Major Japanese retailer FamilyMart Uny Holdings Co. said Thursday it will make discount store operator Don Quijote Holdings Co. its affiliate in a deeper capital tie-up amid intensifying competition in the shrinking domestic retail market.

FamilyMart Uny will also sell its entire stake in struggling supermarket unit Uny Co. to the discount store operator, which currently owns 40 percent of shares under a capital alliance formed last year, aiming to focus on its convenience store operations, the second-largest in size in Japan.

(CG image of a joint outlet of FamilyMart Uny and Don Quijote) [Supplied image]

FamilyMart Uny hopes to further capitalize on the know-how of Don Quijote whose flashy shops are popular with young people and foreign tourists, in the face of fierce competition with the rise of online retailers, discount stores and drugstores.

"The environment surrounding general supermarkets is becoming severe and...the competition has become tougher than I expected. I judged that this is the right timing," said FamilyMart Uny President Koji Takayanagi at a joint press conference with Don Quijote President Koji Ohara.

Ohara said he hopes to overcome the "wild waves" of the distribution industry through the strengthened alliance. He expressed hope to expand businesses overseas through cooperation with FamilyMart's parent trading house Itochu Corp.

"We will not restrict ourselves to the domestic market but seek to open community-based and competitive outlets," said Ohara. Don Quijote currently operates 39 stores overseas in Hawaii, California and Singapore.

As a sign for its global bent, Don Quijote also said it would change its name to Pan Pacific International Holdings Corp. as of Feb. 1.

Under the latest deal, FamilyMart Uny will acquire a stake of up to 20.17 percent in Don Quijote through a takeover bid of 6,600 yen a share from early November for a total 211.9 billion yen ($1.89 billion), the two retailors said.

FamilyMart and Don Quijote have launched six joint outlets with Don Quijote-style product displays in front of cash registers and in storefronts, and these have proven to be successful, according to FamilyMart.

A typical "donki" store operating around the clock features floor-to-ceiling shelves with a huge variety of products, from electrical appliances and food to cosmetics to clothing.

Ohara said out of some 190 stores and retail facilities of Uny's across Japan, including those under the Apita and Piago brands, around 100 would be transformed to Don Quijote-type outlets in the next five years, while the job force will be maintained.

FamilyMart has some 17,000 convenience stores in Japan and trails industry leader Seven-Eleven Japan Co., which operates 20,600.