Portfolio: Aspirant Group and Yamato Group

Restaurant owners bid aggressively at the first bluefin tuna auction of the year at the Toyosu wholesale market in Tokyo, driven by superstition and bragging rights. The event is widely regarded as a bellwether for Japan’s high-end dining industry and even for wider business sentiment.

Peak prices have risen significantly over the past 15 years, the most recent surge culminating in a winning bid of JPY 333.6m (USD 3.1m) in 2019. It fell to JPY 193.2m the following year, but this was still the second-highest total on record.

In 2021, with restauranteurs counting the cost of the pandemic, the price collapsed to JPY 20.8m. Notably, Kiyoshi Kimura, owner of the Sushi Zanmai restaurant chain and a serial auction victor, declined to participate. He abstained again this year when a 211-kilogram tuna sold for JPY 16.9m.

Japan lifted its initial state of emergency in May 2020, but the economic rebound has been fitful. GDP grew by 1.7% in 2021, the first expansion in three years, but it flipped between positive and negative growth every quarter as new waves of infections broke and receded. State of emergency measures remained in place for six months and then returned in 2022 with the onset of omicron.

Many businesses are unable to operate normally, not least restaurants, which are subject to limits on booking size and, in some cases, opening hours. Large-scale events had yet to return in any meaningful way even prior to omicron. Moody’s Analytics said last month that Japan’s recovery “is unlikely to proceed along a straight line.”

This gives some context to Aspirant Group’s ownership of Yamato Group, a fresh fish wholesaler and retailer with a presence in Toyosu. The GP was in the process of engineering a turnaround when the pandemic hit – though it helps that the investment thesis is more about delivering operational efficiencies and boosting the bottom line than rolling out dozens of new outlets.

“In May 2020, we had to shut stores, shorten working hours, and get as much government support as possible. Conditions started to improve a few months later, but then a third wave came in early 2021,” said Taichi Nakamaru, a principal at Aspirant and formerly CEO of Yamato.

“However, thanks to the improvements we made to the business, such as introducing better controls so inventory levels can be adjusted based on expected customer numbers, Yamato remained profitable and its financial performance is still above the pre-investment level.”

A succession situation

As a Japanese middle-market private equity firm, Aspirant targets companies with enterprise values of JPY 3-30bn. Of the 23 investments made to date, 12 constituted business succession, where ageing founders opted to sell to private equity in the absence of candidates within their families who can assume control. In this respect, Yamato conforms to type.

Founded in 1981 by a fisherman who wanted to move into distribution, the company expanded from wholesale to retail stores to conveyor belt sushi restaurants and casual dining izakayas. Securing a position in Toyosu – formerly Tsukiji – in 1997 supported these efforts because it enabled Yamato to source fish and shellfish nationwide at affordable prices.

Though Chiba prefecture, situated on Japan’s east coast not far from Tokyo, remained its stronghold, the company joined a select group of suppliers approved to help cater imperial household events.

When the husband-and-wife team that ran the business decided to sell up, they were put in touch with Aspirant. The private equity firm completed an acquisition in early 2017, committing capital from its second fund, which closed the same year on JPY 27.2bn.

“We were introduced to the founder because we had invested in a similar company, a seafood restaurant chain, so we were familiar with the business,” said Yuichi Shin, a managing partner at Aspirant who led the deal. “The independent advisor thought we could be a potential buyer.”

The previous investment was Teraken Corporation, an operator of izakaya establishments specialising in seafood. It was exited in 2019 to Umenohana, a Tokyo-listed restaurant operator.

Private equity is no stranger to Japan’s food services industry. Several investors have acquired izakaya chains, often as part of multi-dining concept restaurant portfolios, in recent years with a view to executing roll-up strategies.

Meanwhile, Sushiro Global Holdings – now known as Food & Life Companies – is the standout example in conveyor belt sushi. Permira bought the business from Unison Capital in 2012 and listed it five years later, having supported an expansion to 470 outlets. There are now more than 600, plus a couple of other dining concepts.

Reform agenda

Yamato differs from these investments in two key aspects. First, the company has a diversified revenue base. When Aspirant arrived, there were five wholesale outlets, six retail stores, 14 conveyor belt sushi restaurants, and five izakayas. Wholesale, retail, and restaurants each accounted for about one-third of revenue.

Second, the business has a specific geographic footprint. Yamato emphasises its local credentials, sourcing all its fish within Chiba, often through direct relationships with ports, which brings down costs and ensures freshness. Rice and most condiments are sourced locally as well.

“There are limitations in terms of shipments. If stores are too far from their markets, they cannot deliver. In this sense, Yamato is very different from Sushiro, which has many stores all over Japan. The company focuses on Chiba and area around Tokyo,” said Tetsuro Monobe, a partner at Aspirant.

On a basic level, the challenges Aspirant faced on acquiring Yamato were not dissimilar to those at Teraken. Both were succession planning situations, where existing management had to be augmented or replaced as the founder-owners departed. Moreover, companies of this type often lack standardised systems and processes, have outdated storefronts, and require IT upgrades.

“The first thing we did was strengthen the internal controls,” Shin explained. “The company was run by a husband and wife, so the foundational controls you expect with professionalised management – such as inventory management systems – weren’t there.”

The founders didn’t leave immediately. Aspirant seconded a team member to serve as financial controller, assuming responsibilities from the wife, while an external CEO was recruited to work alongside the husband and eventually take over from him.

Building up a solid financial management infrastructure offered insights into store-by-store and product-by-product performance that were not previously available. It became clear where and why sales were declining. The CEO resolved to execute a restructuring, which resulted in the closure of six restaurants and two wholesale outlets.

Yamato’s existing employees did not respond well to the development. Despite the CEO’s best efforts to engage staff and outline growth plans, he was unable to regain their trust. Aspirant felt that a change in leadership was the only option.

Installed as replacement CEO, 18 months after the acquisition, Nakamaru moved quickly to improve relations with employees. He visited every outlet and met with staff delegations, listening to their ideas. It contributed to store renovation work and the development of new menus. Through these interactions, Aspirant also won support for its business priorities: quality, service, and cleanliness.

Process engineering

Yamato has approximately 600 staff and more than two-thirds of them work on a contract basis. The combination of uncertainty within the business and below-market-rate terms meant the company was unable to make any new hires in the first year. Aspirant subsequently increased salaries and reduced working hours.

This was done in the expectation that other reforms would deliver efficiencies and improved productivity. Procurements and shipments were previously the responsibility of individual stores, which meant the same suppliers and buyers had multiple accounts. Centralising these processes removed redundancies, reduced cost, and cut payment cycles from three months to two weeks.

Standardisation swept through the business, from deep freezes to kitchens to customer relations. Yamato maintained significant stocks of fish in its warehouses and smaller inventories at each restaurant, but little was done to coordinate these efforts company-wide.

“They didn’t perform inventory counting at all. The fish is stored at minus 50 degrees Celsius, and the staff were reluctant to go in there regularly and take stock,” said Nakamaru. “We introduced an inventory control system with monthly reviews.”

Another performance bottleneck occurred during food preparation. The various parts of a red flesh tuna are classified as akami and toro, or meat and fatty belly. Premium cuts, referred to as o-toro and chu-toro, are high in fat, light pink in colour, have melt-in-the-mouth texture, and are priced accordingly. The size and classification of different pieces impact a restaurant’s bottom line.

Aspirant found that individual chefs at Yamato were following their own habits, which often resulted in a disconnect between the overall cost of a fish and the price of each part sold to consumers. This was addressed by establishing a unified pricing approach across all outlets. At the same time, the company set up three central kitchens, one for preparing fish and two for other dishes like rice.

The shift from fragmented, often paper-based processes to integrated digital systems was mirrored at the front end of the business. Advertising switched to search engines and social networks, while iPads were introduced at conveyor belt sushi outlets, which made ordering more efficient. Order data was collected and analysed, with the results feeding into menu design and marketing.

Equipped with proper performance breakdowns and analysis, Yamato’s management was able to set key performance indicators (KPIs) and figure out where to pursue growth. Having closed six restaurants, the company opened three new ones and renovated another five. There are now three wholesale and six retail outlets, 11 conveyor belt sushi restaurants, and two izakayas.

Enter the swans

It is telling that Aspirant pinpoints Yamato’s nadir as May 2019, predating the operational reforms and two black swan events. The first of these came in October 2019 when Typhoon Hagibis became the strongest tropical cyclone to hit Japan in decades. It spawned a tornado that hit Chiba prefecture and conditions were worsened by a near-simultaneous earthquake off the coast.

Cumulative damage amounted to USD 15bn, making it the costliest typhoon on record at the time. It cost Yamato alone USD 2m, according to Nakamaru. “There was property damage, rooftops were blown off, and we had to protect employees,” he added. “But these stores were also trying to capture tourists. After the typhoon, tourists stopped coming.”

COVID-19 arrived not long after the effects of Hagibis receded. Facing substantial operating losses, the company adapted where it could, for example by doubling the takeout and delivery share of revenue to 20%, and returned to profit in three months.

Sales were JPY 6bn when Aspirant invested and have since dropped to JPY 5bn. EBTIDA fell from JPY 200m to JPY 100m, but it has since recovered to JPY 300m. The improvement in EBITDA – plus an increase in gross profit margin from 43% to 46% and a decrease in equipment costs to sales ratio from 14% to 8% – reflects the realisation of efficiencies.

To some extent, Yamato remains a work in progress, yet Aspirant believes the business may prove an attractive acquisition target to larger restaurant operators or fish processing players. The private equity firm overcame significant strategic interest to buy it in the first place.

The lingering concerns are slow-burn structural rather than explicitly pandemic-driven. Conveyor belt sushi has proliferated in the past decade but now growth is flatlining and the segment is consolidating around a handful of big-name brands. More fundamentally, Japan’s JPY 20bn fishing industry appears to be losing momentum as well.

Both developments appear to challenge the Yamato credo of pursuing quality – much of it driven by product freshness – as opposed to just scale.

“Our strength is having our own supply chain, so we need to leverage that in building our brand and attracting more customers,” said Kazunari Shimizu, the company’s current CEO. “The threat is the decline of the local fishing industry, which may result in smaller catches.”

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• Topics
• North Asia
• Buyouts
• Consumer
• Japan
• Aspirant Group
• Food