Itochu Uses Paul Smith Plus Bananas to Outpace Commodity Rivals

When a cash register rings on sales of a Paul Smith suit, a bunch of Dole bananas or a pair of Marks & Spencer (MKS) pajamas, it’s money in the bank for Masahiro Okafuji.

The decision by the chief executive of Itochu Corp. (8001) to take Japan’s third-largest trading house into consumer goods and services through stakes in globally known brands is paying off. Itochu’s 17.9 percent return on equity last year well eclipsed the 3.3 percent at Glencore Xstrata Plc (GLEN), the world’s biggest listed trading and mining company. Mitsubishi Corp. (8058), Japan’s largest trading house, came in at 9.4 percent.

Itochu’s larger rivals at home, Mitsubishi and Mitsui & Co. (8031), are better known for supplying the nation’s oil, liquefied natural gas and other raw materials that made resource-poor Japan an economic heavyweight. Yet it’s Okafuji’s move into fashion and food that’s given the one-time linen reselling firm the best returns of its competitors. And he hasn’t finished yet.

“Some say the higher priority is spending billions of dollars on LNG projects, but I don’t agree, or at least that’s not our only task,” Okafuji, 63, said in an interview. “In resources, trading firms will always work under the producers. But if it’s a consumer business, we can take the lead.”

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Okafuji now has his sights set on surpassing Mitsubishi and Mitsui in total profit, not just margins. His tools of choice, he said, will remain simple: providing value-added consumer services and employees spending less time in the office. Selling branded T-shirts will also help, he added.

‘Big Gap’

“There’s a big gap between us and the top two because of the resource assets they own,” said Okafuji, who still carries the accent of his native Osaka, Japan’s merchant capital.

“So, first we needed to beat them on food, on textiles, and daily goods,” he said, ticking each off with his fingers in an office on the 21st floor of Tokyo headquarters that overlook the Yakult Swallows baseball team stadium. “We did that. Now, with machinery and infrastructure we aim to earn the most of all trading houses from non-resources. That’s for this year.”

The focus on non-resources helped Itochu unseat Sumitomo Corp. (8053) as Japan’s number three trading house in 2012 by market value and net income. In terms of return on assets, Itochu went even better: it beat all three of its top Japanese rivals.

Okafuji’s strategy has rewarded shareholders with a 52 percent gain in a year, while Mitsubishi’s is the best of the other three traders, up 41 percent. Mitsui rose 29 percent, Sumitomo 25 percent. Glencore Xstrata fell 1.9 percent.

Photographer: Akio Kon/Bloomberg

Masahiro Okafuji, president and chief executive officer of Itochu Corp., poses for a photograph following an interview in Tokyo. Close

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Masahiro Okafuji, president and chief executive officer of Itochu Corp., poses for a photograph following an interview in Tokyo.

William Shakespeare

Japan’s iconic trading houses stem from the finance and industrial groups known as “zaibatsu” that emerged since the 1600s. They operate as global suppliers, organizers and risk-mitigators to build, maintain and expand the industrial backbone of the world’s third-largest economy.

Sumitomo dates to the early 17th century when founder Masatomo Sumitomo, a contemporary of William Shakespeare, expanded a book and medicine shop into copper smelting, according to the company’s website.

The roots of the Mitsui name stretch to the 12th century when one branch of the aristocratic Fujiwara family left the emperor’s court at Kyoto to set up independently, according to “The House of Mitsui,” an account of the group by Oland D. Russell published in 1939.

The Mitsui turned to commerce in the early 1600s by brewing sake, and later started off in money lending and trade in dry goods, according to Russell’s account.

What Are They?

Japan’s zaibatsu groups grew to encompass trade and manufacturing, banking and retail until the U.S. broke up some of the companies in the post World War II occupation.

The trading houses re-formed in the late 1940s and 1950s and once more diversified into such a wide range of businesses they are difficult to classify. Moody’s Corp. ranks them as a unique subset of financial services. Standard & Poor’s Financial Services LLC classes them as “capital goods” companies.

That diversity reflects an agility to evolve in line with the needs of the global economy, adding logistics, insurance, information technology and financing roles among others over the decades.

Last year, combined revenue at Japan’s seven top trading companies was $380 billion, or near 7 percent of Japan’s gross domestic product. The seven, which include Marubeni Corp (8002), Sojitz Corp. (2768) and Toyota Tsusho Corp. (8015) hold $57 billion in cash.

In the last decade, the houses known in Japanese as “Sogo Shosha” boosted profits by riding the “commodity bubble,” said Akira Kishimoto, a Tokyo-based analyst with JPMorgan Securities Japan Co.

New Markets

Those fat margins on oil, gas, iron ore, coal and other raw materials are now narrowing and it’s those who capture the growth drivers of emerging Asian economies -- such as cars, food, and machinery -- that will prosper, he said.

“In that sense, Itochu is strong outside of resources, especially in food,” Kishimoto said. The challenge now will be to replicate its successes overseas, he said.

Itochu bought Dole Food Co. (DOLE)’s Asian fruit and vegetable business and global canned foods unit for $1.3 billion this year after partnering with the U.S. producer in Japan for 50 years. The Dole brand will help Itochu export Japanese food produce while its partly-owned FamilyMart Co. (8028) convenience store chain expands in Asia and elsewhere, Okafuji said.

For every yen Itochu invests in commodity assets in the next two years it will spend two on non-resources, said Okafuji.

Big Returns

Itochu’s net income more than doubled to 280 billion yen ($2.9 billion) last year from 128 billion yen in the fiscal year ended March 31, 2010, the last before Okafuji became CEO. While net income trailed Mitsubishi’s by 22 percent last year, Okafuji’s company has just over half the market value at 1.9 trillion yen to its rival’s 3.3 trillion yen.

Mitsubishi and Mitsui declined to comment on Itochu’s strategy. The former said in an e-mailed response to questions that its mid-term plan published in May estimates profits from non-resource assets will double by 2020 from 180 billion yen last year.

Mitsui’s mid-term goal is to increase non-resource profit to about 30 percent of the total, the company, also based in Tokyo, said in an e-mailed response to questions.

According to the April 2010 edition of Itochu’s internal magazine, Okafuji made a mark soon after joining Itochu in 1974. At the welcoming ceremony for new recruits he criticized Itochu for poor environment policies in its forestry business.

Early Birds

The brazen remarks won the notice of then division chief Teruo Hotta, who took him under his wing, the magazine reported in the issue.

Okafuji said he wants to create an environment that encourages his more than 4,200 employees to think differently. From this month, Itochu is asking staff to swap traditional late-night hours in the office for early starts. Work after 8 p.m., which Okafuji said often amounts to just pencil-pushing, will be frowned on.

It’s not just about employee health, but also efficiency and staying focused, he said. Staffers getting in before 8 a.m. can pick up free bananas and yogurt. Dole brand, of course.

Armed with its growing brand portfolio, Itochu expanded its textile business by 12 percent a year in the last decade, tripling profits.

Last year, the unit -- which owns 40 percent of London-based apparel maker Paul Smith Group Holdings Ltd. and all of Bramhope Group Holdings, Marks & Spencer Group Plc’s biggest clothing supplier -- posted a record 6.8 percent return on assets. That compares with 1 percent at the mining business of Mitsubishi, which together with BHP Billiton Ltd. (BHP) is the top exporter of coal for steelmakers.

Myanmar Question

Itochu’s ROA for the whole business was 4.11 percent to Mitsubishi’s 2.5 percent, Mitsui’s 3.18 percent and Sumitomo’s 3.09 percent last year. Glencore Xstrata had 1.05 percent.

“Sell a T-shirt with a brand name on it and you get added value and it’s extra profit,” said Okafuji, adding he owns more than 100 pairs of shoes and buys 10 jackets each season. “I tend to wear gray and navy, so it all looks the same from the outside.”

His standard corporate colors mask an independent streak.

“Now, everyone’s talking about Myanmar,” Okafuji said. “And, sure, like everyone we need to grow in Myanmar, but if everyone goes there, that’s not really such an opportunity.

‘‘We are thinking since last year we should look at the home market again,’’ he said. ‘‘We’re pretty small in real estate and information technology. We need to expand that.’’

To contact the reporters on this story: Yuriy Humber in Tokyo at yhumber@bloomberg.net; Ichiro Suzuki in Tokyo at isuzuki@bloomberg.net

To contact the editors responsible for this story: Peter Langan at plangan@bloomberg.net; Jason Rogers at jrogers73@bloomberg.net

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