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• Industry Positioning and Strategic Direction

  • The Japanese drugstore industry is bifurcating into two groups: the FOOD & DRUG Group (high food share, low gross margin, low selling prices) and the Specialty Drug Group (low food share, high gross margin, higher selling prices). Genky sits in the FOOD & DRUG Group, with a higher food share and lower gross margin than peer Cosmos, and does not face significant entry barriers in markets dominated by the Specialty Drug Group.
  • Genky's business model targets high operating margin via low SG&A ratio and low gross margin, rather than relying on high gross margins. A 5% operating margin is the target model; 4% operating margin is set as the lower bound for acceptable store-level profitability, and Genky views multi-store expansion with 3% operating margin as high risk. Genky's current profit distribution ratio is 25%, allowing it to pursue aggressive store opening plans.
  • In the context of Japan's population decline and rising consumer cost sensitivity, persistent expense control and standardized operations allow Genky to maintain low break-even sales, capture consumer demand for low-priced daily necessities, and achieve surviving player profit growth.

• Store Standardization and Low-Cost Operation Culture (EDLC)

  • All standard Genky stores follow a fixed standardized layout (the only standard store format the company operates, at 300 ping per store), with very limited incremental changes. Fixed layout allows efficient operations and inventory management, with no backroom storage space to eliminate the contradiction of large backroom inventory coupled with in-store stockouts, and shortens staff work routes.
  • Genky prioritizes strict SG&A control: it believes rising expense is harder to cut later, so it prioritizes expense control over unprofitable sales growth, to maintain profitability even when sales decline. It continues to expand sales area per employee (currently growing year over year) through incremental efficiency improvement across dozens of initiatives beyond just self-checkout, targeting 60 ping of sales area per store employee and 40 ping per employee including headcount. The company targets 200,000 yen of sales per ping while maintaining the 15% SG&A ratio, as preparation for overcoming 1,000-store and 2,000-store scale barriers.
  • Genky pursues operational efficiency by cutting low-ROI activities: it does not pursue e-commerce, SNS promotion, or in-store digital coupons, as these activities have unclear benefits and are only done for media attention. It only runs 3-4 flyer per year to support its low-cost model.

• In-House Vertical Integration

  • All core functions including store development are done in-house to control costs, avoiding the impact of rising construction and leasing costs that hits peers that rely on third-party developers. Only trucking operations are outsourced; all other logistics and distribution functions including digital system development are kept in-house.
  • Standardized store layout and product placement (fixed products in fixed aisles across all stores) allows category-based distribution from logistics centers: products are sorted by aisle at the distribution center, so staff can restock directly to the correct aisle without traveling across the store. This level of efficiency is impossible for peers with non-standardized store layouts, so Genky will continue to operate with a single standardized store format for the foreseeable future.

• Everyday Low Price (EDLP) and Product Strategy

  • Genky transitioned from a high-low pricing model to EDLP in 2019, which initially caused declines in sales, profit and gross profit, but the strategy has delivered a sustained reversal to growth.
  • Genky prioritizes fresh food and deli to increase customer visit frequency and basket size: it owns in-house processing centers that supply all stores (no other drugstore in Japan operates a full in-house processing network for all stores), targeting deli quality comparable to convenience stores at lower prices than supermarkets, to capture customers from convenience stores. Centralized single-site production for most SKU improves efficiency, though disruptions to transport (such as snow damage) can impact in-store assortment.
  • Private Brand (PB) strategy: Genky targets 30% PB share by sales and 40% by unit volume, focusing on low-priced PB across all categories, with PB development progressing from simple repackaged national brand (NB) product (the most common PB type in the drugstore industry) to full specification development from raw materials to deliver large price gaps versus NB. Genky currently has the highest PB share by both sales and unit volume in the Japanese drugstore industry. PB has higher gross margin than NB, which allows Genky to lower NB selling prices and support its EDLP strategy. Genky uses switching PB: placing similar-designed PB next to popular NB to encourage customers to switch to lower-priced PB.

• Store Opening Expansion Strategy

  • Genky uses a specialized divided labor model for store development, with 25 staff in commercial area research, 77 in store development, and 15 in construction (over 100 total staff dedicated to store opening), allowing the store development team to focus 100% on landowner negotiation (unlike peers where one developer handles all tasks and only spends 20% of time on negotiation). The commercial area research team continuously improves sales forecast accuracy using data from 500 existing stores, eliminating bad store openings and reducing impairment losses, which improves per-ping profitability. Genky targets 60 ping of sales per employee and controls investment to avoid over-investment.
  • Genky focuses on deepening its dominant position in the Chubu region of Japan, currently operating in 5 prefectures, and targets entry into Toyama as the 6th prefecture following the construction of an RPDC there. It forecasts 500 total stores can be opened in Aichi (its current main focus for expansion), and 1,000 total stores across its current 5 prefectures. It follows a dominant area strategy: one logistics center covers 100-300 stores, builds dominant share in one prefecture before expanding to the next, and avoids scattered cross-region expansion. Long-term, Genky has expansion room across 42 prefectures, but it will not pursue scattered fly-in openings.

• Logistics Network

  • Genky builds mid-sized regional RPDCs (Regional Process Distribution Centers) per prefecture, which integrate three functions: food processing center, PB distribution center, and transit distribution center. It currently operates 2 RPDCs in Gifu and Toyama, and plans to open a third in Aichi by the end of 2028. It also operates 4 transit TCs across its operating prefectures.

• Human Resources and Organization

  • Genky prioritizes recruitment amid widespread labor shortages, and has no issues meeting new graduate recruitment targets. It follows a chain store theory-aligned organizational structure: the organizational chart has not changed substantially since the company was small, only eliminating overlapping roles, with the current headcount of 200 HQ staff. It has a clear internal promotion path: store staff propose operational improvements, then high-performing managers move to HQ to take on specialized roles. The company aligns human resource development with manual creation to support scalable growth.

• Full year 2026 June fiscal guidance updated January 22, 2026: total new store opening target revised downward from 66 stores to 61 stores, due to 5 stores shifting opening to the next fiscal year. This leads to a 600 million yen (0.6 billion yen) downward revision to full year net sales versus the initial plan.
• Full year operating income guidance is upward revised from 10.5 billion yen to 11.05 billion yen, driven by better than expected SG&A control in the first half.
• Long-term expansion guidance: Genky has a long-term target of 10,000 total stores in Japan, with a target of 1,000 new store openings per year by 2040. The company has already built the internal organizational structure for accelerating store opening, and targets 100 new store openings per year in its current 5 core prefectures, a milestone that only 7-Eleven has achieved in the Japanese market.

Genky DrugStores is a FOOD & DRUG focused drugstore, with food accounting for over 70% of total revenue. For the 2Q 2026 accounting period (3 months): total net sales came in almost in line with plan; 17 new stores were opened, 1 store shifted to the next period from the planned 18. Gross margin was 0.1 percentage points below plan, but this does not affect full-year plans as 1Q was 0.3 percentage points above plan. Food waste loss is managed within an appropriate range. Weak performance from non-food categories (cosmetics, general merchandise) due to rising consumer saving consciousness created a small negative impact. Selling, general and administrative (SG&A) expenses came in 210 million yen (0.21 billion yen) below plan, primarily driven by personnel expenses that were 270 million yen (0.27 billion yen) below plan — full self-checkout installation across all stores allowed successful cost control after planning for buffer personnel costs post-implementation. As a result, operating income for 2Q was 140 million yen (0.14 billion yen) above plan. For cumulative first half results, performance follows the same trend as 2Q. Key operational efficiency metrics: sales per square ping, gross profit per ping, and SG&A per ping are all tracked. SG&A per ping is controlled at 202,000 yen, very close to the 200,000 yen target, while sales per ping and gross profit per ping grow steadily, leading to gradual annual growth in operating profit per ping. Sales area per employee now reaches 39.8 ping, meaning a standard 300-ping Genky store operates with fewer than 10 employees. SG&A ratio is stably maintained in the 15% range, the lowest in the Japanese drugstore industry. Even with gross margin in the 20% range (the lowest in the industry), operating margin is stably maintained at a high level in the 5% range.

• Macroeconomic risk: Rising overall prices, food price inflation and broader economic hardship across regional Japan are increasing consumer saving consciousness, which has led to weak performance in non-food categories and pressure on sales of higher-priced prepared foods. Genky's EDLP model is positioned to capture this trend, but sustained deflationary consumer behavior could impact overall revenue growth.
• Supply chain risk: Centralized production of deli SKUs means that transport disruptions (such as snow damage to highway networks) can negatively impact in-store product assortment.
• Expansion risk: Scaling to large store counts creates well-known scale barriers at 200, 500, 1,000 and 2,000 stores, and the company has to build all required systems and capabilities in advance to overcome these barriers, which requires sustained investment and process improvement.
• PB development risk: Hitting the 40% unit volume PB target requires balancing large price gaps with good product quality, and poor product quality would undermine customer acceptance of PB.

Q: The company has a target of 100 new store openings per year and has built out the dedicated store development organization, but it revised the current fiscal year's store opening target downward. Is sustained acceleration of store opening actually possible? What is the short and medium-term outlook for store opening considering downside risks of slower growth?

A: The 100 new store per year target is a milestone the company is preparing for, with longer-term targets of 150, 200, and eventually 1,000 new stores per year, and preparation for this growth is progressing steadily. Protecting the company's established profitable business model is a far higher priority than hitting arbitrary store opening number targets. The downward revision to this year's store opening target was an intentional choice to protect the profit model, and balancing growth with profitability is core to the company's strategy. The organizational structure for accelerated opening is already in place, cost control for new stores is established, and the company is working to deliver the expected growth trajectory.

Q: If a zero food consumption tax policy is implemented as proposed in recent elections, what will the impact be on Genky, and how will subsequent expected tax increases impact consumer behavior?

A: A zero food consumption tax may change the overall food share of spending and lead consumers to shift away from dining out, but the bigger risk is that the policy will be followed by a effective overall tax increase two years after implementation. This tax increase would lead to significant consumer buying cutbacks, as food prices would jump 8% overnight. This trend will only increase consumer demand for low-priced daily necessities, so the next two years will be a period of preparation for Genky to position itself to capture this increased demand.

Q: High-speed store opening requires significant capital, and interest rates have been rising recently. What impact is this having on Genky's capital raising and operations?

A: Rising interest rates are not a material concern for Genky. Looking at the trend in interest expense in Genky's financial statements confirms that current interest levels are not high enough to impact the company's growth. The company intentionally keeps dividends at a relatively low level to prioritize allocating capital to fund store opening expansion, which the company asks investors to understand.