Message from the President

A Step toward a Future of
Creating Corporate Value
Emerging Issue

Hiroshi Aoi
President and Representative Director
Representative Executive Officer     First, let me begin by discussing our performance in thefiscal year ended March 31, 2017, the first year of ourcurrent five-year medium-term management plan.
During this year, we made smooth progress in advancing
this plan, achieving earnings per share (EPS) of ¥80.2,
an increase of 14% year on year, and return on equity(ROE) of 6.7%, up 0.7 percentage point. Both indicators
met their targets. Operating income grew 6%, rising forthe 8th consecutive year, to ¥31.3 billion, and a newrecord was set for cash dividends per share of ¥33, ¥11higher than in the previous fiscal year. In addition, returnon invested capital (ROIC) exceeded weighted average
cost of capital (WACC) as a result of our financial strategies for achieving an optimal capital structure.
Accordingly, we are at last poised to begin creating corporate value. Perhaps a more noteworthy accomplishment was MARUI GROUP’s inclusion in all three of theenvironmental, social, and governance (ESG) investment
indexes adopted by the Government Pension Investment
Fund of Japan in July 2017 (→P.134).
In this manner, MARUI GROUP took a step toward afuture of creating corporate value during the fiscal year
ended March 31, 2017. However, an issue also emerged.
Our total shareholder return (TSR) for this year was anegative 4.5%, well below the Tokyo Stock Price Index
average of 17%. Some may be curious why, despite a
massive increase in per share dividends from ¥22 to ¥33
on the back of a large 14% rise in EPS, the Company’s
TSR fell below the market average.
The reason was most likely that investors and otherstakeholders were unable to fully understand MARUIGROUP’s corporate value, and therefore could not evaluate the Company properly. Based on our interactions withstakeholders to date, we have identified two causes for thedifficulty in properly understanding and evaluating ourcorporate value.

Transition to a Structure in which ROIC Exceeds WACC
(Fiscal year ended March 31, 2017)

Inclusion in ESG Investment andSocially Responsible Investment Indexes

ROIC

3.1%

WACC

3.0%

Note: T
 HE INCLUSION OF MARUI GROUP CO., LTD. IN ANY MSCI INDEX, AND THE USE OF MSCI LOGOS, TRADEMARKS, SERVICE MARKS OR INDEX NAMES HEREIN, DO NOT CONSTITUTEA SPONSORSHIP, ENDORSEMENT OR PROMOTION OF MARUI GROUP CO., LTD. BY MSCI OR ANY OF ITS AFFILIATES. THE MSCI INDEXES ARE THE EXCLUSIVE PROPERTY OF MSCI.
MSCI AND THE MSCI INDEX NAMES AND LOGOS ARE TRADEMARKS OR SERVICE MARKS OF MSCI OR ITS AFFILIATES.

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President Aoi on the roof of MARUI GROUP’s Nakano head office05

Message from the President

Message from the President

The first cause is trouble understanding the uniquebusiness model of MARUI GROUP. The second cause is
our failure to clearly describe our future initiatives or, inother words, our measures for addressing risks. In
Co-Creation Management Report 2017, we will endeavor
to more thoroughly explain MARUI GROUP’s businessmodel and the opportunities and threats we face.

1. MARUI GROUP’s Business Modelquestion, the organism would have to answer “both.”Although the inquirer would understand better if theEuglena were to say “animal” or “plant,” either answer
would entail denying its own identity. The Euglena cannot
do that, and neither can we. Just as Euglena species havedistinctive value due to their combining the characteristics
of both animals and plants, so too does MARUI GROUP
derive its unique corporate value from blending retailingwith finance.

Identity of Euglena

Reversal of Relationship between
Retailing and Credit Cards

A major characteristic of MARUI GROUP is the uniquebusiness model merging retailing and finance that it has
employed since its founding. For those of us on the insideof the Company, shaping our actions based on this model
is a natural part of everyday business. However, whenviewed from outside of the Company, this model has beendifficult to understand, with the meaning of “merging
retailing and finance” being particularly unclear. In fact, themost common question received from investors waswhether MARUI GROUP was a retailer or a financial company. We would always respond to this question by saying“both,” but, unfortunately, there were few who were able tofully grasp what we meant.
While this may be a bit of an unorthodox comparison,
the situation was similar to someone asking a species ofEuglena whether it is a plant or an animal. Faced with thisLet me go into a little more detail. MARUI GROUP was aretailer with approximately 6.4 million cardholders, andwe grew by having loyal cardholders shop at Marui stores.
Taking a different perspective, however, it could also be
said that MARUI GROUP was a financial company withstores where roughly 200 million customers shopped
each year. Either way, we have grown primarily throughretailing operations by providing credit cards as a tool tooffer customers greater convenience when shopping at
Marui stores.
Today, we are witnessing a shift in consumption fromgoods to experiences, which has also made it necessary
for us to change the relationship between retailing andcredit cards. In light of this trend, we transformed ourbusiness model by transitioning away from our previous
credit card, which was only usable at Marui stores, to a     

Balance Sheet Assets
Billions of yen

600

Fixed assets andother store assets

Increase in card shoppingtransactions following
EPOS card launch

Shift of growth focus fromretailing to credit cards

500

400

300

Credit card

operating receivables
Money Lending Business Act revision
Drop in cash advance transactions

200

100

06

Fiscal year ended
January 31, 1992

Fiscal year ended
March 31, 2006

new multipurpose card that can be used anywhere in theworld. This new card was the EPOS card launched in2006. Since issuing EPOS cards, our number of cardholders
has increased by 1.6 times, from about 4.0 million toaround 6.4 million, and card shopping transactions haverisen by approximately 8 times, from ¥180.0 billion to¥1,390.0 billion. Furthermore, although 100% of cardtransactions used to take place within Marui stores, thisfigure has since dropped below 10%. Previously, credit
cards supported the growth of our retailing operations.
However, as I have explained, this relationship has been
reversed, and now our stores are supporting the growth of
our credit card operations.
This change in business structure is most clearly
apparent on our balance sheet. In the past, the land,
structures, and other fixed assets that had supported
MARUI GROUP’s growth since its inception represented
a majority of assets. Everything changed in the fiscal year
ended March 31, 2014, when the balance of credit card
operating receivables came to account for more than halfof our assets. Since then, this balance has continued torewrite record highs.

Retailing and Finance—
Two Sides of the Same Coin
What I want to make perfectly clear is that this change inbusiness structure—this innovation—did not transform
MARUI GROUP from a retailer to a financial company, butrather that it led to our using the stores of our retailing
operations to drive the growth of our credit card operations. I mentioned that only less than 10% of total credit
card transactions are conducted at Marui stores. However,approximately 80% of cardholders applied at Marui stores,
clearly illustrating how both businesses are in a mutuallycomplementary relationship and are intrinsically linked.
For example, you could say that retailing and financeare two sides of the same coin for MARUI GROUP. If you
stand a coin on its edge and give it a spin, the spinningcoin will appear to take the shape of a sphere. Our business model is like this spinning coin, with no heads ortails, just one sphere of retailing and finance.
By taking a snapshot in time of this sphere, we canreport on our financial condition by showing the twocircles, one for retailing and one for finance, that would be

visible in this picture. A great deal of information can begleaned from this picture. One could take the perspectiveof looking at which circle is larger and which is smaller or
which is heads and which is tails. However, we see suchinformation as only supplementary and not as truly important to MARUI GROUP.
To MARUI GROUP, it is important for the “coin” to spin
more smoothly, gain speed, and ultimately draw a more
powerful and beautiful sphere.
For this reason, we do not segregate retailing andfinance. Rather, we share human resources, stores, anddata throughout our integrated business as we seek toimprove corporate value by evolving our unique businessmodel merging retailing and finance.

2. O pportunities and Threats Facedby MARUI GROUP     

Eight Operating Environment Changes
over the Next Decade
The ability for MARUI GROUP’s business model tocontinue creating corporate value into the future will hingeon our ability to furnish long-term responses to thechanges in the operating environment that will be seen
going forward.
I would therefore like to discuss the long-term operating environment changes we expect to see over the next
decade. Specifically, we have identified eight majorchanges projected to occur. In this report, we will look at
how these changes will unfold going forward, examine theopportunities and threats they will present for our business, and explain how MARUI GROUP intends to respond.
(1) Transition to e-commerce(2) Shift from goods to experiences(3) Emergence of a sharing economy(4) Declining birthrate and aging population(5) Increase in demand from inbound travelers(6) Rise of cashless payment methods(7) Change of focus from saving to investment(8) End of era of low interest rates


Fiscal year ended Fiscal year ended
March 31, 2014 March 31, 201707

Message from the President

Message from the President

Opportunities and Threats for the
Retailing Business
For the Retailing business, we see opportunities in the
projected increase in demand from inbound travelers.
However, we will also have to face numerous threats, thegreatest of which may be the transition to e-commerce.
As e-commerce becomes more prominent going forward,
it can be expected that conventional retailing businesses
selling goods at stores will begin to decline, a trend that isalready apparent in the United States and China. This
trend will be compounded by the shift from the consumption of goods to the consumption of experiences, which
will decrease demand for goods. This decrease is currently
visible with regard to apparel products, which have been
undergoing a noted decline in demand in recent years.

doubt be replaced by e-commerce sales, to place moreemphasis on tenants that provide dining, services, experiences, and other offerings that cannot be supplied via
e-commerce. The expansion of omni-channel retailing will
be conducted to deliver new value to consumers by evolving our retailing business in a manner that is complementary to e-commerce.
Meanwhile, we look to address the declining birthrate
and aging population by expanding our customer baseand increasing customer numbers through diversity andinclusion initiatives targeting customers. These initiatives
will include providing products, commercial facilities, andservices that can be enjoyed by all customers, regardlessof their age; physical characteristics, or if they have adisability; or gender, which will entail catering to members

At the same time, we project the emergence of a sharing
economy. “Sharing” also means a reduction in the consumption of goods, making it a threat to retail businesses.
Meanwhile, the declining birthrate and aging population
will result in a decrease in the number of consumers.
We have formulated two main measures for responding
to these changes. One measure is the transition to shopping centers and fixed-term rental contracts that we havebeen advancing under the medium-term management
plan or, in other words, the transformation of our businessmodel from focusing on a department store model toutilizing a real estate model. The other measure is the
expansion of omni-channel retailing. The transition to
shopping centers and fixed-term rental contracts entails
deemphasizing apparel tenants, whose services will noof the LGBT community. As for the emergence of a sharing
economy, we will respond by creating new businesses toexpand the scope of our operations.

Opportunities and Threats for the
FinTech Business
The greatest opportunities for the FinTech business will
come from the rise of cashless payment methods. The
transition to e-commerce, the shift from consumption of
goods to consumption of experiences, and the emergenceof a sharing economy will all contribute to the rise of cashless payment methods. Credit cards are a major componentof the FinTech business. In the credit card market, the riseof cashless payments has contributed to the continuationof 7% average annual growth rates over the past decade.

Opportunities and Threats to Be Faced by the Retailing Business over the Next Decade

Opportunities and Threats to Be Faced by the FinTech Business over the Next Decade

Present

Present
Opportunities

Increase in demand from inbound travelers
Inbound travelers: 20 million → Approx. 40 million

Rise of cashless payment methods

Transition to e-commerce

Opportunities

1. Transition to e-commerce; 2. Shift from goods to experiences;
3. Emergence of a sharing economy
Continuation of 7% average annual growth rates in line with the past decade

Ratio of e-commerce sales: 5% → 20%

Change of focus from saving to investment

Shift from goods to experiences

Portion of family financial assets represented by stocks and investment trust­receivables: 15% in Japan, and 30%–50% in Europe and U.S.

Threats

Continuation of 3% reductions in apparel product selling prices

Emergence of a sharing economy

Sharing economy usage ratio: 2% → 10%

Rise of cashless payment methods (cash advances)
Potential contraction of cash advance market

Threats

Declining birthrate and aging population

Working-age population: 71 million (7% reduction)

Transition to shopping centers and fixed-term rental

Improve business profitability by transitioning from a department store model
to a real estate model

Diversity and inclusion initiatives targeting customers

→P.32

→P.34

Compatibility with sharing economy through new businesses (goods, space)
10 yearsfromnow

New businesses (variety of financial services)

→P.40

Increase in cardholders; Usage of EPOS card as main card

→P.38

MARUI GROUP’s Response

Create business model integrating stores, credit cards, and the Internet

Emergence of payment options other than credit cards
MARUI GROUP’s Response

Expansion of omni-channel retailing

Rise of cashless payment methods (diversification of payment methods)→P.24

10 yearsfromnow
Note: Information on measures related to (8) End of era of low interest rates can be found on page 80.

08

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Message from the President

Message from the President

We expect this 7% trend to be sustained going forward as
infrastructure is installed in preparation for the Tokyo
2020 Olympic and Paralympic Games. On the other hand,
the rise of cashless payments presents the threat of contraction in the cash advance market. In addition, technological progress could stimulate the diversification of
payment methods and consequently detract from thecredit card market.
Our responses to these trends include the shift in ourbusiness model from an in-house credit card to a multipurpose credit card—the EPOS card—which took place in2006, as well as the redefinition of our credit card services
business as the FinTech business, which was described in
our medium-term management plan. As the diversificationof payment methods detracts from the credit card market,
MARUI GROUP will evolve its operations into a FinTechbusiness in order to transform this threat into an opportunity while at the same time expanding the scope of its
business. This move will also enable us to take advantageof the opportunities presented by the change in people’s
focus from saving to investment.

Immunity to Downside Risks and Growth
Investments
To summarize, we will first transition to a real estate model
for stores in the Retailing business in order to part ways
with the declining department store model. This transition
will change the source of our earnings from product sales
to rent revenues, effectively guaranteeing stable earnings
that are almost completely unaffected by weather, trends,
inbound demand, or other external factors. Moreover, by
utilizing fixed-term rental contracts, we will be able toincrease the value of our shopping centers by periodicallyreplacing tenants, thereby realizing steady growth.
Compared to the prior department store model, thisreal estate model will lack in its ability to capitalize on
upside risks. However, it will be almost immune to downside risks, which is our main aim. During past periods ofGrowth Investments under Medium-Term Management Plan (5 Years)
Investment Policy
Rather than focusing on pure investment, engage in investments and alliances that
contribute to expansion and innovation of main business

Target Investment Areas

Investment-Based Alliances*strong economic growth, department store models operating with consignment agreements were able to exploit
upside risks over long periods of time. Today, the situationis quite the opposite. Not only are we in a period of low
economic growth, but stores that sell products are also
exposed to significant long-term risks arising fromchanges in consumer needs and the spread of e-commerce.
Next, we will pursue the creation of new value bytransitioning to a business model that can grow by taking
advantage of the e-commerce trend. Specifically, we will
promote omni-channel retailing to build a complementary
relationship between our retailing operations and our
e-commerce operations and provide value that cannot be
replaced solely by e-commerce. This approach will be
adopted in all conventional, product-selling retailing
operations, including Marui stores and private brands andeven tenants. In addition, we will capitalize on the greater
degree of freedom in stores granted by the real estatemodel to develop new, sharing businesses. These businesses will not be limited to sharing goods, but will also
include sharing spaces to foster communities amongcustomers and thereby respond to changes in lifestyles
and needs.
Under the current medium-term management plan, we
intend to invest ¥30.0 billion in new businesses leading
up to the fiscal year ending March 31, 2021. We havealready begun investments and collaboration aimed atadvancing omni-channel retailing, sharing economy, and
FinTech initiatives through open innovation.

forward-looking business model we envision for our
FinTech business.
Our quest to create value for the future has only justbegun. In this report, we have taken every possible angle
toward explaining the business model we are targeting,but I am aware that these explanations may still be insufficient. For this reason, we hope that investors will provide
us with their frank opinions as professionals.
We also desire to co-create corporate value throughengagement with our customers, business partners,
members of local communities and the greater society,employees, and all of our other stakeholders. I lookforward to your ongoing support and understanding.

August 2017

Hiroshi Aoi
President and Representative Director
Representative Executive Officer

Forward-Looking Business Models

Growth investments¥30.0 billionof ¥90.0 billion in
growth investments
to be conducted in
new businesses

FinTechPayment
services / Assetmanagement

Investments within MARUI GROUP
Investment Standards: ROI of more than 10%
Sharing
economyGoods / Space

Investments in venture companies that share
our vision and possess advanced technologies
Investment Standards: IRR of more than 30%

E-commerce
Investments in venture capital firms thatpossess vast, sharing networks anddiscerning eyes
Investment Standards: IRR of more than 15%* Investment in and collaboration with applicable companies
to be conducted based on investment standards by the
Research Department and the New Business Development
Department

10

MARUI GROUP aims to develop an unprecedented,
forward-looking retailing business model that is unlike
department stores, shopping malls, train station buildings,
fashion retail complexes, specialty shops, or anything else
seen before. By evolving our retail stores from a forwardlooking perspective, we anticipate that synergies can becreated with our FinTech business. There is only one financial
company in the world with stores where roughly 200
million customers shop each year, and that is MARUIGROUP. We plan to promote financial inclusion throughthe use of these stores, our approximately 6.4 million
cardholders, and big data that links our retailing operations with our credit card operations. Simultaneously
growing our credit card operations will create the

Messages from President Aoi can be accessed through the following links.
Fiscal Year Ended March 31, 2015:
Co-Creation Management Declarationwww.0101maruigroup.co.jp/en/ir/message/ceo_2015.html
Fiscal Year Ended March 31, 2016:
Co-Creation Management from a Corporate Value Perspective
www.0101maruigroup.co.jp/en/ir/message/ceo_2016.html

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