Fully Global, Truly Local Annual Report 2007 Fiscal year ended February 20, 2007 A leading-edge, global-level operating and management infrastructure raises the quality and satisfaction of shopping with ÆON. 155 ÆON companies in Japan and overseas apply a “glocal (global + local) strategy”: global-class management systems tailored to local needs in a drive to be the best local retailer wherever we operate. Our business is based on large-scale shopping centers serving their respective communi- ties with tailored services comprising GMS (general merchandise store) retail, supermarkets, drugstores, home centers, convenience stores, specialty stores, shopping-mall development, financial services, entertainment, food services and more. ÆON is growing through internal expansion and strategic tie-ups that add new services, synergy and sales. Being the best local retailer means being the best at meeting local needs, with shuttle buses, environmental action and direct community involvement. Contents Highlights for the year 2 Financial section 29 The President’s message 4 Board of directors and executive officers 67 The Chairman’s message 6 Corporate responsibility 68 Review of operations 12 Corporate history 73 Environmental and social contribution activities 24 Major group companies 77 Shareholder information 77 ÆON ANNUAL REPORT 2007 1 Applying unique management know-how to develop and manage shopping malls centered on each community, ÆON is building a uniquely positioned retail network in Japan and overseas. In fact, ÆON shopping mall facilities account for one-quarter of the large-scale shopping center retail space in Japan—over 11 million square meters. Supermarket Convenience store Specialty store GMS operations operations operations operations Earnings rebound in Japan: Leveraging group scale to Differentiation with original Adding variety to ÆON retail revenues up 2.6%, operating achieve double-digit growth products developed in coopera- operations and new strengths income up 31.8% through demand aggregation tion with other ÆON companies to lifestyle marketing and joint procurement P. 14 P. 17 P. 17 P. 18 Financial service Drugstore operations SC development Other operations operations operations Developing one of Japan’s Massive increase in earnings Launch of electronic transaction Merging subsidiary companies largest chains with network from accelerated shopping mall cards; preparing for full-scale for efficiency and enhanced partner companies development and consolidation banking operations in FY2007 operation; incubation of new of Diamond City business P. 19 P. 20 P. 23 P. 21 Highlights for the year Financial highlights ÆON achieved a seventh straight year of record-high consolidated operating income. Much credit for this goes to our strategy of centering our retail and services operations on shopping centers we develop and manage. Years Ended February 20, ’03 ’04 ’05 ’06 ’07 ’07 Total revenues (¥ billion) 3,086 3,546 4,195 4,430 4,824($ billion) 40.2 Operating income (¥ billion) 132 132 146 166 189($ billion) 1.5 Net income (loss) (¥ billion) 51 55 62 28 57($ billion) 0.4 Equity (¥ billion) 426 479 632 676 1,200($ billion) 10.0 Basic net income per share (¥) 76.9 83.1 88.7 39.6 77.3($) 0.6 Notes: 1. For convenience only, U.S. dollar amounts were translated at the rate of ¥120=$1, the rate of exchange at February 20, 2007. Such translations should not be construed as representations that the Japanese yen amounts could be converted into U.S. dollars. 2. Japanese yen figures less than a billion yen are rounded down to the nearest billion yen, except for per share data. 3. According to a new accounting standard for presentation of equity, which is effective for fiscal years ending on or after May 1, 2006, stock acquisition rights, minority inter- ests and any deferred gain or loss on derivatives under hedge accounting are now presented as components of equity. Accordingly the amounts of equity as of February 20, 2007 is not directly comparable to shareholders’ equity of prior years, stated above. Forward-looking statements Statements contained in this report with respect to ÆON’s plans, strategies and beliefs that are not historical facts are forward-looking statements about the future performance of ÆON which are based on management’s assumptions and beliefs in light of the information currently available to it. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause ÆON’s actual results, performance or achievements to differ materially from the expectations expressed herein. 2 ÆON ANNUAL REPORT 2007 Operating highlights Revenues and operating income by industry segment Performance that mirrors ÆON’s comprehensive product and service offering Revenues Operating income GMS and other retail store operations 73% GMS and other retail store operations 39% Specialty store operations 12% Specialty store operations 9% SC development operations 2% SC development operations 20% Service and other operations 13% Service and other operations 32% Revenues and operating income by geographical segment Growing diversity through measured expansion Revenues Operating income Japan 89% Japan 86% North America 5% North America 5% Asia and Others 6% Asia and Others 9% ÆON ANNUAL REPORT 2007 3 The President’s message ÆON strives to become an advanced “glocal” enterprise that combines world-class management quality with a commitment to local communities. Motoya Okada President With its main business model based on shopping mall and consolidated operating income was ¥189 billion operations, ÆON continues to grow under two strate- (US$1,581 million), up 14.2%. The driving force for these gies: organic growth and company tie-ups. Around its results was ÆON CO., LTD. During the year, it began to core business of shopping center operations, which see positive results from its efforts to strengthen the includes GMS stores and supermarkets, ÆON builds sales force, improve merchandise, and remake sales complementary operations such as specialty stores, floors, especially in apparel. All of these efforts have led shopping center development and services, and works to an increase in existing store sales by 0.2% from the to create synergies among these diverse businesses. previous year; the first time in 11 years that GMS opera- ÆON aspires to become one of the top retailers in the tions have shown growth in existing-store sales. world in terms of both revenues and operating income This fiscal year, we have taken our first step toward by the end of fiscal 2011. organizational reform in order to maximize overall cor- porate value with a view to adopting a pure holding A growth strategy for all of ÆON company structure. Several actions have been taken We have been pursuing management reform as ÆON towards group re-organization during the fiscal year tries to quickly adapt to changes in Japan’s social envi- under review. Subsidiaries of ÆON CO., LTD. and ronment such as deflation, low birth rate and aging MYCAL CORPORATION were merged to bring out syn- society. In the fiscal year under review, ÆON kept up its ergy and create competitive mass. ÆON integrated efforts in new store openings, renovations, and general merchandise store chains within Hokkaido and improvement of sales floors and merchandise selection; Kyushu, which created two local community-based which as a result steadily enhanced performance. companies that lead their regions. This will effectively Consolidated revenues reached ¥4,824 billion exploit management resources by optimizing both cen- (US$40,206 million), up 8.9% from the previous year, tralization and decentralization. We also added two new 4 ÆON ANNUAL REPORT 2007 7th ¥4,800 10,292 year billion facilities Of consecutive record consoli- Largest scale of business Total number of ÆON dated operating income growth operations in Japan in stores and offices operat- terms of revenues ing in Japan and overseas consolidated subsidiaries, ORIGIN TOSHU CO., LTD., a shopping malls, something that only ÆON can do. creative leader in the takeout food business, and GMS operations will continue to be our main busi- Diamond City Co., Ltd., which merged in August 2007 ness, but we intend to develop and nurture shopping with ÆON Mall Co., Ltd. The merged company will be center development business, service businesses and one of the largest shopping mall developers in Japan. financial service to our anchor businesses that will Another significant move was the decision to spin off lead us into the next era. ÆON will emerge as a new group headquarters functions and other shared group enterprise comprising highly integrated retail and functions in consideration of enhancing synergy. The service operations. shared group functions to be developed into individual companies are demand aggregation for national-brand Acceleration of overseas expansion products, TOPVALU private brand development, and We have been opening overseas stores in line with our distribution network centralization. These companies key strategy, which is to accelerate our expansion in will provide centralized services to ÆON companies. China and other rapidly growing Asian markets. In fis- In March 2007, ÆON CO., LTD., The Daiei, Inc. and cal 2007, we entered into a new growth phase in Asia. Marubeni Corporation agreed to an operational and Our first large-scale shopping mall in southern China capital partnership. Under this partnership, ÆON CO., opened this year, and our Malaysian operation added LTD. and Daiei will explore innovations that take advan- three shopping malls and one supermarket. We are tage of their scales to support the timely revival of also planning to open our first shopping mall in Beijing Daiei. We will also work together in supermarket opera- in 2008, which will be a joint effort by all ÆON compa- tions with The Maruetsu, Inc,. an interest in which we nies such as ÆON Mall, applying all we have learned in acquired from Daiei. Japan with sensitivity to local preferences and culture. The Beijing mall will house various ÆON companies Creating new business models who will be opening their first retail outlets in China.