MARKET ACCESS SECRETARIAT Global Analysis Report

Foodservice Profile

Japan

May 2014

EXECUTIVE SUMMARY CONTENTS

• Japan has a population of 127.3 million people and had a gross Executive Summary ...... 1 domestic product (GDP) of US$4.9 trillion in 2012. It is one of the largest consumer markets in the world, providing Country Overview ...... 2 opportunities for Canadian agri-businesses, especially those interested in a major consumer foodservice market. Consumer Profile ...... 2

Foodservice Industry • The Japanese economy continues to recover from the March by Segment ...... ……….3 2011 earthquake which set off a tsunami in the Tohoku region,

and disrupted many regional supply chains. Foodservice Industry

by Value…………………………. 4 • Despite a decreasing population, the Japanese consumer foodservice industry remains important, reaching estimated Distribution Structure ...... 5 sales of US$256 billion in 2013. Changes to the foodservice industry have created opportunities, even if the market is not Top Five Foodservice Companies . 6 poised for growth. Market Opportunities...... 8 • The Japanese consumer foodservice industry is undergoing restructuring. Major chained restaurants are playing an Market Challenges ...... 8 increasingly important role. Independent players and wholesalers are being cut out of the market, as major Resources ...... 9 companies create vertical supply chains and purchase directly from producers, reducing the costs of dealing with middlemen, and creating opportunities for higher profits.

• Opportunities are available as Japan continues to be at the forefront of innovation in food products and is one of the largest net importers of agri-food and seafood products in the world.

COUNTRY OVERVIEW

Japan consists of four major islands (Hokkaido, Honshu, Shikoku, and Kyushu), numerous minor islands, and is home to one of the largest cities in the world, Tokyo (Central Intelligence Agency, 2013). In 2012, it had a national population of 127.3 million (Euromonitor, 2012).

The Japanese agriculture sector is small, but highly efficient. It employs 3.9% of the labour force, and produces 1.1% of the gross domestic product (GDP). Products grown in Japan include rice, sugar beets, vegetables, fruit, pork poultry, dairy products, eggs and fish (Central Intelligence Agency 2013). Agriculture still receives significant state support; however, Japanese agricultural production is shrinking, as is the number of farmers. National self-sufficiency in agriculture has fallen consistently since the 1960s, and will continue to decrease as the population ages.

Japan is the third-largest economy in the world, but has experienced anemic economic growth since the end of the 1980s. This is primarily due to poor investment choices and significant debt loads, which have stifled the ability of the government to stimulate the economy. The March 2011 earthquake and tsunami also deeply affected the entire economy in Japan (USDA Foodservice, 2013). While economic growth has been minimal for over two decades, Japan remains at the forefront of innovation in food products, and is one of the largest net importers of agri-food and seafood products in the world. It is also the world’s largest producer of fish and seafood.

The economic outlook for Japan is positive, albeit slow in growth. The economic recovery from the March 2011 earthquake and tsunami will also be slowed down by an increase in the Value Added Tax (VAT) rate. The VAT is expected to rise from 5% to 8% in April 2014, and then to 10% in October 2015 (Doing Business, 2014).

Japan - Economic Overview

Categories 2008 2009 2010 2011 2012 2013E Total GDP US$ bn 5,135.5 4,827.4 4,942.6 4,829.1 4,854.4 4,900.5 Real GDP Growth % -1.0 -5.5 4.7 -0.5 1.4 1.7 Inflation % 1.4 -1.3 -0.7 -0.3 0.0 0.3 Exports US$ mn 782,048.6 580,946.1 769,875.4 822,572.6 798,633.3 718,005.0 Imports US$ mn 762,590.2 552,188.2 694,151.4 855,007.0 886,051.0 835,065.9 Source: Euromonitor, 2014. E: estimate

CONSUMER PROFILE

Japan has one of the most demanding consumer bases in the world with regards to product quality and innovation. Japan also has a large, aging population, as well as low birth rates. The population aged 65 and over surpassed 30 million in 2013, and is expected to continue to grow at a compound annual growth rate (CAGR) of 1.9% until 2018. Population growth for the 0 to 14 years category is expected to continue to decrease at a CAGR of 1.6% until 2018 (Euromonitor, 2014). These demographic changes will weigh heavily on prospects for growth in the foodservice sector. As Japan’s population increases in age and decreases in number, a higher share of consumer income will be directed toward meeting debt and social security obligations, leaving less available for the purchase of luxury items, or dining out.

There are, however, some positive influences that will affect the future of the foodservice industry. Planet Retail notes that household sizes are shrinking, and the single-person household is becoming more common. This may act as a positive shock to the industry, as single-person households are more likely to dine out than families (Planet Retail, 2010).

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The aging population also brings demand for certain products, specifically in the realm of health and wellness. Products aimed at enhancing the nutritional and health value of foods, while still offering quality, taste and innovation, will appeal to Japanese consumers who want to increase their longevity and improve their health. These products will come with higher prices, likely for lower volume, but will most likely not offset the overall decline in value that is expected to occur in the Japanese food market.

FOODSERVICE INDUSTRY BY SECTOR

The foodservice sector in Japan is highly fragmented, diverse, and has suffered significant business changes over the past five years. The industry can be divided into six segments: home delivery/takeaway, cafés/bars, full service restaurants, , self-service restaurants and street stalls/kiosks. Food chains are growing in importance, but the sector is currently dominated by independent foodservice outlets. It is also dominated by Japanese domestic companies, driven by consumer preferences for domestic products. Japanese, Western, and Chinese food are all popular, and new international operators see Japan as a great potential new market. Companies such as Ben & Jerry’s and Cinnabon established themselves in 2012 and have attracted interest from the younger demographic who are eager to eat more international food (Euromonitor, 2014).

Full-Service Restaurants

This remains the largest segment of the foodservice industry, accounting for 46% of the total market value, and almost one quarter of the transaction volume in 2012. This segment is mostly dominated by independent outlets and conventional family restaurant operators. The expansion of restaurant chain operators and the growth of mid- to large-sized corporate caterers have greatly affected the foodservice market. This, combined with the fact that many restaurant owners are aging and retiring, is reflected in the closure of full-service restaurants (Planet Retail, 2011).

Cafés/Bars

The cafés/bars segment is the second-largest in the Japanese foodservice sector. Similar to the full-service restaurant sector, this segment is shrinking in both value and volume terms, as well as in numbers of outlets. Furthermore, the segment is experiencing a shift away from independent outlets to chained, American-style outlets (such as ). A large number of convenience stores are also offering brewed coffee. This has created great competition between cafés and convenience stores, as both seek to attract consumers. Cafés/bars are expected to continue to decline over the 2013-2017 forecasted period in value, volume and outlets.

It is important to note however, that there has been an increase in interest from companies to cater to an older generation of Japanese consumers. As more and more Japanese consumers are entering retirement, there has been an increase in demand for coffee shops in residential areas (Euromonitor, 2013), where consumers can get together, socialize, and enjoy their coffee for an extended period of time.

Fast Food

The fast food sector is highly competitive and relies primarily on franchised restaurants. However, despite the competitive nature of the segment, fast food restaurants are increasing sales in a shrinking market. Furthermore, the number of transactions is increasing. This indicates that more Japanese are turning to the fast food segment for a convenient meal. Finally, the fast food sector is increasing the number of outlets, meaning the demand for fast food product supplies will be increasing as more retailers enter the market. Products such as french fries and other similar international fast food products will continue to increase in demand as new outlets are created. Overall, in a market of shrinking value, volume and outlets, the fast food sector offers opportunities to suppliers of agriculture and agri-food products.

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Street Stalls and Kiosks

The street stalls and kiosks segment is a small part of the Japanese restaurant sector. This segment has been declining in value and volume terms, similar to other segments in the foodservice industry. This sector is dominated by independent outlets and excludes the Nakashoku (ready-made meal) segment. Over the forecasted period of 2013 to 2017, the segment is expected, like the rest of the restaurant sector, to decline in value, volume and outlets.

Self-Service Cafeterias

Self-service cafeterias are suffering disproportionately in the new age of austerity in Japan. Japanese consumers view self-service cafeterias as a low-end, value segment of the market, and it is not associated with high quality. This sector is expected to perform poorly outside of the institutions sector. Within the institutions sector, self-service cafeterias are expected to thrive due to the lack of alternative options.

Home Delivery/Takeaway

The home delivery/takeaway segment is also known as the Nakashoku and is characterized by the famous “ box” (USDA, 2009). This segment is essentially a take-away, ready-meal foodservice, where consumers buy pre-made meals and take them back to work or home. The “bento box” is the most prevalent product in the Nakashoku market and is an extremely popular lunch option. Other Nakashoku lunch options include purchases made from stand-alone, mobile kiosks (Euromonitor, 2010).

Like all the other sectors, the home delivery/takeaway sector experienced a decline in the value and volume of sales. However, this sector does have the potential to remain relatively important in the overall Japanese foodservice market, due to shrinking household size and aging consumers. These households are less likely to cook for themselves, but also tend to have lower incomes, so will be looking for lower cost, convenient options in consumer foodservice. Additionally, as a result of the March 2011 earthquake, many Japanese consumers prefer to save their home energy and not prepare meals at home, seeking ready-to-eat and prepared meals as options. This trend is particularly noticeable in the Tohoku region and is likely to drive up the demand in that area for home delivery/takeaway meals.

FOOSERVICE INDUSTRY BY VALUE

The consumer foodservice industry saw a CAGR decline of 2.4% between 2008 and 2012. The consumer foodservice market in Japan is in an overall state of decline. However, there are two categories that are expected to continue to grow, presenting a number of opportunities in this industry: fast food and self-service cafeterias.

The fast food and self-service cafeterias categories are the only areas that experienced growth over the 2008-2012 review period. These categories saw a CAGR of 2.3% and 5.2% respectively, and are the only two categories expected to continue to increase until 2017. Growth in these areas can be attributed to chained operators in the fast food area benefitting from consumers looking to maximize their money, and presenting value promotions. Self-service cafeterias are expected to continue to increase in popularity in the institutions sector, as they offer healthy meals at a low price. These cafeterias will also offer all-you- can eat menus, which are popular for families.

Despite being the largest component of the foodservice industry by total value, the size of the full-service restaurants category will continue to decline. It fell from US$136 billion in 2008 to US$119 billion in 2012 and is expected to drop even further by 2017, to a size of US$114 billion.

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Historic Consumer Foodservice by Type - Market Size in US$ Millions Current Prices - Fixed 2012 Exchange Rates CAGR % Categories 2008 2009 2010 2011 2012 2008-2012 Consumer Foodservice by Type 286,898.6 270,613.0 265,655.4 260,666.5 259,891.7 -2.4% Full-Service Restaurants 136,008.0 127,059.5 123,877.0 120,664.3 119,462.1 -3.2% Cafés/Bars 70,739.8 65,506.8 63,738.2 61,258.1 60,245.9 -3.9% Fast Food 45,639.3 45,858.3 46,671.4 47,942.7 49,974.1 2.3% 100% Home Delivery/Takeaway 32,026.0 29,608.6 28,701.7 27,994.5 27,272.9 -3.9% Self-Service Cafeterias 2,187.3 2,296.7 2,395.0 2,540.7 2,675.2 5.2% Pizza Consumer Foodservice 1,942.2 1,957.2 1,827.4 1,842.3 1,886.6 -0.7% Street Stalls/Kiosks 298.3 283.1 272.0 266.1 261.6 -3.2%

Forecast Consumer Foodservice by Type - Market Size in US$ Millions Current Prices - Fixed 2012 Exchange Rates

CAGR Categories 2013ᴱ 2014 2015 2016 2017 2013-2017 Consumer Foodservice by Type 256,292.2 254,128.8 253,121.3 251,692.4 249,674.4 -0.7% Full-Service Restaurants 117,559.4 116,357.0 115,893.0 115,166.7 114,084.8 -0.7% Cafés/Bars 58,681.0 57,329.8 56,216.1 55,156.2 54,079.5 -2.0% Fast Food 50,636.7 51,427.6 52,210.7 52,884.4 53,407.2 1.3% 100% Home Delivery/Takeaway 26,452.1 25,995.9 25,718.8 25,351.9 24,958.4 -1.4% Self-Service Cafeterias 2,706.0 2,762.3 2,825.2 2,874.2 2,884.4 1.6% Pizza Consumer Foodservice 1,918.4 1,948.4 1,986.4 2,021.4 2,053.5 1.7% Street Stalls/Kiosks 257.0 256.3 257.5 258.9 260.0 0.3% Source for both: Euromonitor International, 2013 E: 2013 figures are estimates based on partial-year data. Note: Pizza consumer foodservice is the aggregate of three sub-sectors, Pizza fast food, Pizza full-service restaurants and Pizza 100% home delivery/takeaway. These three pizza sub-sectors are also included within the Fast food, Full-service restaurants and 100% home delivery takeaway sectors.

DISTRIBUTION STRUCTURE

Japan has a highly complex distribution structure, which can involve both vertical and horizontal movements of goods (USDA, 2010). The country operates on an importer and wholesaler model, where wholesalers will bring in goods from abroad, and resell them in the domestic market to foodservice and grocery retailers. Larger operators in the market have been trying to alter this model as much as they can. Switching to a system where goods are sold directly to the operators in the market is seen as ideal, as it would allow for streamlined business and lower costs (USDA, 2010).

The substantial buying power that foodservice operators have acquired has allowed them to try this new model of eliminating the middlemen. Foodservice operators are taking possession of the product directly or using designated distribution centers rather than wholesalers. More and more foodservice operators are starting to import their product directly from export trading companies. This new business model, combined with a harsh economic environment has led to an increasingly competitive marketplace. Wholesalers have to consolidate while smaller wholesalers are disappearing or being bought out. Additionally, wholesalers are increasingly seeking to add value to their services. Some wholesalers now own their distribution trucks, while others are importing their product directly from exporters, rather than via import companies, in order to reduce costs (USDA, 2013).

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Source: USDA, 2013.

TOP FIVE FOODSERVICE COMPANIES

The following are the top five foodservice companies in Japan based on market shares reported by Euromonitor International. Profiles of the companies are derived from Planet Retail 2014.

Seven & I is the one of the largest retailers in Japan, operating almost 18,000 outlets. Seven & I has a variety of food-oriented businesses, including foodservice, grocery, and convenience stores (most notably 7-Eleven). The company acquires products through a variety of wholesalers and is trying to encourage those wholesalers to begin joint distribution to reduce costs. Seven & I does not purchase directly from farmers and manufacturers for its Japanese operations. Five companies currently supply food to Seven & I: SEJ, Ito-Yokado, York-Benimaru, York Mart, and SHELL GARDEN.

McDonald’s is one of the largest fast food corporations in the world and has a global supply chain that provides for all of its foodservice industry needs. McDonald’s in Japan tends to source as much of its product as possible from the Asia Pacific region, in order to reduce costs. The entire supply chain operates on the mantra of low price for quality products. The company operates 13 distribution centers and handles the logistical aspects of food distribution in the company. Total sales reached US$6.6 billion in 2013, and the company currently operates 3,265 outlets in Japan.

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Lawson is a company that operates convenience stores, health-focused outlets, fresh food discount stores, drugstores, and hybrid formats that focus on fresh foods. It is one of the top players in the convenience store category in Japan and is aiming to expand its customer base. Lawson is expected to roll out an “in-store cooking system,” offering clients rice-based meals and deli food quickly at its convenience store locations. It is also seeking to increase visits from female and elderly consumers by developing stores with enhanced line-ups of fresh foods.

Zensho Group is a Japanese restaurant operator with a variety of Asian, European, and North American style foodservice restaurants. It has over 4,000 outlets in Japan in a number of foodservice categories: gyudon (beef bowl), family dining and fast food. The company operates some Duskin and MOS outlets in certain regions of Japan. Its most successful operation is its gyudon (beef bowl) chain, Sukiya, which accounts for 38% of the group’s sales. The company has a national network of distributors and food processors to supply its ever-growing number of outlets. The company has an impressive logistical network and it purchases directly from domestic and overseas farmers, rather than using a wholesaler.

Top 15 Company Shares (by Global Brand Owner) Historic Foodservice Retail Value Sales, % Breakdown

Companies 2008 2009 2010 2011 2012 Seven & I Holdings Co Ltd 3.5 3.7 4.0 4.3 4.8 McDonald's Corp 2.3 2.5 2.6 2.6 2.6 FamilyMart Co Ltd 1.5 1.6 1.7 1.7 1.9 Lawson Inc 1.4 1.5 1.5 1.6 1.7 Co Ltd - - - 1.4 1.5 Skylark Group 1.4 1.2 1.2 1.3 1.3 Uny Co Ltd 0.9 0.9 0.9 1.0 1.0 Plenus Co Ltd 0.6 0.7 0.7 0.7 0.8 Monteroza Co Ltd 0.7 0.8 0.8 0.8 0.8 Holdings Co Ltd 0.6 0.7 0.7 0.7 0.7 Yum! Brands Inc 0.6 0.6 0.6 0.6 0.6 AEON Group 0.5 0.5 0.5 0.5 0.6 Duskin Co Ltd 0.6 0.6 0.6 0.6 0.5 Starbucks Corp 0.4 0.5 0.5 0.5 0.5 Doutor Nichires Holdings Co 0.5 0.5 0.5 0.5 0.5 Ltd Source: Euromonitor, 2013

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Top 15 Brand Shares (by Global Brand Name) Historic Foodservice Retail Value Sales, % Breakdown

Brand Company name (GBO) 2007 2008 2009 2010 2011 2012 7-Eleven Seven & I Holdings Co Ltd 3.4 3.5 3.7 4.0 4.3 4.8 McDonald's McDonald's Corp 2.1 2.3 2.5 2.6 2.6 2.6 Family Mart FamilyMart Co Ltd 1.4 1.5 1.6 1.7 1.7 1.9 Lawson Lawson Inc 1.3 1.4 1.5 1.5 1.6 1.7 Sukiya Zensho Holdings Co Ltd - - - - 0.8 0.8 Plenus Co Ltd - 0.6 0.6 0.6 0.7 0.7 Gusto Skylark Group 0.4 0.4 0.5 0.5 0.5 0.5 Duskin Co Ltd 0.5 0.5 0.6 0.6 0.5 0.5 Starbucks Starbucks Corp 0.4 0.4 0.4 0.5 0.5 0.5 KFC Yum! Brands Inc 0.5 0.5 0.5 0.5 0.5 0.5 Circle K Uny Co Ltd 0.4 0.4 0.4 0.4 0.5 0.5 Yoshinoya Yoshinoya Holdings Co Ltd 0.5 0.5 0.5 0.5 0.5 0.5 MOS Burger MOS Food Services Inc 0.4 0.5 0.5 0.5 0.5 0.5 Akindo Shushiro Akindo Sushiro Co Ltd 0.3 0.3 0.3 0.4 0.4 0.5 Saizeriya Co Ltd 0.4 0.4 0.4 0.5 0.5 0.5 Source: Euromonitor, 2013

MARKET OPPORTUNITIES

• The Japanese consumer foodservice industry is large, reaching a size of US$260 billion in 2012. Despite a decreasing population, this industry will continue to present profitable categories such as fast food and self-serve cafeterias.

• The expected increase in fast food outlets showcases the opportunity for international companies to export their products to Japan and supply this category of the industry. Products needed would be difficult to obtain in Japan, giving an advantage to international players.

• While, overall, the Japanese consumer foodservice sector is not forecasted to grow, it remains a fractioned industry, increasing the probability of success to new players.

• Ongoing changes to the Japanese population structure will present a number of opportunities. As more and more Japanese consumers retire, demand for cafés and coffee shops to gather and meet with friends will increase. The increasing aging population in Japan will also change the Japanese consumer profile, demanding healthier, organic and better-for-you products in food establishments. Finally, the number growing single-households will increase the overall demand for food not prepared at home.

MARKET CHALLENGES

• The Japanese economy is still recovering from the March 2011 earthquake and tsunami. While the economy is expected to grow, it will be several years before the economy returns to its full potential.

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• The VAT will increase from 5% to 8% in April 2014 and will significantly impact consumers’ purchasing power, leaving them to choose between the added expense of eating out or saving money and eating at home.

RESOURCES

Central Intelligence Agency. “Japan.” CIA World Factbook. Retrieved on January 27, 2014 from: [https://www.cia.gov/library/publications/the-world-factbook/geos/ja.html].

Euromonitor International. (2013). — “Consumer Lifestyles in Japan.” — “Fast Food—Japan.” — “100% Home Delivery/Takeaway—Japan.” — “Cafés/Bars.” — “Street stalls/kiosks—Japan.” — “Self-service cafeterias—Japan.” — “Foodservice in Japan”.

Japan National Tourism Organization. Various regions. Retrieved on January 2013 from: [http://www.jnto.go.jp/eng]

Metro Tokyo Japan (January 2013). Retrieved in January 2013 from [http://www.metro.tokyo.jp/ENGLISH/PROFILE/overview03.htm].

Planet Retail. (June 2010). “HoReCa Market—Japan.”

Planet Retail (August 2010). “HoReCa Companies—Japan.”

Planet Retail (January 2014): Company profiles. 2014

Planet Retail (January 2013). Image Library.

Statistics Bureau of the Ministry of Internal Affairs and Communications. “Regional Statistics Database.” Retrieved on 2010, from: [http://www.e-stat.go.jp/SG1/chiiki/Welcome.do?lang=02].

Statistics Canada (2013). CATS Beta Database.

United States Department of Agriculture. (March 2009). “Japan HRI Food Service Sector Report 2009” Global Agriculture Information Network. Retrieved on 2010, July 23 from: [http://www.stat-usa.gov].

United States Department of Agriculture. (December 2012). “Japan HRI Food Service Sector Report 2013” Global Agriculture Information Network. Retrieved on February 4, 2012 from: [http://www.stat- usa.gov].

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