Low Profits Threaten Japanese Restaurant Chains' High Valuations, According to AlixPartners Study

NEW YORK, Oct. 30, 2014 (GLOBE NEWSWIRE) -- Capital markets currently place a high value on the top Japanese restaurant chains due to recent strong revenue growth. But a new study published today by AlixPartners, the global business-advisory firm, says these high evaluations may not last due to the chains' low profitability.

Eight of the top 10 listed restaurant chains by revenue in Japan are home-grown – only McDonald's and Starbucks rank alongside the likes of Zensho, Shidax and Watami in that regard. The top 10 chains achieved revenue growth of 7.2% in 2013, significantly larger than the 2.3% achieved by the overall Japan market. By way of comparison, in the same period the top 10 listed chains in the US achieved revenue growth of just 0.3% (based on their sales in the US market).

But in the same period the Japanese chains' EBITDA margins were 6.9% on average, compared to 20.4% for the top 10 listed chains in the US (based on their US operations). The study notes that the Japanese players are small relative to the US chains, and with slim profit margins need to simultaneously pursue growth and reduce costs.

"Japanese restaurant chains are popular with investors, but unless profitability improves this situation may not last, says the study. We believe these chains must consider more economies of scale to improve their situation," AlixPartners Managing Director and Co-Japan Representative Masahiko Fukasawa said.

The wide-ranging AlixPartners Japan Restaurant and Foodservice Review makes it clear that, despite a pick-up in market size in the overall foodservice and restaurant market over the last two years, restaurant and foodservice companies in Japan will need to work hard to spur fresh growth.

As part of the study, AlixPartners surveyed 1,018 adults across eight regions in Japan. Participants were asked about their dining-out habits, their expected spending on meals outside the home and their preferred restaurants.

The results suggest a bifurcation of the market into price-sensitive consumers versus quality-focused consumers. Restaurant and foodservice companies may need to step up their innovation efforts to find growth in the segment of the market that values quality, the report says, with casual-dining restaurants most likely to benefit.

Consumers surveyed this year now view casual-dining restaurants as the most innovative type of restaurant, but despite this the frequency of visits to casual-dining restaurants declined to 2.0 times per month in this year's survey versus 2.3 times in a similar AlixPartners survey of a year ago. An overhaul of marketing strategies and operating models may help casual-dining establishments turn the perception of innovativeness into actual revenue, says the study.

The split between quality- and price-oriented consumers places fast-food restaurants in a difficult situation, according to the study. They are squeezed as convenience stores target price-sensitive consumers and casual-dining restaurants win over those focused on quality, the study says. Frequency of visits to fast-food restaurants reported declined to 2.7 times per month in this year's survey versus 3.3 times in last year's survey.

Restaurant and foodservice companies need to attract the over-55 age cohort to spur fresh growth in the face of demographic challenges, the study suggests. Convenience stores have already found success here – nearly 80% of respondents in this year's survey said they have visited convenience stores in the past year to buy a meal, and of those, 78% were in the over-55 cohort.

The study says virtually all restaurant and foodservice chains in the industry have an opportunity to improve operationally, starting with the fact that Japanese chains are comparatively small and may need to achieve the economies of scale to improve profitability. The study also says they should:

  • Strengthen cooperation between marketing and operations, to increase the odds of scoring a successful launch of a new product or service (e.g., better integrating product and menu-development processes).
  • Improve purchasing practices, to achieve more-favorable pricing and higher-quality inputs from suppliers (e.g., undertaking more benchmarking and "smart" purchasing practices).
  • Pursue scale, to bring the financial resources, capabilities and brand awareness needed to grow revenues (e.g., enter adjacent markets, develop clear brand positions and consider exploiting advantageous M &A opportunities).

"There is a less-than-ideal confluence of forces shaping the competitive landscape of the restaurant and foodservice industry in Japan. In such an environment, Japanese companies must not shy away from tough challenges if they want to spur growth in their businesses," Fukasawa said.

About the Study

A Full Plate: The AlixPartners Japan Restaurant and Foodservice Review assesses past and future industry performance through an analysis of industry financials and consumer research, including a June 2014 survey of 1,018 adults (aged 18 years or older) in Japan. All figures, references, facts, statistics and opinions contained in this article and the respective source material can be found in the study.

About AlixPartners

AlixPartners is a leading global business-advisory firm of results-oriented professionals who specialize in creating value and restoring performance at every stage of the business lifecycle. We thrive on our ability to make a difference in high-impact situations and deliver sustainable, bottom-line results. The firm's expertise covers a wide range of businesses and industries whether they are healthy, challenged or distressed. Since 1981, we have taken a unique, small-team action-oriented approach to helping corporate boards and management, law firms, investment banks and investors respond to critical business issues. For more information, visit www.alixpartners.com.

CONTACT: Tim Yost + + (m) tyost@alixpartners.com

Source: AlixPartners