From reading the financial press recently you would think that Japan was well on its way to reversing 20+ years of economic stagnation.  The stock market is way up, there are anecdotal stories of wealthy people returning to luxury stores to buy jewelry and apparel, and there was even a small whiff of inflation last month given the devaluation of the yen. The Prime Minister, Shinzo Abe, has promised to wage a three front war on deflation using monetary & fiscal policy as well as structural reforms.  Will any of this work and will Japan be a more promising market for restaurant chains in the future?

There is no doubt that easy money can improve economic performance in the short-term but it is doubtful Japan can return to strong sustained economic growth.  The reasons are very straight forward but often forgotten. The population is shrinking and aging at the same time.  The country is anti-immigration. Corporate governance is extremely weak and over the past several years looks to be getting even worse.  Japanese companies are highly reluctant for cultural reasons to reform themselves and are resistant to empowering the female labor force.  Put that all together and it is hard to be very optimistic.

Overall retail & restaurant same store sales have been mildly negative for the past 10-15 years. Spending per person continues to decline and restaurant chains attack each other with cheaper menu offerings and new value for money concepts.  Japanese salarymen were accustomed to spending 1000 Yen as a budget for lunch 20 years ago but now 500 Yen is the comfort level. Not much you can eat for 500 Yen other than some food at Seven-Eleven, McDonald’s or cheap udon & ramen  shops.  In many respects, Japan is more similar today to a developing country than a developed one with the focus on low price high carb meals.

I doubt these trends are likely to change in the next 5-10 years.  So what should overseas restaurant chains do if they are not in Japan already?  Forget about the market or try to find a niche to develop?

Here are a few helpful suggestions.

*  Focus on low price value for money concepts with high carb food menus. Personal budgets will remain tight.

* Keep the operations very simple and use central kitchens.  Rent and labor are still very high and spending per person low.

* Rely on franchising for business expansion once the business case is proven with a few direct owned stores.  Individual Japanese franchisees are comfortable with single digit financial returns.

* Keep overheads very low and maximize technology.  People are expensive.

There is still money to be made in Japan but the market is not for the faint of heart!


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