TOKYO — After sweeping consolidation a year ago, Japanese department store retailers face challenges from an ongoing recession.

Following the creation of J. Front Retailing Co. Ltd. by Daimaru and Matsuzakaya Holdings in September, H O Retailing, by Hankyu Department Stores and Hanshin Department Store, was established in October. Next month, Isetan Mitsukoshi Holdings will begin operating, combining ownership of the Isetan and Mitsukoshi department store chains.

Besides those three recently formed groups, there also were developments at Millennium Retailing by Seibu Department Stores and Sogo, and Takashimaya, which already boasts sales of 1 trillion yen, or $9.56 billion at current exchange.

As a result, the five major groups now represent 70 percent of all department store sales in Japan. Such integration was inevitable since the industry has watched sales decline for 11 consecutive years, while retail competition has grown due to an aging population and shrinking market.

Now the top management of each group faces the challenge not only to build sales, but to overcome Japan’s ongoing recession.

Nobukazu Muto, president of Isetan and soon to become Mitsukoshi Isetan Holdings’ president and chief executive officer, is determined to reform the supply chain and make maximum use of management resources through the integration with Mitsukoshi.

“In order to survive adverse market conditions, retailers must adapt to diversified and sophisticated customer demands with more accuracy and speed,” he noted. “To do so, we must improve our planning and development abilities.”

Tsutomu Okuda, president and ceo of J. Front, observed, “With acceleration of aging and a low birthrate, consumers’ lifestyles are rapidly changing. There is really no boundary between different types of businesses anymore. I feel we all face the same competition and this trend will likely continue. We must succeed in Daimaru and Matsuzakaya’s merger before moving on to the next stage.”

Kazuyoshi Sano, president of Millennium, pointed out that Japan is still oversupplied with retailers such as department stores, convenience stores and mass market discounters. He believes the management consolidation of department stores last year played a significant role, bringing more corporate downsizing.

“Cultivating new affluent customers and finding ways to keep their loyalty will be what determines our future,” observed Koji Suzuki, president of Takashimaya, which remains the only department store group that hasn’t combined with another one.

This story first appeared in the March 4, 2008 issue of WWD. Subscribe Today.

All top management within the five groups agree that strategies for the Tokyo metropolitan district are key to their success. J. Front opened the first stage of the new Daimaru Tokyo store last year and plans to complete the second stage and redevelop Matsuzakaya Ginza by 2012. Mitsukoshi Isetan Holdings is also in the process of restructuring the Isetan Shinjuku store and plans to expand Mitsukoshi Ginza in 2010.

Osaka has become another location with increasing competition due to the recent integration of department stores’ management.

Shunichi Sugioka, president and ceo of H O, is confident about the management integration of the Hankyu and Hanshin chains, and believes that, by giving Hankyu more highly specialized fashion and Hanshin a more approachable concept, more customers will be drawn to both operations.

Meanwhile, the Umeda Daimaru store is expanding its floor space to compete with Umeda Hankyu-Hanshin’s main store, scheduled to open in 2011, and in response to intense competition in the Umeda area, Nanba Takashimaya has increased its budget for renovations while Sogo may close its Shinsaibashi store if sales continue to decline.