Lawson Bets on Health Food to Double Growth as Cigarettes Slump

Lawson Inc., Japan’s second-largest convenience chain, intends to double average profit growth by opening stores that offer drugs and more healthful foods as demand for cigarettes, its biggest-selling item, dwindles.

Operating profit will probably jump to as much as 130 billion yen ($1.3 billion) by fiscal year 2018, said Lawson Chief Executive Officer Takeshi Niinami. The target reflects average annual growth of more than 14 percent, compared with the 7 percent mean increase in the past five years.

Niinami’s biggest rivals, Seven & I Holding Co.’s 7-Eleven chain and FamilyMart Co. are adding 1,500 stores a year each in Japan targeting older shoppers and single-person households. Lawson has set a five-year target to raise Natural Lawson stores, which sell more healthful food, to 3,000 from the current 109 and to raise stores that sell prescription or over-the-counter drugs to 3,000 from 82.

“The percentage of sales from tobacco will fall, so we have to find replacements for that,” Niinami said. “Otherwise, the convenience store business will fall apart.”

Demand growth for cigarettes, accounting for about 26 percent of net sales at Lawson stores last fiscal year, is slumping as tax increases push up prices, more consumers shun cancer risks and some local governments ban smoking in public areas. Competition for tobacco sales is also rising, Niinami said.

Smokers made up about 21 percent of Japan’s population last year, down from 26 percent in 2007, according to Japan Tobacco Inc., the country’s former cigarette monopoly. Demand in Japan fell 32 percent to 195 billion cigarettes in 2013 from 285 billion in 2006, according to Japan Tobacco.

Cigarette Sales

Niinami declined to give a target for cigarette sales, which jumped 45 percent to 497 billion yen in the year ended in February from 342 billion yen four years earlier, according to the company’s annual report. The sales figures represent totals from all stores in the chain, while Lawson’s revenue comes primarily from fees paid by franchise owners.

Lawson’s shift toward more healthful foods will also help stores attract more women, which have traditionally shopped at convenience stores less than men. He said more boxed meals known as “bentos” are being prepared to suit the diets of women and older people who will pay more, Niinami said.

“Our goal is to reduce fat and salt in the bentos we sell without sacrificing taste,” he said. “These are priced a little higher than regular bentos and are more profitable and as we sell more, we can lower unit costs to gain even more margin.”

Share Performance

Niinami’s growth strategy so far has lured investors and produced a more than 90 percent total return on the shares over the past five years, compared with about 61 percent for 7-Eleven’s parent.

Net income will probably climb to 36.8 billion yen this fiscal year, according to the average of 16 analyst estimates compiled by Bloomberg.

Profit in the three months ended in August rose 2.2 percent to 11.9 billion yen. Operating margin, or operating profit divided by sales, surged to about 17 percent last quarter, from 12 percent in the previous three months and 16 percent a year earlier, data compiled by Bloomberg show.

Niinami also said Lawson is “interested” in buying smaller convenience store chains in Japan. He didn’t name specific targets or give a timeframe.

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