UPDATE 2-Japan's Seven & I says to launch discount stores

(Adds analyst, Aeon comments)

By Yumiko Nishitani and Sachi Izumi

TOKYO, Aug 20 (Reuters) - Top Japanese retailer Seven & I Holdings Co (3382.T) said on Wednesday it would launch a discount store, selling groceries and other items at 25-30 percent less than at its Ito-Yokado superstores, as consumers cut spending amid rising gasoline and food prices.

Consumers have been tightening their purse strings as prices climb and wage growth remains sluggish, pressuring retailers and leading Seven & I, operator of the Seven-Eleven convenience store chain, to report flat quarterly profits last month.

Weakening consumer spending has prompted retailers, including Seven & I rival Aeon Co (8267.T), to widen their offerings of low-cost private-brand items in recent months.

Seven & I plans to open its first "The Price" store in Tokyo on Aug 29 by remodelling a closed branch of Ito-Yokado in a residential area, a company spokesman said.

"What this means for the company's earnings outlooks is not clear, as it's yet to be seen if this pilot store will be a successful model for reforming other Ito-Yokado outlets," said Katsura Kihara, analyst at Credit Suisse Securities.

"It's not a type of business that generates big profits, although it can be credited as an effort to (improve profitability) and to secure a market share amid stiff competition and weak consumer sentiment," she said.

The Seven & I spokesman added that the store aimed to operate at low cost by handling at least 30 percent fewer products than it normally does at Ito-Yokado.

The store will have fewer full-time employees and more part-time staff and will buy some products directly from manufacturers without going through wholesalers. It will also spend less on store decorations and marketing. This will mark Seven & I's second foray into the discount store business. The company previously operated outlets selling low-priced non-grocery items but sold the business to electronics retailer Yamada Denki (9831.T) in 2002.

Seventy to 80 percent of the items sold at the new outlet will be groceries, the Seven & I spokesman said, which may help it avoid competition with other discount stores focusing on different types of goods.

Seven & I plans to open more The Price discount stores mainly in the Tokyo metropolitan area depending on the success of the first outlet, he said.

Sales of clothing have been weak at supermarkets as well as department stores amid tougher competition from casual-clothing shops such as the Uniqlo chain run by Fast Retailing Co Ltd (9983.T), which has been expanding sales with low prices.

A spokesman for Aeon said the company does not plan to open discount shops, denying a Yomiuri newspaper report earlier this month that it would start such a business.

Shares in Seven & I were up 1.5 percent at 3,330 yen along with other convenience store operators buoyed by a bullish analyst report on the sector. The Nikkei average .N225 was up 0.2 percent. (Reporting by Yumiko Nishitani and Sachi Izumi; Editing by Hugh Lawson)