Hawaiian partner takes Wendy's back to Japan

Only an optimist would view today’s Japan as a bastion of entrepreneurial opportunity. The nation’s business has long been in the grip of big, faceless corporations. And the economy, after two decades of stagnation and deflation, is synonymous with decline. But Hawaii-born Ernest M. Higa has learned to cope.
“What doesn’t kill you makes you stronger, if you’re an optimist. And you have to be an optimist to be an entrepreneur,” Higa says. “Japan is still alive. It’s the third-biggest economy, and you can still succeed here by finding the right niche and adapting.”

Higa, known as Ernie, has been there, done it and at age 60 is coming back for more, as one of Japan’s most successful foreign businessmen. His three main ventures so far–lumber, medical devices and pizza delivery–attained first or second market share in their categories. In 2010 Higa and his co-investors sold Domino’s Japan to Bain Capital, Mitt Romney’s former firm, for a sum reported by Reuters as $67 million. Higa got at least half of that.

Now he’s gone back into food service, leading a reintroduction of the U.S. burger brand Wendy’s into Japan.

Higa began his first venture in 1980, back when the U.S. trade deficit with Japan was beginning to stir trouble. That business sold North American lumber cut to the specifications of Japanese home builders, and Higa sold it in 2000. “There wasn’t even a word for entrepreneur in Japanese when I started out,” Higa recalls. “The closest thing was datsusara, which means something like ‘reject.’ You couldn’t get a job in a big company, so you started a ramen shop.”

It became a personal matter for Higa after he got into Domino’s. He was dating the daughter of an executive at Marubeni, the giant trading company. “I told him I was an entrepreneur, and he asked what kind of business. I said pizza delivery. So that sounded like a ramen shop. He really had concerns.”

But a pizza franchise looked grand to Higa. In 1984 he had traveled to Detroit‘s Tiger Stadium to meet Tom Monaghan, legendary founder of Domino’s, who also owned the Detroit Tigers baseball team. A helicopter arrived to take Higa to the company’s 300-acre campus, newly built in the style of Frank Lloyd Wright.

“I assumed a limo would pick me up,” Higa recalls. But Monaghan, who had amassed 1,000 Domino’s outlets to lead the pizza delivery business throughout North America, had stumbled abroad, and so he wished to court a partner in Japan. He dazzled Higa with his collection of 250 classic cars and other spoils. “Ernie, I got all this with pizza!” declared Monaghan, who joined The Forbes 400 list of the richest Americans that year, with a fortune estimated at $200 million.

And so it was that Higa agreed to a joint venture to launch Domino’s and its guaranteed 30-minute delivery service in Japan. But that promise was a recipe for bankruptcy in the maze of nameless streets that is Tokyo or Osaka. As for pizza, Japanese didn’t even like cheese or tomato sauce, Higa was repeatedly told, and other chains were doing poorly.

So Higa adapted. He rolled out pizza toppings Monaghan probably never dreamed of: squid, teriyaki chicken, potato with mayonnaise and Camembert cheese with mille-feuille puff-pastry crust. Such gourmet offerings helped to justify prices typically 50% higher than in the U.S. for deliveries, each outlet developed its own wall-size map listing every local household by family name, so hyperdetailed that pedestrians would visit Domino’s to get directions. Higa customized his own roof-covered delivery motorbikes to cope with rain and serve as moving billboards. He even beat the competition to online ordering.

The results? Domino’s had 180 stores in 2010, with average per-store sales of $1 million a year, twice the U.S. level. Long before then Higa was being honored as one of Japan’s top, well, entrepreneurs.

The food business must have stuck to his ribs. Last year Higa got 51% of a Japanese joint venture for Wendy’s, the world’s third-largest hamburger chain. Wendy’s exited Japan in 2008 after its partner, Zensho Holdings, known for the Sukiya chain of beef bowl restaurants, showed lackluster results, with only 71 burger shops in operation after 30 years, versus 3,400 run there by McDonald’s. Yet Wendy’s left behind a local cult following–30,000 fans on Japanese social media who clamored for its return.

Wendy’s Japan is being reborn, Higa-style, not as fast food but as “fast casual,” quicker than a table-service restaurant, yet with better quality and atmosphere than fast-food outfits. “The fast-casual category has taken off in the U.S.–Panera Bread, Pollo Loco and so on–but doesn’t exist in Japan,” Higa says. A spiffy new shop design features agreeable lighting, comfortable seating and free Wi-Fi.

Tokyo these days boasts more Michelin three-star restaurants than Paris. So Higa is launching not just fast and casual but “fast-casual gourmet,” with offerings like the Foie Gras Rossini–a burger topped with goose liver pate, priced at 1,280 yen, about $16.30 (or 16 times the 80-yen cost of a plain hamburger at McDonald’s). Other premium items are an avocado-and-wasabi burger, a truffle-porcini-and-chicken sandwich and lobster salad. “To say you make a better burger is not a very strong claim,” Higa explains. “But a foie gras burger has a halo effect. It shows we are serious about quality.”

It’s also 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 accessible. “You have two options in a deflationary environment. Go low-cost, like McDonald’s. Or offer value for money, whatever the cost,” Higa says.

The foie gras burger has become the bestseller, led by heavy media coverage. The Japan-only premium line accounts for 30% of sales overall. “It’s early days, but so far, so good,” Higa says. Yet only two branches have launched, in Tokyo’s tony districts of Omotesando and Roppongi. Higa says it will take five years to open just 100 shops; despite the weak economy, competition for storefronts is fierce.

If this works, he can see working with other U.S. eateries that have shied away from Japan. Too optimistic? Annual spending in Japan’s restaurants has shrunk from $390 billion in 1997 to $340 billion today. But Higa differs: “It’s lost $50 billion, but on a niche basis you can still succeed and grow in this marketplace by adapting your model.” One factor helping new businesses today is better human resources than back when the best and brightest all joined big companies, he says. “You need good human capital for good entrepreneurship, and today we have it.”
A bit like his fast-casual gourmet format, Higa himself is both the laid-back product of Hawaii and a dapper, polished Ivy Leaguer (Wharton undergrad, Columbia Business School and a Swiss boarding college). His father, Yetsuo, built businesses in Hawaii and Japan. But Ernie was the youngest of four children, and his siblings got the three family firms.

The family remains close–sometimes very close. His sister, Merle, chairs JC Foods, one of their dad’s creations in the frozen foods sector. She married Shin Okawara, who became head of KFC Japan, the nation’s second-biggest fast-food company.

He mentored Ernie for years, until KFC went into competition with Domino’s as a result of a deal in the U.S. that gave it control of Pizza Hut Japan. (Higa says they stayed a happy family by avoiding discussion of pizza.)

Higa’s father’s pluck set the pattern. He owned a trucking company in Hawaii when Pearl Harbor was bombed in 1941 and sent his fleet in to help evacuate. When the U.S. military later asked how much he was owed, Yetsuo Higa said it was service to the country. (Unlike on the mainland U.S., Japanese-Americans in Hawaii were not sent to detention camps.)

He was rewarded with U.S. military contracts throughout Asia, becoming a millionaire in his 30s. After the war he bought a Pepsi bottler in Okinawa, where his immigrant father was born, and brought U.S. baseball teams to Japan for exhibition games. These links led to Tom Monaghan and Ernie’s fateful helicopter ride.

Pizza must have ultimately made sense in his girlfriend’s home as well. Today she is his wife and the mother of their three teenage children. Their house in Hawaii sits on a golf course, but Higa gives little thought to retirement. “I can’t play golf, so business is my hobby. There’s still a huge gap between Japan and the rest of the world even today. It’s a cultural enigma for a lot of companies. I’m not a restaurant guy, but I do understand Japan.”

A bit like his fast-casual gourmet format, Higa himself is both the laid-back product of Hawaii and a dapper, polished Ivy Leaguer (Wharton undergrad, Columbia Business School and a Swiss boarding college). His father, Yetsuo, built businesses in Hawaii and Japan. But Ernie was the youngest of four children, and his siblings got the three family firms.

The family remains close–sometimes very close. His sister, Merle, chairs JC Foods, one of their dad’s creations in the frozen foods sector. She married Shin Okawara, who became head of KFC Japan, the nation’s second-biggest fast-food company.

He mentored Ernie for years, until KFC went into competition with Domino’s as a result of a deal in the U.S. that gave it control of Pizza Hut Japan. (Higa says they stayed a happy family by avoiding discussion of pizza.)

Higa’s father’s pluck set the pattern. He owned a trucking company in Hawaii when Pearl Harbor was bombed in 1941 and sent his fleet in to help evacuate. When the U.S. military later asked how much he was owed, Yetsuo Higa said it was service to the country. (Unlike on the mainland U.S., Japanese-Americans in Hawaii were not sent to detention camps.)

He was rewarded with U.S. military contracts throughout Asia, becoming a millionaire in his 30s. After the war he bought a Pepsi bottler in Okinawa, where his immigrant father was born, and brought U.S. baseball teams to Japan for exhibition games. These links led to Tom Monaghan and Ernie’s fateful helicopter ride.

Pizza must have ultimately made sense in his girlfriend’s home as well. Today she is his wife and the mother of their three teenage children. Their house in Hawaii sits on a golf course, but Higa gives little thought to retirement. “I can’t play golf, so business is my hobby. There’s still a huge gap between Japan and the rest of the world even today. It’s a cultural enigma for a lot of companies. I’m not a restaurant guy, but I do understand Japan.”

 Land of Rising Noodles
While Japan’s restaurateurs have been stymied by flat or falling sales at home in recent years, more and more of them now profit from an ever growing appetite for Japanese fare abroad, especially among the burgeoning middle classes of China and Southeast Asia. Five of the hottest Japanese chains overseas:

Mos Food Services offers Japan’s take on America’s favorite fare, a burger served on a bun made of rice. Mos Burger is second at home to only McDonald’s in number of stores, at more than 1,300. The company aims to have 500 outlets overseas by 2015, expanding from some 200 venues now in Taiwan and dozens more in Southeast Asia, China and Australia. The name is an acronym for mountain, ocean, sun.

Yoshinoya Co. was founded in Tokyo in 1899 and today is Japan’s biggest chain, offering donburi bowls of rice topped with thin-sliced beef. Has some 500 outlets overseas, led by China, with fast growth in Indonesia.

Shigemitsu Industry Co. is known for its Ajisen Ramen brand of Japanese-style Chinese noodle soup featuring a thick, white broth flavored by pork bones and garlic. Founded in the 1960s by an immigrant from Taiwan on Japan’s southern island of Kyushu, the brand has become more successful overseas than in Japan. Its China branch, a kind of master franchise, has some 600 units, and its president, Daisy Poon, is among China’s richest.

Hachi Ban Co. , another noodle soup chain founded in the 1960s, has about 100 ramen restaurants overseas, led by operations in Thailand. The company has shops in Hong Kong and Taiwan and plans to open 100 stores in China within ten years .

Ootoya Holdings operates family-style restaurants serving teishoku , or set menus featuring such fare as grilled mackerel and fried pork cutlets. The company aims to have 100 venues overseas by 2014 and is upgrading some of its restaurants to serve more expensive meals. –B.M.