Stuck-at-Home Demand Prompts Japan Hardware Store Consolidation

(Bloomberg) -- A rare bright spot in Japan’s retail space during the coronavirus pandemic has been the nation’s hardware stores, with sales surging as stuck-at-home Japanese took to doing up their gardens and balconies during the country’s state of emergency.

That may be spurring an overdue consolidation of the fragmented industry, with Arcland Sakamoto Co. planning to buy out larger rival Lixil Group Corp. unit Lixil Viva Corp. for a total of 108.5 billion yen ($1 billion). Investors welcomed the news, driving Arcland up 15% Tuesday on heavy volume, the biggest jump since September 2014. Lixil Viva climbed 3.2%, while Lixil Group was unchanged.

Known as “home centers” in Japan selling everything from furniture to gardening equipment, the industry is split among multiple rivals which have strong bases in their home regions. Japan had just 28 of the stores in 1973, a figure which had surged to almost 5,000 as of 2019, according to Japan DIY HC Association. Revenue growth has not kept pace with expansion, however -- sales in the sector have been essentially flat for 15 years, the data show, as Japan’s population began to decline just as competition increased.

At least, that was until the country was asked en masse to stay at home to curb the spread of the coronavirus. Just as Americans flooded into Home Depot Inc. and Lowe’s Cos., the pandemic prompted a surge in sales in Japan. After a sharp drop in January, revenue increased each month to April on year, according to industry publication Diamond Retail Media.

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A new buzzword, “veramping” -- a portmanteau of veranda and camping -- came to describe the increasing numbers of people eating, drinking and relaxing outdoors on their own property, while TV pickups led to a surge of interest in do-it-yourself home improvements. Shares in the leading firms have gained, with DCM Holdings Co., the largest listed hardware store operator, up 22% from its low in March.

The long-stagnant sector has begun to attract further attention, with activist fund Oasis Management Co. disclosing in November it held a stake in eighth-largest hardware store operator Shimachu Co., which it increased further to 6.4% in January. The fund, currently waging campaigns against a multitude of Japanese firms including Fujitec Co. and Tokyo Dome Corp., hasn’t yet publicly disclosed any proposals it plans to make to management. It declined to comment on the consolidation when contacted by Bloomberg News.

Lixil, itself formed in 2011 from a merger of five Japanese building-material and housing companies, listed the hardware store operator in 2017. It invited bidders for Viva as the chain was facing a “challenging business environment with intensifying competition.”

Arcland will pay 56.6 billion yen to Lixil for its shares, and another 51.9 billion yen to buy those held by other shareholders in a tender offer. The company will take out a 109.6 billion yen loan from Sumitomo Mitsui Banking Corp. to finance the acquisition. Sales of a combined entity would vault it above Nafco Co. into fifth among the nation’s hardware chains, a list topped by closely held Cainz Corp., which has sales of 441 billion yen in the year ended February, according to its website.

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