Multidirectional Management Strategy of JR Hokkaido Yukihiko Usui

Features Railway Diversification

Non-railway Businesses Sapporo and Asahikawa. They generated companies, and design, construction and in JNR Era ¥3 billion (approximately 3% of earnings) management of new station buildings. during 1986, immediately before privati- The concept of station buildings marked Ten years have passed since Japanese Na- zation. Management of the terminal sta- a turning point in changing stations from tional Railways (JNR) was privatized and tion building was left in the hands of retired just facilities for passenger transport to we became JR Hokkaido, a private railway JNR employees who relied entirely on the more multi-functional facilities. In fact, company serving Hokkaido. I recall groups station’s location. The station buildings it is the most important concept for all JR of people, including myself, who were to- only played a role for providing a place to companies engaged in non-railway busi- tally ignorant of anything other than rail- work for retirees. The knowhow to man- ness today. way operation, doing their best to age diversified businesses was never ad- At first, during the JNR days, the concept contribute through commercial activities equately accumulated. was applied only to stations in large cit- with no direct connection to railway oper- When JNR began suffering from worsen- ies with high purchasing power. The new ation. Before the privatization, JNR was ing deficits in the mid-1960s, it turned to companies established to run non-rail- prohibited by law from engaging in such investments in new businesses. But the way businesses did not make any extra commercial activities. Even if there had layout of People’s Stations was inappro- efforts because they already had custom- been any, there was only a slim chance of priate and the company began seeking a ers. Moreover, JNR corporate culture was making profits in Hokkaido where there is new style of station building. When the such that it lacked clear definition of re- not much economic activity in the first JNR legislation was revised in 1971, it sponsibilities making it difficult to create place. The main non-railway activities at allowed JNR to invest in station build- know-how for running new businesses in that time were operating stores in stations ings and to engage in a restricted man- any profitable manner. and leasing facilities in People’s Stations ner in ‘...construction and management JR Hokkaido was no exception; the busi- (see information box below) to outside en- of shops and offices within the stations ness environment was even worse than trepreneurs. These activities were all small as well as management of dining and that of the other JNR offspring in terms of scale and went no further than utilization boarding facilities within the station com- market scale and market selection, be- of idle and excess facilities in station complex, bus terminals, parking and other cause Hokkaido is generally a depopu- plexes. The only active engagement in facilities located adjacent to the passen- lated and cold region. commercial activities (investment in station ger stations’. building ownership and property leasing) This allowed JNR to reflect its business was limited to terminal station buildings in intent in planning incorporation of new

People’s Stations were born out of strong demand in the postwar res- toration of local cities to innovate stations to match the communities in which they were located. In doing so, the local community shared the cost of building the station with JNR and won the right to use part of the new station building for commercial pur- poses. A total of 66 People’s Stations were built, the first being Toyohashi Station completed in 1949. Among them were Sapporo, Obihiro, Asahika- wa, and Kushiro stations in Hokkaido. Their basement floors were designed for commerce and these stations presented a model for station buildings where railway companies could engage in non-railway business.

JR Hokkaido’s Building next to Sapporo Station lease to a Major Department Store (JR Hokkaido)

10 Japan Railway & Transport Review • January 1997 Copyright © 1997 EJRCF. All rights reserved. Need for Multidirectional will be extremely unstable because we Sapporo. There are 8 cities in Hokkaido Management cannot expect a great increase in de- with a population greater than 100,000 mand. but there are only three cities over Poor railway characteristics 200,000: Hakodate (300,000), Asahika- Unstable financial structure: In 1994, JR Transportation characteristics versus wa (360,000) and Kushiro (200,000). Hokkaido had a route distance of 2,623 urban structure: It is often said that rail- Hokkaido’s population density of 68 per- km and 38,112, in passenger-train kilo- way characteristics are maximized by (1) sons/km2 is only 20% of the population meters; 128 million passengers travelled transportation in metropolitan areas and density of 316 persons/km2 in Kyushu, 4,810 million passenger-km. This result- (2) medium-distance transportation be- with which Hokkaido is often compared. ed in a railway operating revenue of tween cities. Sapporo, with a popula- The population density of Sapporo is 22 ¥90.5 billion, and costs of ¥132.8 billion, tion of 1.72 million people, is the fifth times higher than other cities in Hok- producing a loss of ¥42.3 billion com- largest city in Japan after Tokyo, Yokoha- kaido, whereas that of Fukuoka in Kyushu pensated for by interest from the Man- ma, Osaka and Nagoya. The Greater is only 11 times that of other cities in agement Stability Fund (see JRTR 8, Sapporo area within a radius of 40 km Kyushu, also suggesting the heavy popu- p. 5). from central Sapporo has a population lation concentration in Sapporo. Running the company is tough under to- of 2.31 million, accounting for 40% of As a result of this unique urban structure, day’s low interest rates. If the company the population of Hokkaido. This shows JR Hokkaido enjoys good business from must rely solely on railway operation, it the heavy population concentration in transportation in the Greater Sapporo

Figure 1 Major Inter-city Routes in Hokkaido

300 km (×1000 population as of 31 March 1995); [route distance from Sapporo] Electrified sections Wakkanai (50) [396 km]

200 km

Rumoi (30) Nayoro 100 km (30) Abashiri Fukagawa (40) (30) Ishikari Bay Takikawa 40 km (50) Asahikawa Kitami Otaru (30) [137 km] (110) [322 km] (160) Iwamizawa Furano (Chihoku Kogen Railway) Sapporo (80) (30) Nemuro (1720) Yubari (40) [484 km] (20) (Greater Sapporo) Obihiro (170) [220 km] Kushiro Tomakomai (200) [349 km] (170) Muroran (110)

Hakodate (300) [319 km]

area but inter-city transportation remains even smaller cities such as Memanbet- gy because it allows us to take advan- extremely low. Since Hokkaido does not su, Nakashibetsu and Wakkanai are con- tage of our existing resources to a large have shinkansen operation, it takes 3 to nected to Tokyo. This reduces the need extent while starting something new with 5 hours to travel from Sapporo to Hako- for feeder transport by train to and from relatively low risk. It is also true that it date (319 km) and from Sapporo to Shin Chitose and other airports. may be hard, if not impossible, to expand Kushiro (349 km). This type of medium- these new businesses to a scale that can distance inter-city transportation makes Positioning of non-railway greatly improve the company’s financial it hard to take advantage of railway char- businesses balance if we stick to railway operation. acteristics. The conditions suggest only slim chances for further development of railway JR Hokkaido’s resources: Stations and the Automobile-oriented society: The roads operation, and JR Hokkaido must grow rail network are our primary resources as in Hokkaido cover 84,150 km, or 14.8 less dependent on such operation very we explore new business. Traffic con- km per person, substantially higher than quickly. However, looking back over the gestion and air pollution by automobiles the national average of 9 km. The ratio past 10 years, it seems as if everyone was are presenting serious environmental of passenger car ownership is 0.35 cars busy trying to make money with no gen- concerns. As a result, trains are receiv- per person, slightly higher than the na- eral strategy for developing non-railway ing new attention as a clean and efficient tional average of 0.33. The roads are businesses in any efficient manner. Start- means of transportation in large cities. A never congested and driving is pleasant ing a new business is hard in an area station is often considered the centre in in Hokkaido. This makes cars the pre- where railway operation is hard to ex- an urban development project. As long ferred means of transport all year, despite pand in the first place. Nevertheless, our as the station continues to play a central the fact that the roads are covered with company is now determined to become role, a large number of people will ride snow in winter. a total service industry by developing trains everyday. This, in turn, creates new business. This involves changing the many opportunities in the station. A sta- Undeveloped railway facilities: JNR was company’s structure completely and con- tion is no longer a mere node along the reluctant to make new investments in structing an entirely new operation. It railway; people will begin to see oppor- Hokkaido. In terms of the route kilome- involves rebuilding and revitalizing cor- tunities for many new functions and the ters per geographical area, JR Hokkaido porate strength by integrating railway and space in a station can create new value rates only 30 km/km2, far below the com- bus operations with new non-railway as an amenity centre. bined rate of all JR passenger companies businesses. It involves adding new val- However, the number of passengers per (53 km/km2). The double track (22%) and ue to the company’s management by stra- station per day is small to begin with in electrification (17%) ratios in Hokkaido tegic development of new railway and depopulated Hokkaido. Sapporo, the are far lower than the JRs’ overall ratios non-railway businesses. Developing new busiest station in Hokkaido, serves only (33% and 55%, respectively). Tracks non-railway businesses could lead to a 176,000 passengers a day, followed by have not been reinforced in many sec- structural transformation as well as cul- Teine Station (27,000). The eighth busi- tions and concrete sleepers are only be- tural innovation of the company. est station, Asahikawa, has only 16,000. ing introduced now for the first time in Although Sapporo serves a far greater some sections serving inter-city medium- New Business Development number than Teine, it falls far behind sta- distance transportation. The undevel- Method tions in other parts of the country, such oped railway facilities naturally reduce as Shinjuku (741,000), Ikebukuro the advantages of railway even further, Selecting new businesses (611,000), Tokyo (421,000), and Osaka and new investments to correct the situ- What shall we do and how shall we do (438,000). ation present high financial burdens. it? Selecting the market and business method is the first problem any compa- Areas along tracks: The areas alongside Others: On the other hand, air transpor- ny faces when undertaking a new busi- tracks were traditionally left nearly un- tation has increased dramatically in Hok- ness. used. However, as a result of new land kaido during the past few years. Most of the new businesses that JR Hok- utilization plans as part of urban devel- Hakodate, Asahikawa, Obihiro and kaido has begun stay as close to the rail- opment projects, etc., there are greater Kushiro are connected directly by air to way business as possible while exploring chances today to use this idle land more Tokyo, Osaka and other major cities, and new opportunities. We chose this strate- effectively.

12 Japan Railway & Transport Review • Jaunary 1997 Copyright © 1997 EJRCF. All rights reserved. JR Hokkaido owns huge tracts of railway Business development cause large numbers of people use it ev- forests and their role is gradually chang- by subsidiary eryday. However, a station is also a pub- ing as more development projects are Initially, JR Hokkaido started new busi- lic facility and there are restrictions as to implemented. They, too, might find en- nesses itself without changing the com- what can be done in it. For example, tirely new usages. pany organization, but it was obviously profitable but offensive businesses are not nothing more than a copy of the state- acceptable. The most appropriate com- Technologies related to railways: Con- run JNR. It lacked flexibility and the ca- mercial operation would be something structing and operating railways requires pacity to respond to changes quickly and that adds to passenger convenience while a wide range of technologies, such as efficiently, which led to a series of prob- enhancing the station’s function as a rail- mechanical, electrical, civil, and infor- lems. We concluded that we had to es- way node. mation engineering. JNR’s expertise in tablish a subsidiary to run the new Ideally, it must blend with the commer- these areas was highly evaluated by in- businesses with sufficient flexibility and cial areas near the station. As a result of dustry and academia, and it is easily ap- efficiency, as well as well-defined respon- these criteria, we chose what everybody plicable to areas other than railways. sibilities. would choose—restaurants and shops This method also had problems especial- selling consumer goods. We began run- Human resources: JR Hokkaido has ly in terms of human resources because ning Mister Donut, Lotteria and other fast- 12,000 employees making it the largest it required transferring employees from food operations as well as Little Mermaid company in Hokkaido. When JNR was the parent to the subsidiary. We had to Bakeries, by becoming a franchisee. privatized, the company started with hire inexperienced ex-JNR employees for Business is good because they are all 2,000 surplus employees. The surplus the new subsidiary, who often presented well-established franchises and every- presents a resource when a company difficulties in running a new business. thing is done as instructed in their man- seeks to undertake new business. uals. They are run by a JR Hokkaido Typical Non-railway subsidiary and JR Hokkaido earns mon- Brand image and creditability: The pub- Businesses ey by letting the space to the subsidiary. lic has a high image of the JRs in terms of These franchises are limited to a few sta- creditability. This will play a very posi- Commercial operations in stations tions (Sapporo, Otaru, Asahikawa, etc.) tive role when undertaking new business. Commercial use of idle space in stations with relatively large numbers of passen- is probably the easiest business. A sta- gers. Methodology tion presents various opportunities be- The subsidiary is also operating kiosks Any new business requires professional know-how to actually run it. For example, a small shop in a station building requires service industry management know-how. One way to acquire such know-how relatively quickly is to join up with an enterprise that has the know-how. But a tie-up is never easy–you save time by paying for it. There were three possible options for JR Hokkaido setting out on a new adven- ture: 1. Join an existing franchise as a franchisee 2. Pay for know-how in a business collaboration 3. Use equity collaboration by jointly in- vesting in a new company with others

Sapporo Station after Elevation (JR Hokkaido)

and eateries started during the JNR days. tional development projects to build able by the readjustment will remain Coin lockers also produce steady profits commercial and amusement facilities empty until 2000. Over the past 3 years, without taking up large space. under elevated tracks at both ends of Sap- we have built a temporary JR Theatre in poro Station. this otherwise-idle space to show musi- Urban development projects Similar plans are also proposed for Obi- cals. It has drawn over 760,000 people, Investments in public works in Hokkaido hiro Station where elevation work is many more than initially anticipated. have focused primarily on infrastructure scheduled for completion this autumn. This suggested the feasibility of operat- projects in areas such as rivers, roads, ing a cultural facility in the station and ports and agriculture. More recently, in- Readjustment: Readjustment of the land this is now being studied as part of the vestments are being made in new areas ownership near Sapporo Station will yield complex. leading to enhancement of urban envi- 15,000 m2 of land for JR Hokkaido near A shopping mall under the station plaza ronments and general quality of life. The the station. This is extremely valuable is subject to readjustment. The present railways are receiving new attention as a urban space in a high-use zone. A build- facility does not meet the disaster pre- clean and energy-efficient means of trans- ing with a total floor area of 200,000 m2 vention standards and corrective mea- portation. As a result, a number of ur- can be built there because the elevated sures must be taken. The company has ban development projects are being portion can be included in calculating plans to expand and renew the mall at proposed centred around JR Hokkaido the building volume-to-lot ratio. We are the same time. When completed in stations. Such projects are currently un- currently working on a plan to build a 1999, it will be one of the largest under- der way near Sapporo and Obihiro sta- complex including a hotel, commercial ground shopping malls in Japan. tions. These projects are changing the facilities and JR Hokkaido office space. We are also building a hotel near Obihi- stations, aspects entirely. Similar projects When completed, it will have the appear- ro Station using the space made avail- are either under way or being proposed ance and dignity appropriate for the gate- able by regrading and readjustment. The in Hakodate, Asahikawa, Kitami, Teine, way to Hokkaido. Stations in Japan are hotel with around 150 rooms will be the Kotoni, Otaru Chikko, and other places. often surrounded only by commercial company’s first undertaking in the hotel Urban development projects are likely to buildings—we must not make the same business since the JNR privatization. JNR rationalize the company’s scattered or mistake. The project, tentatively sched- operated the Asahikawa Terminal Hotel otherwise inefficient railway spaces or uled to start in 2000, will be JR Hok- but an easy-going hotel management create new spaces. This means greater kaido’s first and last megaproject. failed to accumulate the required know- ease of using JR Hokkaido land for fur- Meanwhile, the free space made avail- how for the hotel business. The new ther development. Furthermore, we en- joy reduced initial costs because the land near stations is often improved within the scope of urban development projects.

Regrading: Sapporo Station is now elevated. This has created new space un- derneath the tracks; before the elevation work began, we had also initiated another project to secure underground space. The space under the tracks and in the basement of the new station building pro- vided precious room for development. It is precious because space in or near a major station is especially expensive. JR Hokkaido, through a subsidiary, built a commercial facility called Paseo 39,000 m2 (total floor area, including 14,000 m2 for shops) in this space. The subsidiary is now working on addi- JR Theatre Temporasing Built near Sapporo Station (JR Hokkaido)

14 Japan Railway & Transport Review • Jaunary 1997 Copyright © 1997 EJRCF. All rights reserved. tain types of urban development or readjustment, so long as they agree to create open space for public use. This system often increases the efficiency of buildings resulting in greater profitability. Owners of facilities affected by urban development are also entitled to various low-interest-rate loans. JR Hokkaido made full use of such loans in expand- ing and renewing the underground shopping mall near Sapporo Station to raise profitability as much as possible, and which by its nature is unlikely to produce high profits in the first place. Artist’s Impression of New Hotel at Obihiro Station (JR Hokkaido) Railway forests hotel in Obihiro will be staffed by expe- Others: As we participate in urban plan- Railway forests serving as barriers to rienced personnel borrowed from an es- ning and consider ways to maximize the snow or wind are common in cold areas tablished hotel in Sapporo which will value of our space, we make it a rule to like Hokkaido. However, the forest en- provide technical assistance. It will open learn from the available development vironments are changing rapidly due to in the summer of 1997 and advertising methods based on the Building Standards housing development projects along the has already started. Law and Urban Redevelopment Law. tracks and the function of railway forests Asahikawa Station is also the subject of Some of these methods are explained is changing as a result. In this case, we a similar urban development project in- below. must find new ways to use them more volving regrading and readjustment. The effectively. As a result, part of the rail- project will create large space under the Higher building volume-to-lot ratios: way forest near Hoshioki Station in Great- elevated tracks, and land that can be ex- Land owners are entitled to build new er Sapporo was cut down and a JR Daiei ploited for further development. buildings at higher building volume-to-lot hypermarket was built in its place. This ratios when their land is affected by cer- marked our first joint venture with the Urban redevelopment projects: The land in front of Kotoni Station owned by JR Hokkaido is included in the city’s redevelopment project. As a result, the company has acquired 10,000 m2 of floor space in the new building, comprising residential, commercial, office and parking spaces, which we will lease to ten- ants. This provides an ideal opportunity for a company with few business and financial resources because we can turn land that can otherwise only be used for parking into highly-profitable commercial and office space with no investment. For a company with small financial resources but plenty of space along tracks, urban development projects are probably the quickest way to produce profits from idle land. JR Daiei Hypermarket near Hoshioki Station (JR Hokkaido)

porate view and rebuild toward a multidirectional business operation. Large free spaces are being created that can be explored as we like. It requires large investment but we tend to be reluctant about such investments especially in the current financial climate. However, major decisions must be made to activate the company after careful and sound forecasts for the future. Procure- ment of the necessary funds by sale of land or other means is essential to reduce risks.

Crawford Inn Onuma near Onuma Station (JR Hokkaido) Future Direction Daiei chain store group and another is Problems in Course of planned. New Business Development JR Hokkaido’s non-railway business cov- Another example is the small Crawford ers hotels, restaurants, distribution, real Inn Onuma hotel built on the previous The business environment is very severe estate, construction and services. It has site of a railway forest near Onuma Sta- in Hokkaido and yet the company has expanded to about ¥115 billion in sales, tion. This hotel is designed primarily for no overall strategy for diversifying its ac- of which distribution (35%) and construc- people travelling in small groups, which tivities by making full use of its business tion (28%) represent by far the highest seems popular nowadays. Another Craw- resources. We need to concentrate our percentages. We need to expand in oth- ford Inn is planned. efforts in terms of people, material and er areas if we are to grow as a total ser- financial resources, on changing the busi- vice industry. We may make a special Railway technologies ness structure towards a truly strategic effort to increase the real estate business During the JNR days, all tracks, civil en- corporate management. (4% at present), but we must remember gineering, station structures and buildings The railway operation during the JNR that many of our current businesses are were designed and constructed by JNR days was more strictly controlled than still below the break-even point, and itself. JNR had some of the best exper- any other industry. Its organization was there are some that we started but later tise in civil engineering and construction. very much like a community where mem- withdrew from because they generated JR Hokkaido is taking advantage of this bers did few things of their own will and more losses than profits. expertise today. It has engaged in con- were afraid of being different from oth- struction work exceeding ¥30 billion. ers. Such a corporate culture creates General economic conditions One of the earliest undertakings along people least suited to starting or operat- and social trends this line was the manufacture and mar- ing a new business, so the quality of the In 1995, the birth rate in Japan marked keting of prefabricated panels for homes. human resources was a main obstacle. the lowest score (1.43) ever. The Minis- This began 9 years ago, shortly after the Nearly 10 years have now passed and try of Health and Welfare predicts that privatization. The company started this we have gained some know-how, and 25% of Japanese in 2020 will be over 65 business due to the predicted future short- new employees have been hired. It’s time years of age. The falling population and age of carpenters. Prefabrication of pan- to review the personnel aspect of our increase in the number of the elderly els as home building components was business, develop potentials and proceed present serious problems for Japan’s fu- revolutionary and makes this business with new assignments. ture. quite unique and different from other The company is still dependent on old- On the other hand, the Japanese govern- non-railway businesses undertaken by fashioned leasing of spaces and adver- ment is shifting to a multiaxial national the company. tising in stations and trains where we only policy. The new policy calls for exchange use our land and buildings in a direct and between areas. When population is in- simple manner. We must change our cor- creasing, local communities grow in eco-

Hotels and Distribution and Real estate and 1,148 restaurants commercial leisure facilities 1,097 1,072 73 JR Hokkaido must review the station as Construction Other service 1,049 business 74 the basis for cultural exchange. This in- 75 993 75 cludes commercial as well as cultural and 75 community facilities. 883 412 Business areas for JR Hokkaido 64 411 801 420 Our company believes that tourism is an 769 58 428 integral part of the railway business. We 58 (total) 438 must propose travel plans and make trav- 669 elling a joy. We must plan events that 56 405 51 will attract people; these events must be 33 373 sufficiently unique to encourage people 46 to actually attend. And wherever peo- 397 51 ple gather together, there are new busi- 21 321 354 304 ness opportunities. 27 274 Hokkaido’s grand scenery cannot be ap- 22 259 251 preciated fully from just trains. Rental 12 cars make a vacation in Hokkaido even 237 11 224 more satisfying and car rental operations 192 may be tied in with resort facilities to 158 291 ensure even greater pleasure. 275 236 257 This multilayered network, comprising 208 124 150 railways, stations, cultural facilities, rent- 90 110 a-cars, hotels, events, and resort facili- '87 '88 '89 '90 '91 '92 '93 '94 '95 ties, will create a new type of travel (Units: ¥100 million) promising spiritual fulfillment. It will also encourage more frequent exchange be- nomic terms because more-and-more overseas in 1995 while 3.35 million for- tween regions. JR Hokkaido’s future de- people live in them. This is not the case eigners visited Japan during the same pends on how well we can provide these when population is decreasing. For com- year. Japan’s deficit in international tour- services. I munities to prosper, we need to resort to ism, equivalent to 25% of the surplus in population exchange measures. international trade, is helping correct the The 20th century has been an era of rea- trade balance. But the number of for- son and technology, but people still feel eign visitors to Japan is still very small. unsatisfied; they are beginning to look for The Japanese Ministry of Transport has spiritual fulfillment. How can people find proposed Welcome Plan 21 to double the spiritual fulfillment? They will find it in number by the year 2005. This is ac- art, nature and culture and will travel in companied by several measures to de- search of these things in the next century velop tourism resources. just as they sought reason and technology in the 20th century. We need to develop a transportation network that will Yukihiko Usui make it easy for the elderly and disabled to travel. Yukihiko Usui is Deputy General Manager of Development Projects at JR Hokkaido. He gradu- Cultural facilities will be required for ated from Kyoto University in Civil Engineering and joined JNR in 1970. people to appreciate art. Stations could provide the place for such cultural exchange, as our JR Theatre has proved. About 15.3 million Japanese travelled