By  on July 26, 2007

TOKYO — Reflecting a major shake-up going on in the Japanese department store sector, Mitsukoshi, the fourth largest, has begun talks with Isetan, the fifth largest, to form a capital tie-up that could lead to a merger or management integration, according to sources.

The Mitsukoshi-Isetan link, if it materializes, would create Japan's largest department store group, with total sales of 1.58 trillion yen, or $13.2 billion at current exchange.

Mitsukoshi and Isetan may expect synergies from pooling their resources, according to industry observers.

Mitsukoshi is the oldest and most prestigious name among Japanese department stores, attracting a large number of affluent customers to its 15 stores nationwide, including its flagships in Nihonbashi and Ginza, Tokyo. Isetan, which also operates a profit-yielding fashion business, has seven department stores mainly in the Tokyo area, including its flagship in Shinjuku, Tokyo.

A potential merger or management integration involving Mitsukoshi and Isetan follows an earlier announcement by Daimaru and Matsuzakaya, which are expected to combine their operations in September. In addition, in October, the Hankyu and Hanshin department stores will integrate their management by establishing a new holding company for both chains.

Mitsukoshi, with group sales of 804.1 billion yen, or $6.7 billion, in the fiscal year ended in February, exceeded the sales volume of Isetan, which reported revenues of 781.7 billion yen, or $6.5 billion.

But in terms of profitability, Mitsukoshi has been lagging behind despite the restructuring program it carried out in 2005 which involved closing four stores in Osaka and other locations due to poor performance. Mitsukoshi posted operating profits of 12.6 billion yen, or $105 million, last year against Isetan's 32.2 billion yen, or $268 million.

Mitsukoshi said in a statement Wednesday that reports of talks between it and Isetan about a capital tie-up or management integration are based on speculation and that the company has not made any decision. Similarly, Isetan said in a statement that it has made no such announcement nor decision regarding the talks.

Japan's department store industry is confronted with problems such as an ageing and declining population, intensifying competition from specialty stores and a growing threat from shopping centers, which, observers said, are triggering waves of reorganization in the industry.

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