AVCJ Awards 2017: Exit of the Year - Mid Cap: Riraku

Japan’s unemployment rate has held steady at 2.8% for most of 2017, a 23-year low, while the ratio of job openings to job applicants is at a 43-year high. Companies are rushing through initiatives to improve working conditions for existing staff, offering part-time positions to housewives, and making roles more attractive by converting them from temporary to permanent. For massage chain operator Riraku, this tightness in the labor market has been the biggest impediment to growth.

“In this tight labor environment, how do we attract the therapists we need at a cost level that makes sense to maintain our price points and deploy them in volume? That was the biggest limiting factor on store roll-outs,” says Richard Folsom, co-founder and representative partner at Advantage Partners, which owned Riraku until September of this year. “At our peak, we were opening 110 new stores a year. Last year and this year we reduced it to 60-80 new stores, as we held back to allow the recruiting to catch up.”

Nevertheless, the company’s expansion over the last four years has been remarkable. Riraku has grown from 240 directly-owned outlets to 569 outlets as of the end of August as a network previously restricted to Kansai, the western region including cities such as Osaka and Kyoto, has spread to cover the whole of Japan. Meanwhile, revenue has nearly doubled and EBITDA has tripled, surpassing JPY3 billion ($26.5 million) this year.

Expansion agenda

Advantage sold the business in September at a valuation of approximately $300 million, securing a 12x money multiple and returning more than the entire corpus of its bridge fund, which closed at JPY20 billion in 2013. Unusually for deals that involve returns of this magnitude, the mode of exit was a buyback by one of the company’s two founders. Riraku has established itself as the largest player in Japan’s massage chain industry by number of stores, and the growth is expected to continue.

“When we opened new stores we saw a lot of demand, but the question is can you find potential therapists, train them and match the therapists with customer needs. Riraku is one of the only players with the potential to keep on growing in this industry. The others are owner-operated and they don’t have the infrastructure to handle complexity and scale,” says Daisuke Murakami, a principal at Advantage. The GP believes the company could reach 1,000 stores over the next few years.

When Advantage was first alerted to Riraku through an intermediary, the company had only been operational for about two years. It tracked the business for 12 months and was impressed by the growth rate. The GP saw the same kind of potential for scale that it had managed to realize in other parts of the services sector through the introduction of professional systems and management.

It acquired a 75% stake in the business at a valuation of $50 million, including debt, in October 2013, facilitating an exit for one of the three founders. The other two, Yukihiro Takenouchi and Satoshi Koizumi, reinvested in the business – taking a combined 10% interest – and continued to serve as directors. Takenouchi led the buyout from Advantage.

Riraku’s appeal was based in part on its market positioning. The company offers back and shoulder massages to the mass market. While most salon operators charge JPY6,000-10,000 ($53-89) per hour, Riraku’s price point is around JPY3,000. The company is also more efficient, with each outlet completing 1,000 massages every month, twice as many as its competitors. It has used the tagline: “Riraku, popular and affordable relaxation for salarymen, office ladies (OLs), and housewives.”

“Riraku has made the service accessible to a regular buying base of customers who find it affordable and repeatable as part of their health regimen. For example, you get retirees who come in a 10 a.m. every Thursday,” says Folsom. “We implemented systems that have come online in the last 18 months to collect more client information and allow more of an understanding of who is coming and how often.”

Service standards

Advantage used the same outside consultant it has used for other investments where the onus was on achieving scale. The strategy was based on a geographic and demographic modeling of the country to draw up a list of target cities, then identifying particular sites based on location, traffic and expected revenue. 

“We put in place the infrastructure, including IT systems, and that helped us achieve bigger scale in a stable manner,” says Murakami. “From 2017, following long discussions with management, we decided to enhance the quality of service for customers and therapists.”

Initiatives on the customer side included a new style of treatment whereby clients lie on their sides rather than their backs, fully exposing the back and allowing a deeper massage of the back and shoulders. These treatments are delivered on higher quality mattresses – at an additional cost of JPY500 per session – that are more resilient and remain comfortable even for longer treatments.

Steps were taken to improve staff training so that these premium services are properly delivered. Novice therapists are now put through apprenticeships, lasting between three weeks and six months, alongside more experienced practitioners. Once established, they can attend regular seminars to review and upgrade their techniques. Therapists also participate in a ranking system, which means they can enjoy higher compensation based on customer feedback and length of working hours.

Riraku is one of six exits for Advantage over the last 12 months, with distributions amounting to nearly JPY100 billion across two funds. There haven’t been any other founder buybacks, but the Riraku auction process still says a lot about broader exit trends in Japan’s middle market. “Take the founder out of the equation and the next two highest bidders were financial sponsors,” says Folsom. “We are seeing an increasing number of secondary deals in Japan.” 

Pictured: Richard Folsom of Advantage Partners

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• Topics
• North Asia
• Buyback
• Consumer
• Japan
• Advantage Partners
• Exit
• AVCJ Awards