running cost (mainly personnel costs) of its used car sales business.
Phase 3: Establishing a used car retail model by opening large stores
In the three years from FY02/20 to FY02/22, the company revised its criteria for store openings and closures, making them more stringent, and rated each store according to its profit and capital efficiency. Traditionally, the company had closed loss-making stores. Under the new criteria, the company even closed some stores that were profitable, if their efficiency was low. The company also tightened its criteria for new store regions and sites.
The company began opening large stores on the basis of its profit and capital efficiency. As it promoted the large-store format, stores became more spacious and retail sales volume per store increased. As it moved from a buyback-retail model (retailing the vehicles it purchased from customers) to also purchasing used cars at auction, the company transitioned to a retail model, in which retail sales of used cars became the major source of earnings.
The large stores will have larger site areas than its conventional stores (medium-sized purchase/retail stores), allowing them to have more vehicles on display. The company began using the large format in FY02/20, and as of end-FY02/22, 29 of its 445 directly managed stores employ the large format. IDOM says that as a result of the increase in large stores, comparing FY02/19 and FY02/21, the number of directly managed stores fell from 519 to 460 (-59 stores), but display space increased from 106,000sqm to 165,000sqm (+59,000sqm). The number of vehicles sold at retail grew from 124,527 to 137,382 (+12,855 vehicles, +10.3%).
Retail sales volume on a par with medium-sized automakers
In FY02/14, the company sold 50,000 used cars through its retail sales network, accounting for only 28.2% of the total number of vehicles sold through its directly managed outlets. After strengthening its used car retail sales, this figure grew to 137,000 cars by FY02/21 (62.5% of total). Although direct comparisons are not strictly proper, we note that Subaru, the No. 7-ranked domestic brand in terms of new automobile sales, sold some 106,000 vehicles, while No. 8 Mitsubishi Motors sold approximately 70,000. In terms of number of automobiles sold, this puts IDOM ahead of all new auto manufacturers and imported auto dealers from the No. 7 rank down.
In 2021, the number of used cars (standard and small passenger cars) registered reached 3,246,000 (+2.9% YoY). IDOM’s share of this used car retail volume was 4.3% (+0.2pp YoY).
Preparation for the next growth stage
Having established itself as the largest used car buyer in the industry and built up a solid track record in used car retail sales, the company is now starting to take steps toward its next growth stage, during which it plans to focus on diversifying sourcing and its product and service lineup. Shared Research believes that 1) since the company’s status as a major used car retailer puts it in a good position to follow the trends in consumer preferences, there is no reason why it should only buy used cars from consumers, as it is now in a position to generate sufficient gross profit on sales even when buying at auction and through other channels that it did not use in the past; and 2) the company understands that consumer needs vis-a-vis cars may shift from “ownership” to “use,” especially among the younger generations, and is taking steps to meet this demand as well.
Specific initiatives on this front include its establishment of NOREL, a subscription car service that makes use of used cars (as well as some new cars such as BMWs and Minis), Gulliver Flea Market, a C2C platform that brokers used car sales between individual consumers, and Go2Go, a C2C car-sharing service launched in August 2019.