Top Management Message October 11, 2006

Today, LAWSON announced its operating results for the first half of fiscal 2006, the year ending February 28, 2007. First-half existing store sales dropped 3.2% year on year, a disappointing result. Besides the more than 1 percentage point negative impact from the discontinuation of Highway Card sales in September last year, this result was attributable to stiffer competition among companies operating conventional convenience store (CVS) formats and the effect of unseasonable weather, which has impacted operations since last year. In terms of management initiatives during the interim period, we increased advertising and promotional expenses by around 25% from a year earlier to increase the motivation of franchise owners and boost customer numbers. We actively ran a number of campaigns, including LAWSON Fair and a campaign in which qualifying customers received a free Miffy picture plate. We also continued to make upfront investments in strategic formats, namely NATURAL LAWSON and LAWSON STORE100. Despite these efforts, interim consolidated recurring profit declined 2.8% year on year to 24.3 billion yen. However, we achieved the targets in our initial plan as the benefits of sales campaigns gradually showed through and we focused on controlling selling and administrative expenses. For more detailed information on our interim operating results, please click here.)

Since the beginning of this year, growth in existing store sales at all companies in the CVS industry has remained sluggish, increasing the need to create new markets to expand the customer base. In 2001, we took a pioneering step in the industry by launching NATURAL LAWSON, a new convenience store format pitched mainly at women and offering a range of health-oriented products. Last year, we continued our innovation drive by opening another new format, LAWSON STORE100, a convenience store offering perishable foods targeted mainly at housewives and senior citizens. Both new formats are posting steady growth, with average daily sales on a par with regular LAWSON stores. Going forward, we plan to use the products and know-how from these two strategic formats in our more than 8,300 regular LAWSON stores nationwide. In this way, we can expand the customer base and thus strengthen our conventional format stores. Effectively, this approach will drive the evolution of regular LAWSON stores into hybrid stores. We have already begun trials in major cities where we have transferred perishable foods, daily foods and value-for-money private brand Value Line merchandise assortments from LAWSON STORE100 stores to regular LAWSON stores. As a result, we have seen significant improvements in both average daily sales and customer numbers due to an increase in the number of female customers at these stores. In another initiative, in communities where there is a growing number of elderly, we have also started experimenting with LAWSON stores that serve their needs by offering merchandise assortments and planning store layouts with senior citizens in mind. We are thus striving to create convenient stores that are just that, convenient in terms of location and products and services, and offer a high level of satisfaction to customers of all generations in local communities.

In the second half of fiscal 2006, we will continue investing in sales promotions and making upfront investments in trials of new formats. Our aim is to increase the motivation of franchise owners and improve their earnings by expanding the customer base. Furthermore, by leveraging LAWSON PASS and its more than 2.5 million members in promoting sales, we aim to expand our customer base. As we announced at the start of the current fiscal year, we expect these and other activities to result in only a slight increase in recurring profit for the full year. However, we believe that our strategy of actively widening our customer base ahead of other CVS companies will translate into higher earnings in future fiscal years. We ask for your understanding on this point as we work to realize sustained, consistent growth at LAWSON.

October 11, 2006

Takeshi Niinami
President and CEO

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