Lawson Sees Accelerating Sales With Japan Pharmacies

Lawson Inc. (2651), the Japanese convenience-store company anticipating a 10th straight year of operating income gains, plans to accelerate growth by tapping rising demand for prescription drugs.

The Tokyo-based company’s revenue could jump by as much as 45 percent in seven years as it adds pharmacies in more stores and benefits from consolidation in the health-care industry, Chief Executive Officer Takeshi Niinami said yesterday in an interview at the company’s headquarters.

Lawson is seeking a bigger presence in the pharmacy business as an aging population in Japan drives up demand for medicines and health care. Deregulation needed to cut health care costs as the national debt rises could spur consolidation in the pharmaceutical industry and create opportunities for Lawson, Niinami said.

“I expect 50 percent of the 52,000 mom-and-pop pharmacies will survive” over the next seven years, Niinami, 53, said.

If all Lawson stores offered pharmaceutical services, the company would boost per-store turnover to 800,000 yen ($10,207) daily from the 550,000 yen now, he said. As of August, 15 of Lawson’s stores offered these services, according to an Oct. 3 earnings statement.

By 2050, 42 percent of Japanese will be at least 60 years old, up from 32 percent now, already the highest proportion in the world, according to Global AgeWatch.

Lawson shares rose 1.4 percent to 5,750 yen in Tokyo trading today. The Nikkei 225 stock average rose 0.2 percent.

Health-Care Costs

Japan’s aging population is expected to boost demand for medicine, leading to growth in the market even with biennial price cuts, the IMS Institute for Healthcare Informatics said in a July report. The nation’s market for prescription medicine was worth $111.2 billion last year after growing 3.9 percent annually from 2007 to 2011, according to the report.

“Convenience stores are doing well,” Akira Iwasaki, a Tokyo-based analyst at Iwai Cosmo Securities Co., said in a phone interview. “One thing is they are expanding into the elderly population and winning customers.”

Japan should make its health care more efficient by reducing government subsidies, Niinami said. Lawson would seek to employ pharmacists in its stores, creating jobs for the “sleeping workforce” of educated and trained people who currently don’t have jobs.

Deregulation

“Deregulation would be good for the deficit and good for society,” said Niinami, who added that he expects the opposition Liberal Democratic Party to push for changes after it regains power from Prime Minister Yoshihiko Noda’s Democratic Party of Japan in elections no later than the end of August.

Lawson, which had 10,960 stores in Japan as of September, lowered its revenue projection for the year ending Feb. 28 by 0.4 percent to 501 billion yen on Oct. 3. Its same-store sales fell 1.5 percent in September, the fourth straight decline, while the number of customers shrank by 1.3 percent, according to the company.

Japanese consumer sentiment deteriorated in September for the first time in four quarters as more households saw their incomes decline, according to a Bank of Japan (8301) survey released Oct. 1.

Seven & I Holdings Co. (3382), operator of the 7-Eleven chain and Japan’s biggest convenience-store company, lowered its net income forecast by 7.7 percent to 143 billion yen for the year ending February due to weakened consumer confidence.

Widened Margin

While Lawson might have to revise its sales projection again at a future date, profit forecasts are unlikely to be affected because margins continue to improve, Niinami said.

Lawson’s operating margin widened to 16.2 percent in the second quarter ended August from 11.5 percent in the first quarter, according to data compiled by Bloomberg.

“Gross profit on merchandise went up by 0.6 percentage points in the first half of the year, and could grow by another 0.2 or 0.3 points in the second half,” Niinami said. He expects another 1 percentage point gain next fiscal year.

Lawson’s results aren’t likely to be hurt by a consumer backlash over a territorial dispute between Japan and China, Niinami said.

Demonstrators protesting Japan’s purchase of islands claimed by both countries in September ransacked stores and auto showrooms, forcing Japanese companies to shutter Chinese outlets and factories.

China Dispute

Toyota Motor Corp. (7203) and Nissan Motor Co. (7201) reported their biggest drops in China sales since at least 2008 after consumers shunned Japanese cars in September amid the tensions. Lawson plans to have 10,000 stores in the world’s most populous nation by 2020, up from close to 400 at the end of September.

The dispute could damage Asia’s biggest economies, Prime Minister Noda warned on Oct. 10. “If our ties cool, particularly economic ones, then it isn’t a question of one or the other country suffering,” Noda said in an interview in Tokyo. “Both countries lose out.”

Lawson originated in the U.S. state of Ohio in 1939 as a dairy milk store before moving to Japan in 1975, according to its website.

Lawson, which has two stores in Hawaii, doesn’t have a presence in the continental U.S. The chain will be interested in eventually expanding into North America, with a focus on cities like New York or San Francisco, Niinami said.

To contact the reporters on this story: Yuki Yamaguchi in Tokyo at yyamaguchi10@bloomberg.net; Brian Fowler in Tokyo at bfowler4@bloomberg.net

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

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