UPDATE 3-Takashimaya, H2O plan to merge in three years
(Recasts, adds company comments, Takashimaya earnings)
TOKYO, Oct 10 (Reuters) - Takashimaya Co (8233.T), Japan's third-biggest department store operator, and smaller rival H2O Retailing (8242.T) plan to buy stakes in each other as a first step towards a merger to survive in the country's mature retail market.
Takashimaya had been the country's top department store until a wave of consolidation swept through the industry last year, creating bigger rivals Isetan Mitsukoshi Holdings (3099.T) and J. Front Retailing Co Ltd (3086.T).
Department stores have been joining hands to become more efficient as the population shrinks and the economy slows. They also face increased competition from drugstores and suburban shopping malls encroaching on their turf.
Industrywide revenues have declined for the past 10 years, during which nearly 1.5 trillion yen ($15.2 billion) in sales, roughly equivalent to the entire annual sales of Japan's largest chain, has been wiped out, data by Japan Department Store Association shows.
"Consumer spending in Japan will undergo huge structural change due to the ageing population," Takashimaya President Koji Suzuki told a news conference.
"We have long felt the need to consider alliances or mergers looking at the tough business environment ahead."
The two companies said they would take a 10 percent stake in each other by buying stock from existing shareholders. This is the first step towards the goal of a merger in three years.
The recent turmoil in financial markets and the likelihood of Japan heading into recession have led consumers to rein in spending. Apparel sales, in which department stores are stronger than other retailers, have been hit especially hard.
Takashimaya on Friday reported a 14.7 percent fall in its first-half operating profit, hurt by a sharp fall in sales of clothing and luxury items such as jewelry and fine art.
The alliance between Takashimaya and H2O Retailing would create a department store group rivaling current industry leader Isetan Mitsukoshi in terms of revenue.
Takashimaya started as a clothing store in Kyoto in 1831. It has major stores in Tokyo, Yokohama, Osaka and Kyoto.
H2O Retailing, based in Osaka, operates Hanshin and Hankyu department store chains, and most of its stores are in the Kansai area. The firm itself was a result of a merger between rivals last year.
The companies said they would join hands in areas such as product procurement, cost reduction and personnel exchange.
But they plan to keep the store chains separate after the merger.
Shares in Takashimaya closed down 3.7 percent at 713 yen after media reports on the deal helped it to turn positive at one point. H2O Retailing ended down 6.5 percent at 490 yen.
The Nikkei average .N225 ended down 9.6 percent. (Additional reporting by Sachi Izumi; Editing by Rodney Joyce)
