A fund manager who previously invested in Japanese trading companies ahead of Warren Buffett is now turning his focus towards a different sector: drug store chains. Tsukasa Tokikuni, head of Orbis Investment Management’s Japan unit, believes that the Japanese drug store market, unlike its US counterpart, is fragmented and ripe for consolidation.
Tokikuni sees potential for profit in this unexciting and saturated sector, particularly in the medium term. One driver of growth is the ability of drug stores to take away retail business from supermarkets. By setting up dispensing pharmacies on their sales floors, drug stores can increase revenue without needing additional real estate. Furthermore, their high profit margins for drugs and cosmetics allow them to sell other products, like food, at competitive prices, drawing sales away from supermarkets.
Private equity funds have also taken notice of the consolidation potential in the sector, with firms such as Tsuruha Holdings Inc., Japan’s second-largest drug store chain, attracting interest. Activist investor Oasis Management Co. has even suggested that Tsuruha Holdings should pursue consolidation in the industry.
To take advantage of these opportunities, Orbis SICAV Japan Equity Fund has adjusted its investments. The fund has reduced its holdings in trading companies and banks, while increasing its exposure to drug store shares. Investments in Mitsubishi Corp. and Sumitomo Corp. were sold off completely, and positions in lenders like Sumitomo Mitsui Financial Group Inc. and Sumitomo Mitsui Trust Holdings Inc. were reduced.
Tokikuni also favors mid-cap stocks, as they have not experienced the same level of growth as larger shares. The Tokyo Stock Exchange’s call for listed companies to take measures to raise valuations has particularly affected large-cap stocks, which have outperformed mid-cap and small-cap shares this year.
In summary, the Japanese drug store market presents an attractive opportunity for investors like Orbis Investment Management. The potential for consolidation, the ability to take business away from supermarkets, and the high profit margins of drug and cosmetic sales position drug store chains for growth in the coming years.