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Asahi on luxury hotel price wars

This article from yesterday’s Asahi comes straight out of the Told You So Department: Ritzy hotels caught up in cutthroat competition.

The Asahi article opens with this:

Luxury hotels are slashing rates amid the economic slump and appreciation of the yen, a strategy that could fill vacant rooms in the short term, but could have devastating longer-term effects.

Many of these hotels opened recently in hopes of attracting an influx of foreign travelers. But when demand failed to reach expectations, the hotels started cutting prices. Now, some hotels are offering rooms at half the normal rates.

Such a situation is bad for brand image. BizCast Japan has pointed out a few times that overcapacity in Tokyo’s luxury hotel market was bound to have negative consequences. Back in February 2008 some time was devoted to wondering what the motivations behind building such hotels could be when Japan fails to draw as many tourists as Singapore, and that Japanese government attempts to draw in more tourists have seen tepid results at best. Even earlier, in May 2007, curency exchange risks and other factors were discussed in a segment looking at Japan’s attempt to draw more tourists. At that time, a plan to build a foreign financial district was being discussed (and the Yomiuri said it was real). A little over two years on, and nothing more has been heard about that.

The fact that the media is already reporting price cuts and damage to brand images is worrying. The big question now is whether downward pressure on hotel bookings will continue long enough to see a major player exit the market. Most of them have deep pockets, and deeper pride, so even a single exit from the Japanese luxury hotel market would represent a huge blow to the industry’s image.

What can the average consumer take from this? Knowledge that the full rates were way overpriced to begin with.

Retail Roundup: Seiyu announces more changes to come

Let’s start by looking at Seiyu, a firm that has been much discussed on this website over the past year or so. According to the Nikkei, Seiyu intends to renovate about 90 of its locations over the coming two years, at a cost of over 30 billion yen.

Seiyu lost about 20 billion yen in fiscal 2007 and has been in the red for six straight years. The Nikkei tells us that Seiyu intends to sell more Wal-Mart brand casual clothing at its shops, despite the fact that clothing sales at supermarkets continues to fall - they were down 8.6% in May alone. Seiyu also intends to link up further with Wal-Mart in terms of sourcing products from China. Although this might make economic sense, it also bucks the trend of consumer mistrust of goods produced in China.

Finally, we see that Seiyu intends to carry an “expanded lineup” of flat-panel TVs. Again, supermarkets are generally selling less of this kind of stuff, and it’s hard to imagine Seiyu outpricing, let alone out-marketing the Yodabashi, Bic Cameras and Kojima Denki shops in this area.

Finally, sales per square meter continue to decline at Japan’s supermarkets. Yet again, Seiyu intends to focus its renovation efforts on its larger locations, with 6,000 to 10,000 square meters of shop space.

Morgan Stanley, Citibank, Sapporo, Sovereign Wealth Funds and Foreign Reserves: It’s Getting Political

After hearing rumors that Wal-Mart may be looking for Citibank to provide a capital injection for struggling supermarket operator Seiyu, we found this morning’s announcement that Morgan Stanley is set to purchase Citibank’s Tokyo headquarters for 48 billion yen quite interesting. Over lunch, someone suggested that selling their head office just might give Citi enough cash to lend Seiyu a helping hand. I laughed out loud. That’s not going to happen, right?

But Morgan Stanley has been playing the Tokyo property market quite well over the past few years, just having sold the Tokyo Westin to the Government of Singapore Investment Corporation for about 77 billion yen. Morgan bought the Westin from Sapporo Holdings in 2004 for about 50 billion yen. That’s over a 50 percent return on investment in under 4 years.

Sapporo posted 5.51 billion yen in net profit in 2007, up from 2.34 billion in 2006, a result that was backed in large part by - you guessed it - asset sales. As we speak, Sapporo’s management remains focused on putting some form of takeover defenses in place, which it plans to announce by March 5.

Back to Singapore: the Government of Singapore Investment Corporation’s purchase of the Westin, as well as other high-profile moves by sovereign wealth funds, appears to have waken some sleeping giants in Nagatacho. We know that former Chief Cabinet Secretary Yasuhisa Shiozaki has been pushing for more discussion leading toward the formation of a Japanese sovereign wealth fund for some time now, but the Ministry of Finance has wanted nothing of it. Read more

BizCast Japan #12 Released

This is just a quick announcement that BizCast Japan #12 has been released over at Trans-Pacific Radio. In this edition of the show, Albrecht Stahmer and I discuss Japan’s tourism industry, the government’s attempt to subsidize the conversion of part-time workers to full-time status, Blu-Ray, Panasonic, Seiyu, capital injections at Japan Air Lines and increasing wheat prices.

Please have a listen and let us know what you think.

Seiyu’s 2007 losses projected to be twice as bad as expected

Last month, we reported that Wal-Mart intended to bring struggling Japanese supermarket chain Seiyu back to profitability in about two year’s time. We were skeptical then, and outlined the reasons why such a project threatens to be nothing but a drain on Wal-Mart’s resources. After all, back in August, we reported that Wal-Mart, which at that time held a 53.6% stake in Seiyu, expected to see the firm post its sixth consecutive year of losses in 2007, to the tune of 5.9 billion yen (about $50 million). Seiyu also happens to hold over 300 billion yen in interest-bearing debt on its balance sheet.

Those loss projections were later revised up to 10.4 billion yen. That sounded bad. Today, however, Wal-Mart announced in a preliminary earnings statement that losses in 2007 have doubled yet again to 20.9 billion yen (about $195 million).

That’s two revisions within a year, each time doubling the losses. Wal-Mart now owns about 96% of Seiyu, which is trading around the 136 yen per share level. Bloomberg reports that Wal-Mart is “in talks with Citibank and Mizuho Corporate Bank Ltd. about injecting funds into the Japanese unit.”

Citibank funds? Where might those be coming from? Mizuho Corporate? Well, that would certainly bring a domestic player back into the game. If Wal-Mart is looking for capital injections, may we assume that it’s no longer willing to pour its own money into Seiyu? Is Seiyu equity actually worth something?

After five years of investing in Seiyu, Wal-Mart only saw it sink further and further into losses. Then it decided last October to sink about 100 billion yen into the firm. Now we see a doubling in losses (for the second time) as assets are written down.

So…Wal-Mart has paid 100 billion yen to acquire a firm with over 300 billion yen of interest bearing debt that has lost money for six straight years and stands to have lost at least 20 billion more yen in 2007, while this firm reduces non-core operations in order to focus on a core industry that has seen falling sales for 11 straight years. We are very interested to see how this turnaround can be pulled off.

And we’re very interested to see if other investors jump on board. We’d be even more interested to hear what they think of Wal-Mart’s plan. How many slides are in that Powerpoint?

Wal-Mart has big plans for Seiyu; What took so long?

We have been following the ongoing saga involving Wal-Mart and Seiyu for some time now. Back in August, we reported that Wal-Mart, which at that time held a 53.6% stake in the ailing supermarket chain, expected to see Seiyu post its sixth consecutive year of losses in 2007, to the tune of 5.9 billion yen (about $50 million). In September, we reported that Seiyu had revised its losses downward to $91 million. Seiyu also announced that it would spend about 4.5 billion yen in an effort to reduce its workforce by 450 people.

In October, it was announced that Wal-Mart intended to sink another 40 billion yen or so into Seiyu in order to turn it into a wholly-owned subsidiary. That figure, however, was grossly underestimated. On December 6, it was reported that Wal-Mart would spend about 93 billion yen in order to boost its equity stake from 53.6 percent to 95 percent. At that time, we outlined the reasons why this was a bad idea.

To the present: Read more

Wal-Mart to boost its holdings in Seiyu to 95% - Why we still think it’s a bad idea

We’ve written before on why we think Wal-Mart’s tie-up with supermarket brand Seiyu is a bad idea and will continue to lose money unless something about the Seiyu brand is drastically changed. Certainly, Wal-Mart went about entering the Japanese market in the right way, by joining forces with an existing Japanese firm in order to take advantage of existing operations and name recognition. The problem, however, seems to be that the wrong partner for this project was chosen.

Almost two years ago, James Fiorillo, the founder of Ottoman Capital in Tokyo, told Bloomberg, “You walk into [their Sangenjyaya location in Tokyo] and you know why the company was failing. It’s horrible and as long as those stores are out there, people everyday are walking in and getting a bad feeling about Seiyu.”

Although one may say the same about walking around Sangenjyaya in general (that’s just a joke - I love Niku no Hanamasa), the thrust of Fiorillo’s comment is dead on. To quote myself, “Renovating [Seiyu stores] is a waste of money, because being in them will still be a waste of time…Not to mention, Seiyu has one of the worst seafood sections in Japan. That should tell you something.” Read more

BizCast Japan #8 Released

BizCast Japan #8 has been released over at Trans-Pacific Radio. After a bit of a long break, Albrecht Stahmer and I sat down to discuss what’s going on in Japan’s business scene. We’d be flattered if you’d have a listen.

Wal-Mart not giving up on Seiyu

In August we reported that struggling supermarket chain Seiyu was set to post its sixth consecutive year of losses in 2007. Wal-Mart, which has spent over $1 billion to acquire a controlling share of the firm, announced in September that it would spend 4.5 billion yen in an effort to let 450 workers go this year.

The climate for supermarkets is currently very difficult in Japan, and it’s hard to see what Seiyu has done to differentiate itself from the other low-end supermarkets in an age when more and more shoppers seem to be making the jump either to convenience store shopping or higher-end ‘lifestyle brand’ supermarkets.

Today, however, Wal-Mart announced plans to step up its engagement with Seiyu. It intends to turn the firm into a wholly-owned subsidiary and delist it from the Tokyo Stock Exchange in a transaction that may cost Wal-Mart up to 40 billion yen. Edit: Kyodo is now telling us that Wal-Mart intends to offer 140 yen per share, which is a nice premium on today’s closing price of 87 yen, though not so nice if you bought into Seiyu in 1999, when they traded above 800 yen a share.

As of the end of June, Seiyu still held 328.6 billion yen in interest-bearing liabilities on its balance sheet.

Seiyu Still Struggling, Announces Job Cuts

We’ve posted before on why we think Wal-Mart’s investment in the struggling Seiyu supermarket chain is just not working. After announcing in August that it expects to post its sixth consecutive year of losses in 2007, Seiyu downgraded its earnings projection this week to a loss of $91 million in the year ending December 31. As Seiyu continues to renovate its shops and switch more locations to 24 hour openings, it also plans to spend 4.5 billion yen in an effort to let 450 workers go this year.

The big question now is whether Wal-Mart, the world’s largest retailer, will exercise its option to increase its stake in Seiyu from the current 51% to 66.7% by the end of the year. Should Wal-Mart not choose to increase its equity stake in the firm, it could be interpreted as a sort of no-confidence vote in Seiyu. With Wal-Mart recently having pulled out of both South Korea and Germany, we see little reason for it to charge ahead in a market where supermarket sales continue to decline and medium to long-term demographics give little hint of a recovery.

On the other hand, with Seiyu shares down 58% over the past 12 months, any hint of a turnaround means those shares (at 86 yen right now) carry quite a discount. It will be interesting to see how Wal-Mart plays this one.

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