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Pan Pacific International (7532 JP) is Japan’s leading discount retailer.
It runs discount stores with brand names such as “Don Quijote” and “MEGA Don Quijote”. These stores offer high-quality goods for price-conscious singles or young families.
While the store layouts may appear cluttered and chaotic, they help create an experience of a treasure hunt. Roughly 40% of store items are purchased through so-called “spot procurement” from other retailers. It represents excess inventory or returned items from other channels at massive 30-90% discounts. The low prices on many goods also lead to a certain fun factor that appeal to young individuals. You never know what you’re going to find.
Another differentiating factor about Pan Pacific is the way the company has grown. It was built from scratch by exceptionally talented entrepreneur Takao Yasuda. He started the business from a single store in Tokyo in the 1980s, finding niches that had not yet been occupied. Don Quijote was one of only retailers with late-night opening hours. He pioneered the use of “compression displays” - cramming as many items as the space allowed.
Takao Yasuda is a remarkable man. He’s a rebel in an industry where rules are rarely broken. As a Credit Suisse analyst said, many businesses have tried to emulate Don Quijote but none have succeeded so far, arguing that “the culture is completely different”. The management ethos has been captured in a 2011 book that has now become required reading for any person in Pan Pacific’s senior management team.
Over the past 15 years, the company has increasingly grown through opportunistic M&A. In 2007, for example, he led the acquisition of discount general merchandise store “Nagasakiya”, which gave the company 369,000 sqm of floor space overnight at a fraction of the price it would cost to build the stores organically. In 2017-19, Pan Pacific acquired low-performing peer “Uny”. Over time, these acquired stores have been converted into the far-more successful Don Quijote store format, which enabled 50-100% increase in store revenues and far greater profitability.
The M&A strategy has worked well. Over the past 16 years, revenues has grown at an average rate of 13% and earnings per share has similarly grown at an average rate of 13%. Pan Pacific is now among the most profitable of any Japanese retailer.
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