Roula Khalaf, the Editor of the FT, presents her preferred stories in this weekly newsletter. One of Japan's largest pub operators, Watami, led by Chief Executive Miki Watanabe, is making a significant business shift. After warning that many customers are reluctant to return to traditional izakaya watering holes, Watanabe is now focusing on fast food acquisitions. In an interview with the Financial Times in Tokyo, he expressed his intention to consider buying local franchises of global brands like McDonald's and KFC if the opportunity arises.

Japan's Business Culture Shift and Its Impact on Pub Operators

The COVID-19 pandemic brought about a sudden change in Japan's business culture. Traditionally centered around long nights out, office workers are now spending less time drinking with colleagues and more time at home. This shift has led to a decline in izakaya patronage, with only 80% of customers returning. On the other hand, delivery of fast food has seen an increase, even surpassing pre-pandemic levels. Watami, with its 300+ pubs and eateries, is responding to this change by pivoting its business towards fast food. 1: The pandemic has forced a reevaluation of Japan's business landscape. The long-standing tradition of late-night outings has given way to a more home-centered lifestyle. This has had a direct impact on pub operators like Watami. As customers' preferences change, these businesses need to adapt to stay relevant. 2: Watami's decision to shift towards fast food is a strategic move to capture a new market segment. By offering quick and convenient food options, they hope to attract customers who are looking for alternatives to traditional izakayas. This shift also allows them to tap into the growing demand for delivery services.

Watami's Expansion Plans and Challenges

Watanabe has pledged to open as many as 3,000 Subway outlets in Japan over the next 25 years. Currently, there are 178 Subway outlets in the country. In addition to expanding Subway, the company also plans to buy out restaurant chains in the US and Southeast Asia. However, these expansion plans face several challenges. 1: The competition from Japan's convenience stores is fierce. Convenience stores offer a wide range of affordable sandwiches that can quickly adapt to changing consumer tastes. Watami needs to differentiate itself and offer unique value to compete in this market. 2: The company's net profit slumped 44% to ¥1.8bn ($12mn) in the six months ending September. Higher costs have hit the group's revenues, which have yet to recover to pre-pandemic levels. Inflation, including rising bills and a countrywide rice shortage, has added to the financial pressure.

Watami's Response to Labor Shortages and Weak Yen

While Watanabe believes the group is currently able to secure enough workers, the weak yen is making it harder to attract tourists from overseas. South Korea, for example, is becoming a more attractive destination. Additionally, the group has been hit by inflation, forcing them to consider raising prices by about 5% next year. 1: Labor shortages in Japan have been a persistent issue, but Watami has managed to maintain its workforce. However, the weak yen is making it more difficult to convince people to choose Japan over other countries. This requires the company to find innovative ways to attract tourists and retain local customers. 2: The countrywide rice shortage has also posed a challenge for Watami. They have experimented with mixing wheat and other ingredients into their white rice, but ultimately, raising prices seems to be the only option. This decision comes with its own risks and requires careful management.