Company Trend Analysis - Sushi Chain Merger To Propel Overseas Expansion - DEC 2017


BMI View: Expansion opportunities overseas and growing consumer preference for authentic and unique food choices globally, has led to conveyor-belt sushi chains, Genki Sushi and Akindo Sushiro, merging as they plan to go global. Slow projected spending on restaurants and foodservices and low wage growth in Japan has further prompted the sushi chains to look beyond the domestic market for growth.

Japan's leading conveyor-belt sushi chains, Genki Sushi and Akindo Sushiro, are poised to merge, forming a domestic titan with global ambitions. Genki Sushi Co will buy a one-third stake in Sushiro Global Holdings Ltd, the parent firm of Akindo, from private equity firm Permira for JPY38bn (USD337mn). Akindo and Genki represent the largest and fifth largest conveyor-belt sushi chains by revenue in Japan, respectively, and together, the two chains will have 630 stores in Japan and control a JPY180bn share of the domestic sushi market.

The main incentive for a merger between the two sushi chains is the expansion into overseas markets with greater foodservices spending growth than Japan. Genki Sushi is popular in the eastern and northern parts of Japan, while its expansion efforts have been more extensive with stores in China, Australia, Thailand and Singapore. On the other hand, Sushiro has stores in Japan and a few in South Korea. The global expansion plans have been brought about by the growing popularity of Japanese food as consumers want to have authentic and unique food choices. This is particularly popular among millennials that are willing to spend on different and exciting experiences, which includes food. Markets such as China and South Korea offer higher upside, as sushi restaurants are underrepresented compared to in Japan. We estimate that restaurant and hotels spending in China and South Korea will grow by an annual 8.6% and 7.0% respectively between 2017 and 2021, in USD terms, faster than the Japanese market.

Opportunities For Growth In Overseas Markets
Restaurants And Hotels Spending % y-o-y (USD)
e/f = BMI estimate/ forecast. Source: BMI/National Statistics

The merger of the two chains comes on the back of a challenging foodservice sector in Japan, which has had a difficult five years as spending by households has declined. We estimate household spending on restaurants and hotels will recover slowly by 2.7% annually in JPY terms between 2017 and 2021, with the segment forecast to be worth JPY21.5bn in 2021, up from JPY19bn in 2017. This means that restaurants will be competing heavily for a share of foodservices, particularly, as Japan's ageing population will put pressure on the continued growth in foodservices as elderly begin to dine out less as they age. Hence, a merger between the two sushi chains will better position the two companies to capitalize from recovering consumer demand in prime locations.

This foodservices environment has become increasingly challenging from years of low wage growth in Japan, which has boosted the popularity of restaurants that offer value for money meals and we expect this to continue over the short-term. Akindo Sushiro and Genki Sushi have capitalized on this cheap dining trend through their JPY100 sushi, similar to other conveyor-belt restaurants. According to the Ministry of Health, Labour and Welfare in Japan, wage growth has been tepid in Japan with total cash earnings increasing by 0.4% in 2016, and 0.2% in 2015. In the monthly data for July 2017 (latest data available), wages fell by 0.6% y-o-y. As such, conveyor-belt sushi chains are competing by lowering their prices to attract price-sensitive Japanese consumers, hurting their profit margins. The Akindo-Genki merged unit will give it greater bargaining power over suppliers, helping its profitability by negotiating cheaper prices on core materials such as fish products. This could prove to be a major advantage over its rivals in the coming years as price competition heats up.

Merged Unit Will Have More Leverage
FY2016/2017 Revenues, JPYbn
* Combined revenues of Akindo Sushiro and Genki Sushi. Source: Company results, BMI

Competing heavily with the merger between Genki Sushi and Sushiro are other popular conveyer-belt sushi restaurants. Kura, which has 362 stores in Japan, also has operations in the US and Taiwan, while Kappa Sushi is another chain popular for their JPY100 sushi plates. In addition, conveyor-belt sushi restaurants will also face competition from high-end restaurants that offer premium and fresh sushi and sashimi and even experiences like omakase (where the chef chooses the whole menu for customers). Japan's upper-income segment, with a disposable income of USD75,000 and above amounts to about 10% of the population in 2017, growing to 13.1% by 2021. This will therefore represent a smaller portion of total households that are more willing to spend on higher quality food when they dine out. Discount and value for money meals will remain more popular for the mass market but this premiumisation angle just further demonstrates the high level of competition in the sushi market.