Lawson Sees Five-Year Profit Jump Selling Coffee

Lawson Inc. (2651), Japan’s second-largest convenience-store chain, is betting wider offerings of higher- margin fried chicken and hot coffee will lure customers from competitors and boost earnings 62 percent in five years.

The company expects to boost operating profit to 100 billion yen ($1.3 billion) in about five years from a record 61.8 billion yen in the year ended Feb. 29, aided by sales of higher margin products such as fast food, Chief Financial Officer Yoshiyuki Yahagi said in an interview in Tokyo.

Lawson, which added fresh fruits and vegetables to its offerings in 2005, is expanding its line of hot food such as coffee and fried chicken that will be prepared inside the outlet and are more profitable. Lawson’s operating margin of 13 percent in the year ended February topped 7.3 percent at its larger competitor Seven & I Holdings Co. (3382) and 4.2 percent at supermarket operator and Japan’s largest retailer Aeon Co. (8267), according to data compiled by Bloomberg.

“We call fresh food magnets -- a tool to attract more customers,” Yahagi said on Aug. 29. “Fresh food has lower margin, but we want customers to buy a dish of hot ready-made food along with it.”

The stock gained as much as 2.9 percent to 6,060 yen in Tokyo today before closing up 1.9 percent. It was the second biggest gainer on the Nikkei 300 index, which lost 1.7 percent.

The convenience store operator aims to raise the margin of such a basket to as much as 43 percent over the next five years from about 38 percent, Yahagi said.

Wooing Women

The convenience store chain aims to boost operating profit by more than 7 percent annually, Yahagi said. That estimate is “conservative” said, Mitsushige Akino, executive director at Tokyo-based Ichiyoshi Asset Management Co. “They can achieve that.”

The company’s operating income rose 11.2 percent in the year ended February, according to data compiled by Bloomberg.

The retailer is trying to woo diversified customers such as women and elderly people who did not frequent the stores earlier.

In May, it started to sell smaller servings of fried chicken to lure more customers away from supermarkets. Lawson sells a piece of chicken starting at 45 yen, according to a May 24 press release. It also added hot coffee to attract more women.

Competition Intensity

“Lawson is moving in the right direction in terms of increasing profitability by increasing food that they cook inside the store,” said Satoshi Yuzaki, Tokyo-based general manager at Takagi Securities Co. in Tokyo. “However, rivals are doing similar things so the competition may intensify.”

Seven & I’s Seven Eleven chain and Aeon supermarkets offer hot food as well.

Lawson had 5,085 outlets selling fresh vegetables as of February, which helped attract more women and the elderly, according to a presentation made by the company in April.

It plans to increase the number of such stores to 6,220 by February next year, the retailer said. The company operates a total of 10,457 stores in Japan as of February.

The retailer forecasts sales will rise 5 percent to 503 billion yen for the year ending in February 2013, while net income will increase 34 percent to 33.4 billion yen, it had said in April.

Operating profit will gain 6.8 percent to 66 billion yen in the period, the company said. That’s lower than the 67.2 billion yen average of 17 analysts’ estimates compiled by Bloomberg.

The efforts to increase margins comes amid a decline in same-store sales in Japan’s convenience store industry for two consecutive months in July and June as competition intensifies.

Sales at Japan’s convenience stores declined 3.3 percent in July from a year ago on a same-store basis, according to the Japan Franchise Association. This follows a 2.6 percent fall from the year earlier in June, it said. Sales expanded at a slower pace amid lower summer temperatures this year.

To contact the reporter on this story: Yuki Yamaguchi in Tokyo at yyamaguchi10@bloomberg.net

To contact the editor responsible for this story: Stephanie Wong at swong139@bloomberg.net

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