IDOM 7599
IDOM
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2021-11-11
2021-11-11
2021-10-14
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Tokyo Building 25F,2-7-3, Marunouchi, Chiyoda-ku Tokyo, Japan 100-6425
Summary
IDOM conducts used car buying, wholesaling, and retailing, drawing particular strength from Gulliver, its own used car purchase trader. It is one of Japan’s largest used car purchasing companies.
Specialty Retail
Key dates
2022-01-14
Next earnings announcement
2014-03-25
Coverage initiation
Executive summary
Business overview
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 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 FY02/21, 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.
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 in FY02/20 and FY02/21. Based on these results, the company says it has emerged from a period of transition (to the retail model) to arrive at a period of genuine growth starting with FY02/22. 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). It has announced that it will enter the maintenance business in FY02/22.
Earnings trends
In FY02/21, sales were JPY380.6bn (+5.2% YoY), operating profit was JPY10.6bn (+16.3% YoY), and net income was JPY1.5bn (-58.1% YoY). From April to mid-May 2020, demand declined due to COVID-19 and the company lowered retail prices and reduced inventories. Since late May, after the lifting of the state of emergency, the number of customers visiting the stores has recovered and the company moved back the retail prices to normal levels. Throughout the year, the impact of COVID-19 on the business has been limited. The company recorded JPY1.7bn in extraordinary gains, including subsidy income of JPY1.7bn. The extraordinary loss was JPY6.9bn, including impairment losses of JPY4.5bn (of which goodwill impairment for the Australian subsidiary was JPY4.0bn) and pandemic-related losses of JPY1.8bn.
In October 2021, the company revised its forecast for FY02/22. The revised forecast calls for sales of JPY405.4bn (+6.5% YoY), operating profit of JPY15.0bn (+41.9% YoY), recurring profit of JPY13.9bn (44.2% YoY), and net income attributable to owners of the parent of JPY8.0bn (+439.1% YoY). Versus the previous forecast, these targets represented an increase of JPY900mn for net income attributable to owners of the parent. The company revised its forecast, because operating profit in 1H was higher than expected, and the effective tax rate was lowered as a result of increases in operating profit at some Australian subsidiaries with losses carried forward. A conservative estimate of the effective tax rate for corporate income tax and other taxes was also a reason for the revision.
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
Revisions to full-year forecast
IDOM Inc. announced earnings results for 1H FY02/22; see the results section for details.
IDOM Inc. revised its forecast for FY02/22.
Revised forecast for FY02/22
Reasons for revision
The company revised its forecast for net income attributable to owners of the parent, because 1H operating profit was higher than expected, and the effective tax rate was lowered as a result of increases in operating profit at some Australian subsidiaries with losses carried forward. A conservative estimate of the effective tax rate for income taxes was also a reason for the revision.
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
1H FY02/22 results (out October 14, 2021)
Sales were up YoY. In Japan, the number of customers visiting stores grew as a result of the operation of large stores opened in FY02/21 and the effect of advertising, which led to higher retail sales volume. The Australian subsidiary meanwhile 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.
Moving expenses associated with headquarters relocation totaled JPY870mn, including booking as an extraordinary loss the portion of the current headquarters' fixed assets that had not been depreciated and the cost of restoring the property to its original condition.
Results by segment were as follows.
Japan
Sales were JPY157.2bn (+13.1% YoY), and segment profit (operating profit) was JPY7.1bn (+98.8% YoY).
Retail sales volume increased thanks to the operation of large stores opened in FY02/21 and a higher number of visitors at existing stores. The retail sales volume at directly managed stores in Japan was 72,694 units (+3.0% YoY), a record high for 1H.
Australia
Sales were JPY69.5bn (+81.5% YoY), and segment profit (operating profit) was JPY2.4bn (+166.8% YoY).
New car sales volume increased on the back of favorable conditions in the Western Australian market due to higher iron ore prices. Used car sales, which the company has been working to strengthen, remained strong. In addition, the yen weakened against the Australian dollar compared to 1H FY02/21, contributing to the growth in sales and profit.
Company forecast for FY02/22
For FY02/22, the company forecasts sales of JPY405.4bn (+6.5% YoY), operating profit of JPY15.0bn (+41.9% YoY), recurring profit of JPY13.9bn (+44.2% YoY), and net income attributable to owners of the parent of JPY8.0bn (+439.1% YoY).
In July 2021, the company revised up its full-year FY02/22 forecast. The upward revision versus the initial forecast, was JPY15.4bn for sales, JPY2.5bn each for operating profit and recurring profit, and JPY1.3bn for net income attributable to owners of the parent. The company revised its full-year forecast to reflect stronger-than-expected Q1 results and booking of the cost of headquarters relocation as an extraordinary loss. The company maintained its price assumptions as a basis for its earnings forecast (domestic used car and Australian new car prices) from the initial forecast, which is little changed from FY02/21. Regarding forex, the company expects the YoY impact of yen depreciation against the Australian dollar to fade from Q2 onward.
In October 2021, the company once again revised its full-year FY02/22 forecast. The revised forecast raised the net income estimate by JPY900mn.
The company revised its forecast, because operating profit in 1H was higher than expected, and the effective tax rate was lowered as a result of increases in operating profit at some Australian subsidiaries with losses carried forward. A conservative estimate of the effective tax rate for corporate income tax and other taxes was also a reason for the revision.
Parent company forecast
The full-year forecast for the parent company calls for sales of JPY296.0bn (+7.4% YoY) and operating profit of JPY11.1bn (+41.3% YoY). These projections assume that even if restrictions on outings continue in the face of the pandemic, the impact on the number of customers visiting stores will be negligible for the fiscal year as a whole.
Main KPIs
Assumptions for main KPIs are that retail sales volume will rise YoY, retail gross profit and purchase volume will be flat YoY, and wholesale gross profit will increase YoY. Higher retail sales volume will lead to an increase in sales, while recovery in wholesale gross profit will be the driver behind gross profit growth.
Retail sales volume
The company expects retail sales volume to increase YoY due to store openings and ongoing store efficiency improvements. It plans to open about 10 large stores. In addition, based on its medium-term growth strategy for the domestic business, it plans to add maintenance shops to its large stores (10 shops over the next few years).
IDOM’s strategy for stores involves closing small stores that have displayed poor sales efficiency and opening large stores in favorable locations it believes will have good sales efficiency. The large stores use refined designs and are capable of displaying some 300 used cars, giving customers more options and improving the company’s sales efficiency. As of end-FY02/21, 24 of its 460 directly managed stores use the large format. As a result of the increase in the number of large stores, comparing FY02/19 and 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%).
Wholesale gross profit
In Q1 FY02/21, the Japanese government declared a state of emergency in April 2020 in response to the spread of COVID-19, and used car auction prices fell in April and May 2020, causing deterioration in the profitability of the company’s wholesale business. IDOM does not disclose a breakdown of gross profit for the retail and wholesale businesses, but in Q1 FY02/21 it reported non-consolidated gross profit of JPY11.5bn (-19.2% YoY) and GPM of 17.7% (-4.1pp YoY). In Q2 and following quarters, GPM was above 20%. Since the impact of the state of emergency declaration in Q1 FY02/21 was lifted, GPM was 19.8% in Q1 (+2.1pp YoY).
Projected parent company gross profit
As a result of the aforementioned factors, the parent company expects gross profit of JPY59.8bn (+5.9% YoY) and GPM of 20.9% (+0.4pp YoY).
It anticipates 1H gross profit of JPY31.1bn (+15.2% YoY) and GPM of 20.7% (+0.6pp YoY) and 2H gross profit of JPY30.0bn (+1.9% YoY) and GPM of 20.5% (-0.3pp YoY). As mentioned, it expects wholesale gross profit to recover in 1H.
In July 2021, the company lifted its 1H and full-year gross profit forecasts by JPY1.3bn. This was due to retail sales volume in Q1 coming in above its initial forecast.
Projected parent company SG&A expenses
The parent company projects SG&A expenses of JPY50.0bn (+2.9% YoY). Whereas it booked personnel and other expenses during temporary closures in FY02/21 as extraordinary losses, in FY02/22 it will book such expenses as SG&A expenses. Advertising, travel, and transportation expenses it kept in check in FY02/21 will also return to their normal levels in FY02/22.
Despite an increase in SG&A expenses, higher gross profit should more than compensate, so the company expects operating profit to rise by 24.7% or JPY1.9bn YoY.
Difference between consolidated and non-consolidated projections
The company expects the difference between consolidated and non-consolidated projections to be sales of JPY109.4bn (+4.3% YoY) and operating profit of JPY3.9bn (+43.8% YoY). Breaking this down, Shared Research understands that, in the Japan segment, profit should recover at domestic subsidiaries (including new car dealers), with profit growth in the Australia segment as well. In addition, goodwill included in the adjustment amount will decline YoY.
In July 2021, the company lifted its 1H and full-year sales forecasts by JPY5.0bn and operating profit by JPY1.2bn. This was due to new car sales volume at Buick Holdings in Perth, Western Australia in Q1 coming in above its initial forecast and forex gains on the weaker yen.
Australia segment
In FY02/21, despite the impact of the pandemic, IDOM bolstered its used car business and improved cost efficiency. In addition, the company reclassified JPY1.4bn in personnel expenses (equivalent to pandemic-related government subsidies) to extraordinary loss as pandemic-related loss, resulting in a significant increase in profit.
However, in FY02/22 the company expects profit to fall YoY due to an increase in SG&A expenses. The personnel expenses (equivalent to pandemic-related government subsidies) it booked as extraordinary loss in FY02/21 will be booked as SG&A expenses again in FY02/22, which will weigh on profit.
IDOM expects new car and used car sales volume to be flat YoY in Australia. Buick Holdings, a subsidiary in Perth, Western Australia, strengthened sales of used cars in 2H FY02/21, boosting profit. In FY02/22, this effect should contribute to performance for the whole fiscal year, and Shared Research understands this will offset some of the profit decline caused by an increase in SG&A expenses.
Adjustments and goodwill amortization
In FY02/22, the company expects goodwill amortization to decline by approximately JPY250mn YoY (FY02/21 goodwill amortization came to JPY684mn). In FY02/21, IDOM recorded an impairment loss of JPY4.0bn on the goodwill of its Australian subsidiary in light of the subsidiary’s current status, so the FY02/22 goodwill amortization amount will decline proportionally.
Dividends
The company’s policy is to pay total dividends equal to 30% of the previous fiscal year’s net income, so FY02/22 dividends are based on FY02/21 net income attributable to owners of the parent. The projected FY02/22 dividend is therefore JPY4.6 per share (versus JPY10.6 in FY02/21).
Medium- to long-term outlook
The company has not announced a new medium-term plan since April 2016 when it announced its previous medium-term plan (FY02/17–FY02/20). However, at its FY02/21 results briefing, it did outline its growth strategy, centered on the domestic business.
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 in FY02/20 and FY02/21. Based on these results, the company says it has emerged from a period of transition (to the retail model) to arrive at a period of genuine growth starting with FY02/22. Its growth strategy includes opening large stores and entering the maintenance business.
Initiatives from FY02/15 to FY02/21
Establishment and move from wholesale model to 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 gradually shifting to a retail model, and from about 2015, it began working on a full-scale move to the retail model.
Five years from FY02/15 to FY02/19
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, 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 in FY02/20 and FY02/21 and resultant profit growth
In FY02/20 and FY02/21, IDOM implemented improvement measures to address challenges identified during the previous five-year period, resulting in two consecutive years of increased sales and profits.
Specific challenges were establishing an area strategy for store openings, attracting customers online, and effectively managing inventory. The company implemented the following initiatives in regard to these challenges.
Establishing an area strategy for store openings
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 and, based on the profit and capital efficiency criteria, started opening more large stores. In response to being its own competition in some areas, it replaced some stores with large format stores with high capital efficiency. In some cases, the expanded commercial sphere has led directly to increased retail sales volume.
As a result of these initiatives, the company had essentially eliminated self-competition by April 2020, and it says future store openings will center on replacing existing stores with large format stores.
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 (FY02/21 advertising expenses were down 27% versus FY02/17).
Effectively managing inventory
From FY02/15 to FY02/19, IDOM’s inventory management was inadequate for the retail model, resulting in slower inventory turnover for its display inventory. In particular, in FY02/19, inventory totaled JPY54.7bn (+71.1% YoY) and inventory turnover was 110 days (versus 73 days in FY02/18).
In response, the company added inventory turnover as a management indicator in conducting inventory control and worked to ensure awareness of the change. As a result, in FY02/21, inventory totaled JPY51.5bn and inventory turnover was just 86 days, enabling the company to achieve optimal inventory control, increasing inventory only in response to increasing retail sales volume.
Growth strategy for domestic business from FY02/22
As already described, IDOM implemented improvement measures in FY02/20 and FY02/21 to address challenges identified during the previous five years and achieved two consecutive years of increased sales and profits. From FY02/22, making use of the ability of the Gulliver brand to attract customers (the company recorded 420,000 customer visits in 2020), the company will implement a growth strategy for its domestic business that involves opening large stores with an emphasis on capital efficiency, along with entering the maintenance business. In addition, there is still room for improvement regarding the three challenges it has already been addressing—establishing an area strategy for store openings, attracting customers online, and effectively managing inventory—so it will continue working to address those as well.
Opening of large stores
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 losing their reluctance about buying used cars. Furthermore, the company, despite being the largest used car retailer in Japan, has only about a 5% share of the used car retail market, so it believes it has ample room to increase its share.
IDOM aims to increase its retail sales volume and grow its market share by using a large store format that has already proven itself
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. In the medium term, the company plans to replace some existing stores with large format stores, opening 10 such stores in FY02/22, and then building up the pace of store openings in stages while keeping an eye on capital efficiency.
The large stores will have larger site areas than its conventional 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-FY02/21, 24 of its 460 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%).
Entering the maintenance business
IDOM plans to add maintenance shops to ten large stores over the next few years.
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 from 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. It will open 10 maintenance shops at large stores over the next few years, and after that determine how to proceed while keeping an eye on capital efficiency.
Management indicators to be considered
In implementing its medium-term growth strategy, IDOM will emphasize the following management indicators.
Other topic: Impact of increasing prevalence of electric vehicles
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.
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
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.
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 expanding its network of used car dealers, 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 2020, the number of used cars (standard and small passenger cars) registered reached 3,371,000 (+0.9% YoY). IDOM’s share of this used car retail volume was 4.1% (+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 rapidly 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.
Business structure
IDOM has a simple business structure: it first purchases used cars from customers (C2B) and then either sells the cars it has purchased via its used car retail sales network (B2C) or wholesales them on the used car auction market (B2B).
Purchasing
The company’s mainstay brand through which it buys used cars is Gulliver. Before agreeing to purchase a vehicle and entering into a purchase agreement, the company goes through a standardized process including vehicle inspection, appraisal of the vehicle by head office staff, negotiations of terms, and finally the completion of purchase contract. This process requires a visit by the car owner to one of the company’s outlets or a visit by a company representative to the car owner’s home; for IDOM, this entire process can take as little as 30 minutes. 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 handling appraisals and all other tasks centrally, using its head office staff. In this manner, the company has been able to complete purchasing agreement in a relatively short period of time while at the same time establishing a fair appraisal value for the car under consideration.
IDOM’s purchasing process
IDOM’s used-vehicle purchasing process has been simplified and split into different steps, including inspection, appraisal, and final decision-making. The only aspect it leaves up to individual outlets is the vehicle inspection, which is based on uniform standards set by corporate headquarters. HQ determines valuations based on the results of inspections, and decides on when and where to send vehicles for auction. At each store the vehicle’s condition is first assessed. This takes about 20 minutes. The results are noted on an assessment sheet, with data sent to HQ. HQ then takes about 10–15 minutes to price the vehicle based on its condition and corresponding auction value, and sends the data back to the store. In about 40% of all cases, this results in a transaction. The Gulliver Flea Market service, which was launched from September 2015, targets an increase in contract rate.
Appraisal based on fair prices
A key element that sets IDOM apart from competitors is its use of fair prices based on auction prices, a practice that has been the driving force behind the company’s rapid growth. The company defines a “fair price” as one that will satisfy the customer, most likely lead to a sale at auction (i.e., high contract rate), and allow the company to realize a reasonable gross profit. At the time IDOM was founded in 1994, companies operating in the used car buying business were a very mixed bag, with a large number of them persistently offering well below the market price for the vehicles they wanted to purchase. IDOM brought transparency to used car purchasing prices where there was little previously, using its experience in the used car auction and its accumulated expertise to offer fair buying prices based on the appraisal value established by its head office staff.
In this relation, we note that customers who visit the company’s outlets with the aim of selling their car generally fall into one of three categories: 1) those who plan to purchase a new vehicle, 2) those who plan to purchase a used vehicle, and 3) those who only want to sell their vehicle (and plan to stop driving for a while). The company’s customers are split almost equally between these three types, but this means roughly two-thirds of the people coming in to sell their car are really looking to trade it in for another.
Retail
Centralized data system Dolphinet provides customers access to the latest information on used cars in inventory
Dolphinet is the company’s centralized information system for used cars, containing the latest information on the vehicles that have been acquired by both its directly managed and franchise outlets. Using Dolphinet, customers are able to view all the cars the company has in inventory around the entire country and place an order for the desired vehicle. One of the big attractions of Dolphinet for consumers is it lets them select from the most-recently added cars which have not been put up for auction and which are constantly being updated because of its rule of holding no car in inventory for more than two weeks.
Showrooms
The company’s push into used car showroom sales since 2014 has been a major growth driver. The aim of showroom sales is to maximize the gross profit per vehicle sold. Major objectives behind the move to showroom sales include 1) eliminating additional procurement costs by utilizing purchased inventory, 2) reducing inventory price risk and eliminating the need for further commitments of working capital by sticking to the company’s two-week limit for holding cars in inventory, and 3) securing a gross profit per vehicle sold that is substantially higher than is possible through its wholesaling operations.
As a general rule, the company is looking to recoup its investment in new showrooms within 36 months. A typical showroom will require an investment about JPY80mn and operating expenses of about JPY60mn per annum, assuming five employees. The company will only open a new showroom if the gross profit expected to be generated can cover all operating expenses and recoup its initial investment within three years. The amount of gross profit generated from the retail sale of an average used car will run between JPY200,000 and JPY300,000, with the amount varying depending on the type of car, its age, and other factors.
According to the company, the rising proportion of sales coming from retail sales has ended up increasing car inventories reported on its balance sheet even though it is sticking with its strict rule of not holding an unsold car in inventory for more than two weeks. This is because it usually takes four to six weeks after contract signing for the company to deliver the car and receive payment. Until the car is delivered to the consumer, the company records it on its balance sheet as merchandise inventories, so while a rise in the retail sales ratio does increase the burden on the company’s balance sheet, the additional inventory does not come with any price risk because it has already been sold.