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. References Euromonitor (2018, May). Fast Food in Japan. Retrieved from http://www.euromonitor.com.libaccess.senecacollege.ca/fast-food-in- japan/report Inagaki, K. (2015, May 3). U.S. fast-food chains return to Japan amid Mcdonald's backlash. Financial Times. Retrieved from https://www.ft.com/content/a3ebd55a-ea47-11e4-a701-00144feab7de Inagaki, K. (2017, February 1). Japan's robot chefs aim to show how far automation can go. Financial Times. Retrieved from https://www.ft.com/content/9672c5a6-d680-11e6-944b-e7eb37a6aage Li, S. (2017, February 28). Wendy's adds automation to the fast food menu. Los Angeles Times. Retrieved from http://www.latimes.com/business/la-fi-wendys-kiosk-20170227-story.html Mertens, B. (2012, November 28). Hawaiian Ernie Higa reintroduces Wendy's hamburgers to Japan. Forbes. Retrieved from https://www.forbes.com/sites/forbesasia/2012/11/28/hawaiian-ernie-higa-reintroduces-wendys-hamburgers-to-japan/ Nagata, K. (2015, July 28). Wendy's Japan chief hopes First Kitchen tie-up is recipe for success. Japan Times. Retrieved from https://www.japantimes.co.jpews/2015/07/28/business/corporate-business/wendys-japan-chief-hopes-first-kitchen-tie- recipe-success/#.XL44dC-ZPjA Onuma, Y. , & Nagoya, K. (2016, May 24). Wendy's fast-food buy exploits Mcdonald's woes in Japan. Nikkei Asian Review. Retrieved from http://asia.nikkei.com/Business/Deals/Wendy-s-fast-food-buy-exploits-McDonald-s-woes-in-Japan Wendy's Investor Relations (2016). Corporate Website. Retrieved from http://ir.wendys.com/phoenix.zhtml?c=67548&p=irol- newsArticle&ID=2173768 This case was prepared for inclusion in SAGE Business Cases 2022 SAGE Publications, Ltd. All Rights Reserved Page | 51979, during the trade wars between the United States and Japan. \"I didn't know much about lumber, but I knew a lot about the United States.\" The players dominating the markets were the big trading firms or Sogo Shosha, who would import logs from the United States for Japanese sawmills to cut up to meet specifications for the housing market; these specifications differed greatly from those required by the U.S. housing markets. Higa then applied his dual cultural expertise to the medical market, importing a neurosurgical brain implant from the United States into Japan. Japanese surgeons were used to working with implants of different shapes and textures, and Higa had to convince the U.S. manufacturer to adapt its implant device. The device garnered great success in the Japanese market, earning the second largest market share. Higa continued to apply his adaptation strategy and expanded into the fast-food market. He took the United States-based pizza delivery business Domino's and adapted it to Japan in the 19805. According to Higa, \"There are three main differences between the U.S. and Japanese fast-food consumer. One, in order to increase customer satisfaction in the United States, you supersize everything. In Japan, though, you must enhance quality. We would add quality cheese, such as Camembert, and introduced caviar as a topping. We even added squid and eggplant to the toppings menu. Two, in Japan, 'you eat with your eyes,' so presentation is important. We added different toppings, not just for taste, but also for color and appearance. In the United States, they say that the 'customer is king,' but in Japan, the saying is the 'customer is god'. Three, compared with the United States, a Japanese consumer wants more variety. Domino's then 12 toppings and one Coke were not going to cut it. We introduced 38 toppings, seasonal menus, a lot of drinks, and a lot of side dishes.\" Ernie Higa's was the first Domino's external franchise. Typically, franchisees enter the company as drivers, move up, and subsequently earn a franchise. Initially reluctant, Domino's realized it needed a local partner in Japan, where, thanks to Higa's help, it became successful, and was acquired for over USD 65 million in 2010 by Bain Capital (Mertens, 2012). Higa then helped introduce Domino's to India, which turned into one ofthe company's biggest markets, with a market capitalization at one time exceeding Domino's Pizza in the United States. 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 | 2 Would You Like Squid Ink With That? -Wendy's in Japan- Author: Helen Shteynberg & Gregory L. Stoller Publisher: SAGE Publications - Publication year:2020 Abstract Ernie Higa has been active in Japan since the late 19705. He brings cultural and business knowledge about successfully breaking into the Japanese marketrare for someone who wasn't born in Japan. This case discusses his role in the introduction of Wendy's in Japan and the idiosyncrasies associated with the ramp up, from flavors and items which wouldn't be available at Wendy's restaurants outside of Japan, to staffing issues possibly affected by robotics in the future, and high pricing not generally associated with fast food. Case Introduction "My father was an entrepreneur and he had done various businesses. And so, when I graduated from Columbia [Business School], the thing was to join the family business, which I did. So, the expectation was to Ill be what they call 'a second-generation CEO (E. Higa, personal communication, March 23, 2017). Ernie Higa was born into a Japanese American family in Honolulu, Hawaii. He began his schooling in Geneva, Switzerland, and completed high school in Tokyo, Japan. Higa obtained his undergraduate degree from the Wharton School at the University of Pennsylvania and earned his MBA at Columbia University. "My father felt that family businesses [and] working with siblings could be very sticky. He had those issues in his generation. He had started his own businesses. Then, he brought in his brothers, and that was a bit of an issue. So, my father, in his wisdom, decided to split his businesses and give one to each child. The thing is, he had three business and four kids. Three does not divide into four equally. Since I was the youngest, l was the one left standing without a business. So, I became an entrepreneur.\" In the 19805, entrepreneurship was not a well-known profession in Japan, a country that emphasizes its traditional values. Men were expected to work for a large company upon graduating from college. In an interview with Forbes Asia, Higa recalled, \"There wasn't even a word for entrepreneur in Japanese when I started out. The closest thing was datsusara which means something like lreject.' You couldn't get a job in a big company, so you started a ramen shop\" (Mertens, 2012). After assessing his own skill set, strengths, and weaknesses, Higa began to leverage his Japanese and American upbringing. \"Generally speaking, in the United States, if you have a good product and a good price, it's pretty easy to sell. The market is not that complicated. The reverse is not true for Japan. Even if you have a good product and a good pricing, the market is more difficult. You need an understanding of the way business is done here. It's a little bit more complicated in relationships, in the diverse industrial groupings, and the way of doing business is so different. So, I figured that my value-add would be bringing [U.S.] products or concepts from the United States into Japan: accordingly, leveraging my understanding of both cultures and adapting the products for the Japanese.\" Higa got into his first business by accident. His father had wanted to build a vacation home, and so he connected him with the director of Misawa Homes Co. While at lunch, the director expressed his worries about a possible ban on exported logs from the United States and wanted to find a way to cut up the logs in North America. Higa saw an opportunity; his first foray into the Japanese market was in the lumber business in Page | 1 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 (lnagaki, 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 stores1,000 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 experiencea 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- 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 and 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 | 4 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. Fast Food in Japan In the 19805, US. fast food chains faced much backlash in Japan. However, fast food is making a comeback in this land of rice- and fish-based cuisine. While the consumption of meat has tripled over the past 50 years, that of rice has decreased by half. According to a Financial Times article, \"Just as Japan's sushi and ramen noodles are hits in New York and London, the country's younger generation are willing to queue for hours to eat Eggs 'n Things pancakes from Hawaii and to get hold of a $10 container of Garrett Popcorn from Chicago\" (Inagaki, 2015). However, the steadfast proliferation of U5. fast food in the Japanese market is not without bumps. McDonald's, a leading player, has come under scrutiny for food safety scandals. According to Hisakazu Matsuda, the president ofthe Japan Consumer Marketing Research Institute, the consumer backlash against McDonald's has increased the barriers to entry for other United Statesbased food chains (Inagaki, 2015). Fast food in Japan is a growing industry, increasing by 2% in 2015 (Euromonitor, 2018). Japan's fast-food market has grown from 2009 to 2014 by 16%, attaining USD 43 billion in 2014 (Inagaki, 2015). In 2015, the industry reached JPY 4,658 billion. Outlets grew by 3% and transactions by 1%. Convenience store fast food made up 67% of the industry. Burger fast food came in second. In contrast to the 5% growth in the convenience fast food sector, the burger fast food sector shrunk by 11%its deepest plummet in a decade. 7- Eleven is the front-runner in the Japanese fast-food market, comprising 35% of the overall market in 2015. Lawson and Family Mart came in second. The top three players comprised 57% ofthe overall market. McDonald's had 8% ofthe overall fast-food market in Japan, a 2% drop from 2014 (Euromonitor, 2018). Fast food in Japan has a positive outlook. Using 2015 prices, fast food is expected to reach a 2% compound annual growth rate (CAGR), ultimately attaining JPY 5,055 million in 2020. Convenience store fast food is expected to lead the way. According to the Japan Foodservice Association, the increase in dual-income families is expected to help consumption grow, but Japan's declining population may negatively affect the fast-food market in the long run (Onuma & Nagoya, 2016). Competition is also expected to increase, especially as the lines of demarcation between the sectors of fast-food; fast-food retailing, and food service categories become cloudier (Euromonitor, 2018). However, products needed for the proliferation of fast food are unique and rather difficult to obtain in Japan, giving foreign entrants like McDonald's and Wendy's a competitive advantage over domestic chains. 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 dcor" (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 lnarrow and deep' international strategy to life by initially focusing on four key marketsJapan, India, Brazil, and the Middle Eastwhere we see considerable upside potential over Page | 3