VALUE CREATION

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Conviction obtained fromthe COVID-19 pandemic
In fiscal 2021, the Group started a new Medium-term
Business Plan that aims at full recovery from theCOVID-19 crisis and regrowth. In fiscal 2021, which is its
first year, we pursued initiatives with a greater focus on“defense” than “offense,” including a restraint on
investment and acceleration of management
restructuring, because the impact of COVID-19 was more
prolonged than expected. In the first half of the year, wewere requested to suspend business. We faced such asevere situation again. After that, infections spread andsettled down alternately and we were forced to press theaccelerator a little and brake alternately. We had toconduct economic activities in such an environment.
In the current fiscal year, infections are finally starting
to show signs of settling down but remain high. I think weshould assume that there is a high possibility of aresurgence of infections. What is expected of us isreadiness for change with a view to the era of living with
COVID-19, instead of simply waiting for the postCOVID-19 era. On the other hand, new uncertainties
about the future such as increasing geopolitical risks andconcern about rapid global inflation were added and wecannot be optimistic about our business environment.
Seeing our retail sites, I feel that consumption isfurther polarized and that customers’ values and behavior
are greatly changing. I may say that we can clearly see“what will return” and “what will not return.” On the other

There is no future on the same path as in the pastthat relies on successful experience.
Change our mindset and go forward boldly.

From Defense to OffenseStep Up a Gear to Changewith an Eye to the Future

YOSHIMOTO Tatsuya
Director, President and Representative Executive OfficerJ. Front Retailing Co., Ltd12INTEGRATED REPORT 2022

hand, individual financial assets in Japan as a whole
exceed ¥2,000 trillion and so-called “COVID-19 savings,”
the money saved instead of being spent due to theCOVID-19 pandemic, total as much as ¥50 trillion. We
need to consider how consumption will recover in thefuture based on the assumption that it will not return byfollowing the same path as in the past. Rapidenvironmental changes have also greatly changed
consumer mind. I think COVID-19 has changed thequality of consumption rather than quantity.
The first year of the medium-term plan is summed
up that the year convinced us that we will not return by
doing the same as before. I cannot deny that the Group’s
core Department Store and Shopping Center (SC)businesses lag behind other retail formats. Departurefrom the business structure overly dependent on thebusiness of physical stores is the major theme of thecurrent Medium-term Business Plan. Our future will not
be on the same path as in the past that relies on
successful experience. I could be prepared to change mymindset and go forward boldly. In that respect, I think theyear has great meaning.

Accelerate for “full recovery”
I think it is extremely important to decide to shift tooffense and make sure its timing is right in order toachieve “full recovery,” and furthermore, turn it into
regrowth premised on living with COVID-19. Where are
the seeds for growth? Where will we seek medium- tolong-term return? Proper preparation based on clear
strategies is essential to build a solid foundation for
discontinuous and dramatic growth. We have to makesuch decisions timely and properly.
In light of the above, I think the current fiscal year,
which is the second year of the Medium-term Business
Plan, is positioned as a year for “shifting gears.” We willchange our mindset to offense from a focus on defense
to respond to the COVID-19 crisis and turn it into
concrete actions and achievements to build a solid
business foundation that enables sustainable growth.
First, for full recovery, we will strive to acceleratebusiness model conversion in the core Department Storeand SC businesses, which have been particularly hard hit
by the COVID-19 pandemic. We will strive tooverwhelmingly increase added value that is unique to

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physical stores and cannot be realized online whilemerging the real and digital worlds to depart from thevulnerability exposed by COVID-19, that is, the businessstructure overly dependent on physical stores. To thisend, we will aggressively invest in increasing theattractiveness of physical stores and strengthening
digitization.
For example, use of app as customer touch points isprogressing rapidly. The Department Store positions it asa centerpiece for changing its business model. In fiscal
2021, sales from app users were ¥187.7 billion,increasing to as much as 38.8% of total department store
sales. In order to pursue that, it will accelerate its efforts
to have its private label card holders sign up for app andacquire new app users. I believe that it is moving forward
steadily to change from the business model constrainedby time and place. By doing this, I think it will also beable to sophisticate CRM through regression analysis,etc. Also in Parco, use of its smartphone app POCKETPARCO is progressing so that it can provide the most
relevant information for each occasion such as before
visiting a store, in a store, and after leaving a store. It
also provides an incentive to entice customers to shop
around in a store. If a customer makes a purchase, dataobtained at the time of purchase such as app’s QR code
payment may be used to recommend him/her to shop
around in the store.

Add more value to physical storesIt is only by making physical stores attractive that we canbenefit from such advanced digital touch points. The
expansion of the luxury floor of the Daimaru Kobe store
led to great results and its sales already exceeded thefiscal 2019 level before COVID-19. GINZA SIX, a luxury
mall, is undergoing a large-scale renovation in phasesfrom spring last year. And it achieved record sales in
December last year though inbound sales, which had

Seriously aim for medium- to long-term growth.
Diversity and future-oriented thinking are essential
for portfolio transformation.

represented 30% of total sales, almost disappeared. Whatparticularly stands out recently is brisk spending by young
affluent people. We can say high value-added categories
including luxury, contemporary art, and high-end watches
are moving better than we can imagine. This fiscal year,
the Department Store will focus on the expansion andimprovement of prime content and steadily develop afoundation for full recovery. And in the second half of nextyear, we would like to start to convert the Group’s largest
Matsuzakaya Nagoya store to a hybrid model, which will
become a symbol of Real×Digital.
Parco will focus investment on five flagship storesincluding Ikebukuro and Nagoya and strengthen theirability to attract customers and earning power based on
their area characteristics. Parco is also actively working
on the development of content and promotion. The
creation of entertainment such as theaters and movies isalso what Parco is good at. We would like to provide hot
experience value that frees audiences’ mind withered by

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COVID-19 to the extent possible with due considerations
to safety and security.
At the same time, we will steadily promotemanagement restructuring to strengthen our ability torespond to rapid environmental changes. First, we will
tackle workforce restructuring and cost restructuring
based on business model conversion and reduce fixed
costs by ¥10.0 billion or more in the current Mediumterm Business Plan to lower the break-even point. Last
fiscal year, we reduced fixed costs by approximately ¥4.3
billion, which is a larger reduction than planned. Inaddition, we will continue to improve our balance sheet
by assessing the Group businesses and selling assets.

Strengthen systems
for portfolio transformation
The current core Department Store and Parco will be able
to grow reasonably by converting their business models

and developing content. However, we need to change thebalance of the pre-COVID-19 structure in which theDepartment Store and Parco account for 80% of total
profit in terms of resilience against rapid environmental
changes. I think portfolio transformation is required for
the Group’s dramatic growth for which we aim.
In order to accelerate this initiative, we have newly
established three divisions including the BusinessPortfolio Transformation Promotion Division, the CRE
Planning Division, and the Digital Promotion Division in
the holding company in March this year to strengthen ourpromotion system. We would like to actively appointpeople from Parco and outside the Group to key positions
to bring out unprecedented ideas using diversity andachieve discontinuous growth.
The Developer Business is one of those that have thekey to portfolio transformation. The Group operates
flagship stores in major cities across Japan and many ofthem also hold lands. It is no doubt our strength.
COVID-19 made some people skeptical about thesustainability of value in urban areas. Actually, however,redevelopment projects in major cities are alreadyrecovering momentum. However, physical places aredefinitely expected to provide more special and premium
experience value than ever and I am prepared to act witha sense of crisis that we will lose our existence value
unless we can meet such expectation.
If we have our sights set on residence, offices, hotels,etc. in the future while operating commerce such as theDepartment Store and Parco as our core business, wecan create new social value as well as maximizing realestate value to suit the area. We will develop as not a“dot” but an “area.” I think it is one of the important
directions of contribution that the Group can make inorder to coexist with local communities.

In the Payment and Finance Business, operating
profit is likely to recover to the level of ¥3.0 billion in thecurrent Medium-term Business Plan due to card renewal
in January last year. The purpose of card renewal is toincrease the attractiveness of cards by giving new points
and expanding perks. The conversion of cards carries acertain degree of defection risk but customer defection
could be kept lower than expected. In consideration ofthese circumstances, the Payment and Finance Businessrevised up its operating profit goal in the Medium-term
Business Plan from the original plan.
However, the Payment and Finance Business aims togrow as a business that contributes to portfoliotransformation. Therefore, first of all, its operating profit
should exceed the level of ¥5.0 billion early. To this end, itneeds to further expand its customer base incollaboration with the Department Store which isrecovering customer traffic to physical stores, and at thesame time, to expand its finance area through allianceand other means. After such process, we would like tofurther grow the business as one of the Group’s corebusinesses in the long term.

Take an R&D perspective also in retail
From the holding company’s long-term perspective of 10years and 20 years, I keenly feel that we need toimplement initiatives like R&D, which manufacturers do
as a matter of course, including the innovation of existing
businesses and the development of new businesses inorder to strengthen the competitiveness of the Group. We
cannot deny that the Group sought investment returns
mainly from tangible assets partly because a physicalstore business is at its core. In the current Medium-term
Business Plan, we would like to implement a little

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far-sighted initiative using alliances, M&As, CVCs, andcontent management funds within the strategic
investment limit of ¥10.0 billion.
They will center on customers and sustainability. For
example, speaking of the Department Store, gaisho
provides products and services to affluent people, butfrom a customer perspective, we cannot deny that it is
only a small portion of lifetime value. Obviously, we havean ample chance to increase its share. Given changes incustomers’ values, the elements of sustainability arevery important. Particularly, young people including
Millennial Generation and Generation Z have suchtendency as revealed by various surveys. I think we need
to be aware of this. Considering the desirable shape of
the Group, we would like to expand and improve value tobe provided to customers.
In terms of innovation, I think we as a holding
company should be serious about aggressive digitization.
This is why we strengthened our systems by creating theGroup Digital Unit. As this area evolves particularly
rapidly, on-time efforts are required. An investor said tome, “I feel metaverse has the possibility to innovate retail,which can be called retail 3.0.” The Department Storeand Parco have already conducted trials and we as aholding company would like to pursue our studies fromthe Group’s perspective.

Look ahead to future value creation
Furthermore, in order to enhance true competitivenessfor medium- to long-term value creation, I think we haveto seriously invest in human capital.
Particularly important is to build a pool of humanresources who assume the next generation
management. We will create career development

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programs (CDPs) for individual employees and give them
tough assignments, assign them to projects, and send
them for external training to facilitate their growth.
One of its concrete examples is the Group’s Desirable
Shape for 2030 Project launched in November last year.
Concerning the Group’s corporate vision for 2030, young
employees mainly in their 20s and 30s are currently
working to clarify the Group’s desirable shape and thevalue to be provided using their unique ideas.
For example, in order to revitalize young people, I
think the holding company should aggressively provide
them with opportunities to more actively indicate theirintentions instead of taking a passive stance. That is tosay, it is important to give them more and more
opportunities to study and various experiences. We in themanagement team would like to continue to provide as
many opportunities as possible to exchange frankopinions through interactive dialogue and match ourvector with theirs instead of just saying that we cannot
understand what young people are thinking these days.
In addition, we will create training systems forreskilling and upskilling. We will develop training
programs and examine the effect of training investment
while working on “visualizing skills” to respond to
expected changes in our business model and portfolio.
For example, we cannot imagine even the sales styles ofgaisho , which is a great strength of the Department Storecurrently, will remain unchanged 10 years later. New skills
are definitely required to change a business model. It isnecessary to further improve skills to a level appropriate
for strategies in order to dramatically grow the Developer
Business and the Payment and Finance Business.
Furthermore, we will strengthen the recruitment ofpeople who have professional careers from theperspective of professional talents. We will increase theshare of human resources with diverse experiences andvalues such as professionals who have experience inother industries. Particularly, I expect that the holdingcompany will increase the share of mid-career employees
to 50%. I think what is important in the process of thisinitiative is inclusion. Even if we have diverse humanresources, their abilities will only disperse unless they
have the same vectors. It is important to accept eachother’s individuality, values, and thoughts and unite
efforts to create new value.
Innovation is essential to carve out a path to such acomplicated era. And it is only “people” that can do it.

To be sustainable
It is also true that the COVID-19 pandemic has reinforced
our determination to implement sustainability

management. In the first year of the COVID-19 pandemic,
the Group’s sales of ¥370.0 billion disappeared. What is
our existence value? What does it mean to be required bysociety? I feel such essential questions were presented.
We were given an opportunity to rethink about theimportance of connecting with customers, employees,business partners, and society. In order to be sustainable,
we should remain an entity required by customers andmarkets over the long term. I think it is the very practiceof our Corporate Credo such as Service before Profit andAbjure All Evil and Practice All Good.
The impact of what the Group can do directly on
global issues such as climate change and human rights
issues may be small. However, I think the Group will beable to make a reasonably great contribution bycommitting to initiatives involving stakeholders including
customers and supply chain. It is not easy, though.

Would like to stick with value creation.
Achieving both social value and economic value isthe mission imposed on us.

The Group’s Scope 1 and 2 CO2 emissions represent
5% of total emissions and 95% are so-called Scope 3upstream and downstream emissions in our supply chain.
Therefore, we have to collaborate with suppliers. To thisend, we held a briefing session for suppliers in April thisyear and approximately 250 companies attended it. And
we shared the importance of collaboration to reduce CO2
emissions with them.
We received various opinions from suppliers
including: “We have to review sales promotion, etc.
because CO2 reduction causes cost increase” and “It isdifficult for some smaller businesses to measure CO2emissions.” Valuing these opinions, we will move forwardtogether with suppliers.
And last year, we assessed 7,415 companies
concerning the dissemination of the Principles of Action
for Suppliers formulated by the Company and received
responses from 3,012 companies. More than 80% of them
are aware of or support international human rights
frameworks and we could reaffirm their high level ofinterest. On the other hand, it was only a little more thana half of them that formulated their own human rights
policies and guidelines and we would like to continue toencourage suppliers to improve.
In order for the Group to be sustainable, I think weneed to realize CSV management by achieving bothsocial value and economic value, that is to say, to further
stick with value creation. AnotherADdress, a fashion
subscription business newly launched with a young
employee’s idea in spring last year, attracts morecustomers than expected because the sustainable idea
behind the business as well as its attractive products
draw sympathy. We expect we will be able to monetize it
in a few years. I think we need to incorporate more ofsuch perspective in our business activities.
Needless to say, what we should stick with is valuecreation. We would like to make an investment in not only
tangible assets but also intangible assets, particularly an
investment in human resources and a strategic investment
for the future more aggressively than ever before and turnthem into the Group’s unique value creation.

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