Reference no: EM133389617

Ernie Higa Partners With Wendy's

Wendy's had not had great success in penetrating the Japanese market. Having failed initially with the Daiei Group, it was sold to Zensho Holdings Co., which still could not make Wendy's work. In 2008, after 30 years in the country, Wendy's only had 71 stores, compared with McDonald's 3,400. Wendy's did, however, have a cult following of 30,000 on social media (Mertens, 2012). In 2011, Higa got a call from the U.S. Embassy, saying that Wendy's was seeking a new partner. Initially reluctant, Higa offered to meet and give executives free advice on how to adapt to the Japanese market and navigate its esoteric challenges. After meeting with the team, Higa was convinced to partner them, as he saw an opportunity financially and a chance to change the perception of fast-food hamburgers in Japan. He is currently revamping Wendy's hamburgers with toppings that appeal to the Japanese consumer, such as Iberico bacon and wasabi. Higa obtained a 51% stake in the Wendy's joint venture (Mertens, 2012). True to his adaptation style, he is using Wendy's to bring the "fast-casual" concept to Japan. The first Wendy's reopened in 2012. The chain had set a goal to open 100 outlets by the end of 2016, but in July of 2015, only had two operating. Unlike Domino's, which emphasizes delivery and thus the location of the store is not critical, Wendy's is all about getting high traffic locations, and that has proven to be a barrier to entry for the chain (Nagata, 2015). Most Japanese were moving to home or office delivery, but Wendy's still preferred walk-ins, given the warm store Page | 3 environment they had originally created. As Wendy's continued to struggle in the market, the parent company pulled out, leaving Higa to acquire 100% of Wendy's Japan. With the help of a private equity firm, he acquired First Kitchen, a popular established burger chain in Japan, in an effort to build brand recognition for Wendy's and acquire locations in high pedestrian areas.

Wendy's in Japan

Wendy's Japan is a franchise of Wendy's and is a wholly owned subsidiary of Higa Industries Co., Ltd. On June 1, 2016, Wendy's Japan entered into an agreement with Suntory Holdings Ltd., acquiring 100% equity of First Kitchen Ltd., a Japanese fast food restaurant chain owned by Suntory. In order for the deal to go through, a private equity firm, the Longreach Group, bought a majority stake in Wendy's Japan, which would convert 136 First Kitchen restaurants into Wendy's First Kitchen restaurants, a hybrid concept "offering a blended, revamped menu and refreshed décor" (Wendy's Investor Relations, 2016). Items from both restaurants will be on the menu. According to Bob Wright, the chief operations officer of the Wendy's Company, "This [deal] is an example of how we are bringing our 'narrow and deep' international strategy to life by initially focusing on four key markets-Japan, India, Brazil, and the Middle East-where we see considerable upside potential over Page | 4 the next few years. We believe our best approach is to support our franchisees in building Wendy's brand strength in local markets and enhancing the economic model of their restaurants."

Fast Food Automation in Japan

Fast food chains in Japan seek to increase innovation and productivity, and Wendy's is certainly among these. Japanese restaurants have struggled with chronic labor shortages and, in addition, labor productivity in Japan is 40% lower than that of the United States (Inagaki, 2017). Low labor productivity is a hurdle in raising workers' wages. Fast food chains have shown interest in adopting automation technology, and Wendy's has joined the frenzy. In the United States, Wendy's is introducing self-service ordering kiosks, with plans to add them in at least 15% of its stores-1,000 stores in all (Li, 2017). In the future, Wendy's Japan will likely seek to take advantage of the country's robotics expertise with similar efforts at automation.

Company Analysis

One of Wendy's main strategies worldwide is to find areas with high foot traffic. It is imperative for a business that produces low-margin products like hamburgers to achieve critical mass, a sharp contrast to high-margin businesses like luxury fashion brands. In addition to competing with other fast-food restaurants, Wendy's is up against convenience stores and pharmacies for good locations in Japan (Nagata, 2015). Possible ways to overcome this barrier include entering a joint partnership or an acquisition. Wendy's chose the latter first, acquiring over 130 stores from First Kitchen, a more established burger chain that had been in Japan for around 40 years. Both chains complement each other's market strengths and adhere to Higa's overall strategy of "think global, act local." While First Kitchen had an established local presence, Wendy's sought to have a more global presence, given its menu strength. Their first combined store in Roppongi, which opened in March 2015, did well, with a 160% year-on-year sales increase, compared with its 120% success benchmark (Nagata, 2015). Monthly sales increased, as well as customer counts and their average order check. This was the first time Wendy's had formed a partnership with a local chain. Higa chose to leave the "First Kitchen" name and combined it with Wendy's, giving Wendy's more brand recognition in Japan. The staff at First Kitchen were seasoned in the fast-food industry, rendering training costs minimal, as they needed only minor training on Wendy's products. The locations already existed, negating the locational barrier to entry that Wendy's faced initially. Thus, the lead-time to open a Wendy's First Kitchen (by remodeling an already existing First Kitchen) was minimal. Wendy's strategy in Japan was to differentiate itself as a "fast-casual" dining experience-a more upscale (expensive) version of fast food but not as formal as a restaurant. Higa leaned closer to "'fast-casual gourmet," believing it was a great way to attract more upscale diners, especially given that the number of Michelin three[1]star restaurants in Tokyo exceeds that of Paris (Nagata, 2015). "If I could combine [the] two concepts [of the fast-casual trend and gourmet hamburgers] and rebrand Wendy's when I bring it back not as a fast-food hamburger chain, then there is a possibility to develop a new niche (market)," he said (Nagata, 2015). As a result, Wendy's offered burgers with foie gras and truffle, for example. Compare the approximate JPY 113 cost of a McDonald's Big Mac with the Foie Gras Rossini burger at about JPY 1,280 (USD 16.30)- which is sixteen times more than a McDonald's plain burger (JPY 80). In 2012, this Wendy's burger was a bestseller, accounting for 30% of overall sales. In an effort to capture the Japanese palate, Wendy's also offered a lobster salad, an avocado wasabi burger, and a truffle porcini and chicken sandwich. "To say you make a better burger is not a very strong claim," Higa explained, "but a foie gras burger has a halo effect. It shows we are serious about quality" (Mertens, 2012). Page | 5 Japan, which has the third largest economy in the world, has struggled under inflation. Annual restaurant spending shrank by USD 50 billion over almost two decades, from USD 390 billion in 1997 to USD 340 billion in 2012 (Mertens, 2012). Higa has adapted to this downward trend by focusing on niche markets rather than mass markets. "Offering high-quality products, like the foie gras burger, is a value proposition. Japanese remember foie gras as a high-priced luxury of the bubble-economy years. A $16 burger topped with goose liver is [now] accessible. You have two options in a deflationary environment. Go low-cost, like McDonald's. Or offer value for money, whatever the cost," Higa said (Mertens, 2012). "We got critical mass. We got location. We got everything we need. Our biggest challenge now is people," he continued. "There is a labor shortage in the service industries, especially in fast food. Both for part-time and full-time employees. [...] During the 'bubble economy,' when Japan's economy was growing, getting more people meant higher profits. But in today's deflation, getting more people just allows us to keep our doors open. How do we get more people?" The labor shortage is largely endemic due to low birth rates-there is a smaller pool to choose from. The Japanese are neither getting married nor having children as much as in the past, so the labor market is small. Additionally, Japan has been one of the world's most homogenous markets in terms of its culture, often shunning non-Japanese immigrants for reasons of national pride (and difficulty with the language). The Japanese government is now considering measures to attract non-Japanese guest workers either for short stays or longer durations. Despite fast food's intrigue for customers, attracting labor for fast food restaurants will be a challenge based on the industry's comparatively lower wages. Wendy's in Japan hopes that, with its chic remodeled interiors, creative menus, and willingness to adapt, it can also become an employer of choice.

Question

1. What challenges must Wendy's overcome to succeed long-term in Japan?

2. How does Japan's economy determine whether the country can support Wendy's expansion?

3. How can Wendy's in Japan differentiate itself from its fast-casual competitors in Japan, such as Carl's Jr. and Shake Shack?

4. Based on Ernie Higa's business venture in Japan, what "take away" could you apply to your Export venture?