The Moat Report Asia: Nitori (Japan)

Nitori (MV $13.3bn): “Japan’s IKEA” Experiencing Increasing Returns to Scale from Extending Domestic Dominance and Global Expansion
ROE 23.3% and trading at EV/EBIT 16.3x, EV/EBITDA 14.4x

Nitori Holdings (TSE: 9843) is Japan’s undisputed dominant specialty chain in furniture and home furnishing with rarity value as the only listed Asian company with a unique integrated manufacturing-logistics-retail business model in the industry with an 90% self-developed private label product ratio to sell low- to mid-priced high-quality functional merchandise to the masses. Nitori has achieved an astounding 29 consecutive years of growth in sales and profit, converting macroeconomic adversities ranging from consumption tax hike to whether the yen is weak or strong into opportunities to grow further, and it enjoys the distinction with having the longest consecutive streak of growth of all-time for a listed Japanese company. Despite Nitori’s market leadership, it is still operating in a fragmented domestic market with around 10% market share in the home and garden market and has a long runway ahead to extend its market leadership, particularly in the urban areas. Nitori has expanded its market share in the low-end category, but it has also been releasing mid-priced products that offer additional value in terms of quality and function since 2012, and this has led to the expansion of its customer base. As at May 2016, Nitori currently has a network of 391 stores in Japan and 37 overseas stores (Taiwan 24, USA 5, China 8) and targets 1,000 stores by 2022, 3,000 stores by 2032. Established in Sapporo (Hokkaido) in 1967 by founder Akio Nitori, Nitori has been a pioneer in commencing direct imports of products from overseas in 1985 and listed on the Sapporo Stock Exchange in 1989, migrating up to the first section of the Tokyo Stock Exchange in 2002. The first overseas manufacturing plant was established in Indonesia in 1994, followed by a second one in Ho Chi Minh city, Vietnam in 1996, with a third plant in Vietnam that is 3 times larger than its present one in Hanoi, are scheduled to start in 2017. A logistics centre was opened in Shanghai in 2004 and the company started online sales in the same year. The first overseas store started up in Taiwan in 2007. Nitori moved to a holding-company structure in Aug 2010, and now Nitori Holdings has under its wing Nitori (retail), Nitori Furniture (furniture production in South-East Asia), Home Logistics (logistics), and Nitori Public (advertising and promotions). The new ‘Deco Home’ format was launched in 2011. The store network reached 300 outlets in 2013. The same year saw Nitori move into the US market, and the growth continued into 2014, when the company moved into China. Both e-commerce and corporate sales has grown rapidly to contribute 4.4% and 1.8% of total sales respectively. Founder Akio Nitori, 72, serves as the holding company’s chairman and his family has a 24.7% stake.

1) What Makes It a Wide-Moat Business? Fundamental Dynamics Behind 23.3% ROE

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