Message from the President

MARUI GROUP’s Co-Creation of
Corporate Value Has Only Just Begun.
I eagerly look forward to co-creating our corporate value together with shareholders, other investors,
customers, business partners, and communities from a future-oriented perspective.

Hiroshi Aoi
President and Representative Director
Representative Executive Officer

Let me begin by expressing my sincere appreciation to allof our stakeholders for their ongoing patronage andsupport of MARUI GROUP. I also thank those of you thathave not previously had a chance to connect with theCompany for taking the time to open this report.
This report, Co-Creation Management Report 2016,is MARUI GROUP’s second integrated report. While weanticipate that shareholders and other investors will be
its primary readers, we have taken steps to make thisreport of interest to a wider variety of stakeholders,
including customers, business partners, community
members, and students. The title “Co-Creation
Management Report” might seem a little unfamiliar toyou, and you may wonder why we chose this title insteadof simply calling this report an “integrated report.” Theanswer to this question is that there is a message wewanted to convey through this title.
The overarching theme of this report pertains to
MARUI GROUP’s quest to create corporate value, and we
aim to create this value together with customers, shareholders, business partners, employees, communities,
society, and all of our other stakeholders. The reason forthis approach is that we view corporate value as beingborn out of the harmony between the interests and thehappiness of all of our stakeholders.
We therefore hope to create our corporate value
together with all of you who, after being introduced to
MARUI GROUP’s concept of co-creation management,
are able to get behind this endeavor to even the smallest
degree. This is the message we have encapsulated in thesomewhat unusual title of this report.

DNA of Innovation—History of MARUI GROUP    MARUI GROUP was created in 1931 by my grandfather,
Chuji Aoi. At that time, our business involved sellingfurniture through monthly installment payments. Monthly
installment payments entail providing both products andcredit, or, in other words, represent a business model thatmerges retailing and finance. This business model has
continued to be passed down through our operations,
guiding our business and evolving amid changes in thetimes and MARUI’s products and stores.
Monthly installment payments were a sales technique used by the merchants of Ehime Prefecture.
Although my grandfather was from Toyama Prefecture,
he was able to see the immense potential of this business model. However, he did not blindly embrace thismodel. Rather, he took a critical stance toward monthly
installment payments, driving the evolution of this model,
an undertaking that would lead my grandfather to issue
Japan’s first credit card in 1960. This was MARUI GROUP’s
first great innovation.
The credit sales model grew together with Japan’s
economy during the period of the so-called Japanese
economic miracle that followed the end of World War II,
driving the growth of the Company as a result. However,this situation changed in the 1980s. Up until that point,
consumption had widely been aimed at furniture, consumer electronics, and other durable goods. When these
items became commonplace, the demand for credit sales
began to decline, plunging the entire industry into a stateof crisis.

President Aoi in Yurakucho Marui in July 201618

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Message from the President

Message from the President“I took up the mantle of president in 2005, in the middle ofthis period of stagnancy. As such, I was immediately charged withthe mission of breaking away from our past successes to pursue
the creation of a new business model through fresh innovation.”

During this period, MARUI GROUP’s rivals were
mostly bought out by major department stores andsupermarkets, resulting in their retail operations being
abandoned to focus solely on finance as credit cardcompanies. The only company to take a different path
was MARUI GROUP.
As the center of consumption moved away fromdurable goods, we turned our attention toward the growing demand for consumer goods, choosing to specialize
in sales of fashion. At the same time, we selected youths,
who were generally not viewed as consumers in that era,
as our target customer group. This decision enabled us
to stimulate credit demand and subsequently advancethe evolution of credit sales without abandoning our
retail operations. In 1981, we called upon our credit
expertise to begin offering cash advances. This was thesecond great innovation of MARUI GROUP, which wasthen equated with the young, fashion, and our Akai Card
(Red Card) in-house credit card. This innovation proved
to be a massive success, leading MARUI GROUP to a
new peak in performance in 1991.
However, this success did not last long. Together
with the collapse of Japan’s asset price bubble, the range
of jobs available to young people changed dramatically,

and an increasingly large number of individuals wereunable to find full-time positions. Furthermore, the youth
population actually began to dwindle in 1996, signaling
the start of the decline in Japan’s birthrate and the aging
of its population. These trends were accompanied by alarge shift in the needs of consumers. While consumers
had previously sought to accumulate physical goods,
they began pursuing more fulfilling lifestyles after the
bubble’s collapse. This trend resulted in a sharp decreasein the demand for fashion, which was the focus of
MARUI’s operations, and ushered in a long period ofpoor performance and stagnancy for the Company.
I took up the mantle of president in 2005, in the
middle of this period of stagnancy. As such, I was immediately charged with the mission of breaking away fromour past successes to pursue the creation of a new business model through fresh innovation. We began by seeking innovation in our credit cards. In 2006, we launched
the EPOS card, MARUI GROUP’s new credit card. The
prior Akai Card was only issued at Marui stores andcould not be used outside these stores. Accordingly, theprimary source of revenue from these cards was cash
advances. EPOS cards, meanwhile, are issued through aspecial license with Visa Inc., meaning that these cards

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1975: Launched the Akai Card (Red Card)and began using an in-store, on-the-spot approval system

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GOOD
THRU
有効期限

MONTH / YEAR

can also be issued outside Marui stores and are usable
anywhere in the world.
However, just as we caught this glimmer of hope, a2007 revision to the Money Lending Business Act dealt
a crushing blow to our cash advance operations, which
had been a significant source of revenue up until thatpoint. The impact of this revision was more devastating
than we could have possibly imagined, lingering on forseven years during which MARUI GROUP was forced topost two losses, despite having never recorded a loss inthe past. Regardless of this dire situation, we managed toovercome the crisis by increasing card shopping transactions through the new EPOS card. This transition fromcash advances to card shopping brought about by the
EPOS card was an innovation that took us back to theoriginal starting point of our business: the merger ofretailing and finance.
Meanwhile, our retailing operations continued to
struggle, and we were barely making a profit in 2008.
This outcome was due in part to the global financial crisis
that struck in September of that year. However, the biggest reason for our difficulties was our inability torespond to the needs of consumers that had shifted fromthe accumulation of physical goods to the pursuit ofmore fulfilling lifestyles. With our backs to the wall, we
took drastic action. We realized that our inability torespond to this shift in needs stemmed from our beingcaught up in past successes, which was why we could
not find a way to innovate our department store retailing
operations. Department stores specialize in selling physical goods. However, contemporary consumers seeking
more fulfilling lifestyles desire dining, experiences, services, and other intangible commodities. The department

store business model was just not suited to catering tothese kinds of needs.
Forced to make a decision, we chose to shift towarda business model of operating shopping centers that wascloser to a real estate model. We thus embarked on a
five-year endeavor from 2014 through 2018 to convert
nearly all of our stores, save a few exceptions that havebeen excluded based on requests from the owners, tothis model. We are making steady progress on this front,with roughly 30% of this conversion completed and theresults beginning to appear. This is the retail innovationthat we are currently undertaking.
As you can see, the history of MARUI GROUP is truly
a history of innovation. Moreover, I am convinced thatMARUI corporate DNA is a DNA of innovation. When thedecision to transition to the real estate business model
was made, one officer described the impending transformation as “a change as massive as transferring to a company in a completely different industry.” However, evenwhile speaking of the difficulty, there was an air of excitement. I believe that our ability to foster innovation is theessence of MARUI GROUP. Our mission is to create suchinnovation and continue to evolve in our aim to contributeto the happiness of all stakeholders.

Co-Creation Management—
MARUI GROUP of Today    
MARUI GROUP is striving to foster innovation together
with its customers. In the past, we have grown purely by
our own strengths or by developing our operations
together with business partners or industry specialists.
However, utilizing only expertise from within the“As you can see, the history of MARUI GROUP istruly a history of innovation. Moreover, I am convinced thatMARUI corporate DNA is a DNA of innovation.”

2006: Began issuing EPOS cards on-the-spot in stores(the world’s first IC-chip-equipped Visa card to be issued in this manner)

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Message from the President

Company or the industry, we remained bound by past
successes. We were thus forced to admit that we had lost
our ability to respond to changing social trends.
Performance was deteriorating, no matter how hard wetoiled to advance under our previous business model.
In fact, maybe it would be more accurate to say that themore we toiled, the more our performance deteriorated.
It was clear that creating further innovation would require
us to incorporate fresh insight from outside the Company
and even outside the industry. But, where were we tofind this insight? The answer was right in front of oureyes—our customers.
We were professionals when it came to retailing andcredit cards, and we approached our customers as such.
It goes without saying that we knew more about thesesubjects than our customers. However, this caused dialogues with our customers to be one-sided, with us
imposing our knowledge upon customers. We seemed tohave forgotten the importance of listening to customers,
asking them about their needs and trying to understandtheir perspective. Perhaps we were under the impression
that, because we interacted with our customers on adaily basis, we must have understood them and theirneeds. Our desire to work together with our customers
was born out of our reflections on this shortcoming.
On the sales floor, we are separated by our roles ofseller and buyer, and it is difficult to break out of theseroles. For this reason, we chose to meet on a different
stage so that we could better turn our ears toward customers’ true voices during discussions. These discussions were an eye-opening experience through which welearned of numerous customer needs that we were completely unaware of. It was then that we began to pursue
innovation through a partnership with our customers.
Two items born out of these efforts are our private
brand Rakuchin Kirei Pumps and EPOS Gold cards.
Rakuchin Kirei Pumps were carefully crafted to address
unmet customer needs related not only to design andprice but also to comfort and size range, areas that theindustry had been neglecting. These shoes have wonstrong support from customers, with total aggregate
sales of more than 3.0 million pairs as of August 31,
2016, making them an unprecedented best seller.
With EPOS Gold cards, we wanted to make sure thatmembers of the younger generation, our primary

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Message from the President

customer group, would be able to carry these cards.
For this reason, we chose to offer Gold cards with noannual fees to enable any regular customer to obtainsuch a card regardless of their age or yearly income. Thisdecision has won strong support from youths, our main
target, among other customers, and Gold cards havethus grown to represent more than 60% of total EPOS
card transactions and are now driving growth in ourcredit card services business.
We are pursuing innovation together with our customers in all areas of our business, including products,
lineups, tenant development, credit cards, advertisements,
promotions, IT, and operations. We call these efforts“co-creation.” The latest success of these co-creation
efforts is Hakata Marui.
MARUI GROUP’s first store to be opened in Kyushu,
Hakata Marui was developed together with an aggregate
total of 15,000 customers that participated in the store
development process through more than 600 planningmeetings as well as through our community website.
Based on the concept of “a store in which customers canfind what suits them best,” we built this store through an
ongoing dialectic process with customers. Hakata Marui

Hakata Marui opened in April 2016

Hakata Marui planning meetings held with customers“We view corporate value as being born out of the harmony
between the interests and the happiness of all of our stakeholders.”

has proved immensely popular as a result, with visitor
and purchase numbers high from the start and new
cardholder numbers at the time of the store’s opening
setting a new record for Marui store openings. In addition
to being an amalgamation of initiatives conducted together
with customers, Hakata Marui also marked the start ofco-creation efforts with our business partners. The rangeof stakeholders we partner with in co-creation continues
to expand steadily in this manner. Looking ahead, we hope
to be able to engage in the co-creation of our corporate
value together with all of our stakeholders.
We view corporate value as being born out of theharmony between the interests and the happiness of allof our stakeholders. It is often said that the interests ofdifferent types of stakeholders are at odds with one
another. For example, prioritizing customer interests canlead to neglect of shareholder interests while an overemphasis on shareholder interests may force us to sacrifice
the interests of employees. It is true that the pursuit ofcustomer happiness will not naturally contribute to theinterests of shareholders. It is therefore vital that wedevelop our business model in such a way that the happiness of customers aligns with the interests of shareholders. We believe that such a model can be created byour transition from a department store model to a realestate model. This transition has enabled us to respondto the shift in customer needs from physical goods tofulfilling lifestyles while simultaneously allowing us to act
in the interests of our shareholders. One reason we areable to achieve both of these goals was the change inour key performance indicator, or KPI.
Under the department store model, our KPI was our
profit margins in relation to sales amounts. The realestate model, meanwhile, has us now focusing on profit
margins versus real estate market values, meaning thatnet operating income yield, or NOI yield, is our KPI. Thischange in our KPI cast light on something we had previously not considered. As NOI yield indicates yield versus
the market value of real estate, the core element of ourbusiness amounts to how effectively we are able to utilize
the real estate on which our stores stand to generate
income. This principle holds true whether we own thereal estate or rent it.
One fact that must be considered about real estate,or, in other words, land, is that even the land we own
today was received from someone else in the past. As
such, it is possible that this land will be passed on toother hands in the future. Taking an extremely long-term
perspective, you might be able to say that “our” land isactually just something we are borrowing from society.
If this is the case, we users of land have the responsibility
to pay a form of “interest” on this land by raising its value
in line with society’s expectations before returning it. This
responsibility is represented by anticipated yield on NOI.
We also realized that the concept of effectively
utilizing “borrowed” assets to increase their value before
returning them mirrors our relationship with our stakeholders. The transition to a real estate model was madewith the aim of responding to the shift in customer needs
to more fulfilling lifestyles. However, this move also
linked the improvement of NOI yield on real estate toincreases in return on equity, which represents the yieldon the capital we “borrow” from our shareholders.
To extend the scope of this idea of “borrowing,” wecould also say that our employees are borrowed fromsociety. If this is true, then the Company must become aplace in which employees are able to work in a mannerthat is beneficial to society. Taking this perspective, we
see that the various stakeholders, whose standpoints
and interests appeared to be in opposition, are actuallyinterconnected. This realization then raises the question:
If the connections between these stakeholders weremade stronger, would that not make greater contributions
to the interests of all parties?
At MARUI GROUP, we believe that the fundamentalrole of companies is to strengthen the connections
between their various stakeholders, thereby expanding
the intersection between their interests. The ability to23

Message from the President

accomplish this task, then, is the measure of corporate
value. The goal of our co-creation management is thus toadvance the dialectic progress with all of our stakeholders to eliminate conflicts between their interests andbring these interests into harmony.

Co-Creation of Corporate Value—
Future of MARUI GROUP    MARUI GROUP has kicked off a new medium-term
management plan targeting the five-year period spanningthe fiscal years ending March 31, 2017 to 2021. The
first step of this new plan was to rearrange and redefine
our businesses. Through this process, the previous threebusiness segments of Retailing and Store Operation,
Credit Card Services, and Retailing-Related Services
were organized into two: the Retailing segment, whichmerges the Retailing and Store Operation and RetailingRelated Services segments, and the FinTech segment,
which is the redefined successor to the Credit Card
Services segment.
The Retailing segment comprises store, omni-channel retailing, and facility management and distribution
operations. As we advance the transition to the realestate model for stores, we will integrate the directly
managed specialty stores, private brand, and Internet
sales operations that were traditionally part of our omnichannel retailing efforts. We thereby aim to evolve these
efforts into a future-oriented retailing style that emphasizes Internet sales. The operations of the former
Retailing-Related Services segment will be positioned as
the foundations supporting stores and omni-channel
retailing, and incorporated into retailing operations

Message from the President

based on a broad definition of this concept to further
accelerate evolution in this field.
By redefining our Credit Card Services segment as
the FinTech segment, we aim to achieve rapid growth inthe operations of this segment. Since its founding,
MARUI GROUP has continued to grow by innovating
credit cards together with retailing. Going forward, we
will develop a unique platform that combines the customer contact points created through our cardholder
base of more than 6 million people, primarily youths, andour 29 brick-and-mortar stores. By utilizing this platform
together with startups and various other companies, wewill advance open innovation to create new value by
fostering financial service innovations in an even wider
range of fields.
  

P72 R
 edefinition and Reorganization of Businesses in the New
Medium-Term Management PlanAt the same time, we aim to co-create corporate
value together with shareholders and other investors.
Under the new medium-term management plan, we willseek to realize an optimal capital structure. Setting thisgoal constitutes our response to the requests from ourinvestors to define the type of balance sheet we target.
Over the past several years, MARUI GROUP has undergone a transformation from a company with growth
driven by retailing to a company that grows throughcredit card operations. As a result, the asset portion of
our balance sheet has changed greatly from the time of
our founding, with operating receivables from credit card
operations now exceeding fixed assets from retailing
operations. The liabilities portion, meanwhile, looks very
similar to when retailing drove our growth, creating a sortof imbalance to our balance sheet. The optimal capital“I am convinced that discussing such management issues with shareholders andother investors will help us tackle these issues with a greater degree of success.
This is because such exchanges with shareholders andother investors are the same as our interactions with customers.”

structure we will pursue is aimed at optimizing our balance sheet in reflection of our change in business strategies. By advancing capital measures that ideally are inconsideration of our business strategies, we are confident that we will be able to improve corporate value.
However, capital measures are not the only area in which
we must respond to requests from shareholders andother investors.    P83 Target Balance Sheet
We have received requests to explain our retailing
growth strategies for when the transition to the realestate model has been completed and inquiries about
our ability to further grow Internet sales operations. We
therefore have a lot of issues to incorporate into ourbusiness strategies. It is, of course, our job to resolvethese issues. However, I am convinced that discussing
such management issues with shareholders and otherinvestors will help us tackle these issues with a greater
degree of success. This is because such exchanges withshareholders and other investors are the same as ourinteractions with customers. It goes without saying that
we know more about the Company and our industry thanmost stakeholders. Nevertheless, it is also easy for us toget caught up in past successes and industry norms,
and it is difficult to broaden our perspective and view
MARUI GROUP from the outside. Conversely, given thefact that there are parallels between investment andmanagement, our shareholders and other investors havebeen engaged with various companies in various industries around the world. They therefore possess a type oftranscendental management insight that is valuable
regardless of the industry or company. Through our interactions, we are able to bounce our carefully consideredideas off of this transcendental management insight ofshareholders and investors to formulate even better
ideas. We anticipate that this process will contribute toimproved corporate value.

    
MARUI GROUP’s co-creation of corporate value has only
just begun. I eagerly look forward to co-creating ourcorporate value together with shareholders, other investors, customers, business partners, and communities
from a future-oriented perspective.

August 2016

“The goal of our co-creation management is thus to advancethe dialectic progress with all of our stakeholders to eliminate conflicts
between their interests and bring these interests into harmony.”

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