Drop in sales prompts expansion
Bloomberg News Service
TOKYO — McDonald's Japan Ltd., Skylark Co. and Yoshinoya D&C Co., discount restaurateurs with little in common on their menus, have hit on the same response to faltering sales at their outlets: Open more.
McDonald's Corp.'s Tokyo-based unit aims to triple its number of burger outlets, to 10,000, by 2010, using an initial share offering this summer to help pay for the move. Skylark will nearly double its number of stores, to 4,500, over the next five years. And Yoshinoya plans to add 100 new beef-and-rice eateries, bringing its total to 868, by February.
The push comes as prices and sales are falling in Japan's restaurants amid competition that has forced one big name, Diageo Plc's Burger King, to give up on the world's second-largest economy. "As long as prices continue to fall — and they will — restaurants don't have much choice but to open more locations," said Naoki Samizo, an analyst with Shinko Securities Co.
The expanding chains can't increase sales without opening more stores and are betting that the buying power they will gain through greater size will mean more profit, even as they undercut rivals on prices.
Their new eateries will open to a restaurant market that has fallen to 28 trillion yen ($227.2 billion) in annual sales from 29 trillion yen over the past five years. It's also a crowded market, with one eating and drinking establishment for every 161 people in Japan, more than twice the per-capita number in the United States.
The expansions come as Japan's consumers, daunted by record- high unemployment and slowing income growth, have cut their spending for seven straight years.
McDonald's Japan, Skylark and other restaurateurs are responding by lowering prices. McDonald's, for instance, sells its smallest burger for half price, 65 yen (53 cents), on weekdays.
At Skylark's Bamiyan chain of Chinese restaurants, sweet-and-sour pork, rice, soup, pickles and all the soda you can drink go for about 1,000 yen ($8.11), or what you might pay for two cups of java in a downtown cafe.
Skylark will add 500 locations to its 373-store Bamiyan chain. Already, the company has converted about half of its namesake Skylark restaurants to its Gusto concept, a lower-priced family eatery.
"In this bad economy, cheap restaurants are a hit," said Kana Sasaki, an analyst with Tsubasa Research Institute Ltd. who rates Skylark shares as "average." "There's still plenty of room (for low-priced restaurants) to grow."
Yoshinoya, which hasn't lowered its regular prices, runs a promotion in April and October, selling bowls of rice topped with seasoned beef for 300 yen, a 100-yen discount. However, last year, April and October ranked among Yoshinoya's worst months for sales, in part because competitors cut their everyday prices to 290 yen.
Build or perish
To cope with the pricing battle, analysts said, Yoshinoya and other successful chains must expand. By building more stores, the companies will be able to cut costs per outlet by commanding better deals from suppliers.
"Big companies increasingly are going to dominate the market," Sasaki said, as they'll be the ones that can fetch lower prices.
Last year, Tokyo-based Skylark shaved about 10 percent off its cost of eggplant, cooking oil and 200 other items after it began asking vendors to compete through online bids, said company spokesman Makoto Suzuki. The savings helped boost Skylark's pretax profit margin to 7.6 percent from 6.4 percent in 1999.
By next year, the company will procure all food and other supplies through its Internet system, saving about 8 billion yen annually, Suzuki said.
To be sure, expansion only works when you have a healthy business to start with.
Seiyo Food Systems Inc., which operates 745 restaurants, plans to add 300 new eateries over the next three years, expanding its low-priced Fuchin, Umakatsuya and Pasta Bar Buitoni chains in what analysts say may be a reckless move.
"There are huge risks," said Kiyoshi Mori, a restaurant analyst with Okasan Securities. "Seiyo just started these chains, and we don't know yet if they are profitable."
Seiyo spokesman Yoshiaki Yasumi said the expansion will help the chain cut costs by buying supplies in bulk. The company projects a group loss of 1.5 billion yen on sales of 100.5 billion yen in its fiscal year ending March 31.
No growth from within
Even those chains with stronger track records are no longer able to grow without building new stores. McDonald's Japan last year offset a 0.7 percent sales dip in stores open at least a year by opening 399 new outlets. Skylark's same-store sales fell 3.1 percent last year.
In January, Yoshinoya's same-store sales fell 6.5 percent from a year earlier.
When that happens, analysts said, profit falls, leaving restaurateurs little choice but to build their way out of trouble.
Such expansion only reduces profit further if the new outlets don't perform well enough to justify opening costs. Skylark, McDonald's Japan and Yoshinoya all plan to build new stores without borrowing money, keeping their capital costs low.
Skylark, which has no franchisees, will pay for new stores — at a cost of about 60 million yen each — with cash from operations, Suzuki said.
To meet its 2005 target for openings, the company would need to spend about 24 billion yen a year, on average, which would amount to more than half of its cash flow last year.
Yoshinoya will open about 40 percent of its new outlets through franchisees and will pay for the rest, at a cost of about 50 million yen per location, with cash from operations, said company spokesman Yuichi Matsuoka.
McDonald's Japan plans to sell shares to the public in July. The chain also has franchisees, which bear the costs of opening their own stores.
Restaurant companies that haven't cut prices, meanwhile, aren't expanding.
Royal Co., which operates Sizzler and Royal Host restaurants, last year added eight outlets, bringing its total to 552. Denny's Japan Co., Japan's third-largest family restaurant chain with 535 locations as of August, added about 15 restaurants each of the past two years.
Others have retrenched. For example, Japan's 31 Burger King outlets will close this month after price competition prompted franchisees Japan Tobacco Inc. and Seibu Railway Co. to withdraw from the burger business.
The number of eating and drinking establishments in Japan fell 3.8 percent between 1996 and 1999, to about 805,000, according to a government survey.
Even McDonald's Japan and the other expanding chains are closing some of their weakest stores. The companies are building more outlets than they are closing, though, in some cases replacing older restaurants that are no longer producing profit.
"Eventually, things get a little greasy, a little less clean, and the novelty wears off," said Samizo, the Shinko analyst. "The bad economy just speeds up the decline."
