To our stockholders

Reflecting on Fiscal 2019

The market environment for FY2019 has been very challenging, with a consumption tax hike in October 2019 and a weakening of consumer confidence thereafter, the spread in Japan since the beginning of 2020 of COVID-19, which has become a global pandemic, and a nationwide trend of avoiding unnecessary outings.
Under such circumstances, while closing Youme Town Onoda (Sanyo-Onoda City, Yamaguchi Prefecture) in May last year, we opened Youme Town Fukuyama (Fukuyama City, Hiroshima Prefecture), a property that was accepted from Ito-Yokado Co., Ltd. in June, and is doing very well. Besides newly opening four supermarkets, Youme Mart Hita (Hita City, Oita Prefecture) and Youme Mart Mitajiri (Hofu City, Yamaguchi Prefecture) in April 2019, Youme Mart Minami-Onoda (Sanyo-Onoda City, Yamaguchi Prefecture) in May, and Youme Mart Aoyama (Yahatanishi-ku, Kitakyushu City, Fukuoka Prefecture) in July, we actively invested in existing stores and completed floor expansions in Youme Town Hikari no Mori (Kikuchi-gun, Kumamoto Prefecture) in June 2019, and renovated the food court, food department and clothing department in Youme Town Takamatsu (Takamatsu City, Kagawa Prefecture) in September under the theme of "aiming for the joy of customers and becoming No. 1 in Shikoku."
In summary, one good point is that we have achieved improvements in our gross profit margin thanks to the strong start at Youme Town Kudamatsu (Kudamatsu City, Yamaguchi Prefecture) and Youme Town Himeji (Himeji City, Hyogo Prefecture) succeeded with all fixtures and equipment from Seiyu GK. and the aforementioned Youme Town Fukuyama, three generational demand for school bags and other products that are the Group's strengths and strong sales of celebratory items, and by working to reduce costs and losses. However, challenges remained, including poor sales of seasonal products such as clothing due to unseasonable weather conditions, as well as weak sales at new Youme Mart stores on a non-consolidated basis despite the strong performance of these large-scale stores. In addition, with the consumption tax hike coming into effect in October 2019, and with purchasing power itself taking longer to recover after the tax hike, the implementation of the Japanese government's Point Reward Project for Consumers using Cashless Payment has diminished the Group's existing advantage in promoting loyalty points, and sales at existing stores fell below the previous year's level, producing difficult results. Although operating revenue increased 1.7% year-on-year to 744.3 billion yen due to an increase in sales at floor-expanded and revitalized stores, in addition to the impact of lower sales at existing stores, due to higher SG&A expenses such as store opening costs, personnel expenses and advertising expenses, operating income fell 9.6% year-on-year to 31.8 billion yen, ordinary income fell 8.9% to 31.9 billion yen, and profit attributable to owners of the parent fell 15.1% to 19.9 billion yen, resulting in decreased profits.


Progress and assessment at 2nd year of Medium-Term Management Plan

The Group has formulated a three-year Medium-Term Management Plan for FY2018 to FY2020, but due to the challenging results in FY2018, the first year of the plan, including awareness of the market environment, the Group reviewed its Medium-Term Management Plan in April 2019 and revised downward the numerical targets for the final year. And, we have shifted our policy from the previous expansion strategy of focusing on new store openings to a growth strategy that emphasizes profitability, and have established five new themes: 1. Growth strategy, 2. Revitalization of existing stores, 3. Enhancement of competitive power, 4. Enhancement of human resources development, and 5. Expansion of digital investment.

1. Growth strategy
In terms of our growth strategy, we opened a total of ten new stores by the second year of the Medium-Term Management Plan, and as mentioned above, new small-scale stores are struggling, but succeeded stores from Seiyu and Ito-Yokado, large-scale stores, have steady growth. In addition to opening new stores, we are also proceeding with the liquidation of unprofitable stores, and have closed a total of seven stores in the past two years. Also, we entered into a capital and business alliance in November 2019 with Maruyoshi Center Inc. which operates a network of food supermarket stores in the Shikoku based in Kagawa Prefecture, and brought Maruyoshi Center into the Group as an equity-method affiliate. This will allow us to cover both the small-scale commercial areas of Maruyoshi Center's stores in Kagawa Prefecture, Ehime Prefecture and Tokushima Prefecture, as well as the larger commercial areas of the Group's large shopping centers, and we intend to further strengthen the Group's presence in the Shikoku.

2. Revitalization of existing stores
In the second year of our Medium-Term Management Plan, we worked to revitalize six large-scale stores. In particular, we believe that by expanding the number of dine-in and rest spaces in September 2019 mainly at Youme Town Takamatsu's (Takamatsu City, Kagawa Prefecture) "Setouchi Islands Hopping Tours on Food Cruise," one of the largest food courts on Shikoku, we have improved the attractiveness of this new spot as a place where three generations of family members can gather together, enjoy themselves and connect with each other, as well as further strengthened the convenience of the shopping experience.

3. Enhancement of competitive power
To strengthen our competitiveness, we began handling Seven Premium, a private brand of Seven & i Holdings Co., Ltd. based on our business alliance with them in March 2020. In addition, our food manufacturing subsidiary YOUME DELICA CO., LTD. has started construction of a new addition to its delicatessen plant, which is scheduled to begin operations in FY2020. The new plant will have the latest equipment and new technologies to enhance the supply system and provide a larger variety of fresh products to a wider range of stores than ever before, and we expect that this will contribute to productivity improvements through reductions in in-store manufacturing processes and low-cost operations, while providing safer and more delicious prepared foods.

4. Enhancement of human resources development
We have continued to focus on creating an environment that motivates our employees, and have continued to strengthen measures for human resources development, such as promoting training programs at other leading companies and expanding training from each hierarchy, including the development of the next generation of leaders. From the perspective of promoting employee diversity, we are promoting the participation of women to achieve our goal of having at least 20% female managers. Going forward, we will continue to create more rewarding workplaces by building a system that supports the autonomous actions of employees and skills development, and evaluates results against clear goals in an open organization based in stores.

5. Expansion of digital investment
When it comes to digital investments, one of our goals is to build and leverage our customer data platform. This is an indispensable investment we are committed to make in shifting our sales promotion activities from conventional mass marketing to individual marketing that is tailored to the diverse values of our customers as we anticipate medium- to long-term changes in consumers' behavior. In addition, we have been preparing for the renewal of our e-commerce site, which has started operations as "Youme Online" in March 2020. Digital investment is not only a measure for improving customer satisfaction and attracting customers. By promoting each of the measures set forth in the Medium-Term Management Plan in a cross-organizational manner, we will be able to improve productivity, which will lead to an increase in employee satisfaction.

FY2020: Year to consolidate our system for crisis preparedness

Looking ahead to the market environment in FY2020, it has yet to recover from the impact of last fall's consumption tax hike, and the Point Reward Project for Consumers using Cashless Payment is expected to end in June of this year. Even more significant is the spread of the new coronavirus, which has had an enormous negative impact on production and consumption activities both domestically and globally. In western Japan, our business region, there is still no prospect of an end to the crisis, and the future of Japan as a whole is uncertain. In this context, I would like to position FY2020 as a year to consolidate our system for crisis preparedness. While making maximum efforts to prevent the spread of COVID-19, our top priority will be to promote our business continuity plan (BCP) and fulfill our role as a lifeline, and at the same time, we will push forward with structural reforms to minimize the impact of the new coronavirus by implementing radical reforms such as drastic reductions in advertising and promotional expenses.

Management Policy for FY2020

In order to become a corporate group capable of sustaining growth in FY2021 and beyond, we will rebuild a robust management structure in FY2020 with a focus on productivity reforms. We will promote structural reform of food supermarkets, enhancing human resource development, reforming sales promotion activities, rebuilding the earnings base, and enhancing product competitiveness, all of which we believe will lead to improved productivity.
Another key to improving productivity is digital investment. Specific digital investments include the introduction of predictive supply ordering systems and robotic process automation (RPA) for routine operations to reduce time and improve accuracy, the introduction of semi-self-checkout cash registers and the use of QR codes to improve the efficiency of checkout operations and prevent errors, and the introduction of a customer data platform to automate sales promotions and visualize their effectiveness. This shift to digitalization will not only improve productivity and free up extra time for employees, but also lead to increased customer convenience and greater customer satisfaction. Another digital investment from the customer's perspective is the launch of the "Youme Online" e-commerce site in March 2020, through which customers can now get their items delivered home or pick them up at a store. We are also working to expand the app's functionality, which we expect will not only make it more convenient for customers, but will also improve the effectiveness of attracting customers and maximize sales promotion efficiency.
At the same time, we are shifting our marketing activities from "mass" to "individual" marketing as we aim to reform the structure and organization of the supermarket by reforming productivity. For example, we used to stock and sell a single product in large quantities, but from now on, we will add value and maximize the lifetime value for our customers through product lineups that respond to the diverse values of each customer.
In terms of strengthening our product appeal, we are deepening our business alliance with Seven & i Holdings Co., Ltd., which has already seen the mutual use of e-money services and the opening of new stores within the Group, and the previously-mentioned "Seven Premium" was added to the Group's new lineup from March 2020. In addition, our delicatessen plant, which is currently undergoing the aforementioned expansion, is scheduled to begin operations in FY2020, and we believe that this will further strengthen the Group's product capabilities.

Medium- to Long-Term Outlook

Considering the medium- to long-term business environment over the next five to ten years, we expect to see an even lower birthrate and aging population, and an accelerated decline in population especially in rural areas. As the population ages, demand per household and per capita will shrink, and the problem of those who have difficulty going out on their own will become even more acute. At the same time, the labor force is likely to decline further due to the retirement of a large number of elderly workers, and the shortage of workers and difficulty in recruiting them will become more severe. It is also predicted that purchasing power will not increase as the social cost burden on young people increases. Mutual assistance will be required in local communities, and society will rely to a significant degree on shopping through e-commerce and automation through artificial intelligence (AI).
I think the COVID-19 pandemic has brought these macro issues to light all at once. While fulfilling our mission as a local lifeline and ensuring the safety and employment of our employees are our top priorities for the time being, we are also examining the ideal business structure for the company after we have overcome this crisis.
For the Group to continue to grow over the medium to long term, we must further hone our strengths and become the company of choice for our customers in a highly competitive environment. It goes without saying that our strength is our dominance strategy, which is limited to western Japan, and we have many stores that are "No. 1 in the region," and the sales strength of these stores is strong, which creates a high level of motivation for the employees who work there. In order to maintain and refine this strength going forward, we believe it is important to build and maintain an environment that allows our highly motivated employees to perform their duties with large incentives, mainly at highly profitable large shopping centers, while constantly improving the added value of each store through measures such as revitalizing existing stores.
In light of this medium- to long-term improvement in corporate value, the Group will focus on improving productivity in existing businesses and building a leaner corporate structure by restraining capital investment in new store openings while increasing investment in M&A, human resource development and digitalization. Through these measures, we will strive to achieve customer satisfaction and further expand and deepen our regional dominant position, thereby increasing our management efficiency and leading to further corporate growth.

To Shareholders and Investors

For FY2019, we have decided to pay a dividend of 40 yen per share for both the interim and the end of the fiscal year, for an annual dividend of 80 yen per share, as in the previous year.
In addition, we have left the earnings forecast undecided as the spread of the COVID-19 made it difficult to foresee the impact on the Group, but we have announced the earnings forecast based on our judgment from the information available as of July. Looking ahead, as the spread of COVID-19 in Japan, which began in earnest in the first quarter of this fiscal year, is coming under control, while store management and other business activities will normalize in the second quarter and beyond, it is expected that store management will be constrained by the increasingly difficult business environment due to factors such as worsening employment and income conditions and changes in consumer behavior, such as a shift to a "new lifestyle" based on coexistence with COVID-19. For details, please refer to the news release "Announcement of Financial Forecast and Dividend Forecast" posted on our IR website. In 2020, as we work to consolidate our system for crisis preparedness, we will continue to do our best as a community- based company to create unique added value while fulfilling our role as a lifeline to the local community, and we ask for the continued support of our shareholders and investors.