The Post-Digital World

Our New Reality
We use computers, smartphones, and a wide range of other electronic devices
on a daily basis. The world of today is such that all objects, experiences, andactions are linked via digital technologies, connecting us to the entire world nomatter where we are. This post-digital world, our new reality, is a world in which
digital connections surround us like air, enveloping the physical world. The digital
native generation born into a world permeated by digital terminals enjoys thepost-digital world through social media and other venues as natural as theybreathe the air around them. To companies, this world represents an increased
range of touchpoints with users, making it possible to develop a deeper understanding of our customers and to communicate more closely with them. Thesechanges in the times are pressing us to update how we think, reevaluating ourlifestyles, business practices, and how we interface with others.

Online Merges with Offline—Survive in times without offline (Japanese only) by Yasufumi Fujii and Kazuhiro Obara
www.0101maruigroup.co.jp/en/ir/lib/book/002.html

Visiting Yurakucho Marui in June 2019, this young
woman was clearly enjoying her day off, proclaiming
happily that she was going to the gym next. With smartphone in hand, an emblem of the digital native generation, her steps were cheerful as she left the store.

02

03

The photograph to the right shows the famous Shibuya
pedestrian scramble taken from Shibuya Modi.
The people crossing are of various genders, ages, andnationalities. Their walks of life are varied, from students
on their way home from school and fast-paced office workers
to tourists lugging suitcases. One cannot help but wonder
what each of them is thinking as they walk.

An Inclusive World

Desire for Individuality
and Connections
The post-digital world provides easy access to a vast library of information fromanywhere in the world via the Internet. This access reveals an extensive range ofoptions for any choice, whether fashion, anime, music, food, or something else.
From among these options, we are free to choose the one that suits us best.
More than just that, this access removes barriers of time and distance to allow us
to connect instantly with people who share our interests and values that wewould have never encountered in the physical world, further empowering us toshape our individual lifestyles. In an inclusive society, people of all genders, ages,
nationalities, and physical and mental characteristics will be able to exercise
their own individuality without reservation, and the concept of a minority willcease to exist as a result. We currently live in a world in which people seek
options to live their own individual happiness while also forming connections
and having exchanges with people who understand them.

04

05

Our Planet

Crossroad for Humanity
Since the industrial revolution, humanity has continued to drive economic
growth with energy generated by burning the fossil fuel accumulated within theearth. As we have burned this fuel, greenhouse gases have continued to accumulate in the atmosphere. These gases have increased the average global temperature, triggering droughts and forest fires through record-breaking heat alongwith widespread damage from concentrated rains, typhoons, and other extreme
weather events. If action is not taken, the earth’s average temperature is projected to rise to 4°C above pre-industrial levels by the end of the 21st century,
which would have catastrophic impacts on the survival of the human race.
We are currently placed at a crossroad. The current generation must choose
whether to continue to deplete the rich resources and bountiful environment ofour beautiful planet for their own benefit or to take immediate action to preserve
these benefits for future generations. Once humanity has chosen its path, there
will be no turning back.

Operating Manual for Spaceship Earth by Richard Buckminster Fuller
www.0101maruigroup.co.jp/en/ir/lib/book/001.html

The four-year-old son of a MARUI GROUP employee lifts
a globe-styled ball above his head with both hands. He
represents the future generations that MARUI GROUP has
newly included among its focus groups of stakeholders.
As the current generation, we are obligated to ensure a
happy future for these generations.

06

07

Let’s Join Hands

Co-Creation of
a Platform for Happiness
MARUI GROUP’s mission is to help build a flourishing and inclusive society thatoffers happiness to all. To guide us in accomplishing this mission, in February
2019 we released our long-term vision (MARUI GROUP’s 2050 Vision)—“Harnessing the power of business to build a world that transcends dichotomies.”
However, we realize that this mission cannot be accomplished alone: it will
require that we co-create a platform for happiness together with future generations and all other stakeholders. Through this platform, we will then need to pool
our strengths to generate synergies toward the resolution of social issues. This
report’s message of “Let’s Join Hands” is an invitation for anyone who shares ourideals to join us in the co-creation of this platform for happiness.

“Let’s Join Hands” is an invitation to take part in ashared activity. In Japan, this invitation is issued byextending one’s finger. Whose finger is at the center ofthis picture? Turn to page 148 for the answer.

08

09

Message from the President

Click here for a list of book recommendations from President Aoi.
www.0101maruigroup.co.jp/en/ir/lib/book/001.html

I invite everyone to join hands with us
in co-creating value for the future.
    

Hiroshi Aoi
President and Representative Director
Representative Executive Officer, CEO

Co-Creation Management Report 2019 is our fifth co-creation management report. In this report, we
will once again provide a look at MARUI GROUP’s path to improved corporate value through financial
and pre-financial information. At the same time, I would like to issue an invitation to anyone interested
in co-creating this corporate value together with us.
Just like children invite their friends to join hands for playground games, we invite any of ourdiverse stakeholders who are interested in joining hands with us in co-creating value for the future.
This invitation is issued to the customers who help us create better stores and services, the employees
who work together with us, those who will join MARUI GROUP in the future, companies with which weengage in open innovation, long-term shareholders and investors, and every other stakeholder of theCompany. This invitation inspired the photograph on the cover of this report. We hope that as many
interested individuals as possible will join us in the serious but also fun game of co-creating value.

New EPS Record for the First Time in 28 Years
I would like to begin by looking back at the fiscal year
ended March 31, 2019. We passed many milestones inthis year. One of these milestones was the completion of
the transition to shopping centers and fixed-term rental
contracts that we started in the fiscal year ended March
31, 2015. Taking five years, the transition from department stores to shopping centers was a massive endeavorthat transformed our prior business into something completely new. We were able to complete this undertaking
thanks to the passion and dedication of our employees.
Meanwhile, EPOS card transactions exceeded ¥2 trillion for the first time, a notable milestone in the FinTech
segment. After the launch of EPOS cards in March 2006,
it took nine years before transactions through these cards
climbed above ¥1 trillion in the fiscal year ended March
31, 2015; these transactions grew beyond ¥2 trillion amere four years later. This success was a product of theaccelerated growth we achieved through the nationwide
deployment of EPOS card application centers and the promotion of Gold card issuance.
In terms of performance, these accomplishments led
us to achieve operating income growth for the 10th consecutive year in the fiscal year ended March 31, 2019,
and also to post a new record for earnings per share(EPS) for the first time in 28 years. As we grew our business and improved our earnings, we also worked toward

our targeted balance sheet. These efforts helped us
achieve return on equity (ROE) of more than 9%, which
exceeded cost of equity, resulting in a positive equity
spread and enabling us to finally generate corporate
value that surpassed the expectations of ourshareholders.
With a five-year average annual growth rate of 15.6%
for EPS and a policy of targeting ongoing increases in the
consolidated payout ratio, we have realized seven consecutive years of higher dividend payments combinedwith three consecutive years of new records for cash dividends per share. As a result, the Company’s total shareholder return has grown by 2.7 times over the past five
years, well above the Tokyo Stock Price Index average
growth of 1.5 times over this period. Moreover, the average annual growth rate for total shareholder return was
22.0%, 14 percentage points higher than the Tokyo
Stock Price Index average rate of 8.0%. Only two years
remain in our current five-year medium-term management plan, which is slated to conclude with the fiscal
year ending March 31, 2021. We are currently on coursewith regard to this plan, and we feel that the plan’s targets are entirely within our grasp. As seen in theseaccomplishments, the fiscal year ended March 31,
2019, was a year during which much fruit was borneof our initiatives thus far.
A selection of books, ranging from management guides to comics, recommended by President Aoi, an avid reader, can be foundin the tamaru WORK LOUNGE established in MARUI GROUP’s head office to help heighten the creativity of employees.

1011

Accelerated Growth in Lifetime Value Stemming from Changes in the Nature of Sales
Next, I would like to review the status of MARUI GROUP’s
business model, which furnished the foundations on
which we achieved this success. In last year’s
Co-Creation Management Report 2018, we described
the business model we target as being characterized bytransitions from a flow-type business to a stock-typebusiness and from a business emphasizing on-balance
sheet assets to one built on off-balance sheet assets (seeFigure 1). These transitions are indicated by the two axes
in Figure 1. Today, I would like to discuss the transition
from a flow-type business to a stock-type business, thehorizontal axis of this figure and an area in which wehave seen great change over the past five years.
When we say a “flow-type business,” we are referring
to a business in which the earnings structure is oriented
around profits generated within a given fiscal year. In
contrast, a “stock-type business” features an earnings
structure centered on recurring revenue. Profits generated within a given fiscal year are those profits that are
not guaranteed to recur in the following fiscal year. For
example, when we operated department stores in thepast, we had our regular customers along with a large
number of other customers. Just because a customer
made one purchase at our store, there was no guaranteethat they would make subsequent purchases, meaningthat we had to value each individual transaction.
Moreover, the earnings of department stores were influenced by external factors, such as weather, trends,

inbound demand, and consumption tax hikes, adding to
the inconsistency of this business.
Our decision to transition to shopping centers andfixed-term rental contracts was predicated on our desire
to move away from this inconsistent, year-by-year business to build a more consistent business structure.
Changing the source of our earnings from sales revenues
to rent revenues based on fixed-term rental contracts
created a situation in which we can look forward to consistent rent revenues over a period of three to five years
that is not influenced by external factors.
In the FinTech segment, meanwhile, the rapid growthin transaction volumes drove increases in consistentrecurring revenues. The FinTech segment has always
been in a position enabling it to achieve profits that continue beyond single fiscal years, through finance charges
on revolving and installment payments. However, wehave gone a step further by working to transform thenature of the transactions for which EPOS cards areused. We have thus sought to encourage customers to
use their cards to make payments for communication
fees, utilities, rent, and other ongoing payments in addition to one-time transactions at affiliates.
These efforts have caused the ratio of recurring revenue to total revenue to rise from around 26% in the fiscal
year ended March 31, 2014, to approximately 54% in
the fiscal year ended March 31, 2019. Revenue itself
has increased for two straight years, but the growth in

Figure 1: Business Model for Our Vision for the Future

Bolster stock-type businesses that are notdependent on balance sheet

Off-balance sheet assets
Rent
guarantee

tsumikiCo., Ltd.

Affiliate
Platinum card
commissions annual fees

Flow-typeOmni-channel retailing(Specialty shops,
private-brandproducts)

Onlinesales

Rental dresses
Share houses Shopping­centers using
fixed-term
rental contracts

Stock-type

Credit cards(Revolving payments,­installment payments)

On-balance sheet assets

overall revenue has been outpaced by the growth inrecurring revenue. This change is even more pronounced
in regard to gross profit. Recurring gross profit accounted
for 34% of total gross profit in the fiscal year ended
March 31, 2014, and 63% in the fiscal year ended
March 31, 2019. Over the past five years, overall grossprofit has grown by 22% while recurring gross profit has
risen by 230% (see pages 34–35 for more information
on recurring revenue).

In this manner, MARUI GROUP’s earnings structure has
undergone drastic change over the past five years, manifesting not only in stable growth in top-line revenue but also
in the nature of sales. Rapid growth in recurring revenue iscontributing to accelerated growth in lifetime value, the totalof the present value of future profits (cash flows). As growthin lifetime value is directly linked to higher corporate value,
one could thus say the MARUI GROUP’s corporate value
has improved greatly over the past five years.

MARUI GROUP’s SaaS-Resembling Business Model
MARUI GROUP’s business model is evolving beyond theprior model of combining, or perhaps synergizing, retailing and finance operations to become something resembling a software as a service (SaaS) model.* Comparing
us to a SaaS company may seem like a little bit of astretch. However, the business model of such companies
is actually similar to a model we have been using forquite some time. Let me elaborate. It was apparently
common for MARUI GROUP’s founder to tell the former
president that he should treasure the monthly installment payment business, as it was a lucrative business.
The reason monthly installment payments werelucrative was that they entail ongoing monthly payments
after purchases, allowing for longer-term relationships tobe forged with customers than would be possible underconventional retailing models in which relations end withsingle transactions. Also, under the monthly installment
payment model, it is common for customers to makesubsequent purchases after their payments have been
finished. In this manner, MARUI GROUP’s business wasnever a “one-and-done” retailing business, but rather wasalways a business of building long-term relationships offof single transactions.
I would like to share a recent episode in this regard.
We recently asked the president of a certain start-up
company to give a lecture. This president was born inOsaka. He called his mother the day before the lecture totell her about it. At this point, his mother informed him
that, when his father worked in Tokyo, he bought his firstsuit on installment payments from Marui. The presidentof this company was around 50, meaning that his father
most likely bought that suit more than 50 years ago.
I was moved to hear that our customers still rememberedsuch interactions with us. The truth, however, is that

there are many customers that have such memories.
When I was a kid, I often heard adults speak of how they
“had dealings with Marui.” I had always wondered why somany people remembered their experiences shopping at
Marui and expressed their experiences with the words“had dealings with.” I found the answer when MARUIGROUP was grappling with a management crisis. The
reason why these experiences remained with people forso long was because of the experience provided bymonthly installment payments. Through this payment
scheme, the co-creation of creditability with customers—
our core value—had enabled us to forge strong, lasting
relationships with our customers.
To use today’s lexicon, this practice could be said tohave been a form of “customer engagement.” Such longterm relationships and strong engagement with customers are both characteristics of SaaS businesses.
MARUI GROUP’s business takes place in an industry
that is completely different from standard SaaS companies. However, the process of trial and error driven by
our desire to translate the DNA we have held since ourfounding into a contemporary business has coincidently
led to a business model that resembles that of SaaS
companies. Today, MARUI GROUP is enjoying consistent
top-line growth while evolving to employ a new businessmodel that boasts rapid growth in corporate value on parwith new companies. At the same time, we recognize that
this new business model requires a new method of evaluating corporate value. For this reason, we will look toengage in dialogue with our shareholders and otherinvestors in a manner that goes beyond the conventional
industry categories of retailing and finance to co-create
corporate value together.

* SaaS business models entail providing software and services through the Internet via cloud servers. Rather than purchasing packaged software, these models allow customers to choose their desired functions and use them on a subscription basis, thereby growing lifetime value through ongoing transactions with customers.

1213

Concept of Stores of the Future—Stores That Do Not Sell
Now, I would like to talk about our vision for the future.
I will be explaining this vision from the perspectives ofstores, FinTech, and co-creation sustainability management. Beginning with stores, having completed the transition to shopping centers and fixed-term rental
contracts, we are now poised to undertake the fullfledged development of the stores of the future. MARUIGROUP’s business has evolved, taking us from runningdepartment stores to operating shopping centers. In the
future, we will look to evolve beyond the boundaries of
shopping centers to develop a completely new type ofstore—stores that do not sell. Delving into our concept of
the stores of the future that do not sell reveals various
new possibilities.
I will be explaining these possibilities in accordancewith the eight operating environment changes describedin Co-Creation Management Report 2017. The long-term
trends pertaining to stores are primarily contained withinchanges (1)–(5). The concept of stores that do not sell
has the potential to transform virtually all the threats
associated with these changes into opportunities.
(1)
Transition to
e-commerce(2)
Shift from goods
to experiences(3)
Emergenceof a sharing
economy(4)
Declining birthrate
and aging
population(5)
Increase indemand frominbound travelers(6)
Rise ofcashless payment
methods(7)
Change of focus
from saving
to investment(8)
End of era of low
interest rates

The long-term trend represented by operating environment change (2), the shift from goods to experiences,for example, would have presented a significant threat to
MARUI GROUP if we had failed to move beyond department stores. This is because the business model of procuring and selling products utilized by department
stores, while excelling at selling goods, is not suited tothe provision of food and services. Shopping centers,
however, employ a real estate rental model that is ideal
for the supply of food, services, and other experiences.
Still, both department stores and shopping centers sharethe same Achilles’ heel: they are both focused on sales.
To move past this limitation, we chose to think about
our future course while placing selling, previously
assumed to be the fundamental role of stores, on the

14

backburner. This opened the door for the provision ofvalue in the form of experiences and communities. This isincredibly important because, as many have noticed,
contemporary consumers desire the value offered byexperiences and communities above that provided bygoods and services.
This shift in contemporary tastes is even more apparent when it comes to operating environment change (5),the increase in demand from inbound travelers. It was
only a few years ago when non-Japanese visitors toJapan would often plan their trips around shopping, purchasing electronics and luxury brand items in massquantities. Today, such mass purchases are almost nonexistent, and we have seen a rapid shift toward the consumption of experiences, with visitors looking instead toenjoy Japanese cuisine, traditional culture, and anime or
the natural splendor throughout the country. This shift
mirrors the shift that the Japanese population underwent
over the course of decades, only condensed into a few
years. This different speed of these trends is itself ahighly interesting subject. Back on topic, we cannot denythat Japanese people as well are trending toward theconsumption of experiences. This trend can be seen in
how the vast majority of photographs posted on
Instagram are representative of the consumption ofexperiences. In response to this trend, we aim to evolve
beyond shopping centers to create stores that provide
not just goods but also experiences and communities.
If we decide that our stores do not necessarily needto sell, the potential influences of changes (1), the transition to e-commerce and (3), the emergence of a sharing
economy will become quite different. Looking first at
sharing economies, these economies are the antithesisof consumption and thus represent a threat to stores
focused on selling, whether they are selling products orservices. Conversely, stores that are not preoccupied
with sales are able to synergize with these economies.
We are therefore working to recruit partners that develop
their businesses around sharing economies, which we
expect will experience growth over the long term. In
addition to collaborating with these partners in ourstores, we will also coordinate to introduce EPOS cardholders to these partners, provide convenient payment
methods, and offer other value. This approach has been
adopted because we recognize that such sharing facilitation constitutes the type of sustainable businesses wehope to advance going forward.

The same can be said of e-commerce. Stores preoccupied with selling goods will be forced to compete with
e-commerce, and brick-and-mortar stores will be placedin a disadvantaged position, as seen in the “Amazon
effect” that has transformed the market in the UnitedStates. The shift from physical stores to e-commerce is along-term trend that Japan will not be able to avoid going
forward. In other words, the trend toward e-commerce is,quite possibly, the greatest threat to traditional stores.
However, this threat too can be transformed into a
massive opportunity by putting sales on the backburner.
The new e-commerce trend toward direct-to-consumer(D2C) businesses is emblematic of this opportunity.
D2C businesses were conceived when the Internet
enabled manufacturers to connect directly to consumers
without having to go through the middleman of a wholesale or retail venue. Amazon and other e-commerce sitesof the same vein are counted as “retail venues” in thiscase. D2C businesses may only offer a limited scope of
specific products, but their offerings are unique and thus
stand unrivaled. They are also able to win exceptional
levels of consumer support by offering products notfound anywhere else.
What is perhaps most interesting about this trend is
how it is common for D2C businesses, a type of“second-wave” e-commerce business, to set up physicalstores shortly after launch. One reason behind this drive
to open physical stores is the fact that the fierce competition among e-commerce venders is driving sharp
increases in new customer acquisition costs. More
important, however, is the fact that the increased
engagement made possible through direct interactions
with customers via physical stores contributes to ongoing use by customers and subsequently higher lifetime
value. In other words, D2C businesses see physicalstores as venues for increasing engagement and promoting high levels of communication with customers. Thisbusiness approach targeting strong engagement andlong-term relationships with customers matches thatof MARUI GROUP.
However, there is one obstacle to this approach.
Department stores and shopping centers, which are
exceptional at drawing customers, are focused on generating sales within stores. These stores are therefore notwelcoming of D2C businesses. MARUI GROUP has thus
stepped up to remove this obstacle. We hope to work
together with a diverse range of D2C businesses that
help enrich customer lifestyles. I therefore issue an invitation to such D2C businesses to join hands with us increating value.

Distinctive Strategy of Maximizing Share of Household FinancesMoving on, we will now look at our future vision from theperspective of FinTech. I would like to take this opportunity to offer an update about our assessment regarding
the opportunities and threats associated with operating
environment change (6), the rise of cashless payment
methods. In 2018, much attention was directed toward
the advent of various payment services, which heralded
a full-fledged transition to cashless payments. The
advent of such services prompted many questions for awide spectrum of stakeholders asking about the strategies MARUI GROUP would employ to combat new rivals
such as IT companies pushing smartphone payment services. The common thread between these questions was
the concern for the possibility of MARUI GROUP and its
legacy credit card businesses being replaced by theinnovative smartphone payment services of IT companies. We engaged in an active dialogue with shareholders, other investors, and employees for the purpose of
responding to these questions and to this concern.

Through this process, we were able to clarify the direction needing to be taken in the FinTech’s strategies going
forward, thereby deciding the core thrust of thesestrategies.
This thrust is the maximization of our share of household finances. Specifically, we aim to maximize the shareof EPOS card payments in household finances by offering assistance in the various areas that customers use
money (see Figure 2). As shown in Figure 2, the household finances of customers can largely be divided into
two categories: cash payments and bank transfers.
Companies promoting smartphone payments are primarily focused on the cash payments category represented by the left side of this figure. MARUI GROUP,
meanwhile, is turning its attention largely toward thebank transfers category on the right side of the figure.
This is because the right side primarily represents regular, ongoing payments that can help us generate therecurring revenue we target.

15

Ethical Responsibility of Securing a Number of Forward Days for Future Generations

Figure 2: Approach Targeting All Areas of Household Finances
All Areas of Household Finances
Cash Payments

Bank Transfers (Majority of Household Finances)
Congratulatory and other gifts

Food

Beauty, fashion

Leisure,learning

E-commerce
A strategic alliance with GMO Payment Gateway, Inc., has been
formed to promote the use of EPOS cards for e-commerce purposes.

Reservation applications
MARUI GROUP is turning attention to the new opportunities presented
by concert ticket, taxi, and other reservation applications.

The most representative example of such ongoingpayments is communications and utilities payments.
We have long been encouraging EPOS cardholders to
use their card to make these payments. In this area, weare looking to step up initiatives for promoting the use ofcredit cards to pay rent, generally the largest outflow aspart of household finances. It is normally impossible to
make rent payments with credit cards. However, we offer
rent guarantee services that allow for credit cards to be
used for such payments. These services have proved
immensely popular as they offer customers the benefitof accruing EPOS card points each month as they pay
their rent.
Furthermore, we advanced into the areas of savings
and investment in 2018. Savings and investments are
not technically outflows, and credit card payments havetherefore not been applicable in these areas in the past.
Our initiatives in this field will be advanced by tsumiki

16

Rent

Rent guarantee
Our rent guarantee services areproving immensely popular forallowing customers to accrue EPOS
card points through monthly payments. In the fiscal year ended
March 31, 2019, rent payments
using EPOS cards amounted to¥260.0 billion, growing to accountfor 11% of total transactions.

Communications,
utilities, etc.

Savings,
investment

Recurring
payments

tsumiki Co., Ltd.

We are stepping
up coordination
with power, gas,and other utilities
to expand cardholder services
and promote
ongoing use.

Purchases ofinvestment
trusts via credit
cards are madepossible via
tsumiki Co., Ltd.

Co., Ltd., going forward (for more information on initiatives related to areas on the right side of Figure 2, pleaserefer to “Progress and Future Strategies in the FinTech
Segment,” beginning on page 94).
Also beginning in 2018, we have been implementing
initiatives for using EPOS Family Gold cards to convert all
members of families into cardholders. Gold cards havesubstantially higher rates of ongoing use when compared
to standard cards and also make large contributions tolifetime value. Given this fact, increases in the number ofGold cardholders will have an effect similar to growth inrecurring revenue. As I have explained, our distinctive
strategy is completely different from that of companies
promoting smartphone payments. By advancing thisstrategy, we will turn the threats presented by the trend
toward cashless payments into opportunities in order toimprove corporate value by growing recurring revenue
and evolving into a lifetime value-oriented business.

Lastly, I would like to talk about the subject of co-creation
sustainability management. MARUI GROUP was implementing environmental, social, and governance (ESG)
initiatives previously. Seeking to evolve these initiatives
to practice co-creation sustainability management, wedevoted the year of 2018 to formulating a long-term
vision and targets through discussion between employee
volunteers and management.
These were compiled into our VISION BOOK 2050.
This report describes MARUI GROUP’s 2050 Vision:“Harnessing the power of business to build a world thattranscends dichotomies.” VISION BOOK 2050 also provides information on our three businesses founded on
co-creation—inter-generational businesses, co-creative
businesses, and financial inclusion—through which
we will seek to increase the happiness of all people.
Concrete initiative plans will be drafted over the periodof 2019, through a process focused on employee volunteers similar to the one for formulating a vision and targets in 2018. In drafting these plans, we will use
a backcasting approach.
There are two principles that I feel are important inthese initiatives. The first is to practice co-creation witha new group of stakeholders: future generations.
Previously, we have focused our activities on the fivestakeholder groups of customers, investors, communities and society, business partners, and employees.
However, discussions about a long-term vision and targets made me realize that there was one more stakeholder group we needed to consider in order toco-create value for the future.
This stakeholder group was future generations.
I became aware of this group when examining environmental issues. One may wonder who are the stakeholders that benefit from environmental preservation. People
often talk of “being kind to the earth” or “protecting theenvironment.” However, it seems odd to think of theearth or the environment as stakeholders in the samemanner as customers or investors. When pondering thisquandary, the idea of future generations popped into myhead. From a different standpoint, addressing environmental issues can be seen as preserving a rich and beautiful environment for the sake of children and younger
generations. Rather than squandering this bounty,
depleting and destroying the natural environment andresources in the process, it is an ethical responsibility topreserve this bounty for future generations.

Richard Buckminster Fuller defined wealth as thenumber of forward days we are physically prepared tosustain for future generations. Replacing this definition of
wealth with corporate value is the core of MARUI GROUP’s
co-creation sustainability management. To practice thistype of management, we will promote the contributions ofyounger employees and engage in open innovation withentrepreneurs. We also hope to take part in co-creation
with junior high and high school students. I would thus
like to invite junior high and high school students to join
us in thinking about the type of businesses that will
create value for the future.
The second important principle is how we will shape
our business going forward. In Co-Creation Management
Report 2018, we declared the goal of MARUI GROUP’s
new businesses as being to commercialize initiatives foraddressing social issues. We have made true on this declaration as all of the new businesses we are currently
advancing or developing are oriented toward the resolution of social issues.
Following the example of these new businesses, inthe future, I hope to re-orient our existing businesses
toward the resolution of social issues as well. One goal of
our co-creation sustainability management is to have allof our businesses addressing social issues.
Accomplishing this goal will align the meaning of ourwork with the meaning of our lives, thereby transcending
the dichotomy between work and life. The structure ofcapitalism, which has maintained its hegemony since theindustrial revolution, is reaching its limit. As the world ispressed to evolve toward a sustainable society, MARUIGROUP will strive to create value for the future as afrontrunner in co-creation sustainability management.
I look forward to your ongoing support and understanding and to engaging in co-creation with you.

August 2019

Hiroshi Aoi
President and Representative Director
Representative Executive Officer, CEO

17

D

LOGUE 01

Approach to Transcending Dichotomy between
ROE and ESG by Harnessing the Power of Business    
The following is a discussion between Professor Kunio Ito, who advocates ROESG, a new
integrated indicator for achieving high levels of ROE and ESG in the pursuit of sustainableimprovements in corporate value, and MARUI GROUP President Aoi on the topic ofco-creation sustainability management for transcending dichotomies.

Kunio Ito
Specially Appointed Professor
Graduate School of Business Administration,
Hitotsubashi University

Poison Contained in ROE and ESG
Aoi: MARUI GROUP’s 2050 Vision is “Harnessing thepower of business to build a world that transcends
dichotomies.” Professor Ito, today, I would like to ask
you about how we can transcend the dichotomy
between ROE and ESG.
Ito: That is a task that must be addressed through apractical approach at the management level. In 2014,
I published the Ito Report, which cast light on the lowemphasis placed on capital productivity by Japanesecompanies and encouraged companies to target ROEof at least 8%. Today, the average ROE of all companies
listed on the First Section of the Tokyo Stock Exchange
is on the cusp of reaching this level. However, the focus
on ROE can poison other areas. There are those managers who truly understand the essence of ROE andpractice management accordingly. However, thisemphasis on ROE threatens to give rise to those managers who focus only on short-term numbers andsometimes look to inappropriately adjust profits basedon this limited perspective. An emphasis on ESG also
carries such poison in its potential to become an
excuse for low capital productivity. I think it is best to
harmonize ROE and ESG through a company’s corebusiness activities. Dialogue is a powerful tool for overcoming this dichotomy. President Aoi, I understand thatyou are advocating the power of dialogue to drive

Hiroshi Aoi
President and Representative Director
Representative Executive Officer, CEOMARUI GROUP CO., LTD.

co-creation. Dialogue presumes differences of value,
seeking to bridge the gap caused by these differences
through extensive and ongoing communication aimed
at determining from where these differences arise.
With this belief, I find that various parts of the management stance of MARUI GROUP and of you yourself
resonate with me.

Dichotomies Arising from Differencesin Timeframes
Aoi: MARUI GROUP is generally evaluated by investors
from the perspective of the traditional retail sector,
resulting in many questioning our actual industry andhow we should be evaluated. However, there are in factmany other companies for which the industry is unclear.
Ito: It is currently impossible to box companies into asingle industry or sector. Given this reality, companies
should stress in dialogue the fact that they have a large
staff of talented individuals capable of creating new
businesses and business models that do not conformto conventional industry boundaries. Effective dialogue
is thus about how best to communicate that, fundamentally, employees are acting as the value creators intheir companies.
Aoi: It is common practice for personnel expenses andhuman resource investments to be recorded as costs
instead of as assets for accounting purposes. I thinkthat this practice represents another textbook example

Kunio Ito
Graduating from Hitotsubashi University in 1975, Kunio Ito later became a speciallyappointed professor at this university. Professor Ito has been chairman of the Ministry of
Economy, Trade and Industry’s “Competitiveness and Incentives for Sustainable Growth:
Building Favorable Relationships between Companies and Investors” project. In addition, theIto Report integrated report published in 2014 garnered a great amount of attention, evenoverseas, elevating Professor Ito to the position of a leading figure in corporate governancereforms in Japan. He has written various works on topics including management for overcoming crises, new corporate value evaluation methods, and accounting of intangible assets.
Ito Report 2.0 (Japanese only)
www.meti.go.jp/press/2017/10/20171026001/20171026001-1.pdf

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DIALOGUE 01

It is important to recognize that transcending
dichotomies is not the same as compromising.
Rather, transcending the dichotomy between
Vector A and Vector B requires the establishmentof a third Vector C.
Kunio Itoof a dichotomy. The more investments a company
makes, the more it seems that their profits decline.
At the same time, the more a company invests, the more
it will be able to generate value over the long term.
Ito: Baruch Lev, one of the writers of The End of
Accounting and the Path Forward for Investors andManagers, criticizes our current accounting practices
for how they record R&D expenditures and otherinvestments in intangible assets as expenses, inviting
bearish economies by encouraging managers to limit
such investments. I believe that differences in timeframes, between short-term and medium-to-long-term
perspectives in this case, are a source of dichotomies.
There is no clear answer on how to transcend thisdichotomy, but I think that a good start lies in being
able to effectively explain how one’s company is prefacing management on a medium-to-long-term perspective while doing their utmost to achieve success in the
short term.

Selection of Managers as First Stepin Effective Corporate Governance
Ito: If a manager who will only hold their position for
four years attempts to postulate on their company’s
medium-to-long-term outlook, investors will perceive it
merely as idealism or as an official stance. This is why
the first step to effective governance lies in the selection of a company’s manager.
Aoi: I think it is crucial for Japan to develop corporate
governance frameworks based on timeframes that20

enable managers to commit to fulfilling their duties
over the long term.
Ito: You are exactly right. To add to this point, managers
need to have experienced setbacks in the past if they
are to hold their positions over the long term. A personthat has never experienced setbacks will crack underpressure should a crisis occur. Of course, governancesystems will also need built-in frameworks for dismissing managers that do not exhibit satisfactory performance. What is perhaps most important of all is thedegree to which a manager is self-driven. In otherwords, governance should involve others monitoring
the extent to which a manager can exercise a selfdriven approach.
Aoi: I am the eldest son of the eldest son of our
founder. When I took up the mantle of president, I thus
assumed that I would be in this position for around 20
years. This assumed tenure has greatly influenced myactions as president. Faced with a management crisis
that had lasted seven years, a commitment to moving
forward welled up inside me when I realized that I still
had more than a decade to go. Whenever I would visit
the founder’s grave during this period of adversity,
I could not help but think that, if I were to bring about
the end of the Company, my ancestors would haunt me.
The pressure was enormous.
Ito: When a manager inherits a business from a family
member, it is common for them to be able to effectively
micromanage, being aware of the subtle inner workingsof the company, while also acting based on exceptionally long timeframes. In this manner, these managers
are often able to singlehandedly overcome

dichotomies. My research organization is currently performing pilot tests on ROA and ROIC. On average,these metrics peak when managers have a term of 10
to 11 years. If a manager recognizes that they will not
be around to reap the benefits of structural reforms,
they will simply refrain from those reforms.
Aoi: This is why it is important for presidents to beappointed when they are relatively young. A president
appointed in their 30s or 40s will have time to failwhen they are still new and to learn from and overcome
this failure to succeed.
Ito: A president appointed while younger will have time
to build a track record of success that they can takewith them to other companies. This will also create an
ecosystem in which such individuals are able tobecome investors that nurture the growth of start-up
companies. Conversely, presidents that assumed theirpositions when older will have limited options for after
they leave that position, which may lead them tobecome complacent. In this manner, age is important.
However, this also presents another dichotomy, making
it difficult to determine the appropriate weight to placeon age in the selection criteria for managers.

ROESG Indicator Integrating ROE and ESG
Aoi: You yourself lauded 2019 as the first year of initiatives based on the recommendations of the Task Forceon Climate-related Financial Disclosures (TCFD).

Hoping to adopt these recommendations, we decided
to conduct a scenario analysis based on the TCFD recommendations. Do you think that the TCFD will serve
as a catalyst for the integration of financial and nonfinancial information?
Ito: Scenario analyses based on the TCFD recommendations include both quantitative and qualitative perspectives. As the qualitative perspective pertains to
non-financial information, these analyses will naturally
lead to information disclosure that incorporates bothfinancial and non-financial information. I am currently
researching management based on ROESG, an indicator that integrates ROE and ESG. However, even if we
understand this concept, it will be a difficult andunprecedented undertaking to actually incorporate thisconcept into management. It is important to recognizethat transcending dichotomies is not the same as compromising. Rather, transcending the dichotomy
between Vector A and Vector B requires the establishment of a third Vector C.
Aoi: That is why sustainability is a field that allows us toexercise the greatest creativity and is therefore among
the most motivating and interesting fields.
Ito: The underlying principle of sustainability is a desire
to evolve, whereas being a going concern only means
continuing to exist. These two concepts are therefore
completely different. Japan places too much importance on the simple continuation of companies.
Sustainability, meanwhile, entails continuing to existing
while evolving, and it is corporate governance that
underpins this pursuit.

This assumed tenure has greatly influenced my actions aspresident. Faced with a management crisis that had
lasted seven years, a commitment to moving forward
welled up inside me when I realized that I still had morethan a decade to go.
Hiroshi Aoi

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