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Message from the President

August 2015

We Will Strive to Create New Value
by Transforming Our Business Model.
Hiroshi Aoi President and Representative Director
Representative Executive Officer

We Will Strive to Create New Value
by Transforming Our Business Model.
Hiroshi Aoi President and Representative Director
Representative Executive Officer

MARUI GROUP's History and DNA of Innovation

My grandfather, Chuji Aoi, founded MARUI in 1931.Then, our business involved selling furniture through monthly installment payments. This was the original form of the business model merging retailing and credit card operations that MARUI GROUP still uses today, and MARUI's business maintained this unique characteristic throughout its history. By pursuing the modernization of the installment payment system, my grandfather grew MARUI rapidly, leading the Company to issue Japan's first credit card in 1960.

In 1972, my father, Tadao Aoi, took up the mantle of president. Under his guidance, we launched a new business in 1981 in which we leveraged our credit knowhow to provide cash advances, a type of small-amount consumer loan. In the mid-1980s, MARUI established a unique business model that combined youth fashion with credit cards, the so-called "young, fashion, credit cards" business model, which began to fuel brisk growth. By 1990, the Company had established a solid position in the Japanese retail industry, as indicated by its 30consecutive years of increased sales and income.

Entering the 1990s, our "young, fashion, credit cards" business model grew less responsive to market changes following the collapse of Japan's bubble economy. MARUI thus fell into a period of stagnancy. I became president in 2005. My mission at that time was to utilize MARUI's DNA of innovation to reconstruct our business model and enable it to create new corporate value in tune with the times.

Quest to Create Corporate Value

Reviving our retailing and credit card businesses required that we resolve a number of issues. The first area I addressed after becoming president was the innovation of credit card services. At that time, the impending revision of the Money Lending Business Act scheduled to begin in 2007 was making the future of cash advance operations uncertain. To respond to this change, in 2006, a year before the regulation's revision, we launched the EPOS CARD, which replaced our previous in-house credit card, the Akai Card (Red Card).

EPOS cards hold a special license from Visa Inc., enabling them to be used not only in Marui stores but also at Visa-affiliated stores worldwide. Leveraging these cards, we implemented a strategy of compensating for the decline in cash advance revenues by expanding card shopping transactions, an area closely related to our mainstay retailing operations.

However, the negative impact of the introduction of the Money Lending Business Act revision exceeded our expectations. In addition, due to lost income stemming from reduced interest rates, we were required to refund interest collected from customers who borrowed money under the previous rates. This impact lingered for nine years, until 2014, and resulted in total losses of at least ¥100.0 billion to ¥150.0 billion. Over this period, we faced a harsh operating environment, recording full-year losses twice.

Meanwhile, card shopping transactions increased steadily each year. Furthermore, cash advance operations have now bottomed out, and the strides made in the Credit Card Services business in recent years have been greatly contributing to the creation of new corporate value. While it took a while, we are now feeling the benefits of the innovations pursued to date.

Advance to New Growth Stage

The next area in which I targeted reforms was retailing operations. Previously, our retailing strategies had been focused on youth and fashion, both of which were areas that Marui stores came to be equated with. We began a phased shifting toward new strategies when we opened Yurakucho Marui in 2007.

This probably goes without saying, but when Japan started seeing its birthrate decline and its population age, the future contraction of the youth market was apparent. Addressing this change was an urgent task for the Company. We therefore decided to drastically revise our previous store development practices, which entailed product lineups centered on youth fashion. It was at this time that we began creating stores that offered lifestyle support, devoting more sales floor area to sundry items and restaurants to win the support of a wider range of age groups. However, although these efforts raised customer satisfaction and subsequently visitor numbers, they also had the unexpected effect of lowering profitability.

Addressing this issue was quite difficult, taking several years. In the end, the answer was found in changing the format of stores. Up until that point, MARUI CO., LTD., had created department stores with earnings structures based on the consignment buying system. However, we discovered that by transitioning toward shopping center style stores, we could realize profitability even as we shifted from fashion-oriented to lifestyle-oriented stores. This transition resulted in our core source of earnings changing from product sales to rent revenues, which is negatively impacting top-line sales. Profit, meanwhile, is on the rise. We expect approximately 70%of floor space compatible with this new business model to be converted to shopping center style stores by the fiscal year ending March 31, 2017. After this, the Retailing and Store Operation business is projected to experience a gradual increase in operating income.

A United MARUI GROUP

Throughout its history, MARUI GROUP has created corporate value through its unique business model, merging retailing and credit card operations, and it continues to further refine the strengths of this model. Looking at segment earnings, we see that Credit Card Services is currently supporting overall performance, and it is expected to drive profit growth going forward. Still, we cannot ignore the fact that the Credit Card Services business was built from the Retailing and Store Operation business and could not realize its full potential alone.

Accentuating this reality is the fact that 80% of EPOSCARD applications are submitted at Marui stores. The large portion of customers that apply for cards is a result of the efforts of our employees, with their specialties in retail, recommending cards to customers during their shopping experience. In addition, EPOS cards are issued on-the-spot in stores and can therefore be used immediately. For this reason, the ratio of cardholders that actively use their cards is high. The link with retailing operations is supporting the competitiveness of credit card operations. With regard to collaboration cards as well, the retail experience of our employees is making large contributions to increased value for collaboration partner facilities.

At the same time, this relationship is proving beneficial for Retailing and Store Operation, as the option of using EPOS cards to enjoy shopping on credit is helping increase sales. Customers of Marui stores are also often EPOS cardholders. Similarly, MARUI's retailing expertise is supporting credit card operations. It is this type of intrinsic link between the Group's business and the Group's human resources that creates business value not found among rivals.

Organically, a United MARUI GROUP is something that has been realized naturally through the course of our operations. In the future, however, we will intentionally and strategically build upon these links to further refine the strengths they create.

Co-Creation Management

Since its founding, MARUI's Credit Card Services business has operated under the basic belief that creditability should be built together with customers. We do not assign credit to customers based on their age or their profession. Rather, it is something we build together with customers through the trust we place in them. This belief inspires us to cherish the relationships with our various stakeholders, and it forms the foundation for our management practices that contribute to the development of both the Company and society. Once again, the focus of Japanese society is moving away from the accumulation of physical goods to the pursuit of more-fulfilling lifestyles, shifting the interests of consumers from things to lifestyles and causing them to value individuality above shared experience. The days of mass consumption are over. As the previous seller's market transforms into a buyer's market, the tactic of pressuring consumers to buy without considering their needs will cease to be effective.

The Group strives to practice co-creation management, which means to thoroughly reinforce the concept of creating together with its customers. I believe that there is nothing more important than to maintain a stance of devotion toward incorporating customer needs and creating value together and that this approach must be adopted whether developing stores, creating products, or providing new services. In this manner, our co-creation management is aimed at creating value the likes of which have never been seen before within MARUI GROUP by sharing in the happiness and emotion of customers. I am confident that creating value with our customers in this way will lead to improved corporate value.

I would like to ask all our stakeholders for their ongoing support and encourage them to look forward to the future of MARUI GROUP with eager anticipation.

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