Message from the President

Realization of New Value to
Shape the Future through Co-Creation
Sustainability Management    

Hiroshi Aoi
President and Representative Director
Representative Executive Officer

Review of the Fiscal Year Ended March 31, 2018
Record-Breaking Income and Dividends
In the fiscal year ended March 31, 2018, we posted earnings per share of ¥93.2, an increase of 16% year on year,
and return on equity of 7.6%, up 0.9 percentage point,
thereby accomplishing our targets for both of these items.
In addition, we set new records for operating income,which rose for the ninth consecutive year, to ¥35.2 billion,
up 13%, and for dividends, which were increased forthe sixth consecutive year, to ¥38, up ¥5. Furthermore,
MARUI GROUP’s stock price stood at ¥2,168 on March
31, 2018, an increase of 43% from March 31, 2017,
exceeding the 13% growth seen in the Nikkei 225.
This impressive performance brought with it a highevaluation of our corporate value. What I mean by this isthat at the end of the previous year, our stock price was
6% lower than at the beginning of the year, despite thefact that our performance in this year was every bit asimpressive as in the fiscal year under review. Moreover,there was a significant gap between the change in ourstock price and the 13% increase seen in the Nikkei 225.
The large improvement in our perceived corporate value inthe fiscal year ended March 31, 2018, illustrates the highevaluation that I am referring to. I would next like to review
this year and analyze the factors behind this improvement.

Effectiveness of Unprecedented Transition to
Shopping Centers and Fixed-Term Rental Contracts
I would first like to talk about the increased income in the
Retailing segment that stemmed from the transition to
shopping centers and fixed-term rental contracts. Thistransition entails transforming all of our department
stores into stores that employ a real estate business06

model. The aim of this transition is to allow us to betteraccommodate the long-term trend in consumer needs
that is the shift from consumption of goods to consumption of experiences. Through this transition, our goal has
been to cater to such customer needs by developing
stores that deal in food, services, and experiences in
addition to goods and to improve the previously stagnant
income of the Retailing segment.
In the fiscal year ended March 31, 2017, the Retailingsegment suffered a decline in income. This decline was aside effect of the rapid transition to shopping centers andfixed-term rental contracts, which resulted in a temporary
increase in the area of inactive, or non-revenue generating,floor space following sales floor replacements and renovations. The transition of all stores to shopping centers andfixed-term rental contracts was an unprecedented undertaking. This downturn in performance no doubt confirmed
the concerns held by shareholders and investors worried
about the success of this strategy. We diligently explainedthat this was only temporary and that income was sure to
improve as the benefits of the transition emerged.
However, as this t­ ransition was, once again, unprecedented, shareholders and investors stated that they would
have to wait and see the results.
In the fiscal year ended March 31, 2018, the progress of the transition and the decline in inactive floor
space resulted in an upturn in income in the Retailingsegment, as had been expected. Shareholders and investors were therefore finally able to understand the effectiveness of our strategy. In addition, other companies
undertook similar transitions, which helped investors
better understand MARUI GROUP’s strategy.

President Aoi in Q-COURT British-style garden on the roof of Shinjuku Marui Main Building (certified as an “Urban Oasis”)

07Message from the President

Second Consecutive Year of ROIC Exceeding WACC
The second factor behind the higher evaluation of theCompany was our ability to improve corporate value by
increasing surplus income. Due in part to the higher
income of the Retailing segment, return on invested capital(ROIC) in the fiscal year ended March 31, 2018,
increased 0.1 percentage point year on year, to 3.2%,
exceeding weighted average cost of capital (WACC) for
the second consecutive year. Based on discussions withshareholders and other investors, we defined the balance
sheet that we will work toward over the next five years
and set targets for the optimal capital structure.
By implementing financial and capital measures
based on this plan, we generated surplus income in thefiscal year ended March 31, 2017, by reducing WACC.
We then created additional surplus income in the fiscal
year ended March 31, 2018, by improving ROIC. In thismanner, we have at last become able to start developing
a corporate constitution that will enable ongoing increases
in corporate value. This ability is a product of continuous
discussion with shareholders and other investors.

Goal of Becoming a Forerunner in ESG Initiatives
The third factor is the high evaluation of our environmental, social, and governance (ESG) initiatives. In 2008, a
step ahead of the rest of the corporate sector, we began
implementing what have now come to be referred to as“work style reforms” in Japan. Initiatives to empower our
female employees were kicked off in 2013. Then, in the

Message from the President

fiscal year ended March 31, 2017, we defined the ESG
theme most important for us to address as “inclusion.”
By linking the concept of inclusion to the United Nations
Sustainable Development Goals, we identified four core
themes and commenced full-fledged initiatives based onthese themes.
Our efforts to become a forerunner in ESG initiatives
have won high praise from outside of the Company. In
the fiscal year ended March 31, 2018, we were selected
for inclusion in the three ESG indexes that are utilized by
the Government Pension Investment Fund of Japan andin Dow Jones Sustainability Index, which is administeredby a global rating institution. MARUI GROUP was also
included in the FY2018 Nadeshiko Brand and the
FY2018 Health & Productivity Stock Selection (Figure 1).
Probably as a reaction to our inclusion in these selections,an investor stated that “MARUI GROUP is neither a retailer
nor a financial company; it is an ESG company,” at afinancial results briefing. This praise not only brings us joy
but also indicates the path we should follow in the future.
As I have explained, the fiscal year ended March 31,
2018, was a year in which our initiatives related to strategies, finances, and pre-financial information—information that has not yet impacted financial information but isstill as important as financial information—were linked toeach other and advanced in an integrated manner, earning high evaluations for our corporate value. I am mostappreciative for the support we received from stakeholders throughout this process.

Figure 1: MARUI GROUP’s Stock Price (March 2017 indexed to 100)

Vision for Stores of the Future a Decade from Now
Ultimate Goal of Transition to Shopping Centers
and Fixed-Term Rental Contracts
I would next like to explain our plans for future value creation. I will begin this explanation by talking about our
initiatives for after the transition to shopping centers andfixed-term rental contracts, which we have been advancing based on a five-year plan and are scheduled for completion in the fiscal year ending March 31, 2019. As wehave proceeded to improve income in the Retailing segment through this transition, we have simultaneously
shrunk the amount of floor space dedicated to apparelwhile increasing the space allocated to food vendors andservice providers. This move is meant as a response to
the long-term shift in consumption from goods to experiences. For example, we have been applying the idea of
positioning food vendors on all entry floors at various
stores. This was a successful initiative at Hakata Marui, astore that overturned previous department store conventions, and its application to other stores has resulted inincreases in overall customer numbers and transaction
volumes at all stores.
However, the income improvements and the revitalization of stores through product category rebalancing
achieved via the transition to shopping centers and fixedterm rental contracts are merely by-products of the process of the transition and not the ultimate goal of thetransition itself. The ultimate goal of the transition is toreinvent the very concept of stores to realize a new vision
for the stores of the future a decade from now. By shifting from our prior department store model to the current
real estate model, we will position ourselves to begin thecreation of the stores of the future.

Threats Faced by Conventional Stores

MARUI GROUP

The stores of the future that MARUI GROUP aims tocreate could be explained as “stores that do not sell.” Theconventional concept of a store is an establishment thatsells some type of product or service. However, such
conventional stores will face major threats over the
medium-to-long term because of two reasons.

The first threat comes in the form of the spread ofe-commerce while the second threat could be seen to
be the commoditization of products and services. As
e-commerce becomes more mainstream going forward,
it can only be expected that the sale of products andservices will come to be primarily conducted throughe-commerce venues. In the United States, the spread of
shopping through Amazon has led to shopping mall closures and bankruptcies of specialty shop chains of an
unprecedented scale. At the same time, the global commoditization of products and services is driving down
prices, resulting in fierce price competition for bothbrick-and-mortar and e-commerce venues. The trend
has placed enormous pressure on all retailers with the
exception of those limited few of a scale that enables
them to exercise leverage in setting prices.
Faced with these threats, conventional stores will likely
have to either choose to close or to resign themselves tochronically low profit margins due to never-ending pricecompetition.

Option of Stores That Do Not Sell
MARUI GROUP, however, believes that there is a third
option: the stores of the future—stores that do not sell.
The stores of the future we envision offer the value ofexperiences and community as opposed to the sale ofproducts and services. Up until now, we have devoted
ourselves to customer service and sales at our stores. This
led us to wonder if our customer service efforts to date
had purely been for the purpose of sales and what would
happen if sales were conducted through an e-commercevenue and we devoted ourselves to customer service.
We found our answer in 2017 when we investigatednumerous stores in the United States. This answer was tocreate a store that brought joy to both customers and staff.
The stores in which we saw this answer were those operated by companies that had initially grown as e-commercebusinesses and that used their physical stores as pointsof contact with customers. Customers did not need tobuy products in those stores. They were thus able to feel

NIKKEI 225

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2017.92018.309

Message from the President

more freedom and enjoyment in their shopping experience. Similarly, members of the store staff did not needto sell products but instead were able to help customers
try out various products and answer their questions in afriendlier manner. This approach also brought joy to customers; it was an enjoyable place for everyone there.
Seeing this store made me realize the joy that could
be provided by stores that do not sell. This realization gavea clear form to our vision, which had previously been no
more than an abstract concept. The stores of the futurethat would accurately respond to the megatrend that is theshift from consumption of goods to consumption of experiences are not stores that simply increase the amount of
space devoted to food vendors and service providers. No,
the stores of the future are those that coordinate with
e-commerce to offer experiences and a sense of community. Creating these stores will require a complete change
in direction, a transformation from stores that sell goods
and services to stores that do not sell.

Sales as a Result of Not Selling
We thus embarked on our journey toward the future. The
U.S. stores I speak of employed an omni-channel retailing approach, and we therefore began introducing tenants that adopted similar approaches. We also developed
and launched the try-on store scheme for our private
brand women’s shoes. Another step in this journeyentailed welcoming Apple Store Shinjuku into Shinjuku
Marui Main Building in spring 2018. Apple Store

Message from the President

Shinjuku is an experience-based store, the exact type ofstore we had longed for. Next to this store, you will findlululemon, which deals in athletic wear among otherofferings. A representative of lululemon stated that theirpolicy is that employees can do anything but sell, making
lululemon truly a store that does not sell. Instead of selling, lululemon holds in-store yoga workshops and otherevents for fostering a sense of community among customers. Of course, Apple Store Shinjuku and lululemon
both offer products and boast world-leading per-areasales efficiency. However, their main focus is providing
experiences and community. Sales are simply a result of
those efforts, not the goal of their activities. This is theprimary difference between these stores and conventional stores.
Furthermore, SHIBUYA BASE was opened in Shibuya
Marui in June 2018 through collaboration with start-up
company BASE, Inc. This store offers a physical venue
that can be used by e-commerce business operatorsdeveloping their own brands to engage with fans of theirbrands and meet new customers. Many business operators have high expectations for this new type of store.
By furthering the development of and introducing
such tenants, as well as shops of the same vein operated
by MARUI GROUP, we will create the stores of the future.
The transition to shopping centers and fixed-term rental
contracts laid the groundwork needed to develop such
stores. After the transition is complete, our journey ofcreating value for the future will begin.

Power to Change Threats into Opportunities
QR Code Payments Igniting Spreadof Cashless Payments
The trend toward cashless payments is one example ofa medium-to-long-term change in the operating environment impacting the FinTech business. Over the years, wehave continued to contribute to the spread of cashless
payments with our credit cards. Looking ahead, we
expect that QR code payments, which have exploded in
the Chinese market, will also ignite the spread of cashless payments in the Japanese market. The spread of QR
code payments does indeed represent a threat that may
replace credit cards. However, I believe that the impactsof this threat will be limited. In fact, I suspect that the
spread of QR code payments may actually have a positive impact on credit cards.
To get a better understanding of the threats andopportunities presented by QR code payments, let me
provide an overview of our outlook for the future spread of
cashless payments (Figure 2). Excluding bank transactions
and housing loans, the payment market in Japan has ascale of around ¥200 trillion. Of this amount, credit card
payments account for approximately ¥60 trillion and areprimarily used for large-sum payments of more than
¥5,000 at chain stores and large-scale stores. Meanwhile,
prepaid cards and e-money payments represent ¥10 trillion of this amount, mainly through small-sum paymentsof less than ¥5,000 conducted at transportation venues,
convenience stores, and other such stores. In this manner,each payment method has carved out its own corner ofthe market comprising the uses for which it is most convenient. We therefore expect that the new payment of QR
code payments will find a market of around ¥90 trillion
centered on small to medium-sized businesses and smallsum payments of less than ¥5,000.
We therefore project that, as the overall spread of
cashless payments advances, a clear division between
the use of these three payment methods will be maintained. It is said that a similar division between payment
methods is already being seen in China. One reason
behind this division is that, while QR code payments
have the potential to function as a new payment method,they can also become a new means of making payments
through existing methods. For example, it is possible to
make credit card payments through one’s smartphone byusing QR codes if one links the credit card information
registered with their smartphone to a QR code payment
system. Payments through this method do not involve aphysical credit card and may appear to be QR code payments, but they are indeed credit card payments.
Apparently, many Chinese people select payment via
credit card, even when using QR codes, if they aremaking large-sum payments.

Figure 2: Trend toward Use of Credit Cards for Large-Sum Payments and QR Code Payments and E-Moneyfor Small-Sum Payments
Large sum (More than ¥5,000)

Cash
Approx.
¥40 trillion

Apple Store Shinjuku serving as a representative
example of experience-based stores(Shinjuku Marui Main Building)Athletic wear brand store lululemon(Shinjuku Marui Main Building)

SHIBUYA BASE physical venue for e-commerce sites
developed through collaboration with BASE, Inc.
(Shibuya Marui)Credit cards
Approx. 10 million
payment terminals

Approx. ¥60 trillion

Small stores(Mom-and-pop)

EPOS Pay
Launched in summer 2018

Large-scale stores(Chain stores)

Cash(Can be replaced by QR code payments)
Approx. ¥90 trillion

Prepaid cards / e-money
Approx. 1 million payment terminals
Approx. ¥10 trillion

Small sum (Less than ¥5,000)
Sources: M
 ARUI GROUP CO., LTD. (Based on National Accounts of Japan, Cabinet Office; materials from Japan Consumer Credit Association; General Survey of Payment
Methods, Bank of Japan; General Survey of Electronic Payment Methods 2017–2018, CardWave Co., Ltd.; and other materials; excludes bank transactions andhousing loans)

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Message from the President

A similar trend can be seen with Apple Pay and otherservices already in use in Japan. Apple Pay allows users toregister their IC e-money card and credit card with theiriPhone. I suspect that the majority of users make payments via Apple Pay with their IC e-money card at transportation venues and with their credit card when making
larger-sum payments. Initially, it may seem as though the
spread of QR code payments and other payments via
smartphone has the potential to limit opportunities for
credit card payments. However, as illustrated by the examples I just explained, it is likely that usage of credit cards tomake payments will actually increase.

Introduction of EPOS Pay
QR Code Payment Service
MARUI GROUP fully intends to capture the opportunitythat QR code payments present. To this end, we launched
EPOS Pay, a QR code payment service that is tied to our
EPOS cards, in summer 2018. We are forming affiliate
agreements with business owners around Marui stores topromote usage of EPOS cards for small-sum payments instores where our cards previously could not be used. At
the same time, we will utilize the data collected as
through this service to conduct marketing activities thatoffer benefits for both customers and affiliates. We
thereby aim to create regional economic spheres centered on customers. Our goal is to differentiate ourselvesfrom competitors by developing a platform that enables
QR code payments to be made anywhere in Japan.

Collaboration for Growing E-Commerceand Sharing Economies
Two medium-to-long-term trends we anticipate will buoy
the growth of credit cards going forward are theSmartphone application that allows for­payments to be made by reading QR codes
at stores

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proliferation of e-commerce and the development ofsharing economies. E-commerce has been a consistent
proponent behind the growth of credit cards. In fact, thegreatest contributor behind the growth of EPOS cards
in recent years has been the use of these cards throughe-commerce venues. With an eye to further promoting
the use of EPOS cards for e-commerce payments, weallied with GMO Payment Gateway, Inc., in May 2018.
Another driving force behind the growth of our credit
cards is recurring transactions, which include payments
for electricity, gas, water, and other utilities as well as for
smartphone bills. Going forward, we will be collaboratingwith ABLE. INC. with the aim of gaining access to recurringtransactions in a domain where credit cards previously
could not be used: rent payments. Together with ABLE,we will encourage customers to pay their rent with their
credit card.
Another form of recurring transaction is subscription
payments. Such payments are expected to become morecommon in conjunction with the development of sharing
economies and are therefore anticipated to contribute tofurther increases in recurring transactions. MARUIGROUP is collaborating with sharing facilitators offering
brand-name bags, luxury watches, clothing, and otheritems to encourage the use of credit cards for the recurring transactions their services entail. We therefore anticipate that the development of sharing economies will
drive growth in card shopping transactions.

Message from the President

Figure 3: Revenue Sources and Balance Sheet Characteristics

Bolster stock-type businesses
that are not dependent
on balance sheet

Off-balance sheet assets
Rent
guarantee

tsumikiSecurities
Co., Ltd.

Affiliate
Platinum card
commissions annual fees
Rental dresses
Share houses

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

Stock-type

Shopping­centers using
fixed-term
rental contracts

Onlinesales

Credit cards(Revolving payments,­installment payments)

On-balance sheet assets

total assets below ¥1 trillion in the fiscal year ending
March 31, 2021. This amount of assets should enable us
to maintain an equity ratio of 30% or more in this year,
even if receivables in our credit card services business
are higher than expected. At the same time, we will work
to improve capital efficiency by developing rent guarantee and securities operations and other businesses thatare not dependent on our balance sheet (Figure 3).
Our response to interest rate hike risks has included

upping the ratio of funding sources with fixed interest
rates; achieving a balanced mix of short-, medium-, andlong-term borrowings; and seeking to keep payments
level across fiscal years. As a result, the portion of borrowings that will be impacted by future interest rate hikes
will be limited, and we will be able to spread the impact
across a longer period of time. We therefore expect to beable to minimize the impacts of such interest rate hikes
on income.

Businesses That Are Not Dependent on
the Balance Sheet
It can be expected that credit card businesses will witness steady growth going forward if they are able to takeadvantage of the megatrends represented by the spreadof cashless payments, the proliferation of e-commerce,
and the development of sharing economies. However,this growth will not be without challenges. Specifically,
I refer to the risks of bloated balance sheets that stemfrom the expansion of credit card businesses and theinterest rate hike risks that accompany higher liabilities.
To address the risks of bloated balance sheets,
MARUI GROUP will enact a phased increase in theamount of liquidation of receivables from the prior 12%
to around 25%. Through this progress, we will seek toimprove funding reliability and achieve an optimal capital
structure by diversifying procurement methods. By realizing this level of liquidation, we should be able to keep

Resolution of Social Issues through Co-Creation Sustainability Management
Strength of Business Model Integrating Stores,
Credit Cards, and the Internet
Lastly, I would like to explain how we are creating value
through new businesses. The end of the transition to
shopping centers and fixed-term rental contracts is now
in sight and our credit card services business has been
put on the growth track. Accordingly, we are now poised
to devote our efforts to developing new businesses
beginning from the fiscal year ending March 31, 2019.
We aim to develop new businesses that will drive thefuture growth of MARUI GROUP and contribute toimproved corporate value. In developing these businesses, we will not limit ourselves to the boundaries ofretailing and FinTech, and we will seek to devise businesses that leverage the strength of our business model
integrating stores, credit cards, and the Internet.
To date, MARUI GROUP has proceeded to develop
and cultivate new businesses that go beyond the boundaries of retailing and FinTech. The anime business is one
example. Over the two years since its launch, the anime
business has grown to boast annual transactions of ¥5.0
billion, or ¥3.0 billion on a lifetime value (LTV) basis.
Looking ahead, we will maintain our focus on the development of businesses that leverage the strength of ourbusiness model integrating stores, credit cards, and theInternet to resolve social issues. We hope that these13Message from the President

businesses will allow us to make progress in the practiceof co-creation sustainability management, which represents the next stage of MARUI GROUP’s evolution.

Invigoration of the Securities Business
The first step in this evolution will be the promotion offinancial inclusion. MARUI GROUP’s business began withinstallment payment sales. After issuing Japan’s firstcredit card in 1960, we have continued to provide credit
to people of all ages, regardless of their income. This
commitment to equal-opportunity credit is ingrained in
the very DNA of MARUI GROUP. We are therefore compelled to provide financial services other than credit foreveryone. We call this “financial inclusion” and havedefined it as part of our mission.
Our first forays into financial inclusion began with
our entry into the securities business in the fiscal year
ending March 31, 2019. Asset building has previously
been an area of services only available to a very limitedgroup of wealthy individuals. We aim to make these services available to younger generations and to everyoneelse. In the background of our decision to pursue thisgoal is the concern younger generations harbor for the
future. A survey released in June 2017 indicated thatnearly 60% of people belonging to younger generations
have concerns for the future in relation to money, inspiring them to save and conserve money. Meanwhile, manyof these people find themselves unable to move forwardwith asset building due to a lack of knowledge or apprehension regarding investment. At the same time, the ratio
of private financial assets accounted for by cash anddeposits in Japan is higher than in any other developed
country. In fact, the amount of cash and deposits inJapan is ¥900 trillion. This situation has resulted in slow
growth in financial assets in comparison to other countries, prompting the Financial Services Agency to encourage people to shift their assets from savings to asset
building. The goal of our securities business is to transform this concern for the future into hope and thereby
help resolve this social issue. As we are new to thismarket, we will utilize flexible thinking and other advantages of being a newcomer to invigorate our securities
business with a unique business model.
Specifically, our securities business will specialize insales of investment trusts applicable under Tsumitate
NISA in order to help younger generations build assets
steadily over extended periods of time. We have carefully

14

selected the trust managers we will partner with, choosing only those that share our ambitions, so that we canrecommend investment trusts with complete confidence.
This business represents Japan’s first scheme for making
cumulative investments via credit cards, EPOS cards
specifically. Our securities business will receive backup
through support and financial education provided at ourstores as we implement new branding and marketing initiatives utilizing the receptiveness that is characteristic ofretail. We thereby aim to grow this business to serve one
million users and handle a balance of ¥1 trillion in assets
within 10 years.

New Businesses That Resolve Social Issues
Shaping MARUI GROUP’s Future
Beginning with the securities business, MARUI GROUP
will undertake the simultaneous development of various
new businesses related to sharing economies, new foodbusiness models, and technology-powered personalization,
among other areas. The majority of these businesses will
represent efforts to commercialize initiatives for addressing social issues utilizing MARUI GROUP’s unique business model. We plan on accelerating co-creation withstart-up companies in developing such businesses. These
new businesses will shape the future of MARUI GROUP and
help us create new value alongside existing businesses.
I look forward to your ongoing support andunderstanding.
August 2018

Message from the President

MARUI GROUP’s Vision for the Co-Creation of Corporate Value

Customers

Business
partners

Investors

Expansion of
stakeholder interests(Happiness)

Communities andSociety

Employees

Hiroshi Aoi
President and Representative Director
Representative Executive Officer

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
Fiscal Year Ended March 31, 2017:
Co-Creation Management Business Model
www.0101maruigroup.co.jp/en/ir/message/ceo_2017.html

Corporate value

Intersection of all stakeholder interests

Expansion of this intersection

Improvement of corporate value

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