Japan market entry is hard.

Consumer tastes are different, business culture is different, and market needs can be radically different from those anywhere else.  Entering the Japanese market is a challenge for even the strongest and best positioned brands.

Today we sit down with Ernie Higa, the man behind two incredibly successful market entries, Dominoes Pizza and Wendys, both of which looked like extreme long-shots at the time.

We talk about when to localize and when to stay true to the brand, the importance of repositioning, and how to find startup opportunities in Japan today.

It’s a great conversation, and I think you’ll enjoy it.

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Show Notes

  • How to determine the kind of startup you can create
  • How to sell to Japanese enterprises even when you are not fluent
  • The importance of focusing on difficult things
  • How Ernie knew that pizza would sell in Japan when all evidence said otherwise
  • How Japanese and US consumers measure quality differently
  • When to localize in Japan and when to stay true to the brand
  • Rethinking pricing and positioning for the Japanese market
  • Why Wendy’s could re-enter the Japanese market when others failed
  • Japan’s changing approach to shareholder value
  • How Japanese attitudes abotu failure are changing in Japan

Links from the Founder

Transcript

Welcome to Disrupting Japan, Straight Talk from Japan’s most innovative founders and VCs.

I’m Tim Romero and thanks for joining me.

Perhaps the most common question my non-Japanese listeners ask me is, what kind of a startup should I start in Japan?

You know, I want to be helpful, but the answer to that question depends not just on market opportunities, but the skills and the temperament of the specific would be founder in question. The right question to ask is really what is the best startup for me personally to start right now?

And no one can really know that except for you. But there are some things that remain true and some strategies that remain effective for all people and across decades.

Well, today we sit down with Ernie Higa, a man who’s kind of a legend among those of us who really study Japan market entry. Ernie brought both Domino’s Pizza and Wendy’s to Japan. And although both of those ventures seem like extreme long shots at the time, Ernie made them both work and prosper.

Ernie and I talk about how to identify entrepreneurial opportunities, how to know what needs to be localized for the Japanese market and what needs to remain true to the brand and what so many people misunderstand about brands and branding in Japan.

But, you know, Ernie tells that story much better than I can. So let’s get right to the interview.

Interview

Tim: So, we’re sitting here with Ernie Higa, the representative director of First Kitchen and Wendy’s Japan, but best known as the man who first brought Domino’s Pizza to Japan. So thanks for sitting down with us.

Ernie: Well, thank you, Tim, for having me.

Tim: I really appreciate this. I wanted to get you on the show for a very long time. So, you founded Domino’s back in 1985, but let’s step back a bit before then. Many young founders today are looking to Japan, trying to figure out where they fit in, what value they can add. So in your case, why Japan?

Ernie: Well, back in those days, Japan was becoming the second largest economy in the world and was really growing fast. So, there was opportunity here. Having said that, as an entrepreneur, the last thing you want to do is do something that large companies were already doing. So, the idea was to pick a niche business where I felt that I had a more of a competitive edge and leverage my understanding of both Japan and the US. And learning about Japan dedicated myself to learn the business here, learn the language, learn the culture, but to find an area where the large companies, say for example, the Mitsubishis of the world, Mitsubishis of the world were not doing, or they were not so adept.

Just to give an example the first business I got involved in was in the lumber business in the 1970s, a little bit different than today. There was the US Japan trade wars. The US companies were trying to figure out how to break into the Japanese marketplace. And there’s also some geopolitical pressure as well too. And one of the things was in the lumber business the normally large trading firms would import logs from the United States and have it cut in Japanese sawmills for the Japanese housing size and specifications. But the US said, well, we want the value done in US sawmills. So, you might ban the export of logs to Japan. And of course that was great, except that in the US houses are built on what they call two by four construction. And so there are different sizes, different quality requirements, and the Japanese housings sizes were built upon what they call post and beam. And even further, there was a huge prefabricate home building market that was using lumber, and they had even more difficult sizes, specifications, and so on. And so if the US sawmills could cut those sides, fine, but none of them could. And so this is an opportunity for someone like myself to say, oh, maybe I’ll take on that challenge and see if I can’t find a US sawmill or a Canadian sawmill at that time to cut for the Japanese marketplace. And that’s really where I started.

Tim: How did you get that insight? Were you involved in the lumber industry before then, or no?

Ernie: No. When you’re an entrepreneur opportunities just come by chance and you just have to be looking for that and then again, see where you can fit in. But by chance, I happened to meet a director of a company called Misawa Homes, and in those days, the largest end user of lumber in Japan. And so when this potential of the ban of export of logs came about from the US side, Misawa Holmes said, we really need to have our size and our specification cut in the US otherwise it’ll be out of business.

Tim: There’s an opening. Yeah.

Ernie: So, that was an opening and I got to know the director and said, we have this issue. And I said, well, maybe I can resolve that. Who knows? I had no background in the lumber business, but I thought it was an opportunity.

Tim: Well, I agree there’s a lot of the finding the opportunity is just kind of keeping your antenna up and looking for them. But when you first came to Japan, did you speak Japanese? Did you have a solid cultural understanding of Japanese business?

Ernie: Well, so that’s an interesting question. I guess since I’m of Japanese descent, there was maybe in my upbringing some sense about Japan, but I really had to start almost from ground zero when I came here. So, and I said, okay, if Japan’s a difficult mark to get involved, then this is what I should try to do. But to do that, obviously you do have to learn the language. You do have to learn the culture and the ways of doing business here, which are different than the US. I will dedicate myself, but I’ll give myself five years and really work at it and see if I’m able to do that. And then the opportunity with the lumber business came along and I said, okay, this is what I’ll try.

Tim: What’s your kind of best advice to so many foreign founders and aspiring founders here in Japan today? A lot of people come here, they work really hard, they’re studying every day, but it takes a while. It’s not like you can learn the language in a year and do business. So, like on a practical level, how did you compensate for that early on?

Ernie: Well, you’re asking very deep questions, but since I was an entrepreneur, if I didn’t learn the language and the culture and the way of doing business very quickly, I would go bankrupt. I had a lot of incentive to learn very quickly. So, it took a while. But when you’re an entrepreneur, timing and luck and circumstances does play a role.

Tim: But I also think, like even with a lack of strong language ability, it sounds like if you’re solving a big enough problem, the market will work around that. The bigger edge is not the fluency. It is solving a meaningful problem that they can’t solve on their own.

Ernie: Yes. So that’s where, for example, if you’re a large firm, say, we don’t need to do that. But if you’re trying to develop as an entrepreneur, a new business, then you have to say, okay, there’s an opportunity, but there’s a lot of issues. Can I resolve it or not? And that was my first entrepreneurial venture where I had to leverage everything I knew, but in a niche area. But it had a big opportunity, but that no one else wanted to do. Unfortunately, the most difficult things is where there’s potential for an entrepreneur.

Tim: I think that’s true. I mean, you have to be doing something that is difficult and or that nobody else wants to do. Otherwise, better funded companies would already be doing it.

Ernie: They’d be doing it. Right. And so going back to your initial question to do this business, I had to learn not only Japanese, but we started to sell all over Japan and they have different dialects. And so I had to learn various different Japanese dialects to sell this lumber business. I went the whole nine yards in terms of really trying to get involved in the language and the culture and…

Tim: And super traditional business as well.

Ernie: Very traditional. And so the interesting thing, because I had to go out to the countryside, whatever, and the fact that I was a Japanese was actually kind of a novelty. And so it ended up being an advantage working with these guys in lumber business who once we got to know each other, very fun for them.

Tim: So, identifying a gap in the market, a painful problem, figuring out how to solve it, that makes a lot of sense. But pizza, because how does pizza fit into this? Because back in the mid-eighties, this was not a problem that needed solving Japanese people just didn’t need a lot of pizza. It wasn’t a thing. I mean, Shaky’s was here, I think, but it was small. So, what led you to make a big bet on pizza?

Ernie: I was reading this interesting article and about how this person by the name of Tom Monaghan acquired the Detroit Tigers major league baseball team for that time. This was in 1983. And it said that what he did is he owned a home delivery pizza business called Domino. I never heard of it actually. I said, wow, I didn’t know that you could make that much money in the home dealer pizza business. And that kind of peaked my curiosity and had the opportunity to make an appointment to meet with Tom Monaghan. And he said, well, I’ll meet you at Tiger Stadium, which is in the middle of Detroit. I thought he’d come and pick me up with some kind of limousine or whatever. But while I was waiting there, all of a sudden I saw this Domino’s logo helicopter come from the sky and landed, and he says, ah, come on, we’re going to the head office. And so that was my first impression of Dominos. So this is more than just pizza.

Tim: The man knows how to make an impression, that’s for sure.

Ernie: It was, yes. That was a big impression. And then we went to his head office in Ann Arbor, and he showed me his classic art collection. He had 400 classic cars. And he said, Ernie, I was able to buy all this with Domino’s Pizza. And I said, wow.

Tim: I mean, but there’s lots of incredibly successful businesses and business models that work in the US, in Europe that just don’t work at all in Japan. So, why pizza? What did you see here?

Ernie: Well, I saw this success, then he took me to his private island, and it went on and on. He had private jets and so on. So, I said this is something I really want to do. If he’s so successful with that, I should try to do this in Japan. But to your earlier point, I thought I should do some market research and Shakys had been in Japan, actually done by a large trading firm, and we’re not doing well. And Pizza Hut was in Japan and done by another large trading firm like they all were, and they’re not doing well. And the reason behind that, it was because they said, during the market results, people in Japan don’t like pizza. And I said, well, okay, that’s a very broad statement, but are there statistics behind that? And statistic was the annual procapric consumption of natural cheese in Japan was less than one kilogram. And if you compare that to the US at that time was 11 or 12 kilograms. So right away, if you don’t like natural cheese, you don’t like pizza. And that was a kind of common wisdom.

Tim: So, you were thinking that maybe it’s not that Japan doesn’t like pizza, it’s Japan doesn’t like cheese.

Ernie: Cheese is one thing, but it’s amazing now. But they also didn’t like Italian food in the 1980s. Of course, McDonald’s is successful, KFC was successful. French residents are very, very successful then. But Italian residents were not. Today pasta and pizzas like on every corner. But in those days, Italian food wasn’t popular, pizza was not popular. And the thing was that they said they didn’t like cheese. And so obviously this was a big challenge. But the reason why I talked about how I impressive with Tom Monaghan and what he was able to do with his wealth was I said, but if he’s that successful, I have to figure out how I can make this successful in Japan, despite the fact that these large trading companies were not successful with it. And I thought a little bit like my lumber business though, that if I doubt down was pizza for the Japanese market and consumer, maybe I can succeed where Shaky’s and pizza were not succeeding.

And well this is where there’s a lot of negotiations. Domino’s pizza, which is already a large company in the United States doing billions of dollars of sales and thousands of stores, their thinking was one size fits all because it’s so successful. But, and I said you need to adapt from the Japanese market. We can’t do the same way as in US and the US they had a formula, it’s 12 toppings and one drink Coke. But since Japanese don’t like pizza, we used to think about toppings that the Japanese liked. So, pepperoni, Italian sauces actually didn’t exist in Japan. I was the first to bring it in. I go, I’ll keep that really okay. But we would need things like squid. We need things like teriyaki chicken, eggplant, some shrimp. And that’s when Tom said, you’ve lost me. We can’t do that.

Tim: I can imagine.

Ernie: Yeah. We can’t do that. We’re successful between billions of dollars and we have a formula and we stick to that. I said, but yeah, Tom, but they don’t eat pizza in Japan. And so best thing to do is to come to Japan. Well, he wouldn’t, but he sent the Vice President Japan. And so the vice president comes to Japan and said, Ernie, all the signs are in Japanese. I said, his name was Bob Cosby. Bob, you know, this is Japan.

Tim: The American execs were surprised that the Japanese signs were in Japanese.

Ernie: That’s right. And they were looking at markets in UK, Australia, and actually Hong Kong, but they’re all English signs.

Tim: The localization battle is an uphill one. I take it.

Ernie: Yeah, actually, even today it’s still relevant. But then they said, there are no street signs. I said, yeah, we don’t go by street signs in Japan. We go by landmark. This is before GPS. And so you have to figure out how do you deliver in 30 minutes? Then they said, this is the success formula, we don’t want to change it. And I said, well, okay, I’ll tell you what the difference is with a Japanese consumer versus US consumer. If you talk about customer satisfaction in the US and fast food business, customer satisfaction is all about volume, you supersize it. In Japan, it’s not about volume, it’s about quality versus quantity. So, we have to increase the quality of our products, of our toppings and our ingredients. The other thing is customer service, even fast food business, customer service is second to none. So, we have to change the training manuals, but all the successful fast food chains in the US have a common theme because you’re dealing with so many part-timers. And the thing is to keep it simple, and I understood that, but in Japan, the consumer likes variety. So, the simple formula of Domino’s 12 topping and one drink, we would not be able to really band the business here. And the consumer here likes variety. And also they like seasonality for food.

So, I explained like for example, Coca-Cola in the US they still just sell Coke, maybe Diet Coke and maybe some Fanta drinks. But in Japan, the number one drink for Coke is not even Coke. It’s canned coffee and varieties of canned coffee, and then tea and Variety is a tea. And then they sell Coke. And they introduced seven or 80 new drinks every year. And that is because the customer likes variety. And also the other thing, although food delivery was quite common, they would use flyer, which were like just, very cheap paper and just written words. I said, well, I need to differentiate myself from like a ramen shop or a sushi shop that delivers. And so I decided to use four color laminated menus that were very expensive, but also explained what is pizza? What is pepperoni, what it does, it didn’t exist, but what is Domino’s? And I showed the fact that Dominos owned the Detroit Tigers, and then I had all these toppings that were familiar to the Japanese, even though maybe pizza was not. So, it got a lot of buzz and a lot of actually free media. I mean, every TV station, every newspaper magazine said, what is it? And we had just had one store, but they knew that this is a big chain now because I had the pictures and so on, on the flyer.

Tim: But I love that it is a projection of a much bigger size than is reality, right?

Ernie: It was reality in the US but in Japan, obviously you one store. The point was, we’re part of the largest home builder pizza chain in the world. And I think that was an important statement as well as the fact that you own a major league baseball team.

Tim: So, I can completely understand why this localization is important, but like the big overriding question is how do you know what to localize and when to stay true to the brand? So, for example, like Starbucks very famously, when they came into Japan, everyone told them, you cannot have a non-smoking coffee shop in Japan. It just won’t fly. But they stuck to their guns and they kind of redefined what coffee shops were in Japan. So how do you make that call?

Ernie: Well, first of all, there’s no manual or right way or wrong way in terms of, what you maintain about a US brand and what you localize for the Japanese market. So, that’s a great example of where in the case of Starbucks, the common wisdom in Japan was, it’s a place to also smoke. And how can you have a non-smoking coffee shop? The only thing I can say, their whole concept was not a coffee shop, but it was really just what they call the third place. And so that third place environment was really what they’re selling, I guess it was to be able to do your work there and be free of smoke, I guess. But anyway going back to my case, there’s no right or wrong answer, but there always is this, think global act local thing that is critical particularly when you take a US concept and bring to Japan.

So when I thought about it, you tie up with a US brand because it is successful, it’s got a great business model. There had thousands of stores and billions of dollars in sales in the United States. And so what you want to do is maintain what is the success formula of those brands, but jet adapted for the local market. This is a broad concept. And when it comes to the fast food business, say in the case of Domino’s pizza, the business model was something that I made sure that we had to maintain. It’s all about 30 minute delivery. And how do you make a pizza within two minutes in the oven, six minutes and then say you have eight minutes and then leaves the store in 10 minutes and deliver to the farthest place at the busiest time in seven minutes. So, you have 19 minutes, and if you get lost, you have another 11 minutes to find the home. So, okay, we need to maintain those metrics. The food costs and labor costs have to be so many percentage of sales. There’s a business model aspect to this, or how the structure of banner control, in other words, a supervisor can manage five no more than 10 stores. So these kind of structures and these kind of business models work in the US and will work in Japan. So those are things that we did not change.

Tim: If I’m understanding right, for example, there are certain things that are the core of the brand that define the business itself…

Ernie: That makes it successful, in the United States.

Tim: And so the rapid delivery, the simplicity, the repeatability was part of that. But say the specific toppings or the flavor of the mozzarella cheese was not. And so that was flexible.

Ernie: So, where you localized is really where you touched the consumer. So Japanese consumers wanted, of course US toppings, but also toppings that were Japanese. So, where you talk about the product or where you talk about the marketing and the promotion, this is where you touch the consumer and we’re obviously selling to Japanese, not Americans. And this requires localization. And so that’s how I kind of, I looked at it, I said, okay, the business model we have to maintain, also a lot of the Domino’s pizza culture, which is very much American actually in terms of motivating the managers, having all kinds of awards. If you hit a certain amount of sales, you actually got a Rolex watch. These things were never done in the restaurant business in Japan. And so there’s a lot of incentives and awards and recognition that was very much a Dominos US approach to their business. But what touches the Japanese consumer in terms of product development or marketing. This is where you have to localize. And the other thing is the size of the pizza in the US everything’s big. The portions are big. The pizza’s in the US we’re 12 and 16 inch, that that kind of portion would be too big for the Japanese consumer. So we made a 10 and 14. And that appealed more, particularly with Japanese women. If you give them huge portions, they say that it’s so much, I don’t want to eat it. Portion size sometimes Japan is not perceived as a value added.

Tim: I think that is one of the most interesting differences between American restaurant culture and Japanese. I mean, in America it seems that larger portions are almost universally seen as better service or a better deal, where in Japan it can be seen as like missing the mark and like actually like worse service.

Ernie: Yes. It boils down to customer satisfaction. Certainly in the US it’s all about supersizing, but customer satisfaction in Japan is not about supersizing, but about quality to a higher quality cheese, higher quality toppings. We also had to change the brand positioning. In the US pizza, it’s college students and everybody eats pizza.

Tim: Yeah, it’s kind of a street food.

Ernie: And frequency is very high, maybe say three times a week. In Japan, the equivalent would be a bowl of noodles. They might have it three times a week. So the pricing for pizza in the US as well as for bowl of noodles in Japan is very low. But when I started, people did not eat pizza, so the frequency would be very low. And so if I had a low price and low frequency then we wouldn’t be able to make a business out of it. So, I made it higher prices because I knew we were going to have less frequency. So this was repositioned as a high-end product and accordingly higher prices, but you also have the high quality. So I use high quality toppings to convey that. And in the fast food, when you look at this, you divide your customer into three segments. Heavy users, medium users, and light users. In the states, I would say heavy user of pizzas, maybe three times a week. In Japan, our heavy user once a month. So that’s why we had to change the brand positioning. And I thought that once pizza caught on and as you start to penetrate the market, then eventually you can maybe lower prices and go for more of a mass market.

Tim: So, over the decades since you started that, and pizza has become much more common in Japan, did Dominos maintain that positioning or did they push down into the lower end of the market?

Ernie: So since I sold, they have gone for heavy discounts, two for one and trying to go more for mass market. They were able to increase sales somewhat, but it’s still not like a bowl of noodles

Tim: Getting back to the early days. So when you’re running these experiments, when you’re trying to decide what to localize, what whatnot, how do you know when it’s working? Did it just always work out or were there times where like, okay, that was a bad idea, we’re backing off this. How do you know?

Ernie: Well actually you don’t know. I mean until you try it part, particularly in the consumer business. But I’d been living here, understanding, experiencing the Japanese culture and the consumer, and I had a sense of what some of the differences were just by being here. And the thing is, as I mentioned earlier, there’s no like manual on this. There’s just something that you just have to develop a sense for if you’ve been in Japanese market and live here.

Tim: But in your case, I mean you push back into headquarters and say, no, we’re going to put squid on pizza, we’re going to do all of these unique things. So, I’m sure there were some doubts, right? So did the sales take off right away or, oh, how did you know? How did headquarters get that faith in you?

Ernie: Well, Tim, as an entrepreneur, you also have to be lucky. And so I was lucky that it took off right away. All my adaptation for local market. Also our sales were very strong. We’re selling 30 million a month when I first started versus the average fast food chain with five or 6 million a month. So, and one of the things they say is you eat with your eyes presentation’s very important. So one of the things we also did fit is how you put the toppings on the pizza to make it look pretty. And we also used toppings that had a lot of different color for visual presentation even in the fast food business. So those are the kind of things that you adapt because that’s what the consumer expectation is. The business model, you don’t touch that.

Tim: That makes sense. I want to ask you more about the importance of branding in Japan because it’s almost common wisdom that if you screw up the market entry, you screw up the brand value. If you pull out of the market, you don’t get a second chance. And there’s one really famous exception to that which is Wendy’s.

Ernie: Yes.

Tim: And so Wendy’s exited Japan back in 2008. And they’d been here for like 30 years. It wasn’t a quick in and out. And a few years later you brought Wendy’s back into Japan and they’ve been doing great here. So, I could ask like, how did you do that?

Ernie: Well, first of all, knock on wood, and again, it’s important to be lucky, but Wendy’s actually failed twice in Japan.

Tim: Oh, really?

Ernie: Yes. So it was the third time. And you could say, third time’s the charm. But that is something I thought about. And when Wendy’s approached me, I said, well, I don’t think so because you failed twice before. Coming back a third time is very difficult. And they had tied up previously with large companies. The first one was the largest retail company in Japan at the time. The second one is even today the largest restaurant operator in Japan. And after we went back and forth and talked about it, I thought, well, being an entrepreneur, of course, then you say, well, this is quite a challenge. And so they asked me, by the way, will you do it, I said, no, but I gave them my story about how you adapt for Japan. Said maybe they should do these things. And they said, we agree with you, and what do you think? And so I said, well, you know, I don’t think so. And then they said, well, you free for dinner. And I said, well, yes I am.

And while we’re eating, on third vodka tonic. I started to see that, okay, this is a challenge. They failed twice before maybe if I was entrepreneur enough, maybe I can find a way to bring it back. And so I think I shouldn’t have had the third vodka tonic in hindsight, but I said, yeah, okay, let me think about this. So, I did some market research because they pulled out twice there was some negative feedback, but in general, what it did have was brand awareness. And to my surprise most of it was actually positive. Yes. And so I thought, well, okay, then there’s a possibility. The main issue going back to my experience with Domino’s was…

Tim: Just to back up, how do you get in that situation? How can you have a proven business model, a brand with a very positive perception, and not being able to make money with that?

Ernie: Well, the key thing, again, they did not adapt for the Japanese market. They tried to bring the same Wendy’s as it was in the US to Japan. So they’re tied up with large companies, great brand, great business model, but they didn’t adapt. And so I said, I will need to adapt for Japan. But again, I had to fight the battle with the US company.

Tim: What kind of localizations and adaptations did you do?

Ernie: Number one, again, you have to have smaller stores. And in the US when these are big stores and drive-throughs and big kitchens where you don’t make money and all on the first floor. And I said, no, we have to go not horizontal, but vertical because the rent of the first floor is most expensive. Second and third are cheaper, and you don’t make any money in the kitchen. So that should be as small as possible. You have to make your money in the customer space. This, of course, is just normal economics, but my real big leap, if you will, is that I saw the opportunity in combining Wendy’s with an existing Japanese hamburger chain called First Kitchen, which is owned by Suntory. And I said, they’ve been in business for 40 years, and they are very localized, but they haven’t been growing. And so if I took a local chain, like First Kitchen, combined it with a global chain like Wendy’s that have my global local.

Tim: So when you’re talking about combining, I mean it’s, they’re different brands. They’ve got a very different identity. What aspects are being combined?

Ernie: This is where the market research came in handy. Before I combined it, I did a market research, what was good about First Kitchen and what was not so good about it. And the same thing with the Wendy’s stores. I had opened some Wendy’s stores standalone before I made this big leap. Originally they wanted me to open Wendy’s just like the US and I said, we shouldn’t, we agreed that I should adapt for Japan. And then later on they changed the CEO and I decided to do it just like the US which I knew was…

Tim: Back to Square one again. Yeah.

Ernie: So, that’s why we had to go back and forth in this thing. And then I decided that the best solution was to combine with an existing chain for various reasons. One was to get to critical mass, the other was to get great locations, but Legacy Rent. But the other thing is the localization aspect. Before we combined both concepts, we did a market research on the Wendy stores that we had, and the First kitchen stores. And First Kitchen stores, market research showed that it was 70% heavy to female and 30% male. And our Wendy’s stores was 60% male and 40% female.

Tim: What accounts for that? Is that just branding or is that menu or…?

Ernie: So, that has to do with menu. So First Kitchen had a lot of idle time, sweets and desserts. And also they had pasta, which a female customer prefers pasta. Whereas hamburger and meat is mainly male and that was the strength of First Kitchen. They had variety, they had pasta and they had a lot of desserts. Their weakness was that they didn’t have a strong, kind of like, what kind of store was it? They also had hamburger, but it seemed to the consumer just not clear as to what kind of store it was. And also they had a kind of a weak brand identity. Wendy’s, because it was here in Japan twice before people knew Wendy’s and they knew it as a hamburger store, but they felt that we didn’t have enough variety. Then also we were a higher price and First Kitchen was lower price. So I said, well, if you combine lower price and higher price and the male and the female customers and the strong brand identity of Wendy’s with the First Kitchen, that’s how we can have the global brand and the localization of the menu. But also we combine the brands, which is quite unusual. So, it is called it Wendy’s First Kitchen. And this is very rare. It’s normally franchising and branding is all about brand integrity and keeping it the same. And now this is going way beyond my adaptation with Domino’s Pizza, where I kept the brand the same, but as I said, they failed twice before. So I said, okay, we really have to think outside the box a third time around. Because to your point, they failed twice before. So, how do you rebrand and re-image and bring it back again?

But in the market research, it also said that one thing that Wendy’s and First Kitchen did not have was the concept of the third place that Starbucks did have. So now it’s just common sense. In those days, early days, Starbucks had these charging stations for your mobile, your laptops, you go there, you can do your work. That’s what Starbucks value added was, neither Wendy’s or First Kitchen had that. So I said, okay, we should also include the third place. So, we started doing charger stations and made the atmosphere more like a coffee chop atmosphere and use a lot of wood. And the other thing is, because rents are fixed, you want to look at all of the timeframes. Hamburgers are very much a lunch business, so we’re busy from 12 to one, and then there’s a dinner segment, maybe five to seven. But in between, yeah, there’s idle time and that’d be great if we could sell out the coffee and the sweets and the snacks that First Kitchen had. But as a third place.

Tim: So, does positioning in general for a restaurant or a coffee shop positioning themselves as a third place? Is that in conflict with density, the ability to have a lot of customers in the place at one time and to turn people over quickly? Is that a false dichotomy or is that a tradeoff you have to make?

Ernie: Well, when I did it, there’s all those thoughts, but now if you look at the consumer we cannot be disconnected from our iPhone or smartphone. Now all stores have to offer free Wi-Fi. Actually, it’s critical for any kind of a retail concept to be able to have that. Particularly if you talk about the younger generation, you’ll see that they’re on their phones constantly. And of course the phones will run out of power and they have to power up. And if you don’t have that, they won’t come to your store.

Tim: So 20 years ago this was a novel concept and now it’s just table stakes.

Ernie: You need that. Yes.

Tim: You’ve been doing business in Japan and the US and kind of acting as a bridge for decades. Let me ask you about your thoughts on some of the changes in kind of corporate culture and corporate governance here in Japan. One of the trends we see a lot now is shareholder activism, and there’s a lot more focus on shorter term, high returns. How do you see this playing out?

Ernie: Well, let me go back a little bit to the bubble days. In the bubble days when Japan was taking over the world, again, everyone thought they would beat the United States, and Japan is number one. The people said that the reason why Japanese companies are so successful is that they didn’t do top down decision making, but they did bottom up decision making. So they got buy-in from all the people. So implementation would be very smooth. The other thing they said is that they didn’t fire people. So the best and brightest would stay in the company so because loyalty to the company, because they weren’t fired. And the other thing they said is that the great thing about Japanese companies is they did not look at quarterly profits so they’re looking long term. Today they say the problem with Japanese companies, they cannot do top-down decision making. They can’t fire people and that they don’t look at quarterly profits. Really, the answer I think is somewhere between, and when you talk about shareholder activism and so on, Japan or Japanese companies from the eighties, they were so much concerned about the employee and not about the shareholder. On the other hand, the US has a strong emphasis on the shareholder above the employee and more short term oriented. But the real answer is in between Japanese companies should be more like the US companies. US companies should be more like the Japanese companies. And it is going that direction. So, I think the Japanese companies now, first of all, under the Abe administration, than they had a new governance code to be more geared towards shareholder value. Even the Tokyo Stock Exchange is saying that companies should look at a PBR of one. That means that their stock price should be at least reflective of their book value. So shareholder activism is more accepted in Japan, and as shareholder activists have been quite successful. But I don’t think it should go to the extreme that you have in the United States where it’s all about the shareholder.

Tim: So, you think it’s an incremental improvement rather than a radical change in the way of looking at things.

Ernie: At this point in time so there’s a lot of emphasis now on shareholder value. As the Chinese proverb says, everything in moderation, and I think that Japan’s always the one extreme, and US always at the other extreme, they’re both successful in their own ways, but taking the best of both seems to be the right answer. Because some decisions have to be top down. If you’re doing an M&A transaction, you can’t have a bottom consensus building thing. But oftentimes a lot of decision making, you do need buy-in for implementation so you see the value of both. Three months is not enough to really make a business plan. Warren Buffet never looked at three months you have to have a long term view. But Japan, too long, 10 years.

Tim: You can’t plan that far out, things change too quickly.

Ernie: So I think somewhere in between. And we went through recession, inflation and a lot of issues, but you can’t fire people in Japan. That’s a tough issue to deal with. If your company has some issues. On the other hand in the United States, you are doing well, you can fire companies and if you’re a public company, once you fire people, your share price goes up.

Tim: I think with the extremely strong labor rights in Japan as someone who’s run companies, it can be frustrating at times. But on the other hand, that’s a big part of that glue that sort of holds society together here.

Ernie: So, one of the things engenders loyalty with their employees so that even they have an offer with a higher salary elsewhere, they will tend to stay in your company. That is changing though. That is changing. It is becoming more like the US but not to the extreme. Again, it’s somewhere in between. So there’s more mobility and that’s in general a good thing actually. But if you have too much mobility, then it is very difficult for a company to keep good people and just as important to maintain a corporate culture.

Tim: Well, let me zoom down to the other level here, because you’ve been starting companies in Japan for longer than I have.

Ernie: I’m older than you.

Tim: But entrepreneurship is something that has also been radically transformed to the point where it was, it didn’t used to be socially acceptable at all. Now it is not only socially acceptable, it’s considered a good thing. It’s got huge support from the national and local governments and Keidanren and business administration. So society’s just gotten behind entrepreneurship, which is great. Where do you see entrepreneurship going from here? Is this a plateau? Do you see things going as far as it is in the US where entrepreneurship is almost a career in and of itself? Or what do you see as the future of startups here?

Ernie: Well, again, in the United States, in the 1950s, the term corporate men was used a lot. And it was lifetime employment. And you joined IBM or Ford or GM until you retired. You didn’t jump around. And there was not entrepreneurship until in the 1960s when they broke the social contract and they started firing people. Then you had great human capital in the United States looking for a job. And that, I think was the genesis for entrepreneurship in the United States. Okay, I can’t get a job with the large companies, which was a usual track for the best and brightest. So I have to start my own business. Well, in Japan, after the war, the economy was devastated. You had great human capital that didn’t have a job, couldn’t join a company. So that’s where Honda or Sony or Panasonic, they were entrepreneurial. They became big. But starting with the sixties and seventies, Japan’s economy was growing. And in a growing economy, particularly in Japan, the best and brightest went into government and then went to large companies. And the people that couldn’t get it to the establishment end up opening their own little Yakitori store or something that was the extent of entrepreneur. That’s why it wasn’t perceived as prestigious or a great career path. But after the bubble burst, all of a sudden the best and brightest did not have the jobs that they’re looking for because the government downsized and the large corporates were downsizing. So you had great human capital all of a sudden saying, well, maybe I should try entrepreneurship.

Tim: And also, like in the 2000s, especially the Keiretsu group, that implied promise of lifetime employment also started to unravel.

Ernie: Exactly. And so they started to change the social contract, not as drastically as the United States, but they did. So someone said, okay, well we’ll start our own business. We don’t see a future enjoying the government or a large company. And the genie was let out on the bottle. But here’s the thing, Japan has become an aging population, and all of a sudden there’s a labor shortage. So, now the large companies want to hire people and they’re trying to get as much people as they can. But now entrepreneurship has taken a hold.

Tim: Yeah, I mean that genie’s not going back in the bottle.

Ernie: No. And it’s actually expanding more than you think. The Japanese government realize that they do need more entrepreneurs to really get the economy to come back stronger.

Tim: I think you made a really important point in that. So, often people will try to attribute differences between Japan and the US to vague notions of culture but the social forces, the economic forces that drove America to entrepreneurship in the sixties and seventies are very similar to what we’re seeing in Japan now. And it’s having the same results. It’s just…

Ernie: It’s a time lag actually.

Tim: Yeah. It’s just human beings reacting to the same types of incentives in the same ways.

Ernie: Yeah. So, they say it’s not the strongest or the smartest or the fastest animal that survives. It’s the animal that can adapt to change. The smart humans or the smart countries have to adapt to change. Now when things are going so well, Japan had double digit growth for a long time. There’s no reason to change.

Tim: Right. You don’t want to change anything.

Ernie: And that was the case in 1950 in the United States too, now change is coming more often. And so there really dialing up the fact that you really have to adapt to change. Before like in the consumer business, if you had a hit product, you’d be a hit for at least a couple years. Now you’re lucky with the hit for three months. There’s a constant need for change. But the other thing is the ability to fail and come back and still get people to invest in your company.

Tim: That’s the point. Do you think that aspect is changing? Because the structural things, there’s money being invested, there’s people forming companies, but that aversion to failure in Japan, do you see that changing here?

Ernie: So, in the US an entrepreneur that’s failed once or twice or three times as a badge of honor, because that means he probably will not want to repeat that again and has learned something. In Japan, as I said, the genie been let out of the bottle, entrepreneurship is catching on. Now there are venture capital companies coming in. Ecosystem is still in the early stages. So we don’t have all these Silicon Valley unicorns. But I think the biggest issue is accepting failure. This is where the cultural bias comes in. Once you fail in Japan, that’s it. You’ve lost the faith of your customers, your banks, your investors. And it is hard to come back from that.

Tim: Wendy’s did it.

Ernie: Yes. But they weren’t an entrepreneur. It was a concept and that’s true.

Tim: Alright, well Ernie, thank you so much for sitting down with me. I really appreciate.

Ernie: Well, Tim, I don’t know if I answered all your questions.

Outtro

And we are back.

Ernie made a fantastic point that the best opportunities for founders lies in doing the difficult things. Finding things that are too hard or too risky for the large companies to take on themselves.

This is something I’ve always followed, both as a founder and as an investor. As a founder, doing something that was considered difficult or risky, made sales faster, margins higher and churn lower. Since once that problem is solved, the customer would not want to change things.

And as an investor, I can tell you that far too many founders, perhaps in their rush to market focus on the easy parts of a problem and put off solving the hard parts. The problem of course, is that solving the easy part is rarely a high priority for the customer. And you’ll be facing a thousand other startups rushing into the market, also claiming that they’ve solved the easy parts.

In terms of market entry, Ernie’s advice to aggressively innovate the product while protecting the core business model is excellent. When I brought a US software startup to Japan, we achieved rapid growth by completely repositioning the offering to target a different set of customers. And Japanese firms do this as well. Uniqlo and Muji both position themselves as more upscale brands overseas than in Japan.

And looking at the startup ecosystems in Japan and in America and in Europe, it seems we’re a lot more alike than we are different. As Ernie and I discussed, there are plenty of innovative risk takers in all of these places.

Whether the startup ecosystem is booming largely depends on where that country is in this particular cycle. For quite a few decades, things didn’t look that great for Japanese founders, but the genie is out of the bottle.

Startup innovation has become an integral part of Japanese society and the opportunities are simply amazing for the current generation of entrepreneurs in Japan.

 

 

If you want to talk more about market entry or about pizza in Japan, Ernie and I would love to talk with you. So come by disruptingjapan.com/show246 and let’s talk about it. And if you enjoy listening to disrupting Japan, please share a link online or just tell people about it. Disrupting Japan is free forever and letting people know about it is the absolute best way you can support the podcast.

But most of all, thanks for listening and thank you for letting people interested in Japanese startups and VC know about the show.

I’m Tim Romero and thanks for listening to Disrupting Japan.