We would like to begin ZOZO's FY 2024 third quarter Q&A session for institutional investors. The Q&A session will be attended by Yanagisawa, as well as Director and CEO Fuminori Hirose, and General Manager of Corporate Planning Office, Yusaku Kobayashi. These three will be responding to your questions. The session will end at 5:30 P.M. If you have any questions, please raise your hand by using the icon. When called upon, please unmute yourself and state your name as well as the company name before you ask your questions. Mr. Kawano, please go ahead.
Hello. My name is Kawano from Goldman Sachs. Can you hear me? Yes.
A little bit of a complicated.
This is quite detailed, and I apologize in advance. But about the expenses, I have a question. In the third quarter, when we look at the third quarter numbers, the payroll dropped by about JPY 800 million, and others dropped by JPY 800 million as well. And the equipment from last year is included in other costs. And you mentioned last year about having to increase inventory or store inventory. But can you explain more in detail what happened here? And you mentioned unspent budget. Can you let us know how much budget is remaining for which items? That's my first question.
So thank you very much for your question. So I will talk about payroll first. As you can see here, within payroll, we have logistics and full-time employees included here. In terms of the employee expenses, I think that it's just following the natural trajectory.
But the payroll and logistics centers, so it was 5.7 last year, and it dropped to 4.8. So it dropped significantly. And if we think about this, of course, GMV is growing, so the transaction is increasing. Therefore, ordinarily, this payroll would go up. But as Yanagisawa mentioned during the briefing session, last year we had a lot of inventory stored in the logistics center, and the operation efficiency wasn't optimal. But we expanded the logistics center this fiscal year. And we also started returning inventory that wasn't moving to the branch. That's why we were able to create the necessary space to improve the operational efficiency. And so although the transaction went up, we actually could do more with less people. That is why the logistics center payroll has decreased significantly. Does that answer your question?
Yes.
The next part about the other costs, there's mainly two factors here. Last year, one of the expenses that we incurred last year is the ZOZOBASE Tsukuba 3, about JPY 800 million. We have one-off expenses, but last fiscal year, we didn't have those costs this year, so this is a year-on-year decrease. That's the main reason why you see such a significant difference, and this is not so significant, but AWS connection fees as well. These costs are quite significant, but we were able to reduce these costs due to our cost reduction efficiency, so we have seen year-on-year decrease in these costs as well.
Hopefully, that answers your question, and what was your other question? About the unspent budget. We can really clearly tell you how much, but in the third quarter, the main items that are included in the unspent budget are the promotional costs. That's number one.
That's the biggest cost, and then also shipping as well. Shipping expenses are quite a large volume, and Kawano-san, we mentioned in our one-on-one meetings as well, but with respect to the initial plan, we have estimated that the AOV would be around the same, but every quarter, we're seeing a year-on-year improvement in the AOV. Therefore, we didn't have to ship as many packages as we initially estimated in the beginning of the year. That is why, next to the promotional expenses, shipping fees are also another large unspent budget portion, and also logistics center payroll as well. Honestly, the inventory status wasn't clear if it would improve significantly this fiscal year, so we estimated that the operational efficiency within the warehouses would remain around the same. We weren't very aggressive about those estimates, but the operational efficiency increased more than we anticipated.
Therefore, we're seeing improvement in the payroll, and we can probably estimate the same impact going forward. But you mentioned that the advertising expenses you will spend according to the initial plan. Yes, as Yanagisawa mentioned in the presentation, yes, we will spend the initial budget that we had estimated at the beginning of the year. The second question is about mid to long-term categories that I think you might focus on going forward. I think that we've talked about that in the past as well, but do you have any qualitative updates with respect to those kinds of categories? We don't have anything specific that we can disclose at this time, but as I mentioned from before, next fiscal year onwards, we want to expand the categories, and we are working on our strategy right now.
We would like to explain our thinking at the end of the fiscal year. So if you can wait till then, that would be great. Thank you. But in principle, our thinking hasn't changed. We're going to expand into non-fashion categories, maybe furniture, miscellaneous goods. So those are some areas that we are interested in. So our thinking around that hasn't changed. And the third party, what do you mean by third party? So you would be operating the platform? Yes, of course. Because we will be selling on our platform. You wouldn't be manufacturing your own product. No, that would not be the case.
Thank you.
Thank you. Next. Kanamori-san, please go ahead.
My name is Kanamori from Nikko Securities. I have two questions. First question is a continuation to Kawano-san's question. So you haven't changed the consolidated business forecast.
So the fourth quarter, you will be able to achieve your targets even if you perform 14% lower than the initial target. And you also mentioned that you will be using the remaining budget, promotional budget in the fourth quarter. But what other costs do you think that you will be incurring, or what would you like to spend your budget on in the fourth quarter because you're doing so well right now? And also, in terms of promotional expenses, in January, it doesn't seem like you did. You accelerated your promotional efforts. So it didn't seem like you did anything new or you were doing more of anything. So have you already made plans for February/March to accelerate your spending? So I will answer that. So we will be spending our promotional budget, as I mentioned before. Principal?
We're not going to do any different promotions than we've actually done in the past, personalized discounts, existing promotions as well. So we'll be doing the same kind of promotions, but maybe more frequently, increasing the frequency. And in the first quarter, January of the fourth quarter, I think all companies are having a tough time. Therefore, we have invested quite significantly in January, and we believe that we'll need to do the same in February as well in order to improve the situation. So we will be proactively investing in promotions. And also, in terms of other costs, with respect to promotions, we are going to be planting seeds for the next fiscal year onwards. And in terms of additional costs we may incur, it's not included yet. We haven't decided yet, but maybe bonuses that we might pay out at the end of the fiscal year.
But at the moment, there are no other sizable costs that we estimate. Why do you think that the January is a tough month for everyone? Because it seems like it's been quite cold in January, so it's recovering. But why do you think that is the case? I think that lack of inventory is something that we're all facing. As I mentioned earlier, when we talked about the average retail price, a lot of brands are not focusing on heavy apparel. They're focusing more on lighter clothing, like T-shirts. Therefore, when it became cold at the end of December, they were able to sell a lot of heavy items. And sales began in January as well. So a lot of brands have already gone through a lot of the inventory that they have manufactured and started to manufacture less to start with as well.
So at the moment, the current sales season, they don't have sufficient inventory. In February, you don't have a lot of fall/winter inventory. So unless it becomes warm, you won't be able to sell spring/summer products. So you need to support that with promotions. Yes. So spring/summer will probably launch earlier. This is probably true for offline as well. But both offline and online, we will start selling spring/summer clothing quite early. So you have been growing quite rapidly, even though it's been a year. But LINE commerce has been growing quite strongly. And that's probably partly due to the parent company. But what have you done to contribute to this? And do you think this kind of growth can be maintained for LINE commerce? It's more the LY's initiatives that they have been investing quite heavily in promotions, not just our ZOZOTOWN shop, but LINE commerce.
They've been investing in the platform itself. And so we've been benefiting from those increasing promotions. So they are just strengthening their normal promotional efforts. So they haven't really changed their tactics. What about sustainability? Do you think this can be sustained? It's hard for us to say. It depends on what they're thinking. So it depends on what LY's plans are. But the inventory is shared. So, of course, promotions and inventory levels will impact the fourth quarter. Yes. Thank you. Understood. Thank you. Next, Yamako-sama, please go ahead. My name is Yamako from Nomura Securities. Thank you. I have two main questions. First question is about consignment. So what's the current situation? You have increased the active users and expanded your user base as well. So you've implemented various initiatives. But as far as you can see, do you think that those initiatives have started to bear fruit?
It seems like the GMV growth rate is improving gradually, so I just wanted to know if your initiatives have started to bear fruit. That's the first question. Joseph-san, please go ahead. In terms of the consignment, the way we sell, of course, we've started to segment, and brands can conduct their own sales by segment, and we also are targeting different segments as well, like mothers and younger audiences, so that is contributing to our growth rate at the moment. Okay, so the active user growth rate is probably having an impact on the growth rate as well for the active users. Yes. Thank you. Another question is about cosmetics. Can you give us an update about the cosmetics situation? That's my second question, so I can answer that. With third quarter, for cosmetics, it's been doing well. We had ZOZO Week.
And during this sales week, we issued brand coupons as well. So we have been able to increase our GMV and Gucci Beauty as well. New sources such as Gucci Beauty have joined our fold. So in the third quarter, we have seen positive results. So including consignment, so inventory and turnover over the short term will impact you. But over the longer term, the situation may be improving for you overall. Is that for cosmetics or overall? Consignment and cosmetics, everything included overall. We look at the consignment sales. Is it improving? Overall, do you think that your situation will continue to improve going forward? The forecast, basically. It depends on who or what you compare us to. But we want to continue to increase our active members and thereby increase our GMV. Understood. Thank you. Thank you. Next, Yamako-san, please go ahead. This is Nagao from BOA.
Thank you. Can you hear me? That was a great quarter for you. In terms of logistics centers, last year you had a lot of inventory, and it was tough for you to get around that and cost increase as well. But in principle, in the summer, you already have Ibaraki 5 up and running as well. So with new logistics centers being added to the network, will you be able to automate? And you have been able to automate and also increase the operational efficiency. So is that something that you will see every time you add another logistics center? You are right. In terms of logistics, we have tried to overcome our challenges from last fiscal year, especially from summer onwards. We have been able to make improvements. Our staff on the ground have made great efforts.
So as you mentioned, our bottom line, it's been contributing significantly for us to maintain our bottom line. The second question is about for the fourth quarter, you mentioned that you'll be spending the unspent budget. But the promotional strategy as well, the promotional strategy are going well, doing well. You also talked about how you're doing well in segmentation, but free shipping campaigns and point campaigns, it seems like you're able to do that very well now. But the return on the advertising initiatives, it seems like that's improving as well. So is that true? With respect to promotions, we have the data from the past. So we have been able to come up with a very efficient advertising strategy. So as you mentioned, the advertising efficiency and effectiveness has significantly increased, improved.
But we also have to worry about the inventory, the temperature, and also the amount of products available for sales. Those are areas that we have been having a tougher time with. Inventory and tenant situation, of course, is more seasonal. And every year, of course, there's going to be problems as well as benefits. But within your territory, what you can do yourself, it feels like you're doing a great job. And lastly, a lot of, of course, you mentioned in the waterfall chart, but advertising business is contributing to your bottom line. So you're seeing a lot of logistical efficiency and advertising efficiency and advertising business. All those three elements are contributing to your performance. So if you can provide an update, especially on the advertising business, that would be great. You're right.
So in terms of the sales from the advertising business, we are seeing high demand from the brands. And so we do have a lot of budget that we're managing. So the third quarter, it has performed very well. But we did well up until the third quarter. But fourth quarter, as I mentioned before, of course, if the brands are not doing that well, if they don't have products to sell, then the advertising business may suffer as a result as well. So we can't really sit back and relax yet for the fourth quarter. But if we have the proper inventory and the necessary parts in place, of course, we will see a very good demand from the brands. I have another follow-up question. Search ads are the majority, and some ads are on WEAR as well. But the WEAR traffic has recovered significantly as well.
ZOZO, of course, you have to balance with usability. But the advertising space that you have available on ZOZOTOWN, if you wanted to increase, you probably could. But can you explain your thinking behind the advertising space on your platform? Yes, we can increase if we wanted to. But when we consider the UI/UX, we need to make sure that it's well-balanced. Balance and usability must be well-balanced as well. So we want to continue to be mindful and careful of that. But advertising business, as a business, is a very highly efficient and highly profitable business. So we will keep an eye on things and increase gradually. Clear? That was very clear. Thank you. Thank you. Murata-san, please go ahead. This is Murata from J.P. Morgan. Thank you very much for your support and the detailed explanation.
The ARP and AOV. I have two or three questions around that. First one about the average retail price. So you said that the rise in retail prices have started to settle down. But it seems like when you look at the market, a lot of the products have already or are still increasing in price, maybe single-digit increase in prices we're still seeing in the market. But why do you think that it's settled down? So I think for the most part, the price rise has started to settle down. Of course, there are some brands that are still raising prices by 1% or 2%. But when we look at the overall average, it feels to us as though it's started to settle down. Okay. Understood. And also, you talked about the MD strategy change.
So when the brands launched fall/winter products, they weren't manufacturing as many heavier items. That's why the average retail price came down. That's correct. And so, but in December and January, you had more heavier items that were made available to you. But in December, January, what was the average retail price movement like in December and January? You're talking about the sales price when we sell those items? The average sales price, of course, when we compare it to the beginning of the season to later in the season, of course, it's higher. Sorry? Is it higher? You didn't rise as much in the latter half of the winter season. About the average order value, this has tracked well, trended well. And you talked about how the free shipping campaigns, how they performed well.
In the second quarter, you mentioned that if you did too much, it would actually have adverse effects if you did it too much. You said that you were setting an accelerator of about 70% to 80%. Is that the same image right now, or has your thinking changed? You've already mentioned this, but you talked about personalized and segmented promotions, and also direct mail sending that you sent out to dormant users. Aside from the free shipping campaigns, do you think the other types of advertising or promotional campaigns can deliver the same kind of ROI, as I mentioned before? The free shipping campaigns, we are maintaining the same frequency as second quarter, and fourth quarter probably as well. Next fiscal year onwards, we haven't decided yet. You mentioned the other campaigns, promotional campaigns, especially personalized discounts.
As I mentioned before, it's very efficient. So we would like to is a good method to promote our service. So we would like to actively and aggressively conduct personalized campaigns. Understood. Thank you. Thank you. It's nearing the end of our time. So this will be the last question. Kazahaya-san, please go ahead. This is Kazahaya from UBS Securities. I have two questions. First one is page 10 on the slide. You talked about the logistics equipment implementation has been delayed, but the number hasn't changed. So can you mention why the budget has changed? And is the depreciation amortization been reflected here as well? For now, equipment JPY 5.5 billion to JPY 6 billion will be the investment in our equipment at the end of the fiscal year. In terms of depreciation amortization, this is as planned in the beginning of the fiscal year.
But we believe that it will be about JPY 300 million less than the initial plan. Thank you. So this is just a delay. Yes. So next fiscal year onwards, we will be implementing those equipment instead of this fiscal year. Understood. Also, one more question. Sorry, we're past time. But the number of employees, if we look at the Q and Q results, it seems like the number of employees has decreased. Why has the number of employees decreased? And also, based on your recruiting plans, is there a gap? We haven't been able to hire as many people as we initially planned. That's why we're seeing a decline in these numbers. And in terms of attrition, against the initial plan, it's we're on track. So there's no huge gap in terms of attrition. But what kind of people we haven't been able to hire?
The biggest segment is the engineers and other management, sales, fulfillment included. It's also true for the other types of employees, talent as well. We haven't been able to hire as many as we had initially planned. But we are using additional media to attract more talent. Thank you. In Q2, how many people were you trying to hire, like the number of staff or employees? A little bit less than 1,800 was the initial plan. Understood. Thank you. That's it from my side. Thank you very much. This concludes our Q and A session. Thank you very much for joining us.