Reviving Wendy's: Ernest Higa on Entrepreneurship in Japan

October 3, 2012

Ernest Higa
, Chairman & CEO, Higa Industries Co. Ltd.; Chief Executive Officer, Wendy's Japan LLC

Yosuke Honjo
, President & CEO, ITO EN (North America) INC.; Director, Japan Society

Two years after withdrawing from the Japanese market, Wendy's made an exciting comeback in 2011 with a brand new strategy led by famed entrepreneur Ernest Higa. On October 3, 2012, Mr. Higa, who was born in Hawaii and brought up in Japan, spoke at Japan Society on his experiences as an American entrepreneur adapting U.S. products and concepts for the Japanese market.

His first venture was in the lumber business. Right away, he learned an important lesson: "Lumber is not lumber." American quality specifications for lumber are quite different from, and much more forgiving than, the specifications in the Japanese market, where sizes are measured with calipers to a tolerance of plus-or-minus one millimeter. Moreover, in the U.S., lumber is graded by structural strength—"as long as the house doesn't fall apart, it's okay"—whereas in Japan it's graded visually: "It has to look good."

It was a struggle, but his company met the challenge, and became one of the largest importers of finished lumber into Japan.

Mr. Higa's next business was importing neurosurgical implants made in the U.S. Here too the Japanese market had its own particular requirements. The American manufacturer told him, "'Ernie, we sell this in the U.S. We sell in it in Asia. We sell it in Europe. Why does Japan have to have different shapes and sizes and so on? You must be wrong.' They also said that brains are same in the U.S, and in Japan and Europe. Brains are the same, but the neurosurgeons in Japan had a different approach and philosophy as to how to do the surgery, and it required different shapes and sizes. Once we were able to convince the U.S. manufacturer to adapt for Japan, we ended up with the second-largest market share in this niche area."

In 1985, Mr. Higa was thinking about launching a chain of Domino's Pizza restaurants in Japan. The problem was that in Japan "people just didn't eat pizza"—in fact they hardly ate any cheese, period. Big companies like Sumitomo Trading and Asahi Beer had started pizza businesses, but were not doing well.

Yet these signs pointed to opportunity, he reasoned. "If it was a slam-dunk business, that would go to all the big companies. So, the entrepreneur only gets businesses that are difficult and have challenges. I thought of this as a glass half full, and I did bring Domino's to Japan." To suit the Japanese market, "I added things like squid, teriyaki chicken, and actually one of our best sellers was mayonnaise and potato."

Not long after Mr. Higa sold his Domino's business, he was approached by Wendy's, which hoped to relaunch its brand after having pulled out of Japan in 2009. With McDonald's having a virtual monopoly on the hamburger market in Japan—3,300 stores, $3.8 billion in sales and a 76 percent market share—success for a new Wendy's effort would not come easy.

"If you still want to come back to Japan, then you're going to have to change, and you're going to have to adapt," Mr. Higa told them.

Wendy's has $9 billion in sales and some 6,500 stores in 26 countries. As a franchise, its guiding principle is uniformity: A Wendy's is a Wendy's is a Wendy's, regardless of location. Here was Mr. Higa urging that to succeed in Japan, the company would have to "think global, but act local." It's "the antithesis of the franchising business."

How to act local? The Japanese consumer is "perhaps the most demanding consumer in the world." In the U.S., the way to increase fast-food customer satisfaction is a simple: you supersize everything. But "in Japan, supersizing is not the answer. That's not a value-added. You have to go with quality."

"In the States the expression is that the customer is king. Even that is lip service. In Japan, the phrase is o-kyakusama wa kamisama: the customer is God." Service has to be extraordinary.

Finally, the Japanese customer expects variety. "The golden rule in the fast-food business is to keep it simple. You want to have a simple menu, because you're dependent upon part-timers to do it, and if you complicate it, then they screw it up." Thus Domino's succeeded in the U.S. with 12 toppings and one drink, Coke. Bringing in Diet Coke was considered a major revolution. "But in Japan you can't do that." When Mr. Higa brought Domino's to Japan, the menu grew to 30 or more different toppings, "tons of drinks, and all kinds of side dishes and seasonal menus."

As he researched Wendy's prospects for a comeback in Japan, Mr. Higa was intrigued to see over 30,000 social media fans on networks like Mixi and Twitter who were eager for the company to return. Discussions proceeded with Wendy's parent company in Ohio. He told them that he'd build the Japanese business based on two hot trends: "fast casual," typified by Chipotle and Panera in the U.S. but not yet introduced in Japan, and gourmet hamburgers, bestsellers in the U.S. at restaurants like Five Guys and Shake Shack. The company agreed to a joint venture that gave Mr. Higa a 51 percent interest to the parent's 49 percent.

To honor Wendy's namesake, Mr. Higa chose March 3, 2011, Girls Day, for the announcement on Wall Street. Then March 11 happened. "Every time I saw CNN my heart would drop."

Yet he decided to go ahead. "Being an optimist, and also living in Japan for so long, I really believed in Japan's future, that it would come back. I really believed in the resilience of the Japanese people." The deal closed on April 6, 2011, and the first store welcomed customers in Omotesando on December 27. At the opening, the line to enter started forming at 6:30 in the morning. An enthusiastic young woman from Yamanashi came dressed as Wendy, and ordered everything on the menu. A second store just made its debut in Roppongi.

The new stores have a fresh and sleek décor. The menu includes a foie gras hamburger, an avocado wasabi burger, and a truffle and porcini grilled chicken sandwich. Thirty percent of sales are coming from these high-end items; the foie gras burger is the best seller, responsible for 12 percent of sales. The business plan is now being refined to broaden the appeal and put more emphasis on the classic, less expensive items that Wendy's has long been known for.

Mr. Higa's partners expect Wendy's Japan to end up with as many as 700 stores, and he himself agrees that there's room for "a few hundred," he said. Nearer term, the goal is to build up a critical mass, which Mr. Higa pegged at 100 stores within five years—enough to give the brand "purchasing power and all of the things that you need to develop a chain."


Q&A with the audience followed:

There's a sense of pessimism about Japan's future, both inside the country and abroad. For a 20-year-old coming out of college in Japan, what is your advice about becoming an entrepreneur and developing a career?

"In the old days in Japan, when Japan was growing in double digits, the best and brightest went first into government. So, we have all these Tokyo University graduates in government running Japan. And then they went to the large companies. It's only the rejects of society that became entrepreneurs, and that's because they couldn't make it," Mr. Higa said. The entrepreneurs ended up opening ramen shops or yakitori shops. "Even today the Mikitanis of the world, the Rakutens... they're not quite accepted by the establishment."

After 20 years of decline, however, government is downsizing, corporations are downsizing, and the best and brightest have no choice but to become entrepreneurs. What's needed is for Japanese entrepreneurs to get better access to seed capital, the kind of access that entrepreneurs in the U.S. have.

Will you be expanding the delivery business? I understand McDonald's is testing delivery, with a focus on meeting the needs of elderly people.

With Domino's, "we made it more systematic; you deliver within 30 minutes." Adding IT was an important tool. "When I sold Domino's, about 50 percent of the sales were through Internet ordering. The home delivery pizza industry went from zero in 1985 to about $1.5 billion," Mr. Higa said.

Doing delivery right is "actually quite complicated, and you have to be very dedicated to it. I don't think we will do delivery right away. We have our hands full with all the adjustments to the concept that I'm doing now."

People are staying home with the family more, especially after March 11. Delivery works well for elderly people, who are a growing segment of the population. "For Wendy's it's a little bit more down the road," but it will come.

What are the barriers for Japanese food businesses that want to enter the U.S. market?

"If you look at the restaurant industry, all the global brands are U.S., whether it's Kentucky Fried Chicken, McDonald's, Domino's, Wendy's," Mr. Higa said. American restaurant companies are expert in chain management and in working with many different cultures and ethnicities. And "most U.S. food is bland, which means that it has universal appeal. The minute you start to add a little bit of taste to it, you kind of all of sudden become more of a niche. Japanese food would be more of a niche."

How are you keeping a balance between appealing to kids, as the main focus of the Japanese fast food market, and creating a cool, trendsetting vibe for those who want a gourmet burger?

"You need a broader base" than the very high-end fois gras burger, Mr. Higa said. "Our hope is not the kid market, but the family market," though "we will not probably get to that point where we will be using Pokémon or the very, very kid-specific promotions."

What message would you have for young people in the U.S. who are interested in building an entrepreneurial venture in Japan?

Japan has great human capital, which gives it great resilience, Mr. Higa replied. Even after 20 years of decline, listed companies are "flush with cash, they're still profitable... and they're buying huge companies abroad. That's amazing."

“The perception of Japan is that it is finished but the reality is that it is not. When there is a big gap between perception and reality, that is where there is a big opportunity.”

—Katherine Hyde

Topics:  Business

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