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Sep, 01 2006

JAPAN: SECOND LARGEST FRANCHISE SALES

JAPAN boasts the largest and the most diverse economy in Asia, and is second only to the US on the world\'s economic stage. The US sends more exports to Japan than it does to any overseas destination.

JAPAN boasts the largest and the most diverse economy in Asia, and is second only to the US on the world's economic stage. The US sends more exports to Japan than it does to any overseas destination. In the mid-80s the Japanese market was often characterised as being excessively regulated and a difficult market to penetrate. Several factors have contributed to the easing of these regulations and more open economy.

Changes brought through technology and the internet, restructuring within the Japanese economy and bilateral negotiations, have opened the Japanese market in many sectors, specially where franchising is concerned.

Franchising set-up in Japan

With 1,000 company chains, Japan's growing franchise industry is the second largest in the world in total sales. The number of franchise outlets in Japan exceeds 2.26 lakh. Approximately 40 per cent of total sales at franchise outlets are from convenience stores, and about 20 per cent from food service chains. The gross sales of franchise business amounts to 18,700 billion yen (US$156 billion, or Rs 7,176 billion) and shows firm growth every year. The franchise business in Japan provides more than 24 lakh jobs. The Japan Franchise Association emphasises on the maintenance of a good environment of the franchise business, at a micro level, and has led to the development of the franchise industry in the country, at a macro level.

Regulations for franchising

The Japan Fair Trade Commission (JFTC), the competition authority of Japan, has framed certain franchising guidelines which consist of three parts:

  • General description of franchising
  • Provisions for the disclosure of necessary information at the time of the offer of a franchise
  • Vertical restrains between a franchisor and its franchisees

According to the second part of the guidelines, the failure to provide necessary information shall constitute deceptive customer inducement, which falls under the 'unfair trade practices' listed by the ordinance under the Antimonopoly Act and shall be subject to a cease and desist order by JFTC. The aggrieved party is also entitled to raise a suit for injunction against such an act.

The guidelines also require that if the franchisor provides the franchisees with the projected sales or profits, such projections shall be made in a reasonable manner, on the basis of reliable data. The underlying data as well the way in which the projected sales or profits are worked out must be disclosed to the franchisee. As regards the vertical restraints imposed by a franchisor upon its franchisees, it observes that if these restraints go further than is needed to duly operate the franchised business, they can be condemned as an abuse of a dominant position, as a tie-in, as dealing on restrictive terms or as retail price maintenance.

Food, the most lucrative sector

The food service business industry in Japan is highly competitive, and, to survive, individual businesses are increasing their operational efficiency, and developing new concepts or themes to attract highly demanding epicurean customers. Nevertheless, in the light of the current market demand and trends, there are many opportunities for the foreign investors to enter the Japanese food business market.

There are four main trends open to the investors in the food service industry in Japan.

First, the food service providers are focusing on menu improvement and pricing policies aiming for higher sales per customer.

Second, there are increasing demands from consumers for high-value food and services featuring unique and special menus, health and safety as opposed to low pricing. The recent entrance of Dean and Deluca, Cold Stone Ice Cream, Maison Kayser, a French boulangerie, and California Pizza Kitchen are good examples. Also Doughnut Planet and Krispy Kreme Doughnut have teamed up with Japanese franchisors to enter the Japanese market recently.

Third, diverse management strategies including cross sector collaboration are increasingly sought in search of increased efficiency, diversification of business and new menu development. For example, Compass Group, a UK contract food supplier, entered the Japanese market through an equity participation in Seiyo Food System and Gardner Merchant, Japan.

And last, safety, based on the global standard for food sanitation management using a system called HACCP (Hazard analysis and critical control point), and the trace ability of foodstuff, have become more important.

Any food company that offers a unique concept, high quality and good value-added service can be competitive in the areas of packaged meal retail or the 'nakashoku' business, casual dinning, café and sweets including bakery-café and health-oriented food services.

There is no one law that directly controls franchising in Japan, but there are some major laws and regulations that can apply to the operations of the franchised food service business.

Franchise Show and Business Expo

The Franchise Show and Business Expo in Japan is held every year. It is the largest meeting place for franchisors and new businesses and people who are looking for business opportunities. Here, one can meet Japan's leading franchisors (food, retail and service) and new businesses seeking business partners. What's unique about this Franchise Show and Business Expo is that it is the most recognised franchise exhibition in Japan and is sponsored by Nihon Keizai Shimbun, Inc (NIKKEI), known as the publisher of the 'Nihon Keizai Shimbun' (a nationwide newspaper which provides the largest source of economic news in Japan). Also, the exhibition is supported by the Japan Franchise Association which is the only official franchise association in Japan. This year, the exhibition was held from March 7 to 9. One hundred and seventy-seven companies participated taking up 393 booths, while the total estimated visitors were 30,000.

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