Bain soaks in hot spring opportunity

"It really is a staple of Japanese leisure market," says David Gross-Loh, a managing director with Bain Capital in Japan. "Many Japanese families go to a hot spring a few times a year as kind of standard thing they do, so it is a very well established large market, and within that there are several growth trends."

Bain recently put its faith in the market by acquiring Oedo-onsen, one of Japan's largest traditional inn and hot spring chain operators, for JPY50 billion ($421 million), including debt. The company - which runs 29 spas and resorts nationwide - is best known for the Oedo-onsen Monogatari resort in Odaiba in Tokyo Bay.

Gross-Loh describes the deal as a classic Japan succession play in which Bain has been building a relationship with the founder over three years. Prior to the acquisition, the company was run by Hiroshi Hashimoto, who started the business as a sideline to his circuit board manufacturing interest.

The company's history is rooted in the Japanese boom period of the 1980s when many people used their new-found wealth to open hot springs, among other things. Unfortunately these businesses were harder to run that most expected, and when the economy turned sour in the early 1990s, there were many sell-offs.

"Hashimoto purchased several and brought in professional management to improve operations," says Gross-Loh. "He is very focused on the cost-side, he has a very smart food and beverage model, and he has dropped prices enough to dramatically increase utilization of these hotels."

As a result, Oedo-onsen has developed a reputation for turning break-even resorts into very profitable businesses. According to Bain, sales have increased 30% since 2007, and revenue will reach JPY35 billion for the year ended February.

The GP plans to acquire more hotels and hot springs resorts. "It is a really solid platform, but we think there are many more of these hotels out there, and the company has done a lot of analysis around how many there are, and there are hundreds," says Gross-Loh.

What's more, the company plans to further tap tourism growth by attracting international visitors. Data from Japan National Tourism Organization reveals that a record 13.4 million foreigners visited Japanese last year, a 29% jump from 2013. The government is targeting 20 million visitors by 2020 - when Tokyo hosts the Olympics - and encouraging tourism with measures such as less stringent visa regulations and fewer duty-free restrictions.

"Tourism is always in ebbs and flows, but there is definitely a wave of tourism in Japan right now and that has helped breathe new life into a very traditional and well-established market," says Gross-Loh.

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