Profile: Ernest Higa

Within hours of beginning his Japan recon trip, the vice president from Domino’s Pizza recognized that a carbon copy replication of the US business model wasn’t feasible. Not only were all the signs in Japanese, but the streets didn’t have names. The Domino’s veterans routinely dispatched from the US to various corners of the English-speaking world to champion pizza delivery would not be able to deliver anything. And that’s before they addressed the prickly issue of Japanese distaste for natural cheese.

It was the early 1980s and bicultural entrepreneur Ernest Higa had pitched Domino’s for the Japan franchise rights. Tom Monaghan, who had founded the business more than two decades earlier on an ironclad set of principles, was skeptical. Domino’s didn’t sell franchise to third parties.

“You had to start as a driver, work your way up, and earn a franchise. That made sense domestically because the franchisees really understood the operation and so head office didn’t have to do a lot of handholding. But internationally – in Canada, Australia, the UK, Hong Kong – they were failing because the culture was different,” Higa says. “When I approached Tom Monaghan, I wasn’t about to start as a driver. I told him I could learn Domino’s Pizza quicker than he could learn Japan.”

The recon trip convinced Domino’s that it could only prevail in Japan with a local partner. Higa performed this role for 25 years, building a business at the premium end of the market with around 175 stores and a robust online presence. An exit to Bain Capital came in 2010. Now he is back selling Western fast food to Japanese consumers as chairman of Wendy’s First Kitchen, a Longreach Group-backed amalgamation of US burger chain Wendy’s and local restaurant operator First Kitchen.

Out of the woods

It is a role to which Higa is well suited, having spent his career bridging the Japan-US divide. As the youngest of four children to a father who had three businesses, Hawaii-born Higa was destined to become the entrepreneur in the family. The older siblings duly received the operating companies and he was left to do as he pleased with one of the corporate shells. Higa started out in lumber in 1979, shipping wood from North America and Scandinavia to construction industry customers in Japan.

Though far removed from the world of fast food, the experience conferred on him two insights that have underpinned all his subsequent ventures. First, there are sizeable opportunities for those capable of understanding Japanese demand and tailoring products accordingly. At the time, large trading companies dominated the lumber business, importing logs to Japan and then having them cut to local specifications. Higa reduced the two strands to one, thereby delivering quality and efficiency.

“I was the first person to ship cut-to-finish logs from North America and Scandinavia to Japan. The closer you get to the finished product, specifications become just as much of an issue as delivery. The trading companies were better at the upstream sourcing than the downstream specifications,” Higa recalls. He found similar success supplying US-made surgical brain implants to Japanese customers. Again, understanding local nuance – specifically how neurosurgeons in Japan approached surgery – was crucial.

The second insight was that taking foreign products into Japan is more lucrative than moving Japanese-made goods in the opposite direction. “Your biggest asset as an entrepreneur is yourself. I could sell Japanese products in the US, but it was the 1980s and many companies were doing that,” he says. “As an American trying to be an entrepreneur in Japan, I understood the differences between the markets. A lot of US companies did not, so they struggled to penetrate the Japanese market.”

When Domino’s Japan launched in 1985, McDonald’s and KFC had already established a strong foothold in the country. Many other US casual dining chains had tried and failed. Among them were Shakey’s Pizza, which was backed by Mitsubishi Corporation and Kirin Brewery, and Pizza Hut, a joint venture with Sumitomo Corporation and Asahi Breweries. The conventional wisdom was that unless Japan developed an appetite for natural cheese – annual per capita consumption was less than 1 kilogram, compared to 11-12 kg in the US – pizza would not achieve critical mass.

Higa saw things differently. The Shakey’s and Pizza Hut strategy was flawed because they hadn’t adapted their offerings to suit the local market. Domino’s would not make the same mistake. Convenience and simplicity were the hallmarks of the brand in the US: Delivery within 30 minutes was a novelty in many areas and customers were happy choosing one of 12 toppings and getting the same beverage – Coke – with every order. In contrast, the Japanese were used to delivery and liked variety.

“We ended up with 35 different toppings, five or six different drinks, and all kinds of side dishes,” says Higa. “The golden rule in fast food is to keep the menu simple because you are dealing with part-timers and they turn over. Our concept was how we can stretch the envelope to give variety without complicating operations too much.”

Quality counts

There was also a recognition that quality counts for more than quantity. Rather than take the US approach of supersizing orders, Domino’s Japan emphasized service and taste. Menus were glossy, full color offerings intended to educate customers on pizza as well as stimulate the appetite. Toppings were either deliberately colorful (decisions to use red bell peppers as well as green were driven by aesthetics) or delightfully indulgent (Iberico pork and caviar appeared on the menu at different times).

Even the cheese underwent something of a Japanese makeover. They opted for a blend that was heavier on the butter than in the US, thinking it would appeal more to local tastes. The pizza crusts were cooked to be moister for much the same reason.

The price points were high – top-end pizzas cost as much as JPY5,000 ($46) in the late 2000s – by necessity. “In the US, Domino’s is low-cost fast food for college kids,” Higa explains. “In Japan, the mass market is a bowl of noodles. I knew if I positioned pizza as fast food, we wouldn’t make money. We needed a higher average check because we wouldn’t get the same frequency of orders as the US.”

A delivery fleet of spaceship-like three-wheel Honda scooters – customized with a roof on top and a box at the back and plastered with advertising – ensured Domino’s Japan got plenty of publicity. Success was almost immediate. The average monthly take for a McDonald’s store in 1985 was JPY5-6 million; the first Domino’s outlet generated JPY30 million. It was also a high margin business. The delivery model meant that stores could be small, with no seating, and located away from expensive, high traffic areas.

The push into internet-based services is seen as just as important as any branding initiative. NTT Data’s virtual shopping mall fell flat not long after its launch in 1994, but Domino’s Japan persevered with its website, offering online ordering before its US parent. The company was also among the first to launch a local app when SoftBank brought the iPhone to Japan in 2008. By the time Bain acquired the business, 60% of sales were through digital channels. It made marketing more efficient and helped to shore up growth when Japan’s restaurant industry began to stagnate in the late 1990s.

Higa had no qualms about selling to a financial investor. He wanted to pursue other interests, including a food import business, and Bain was a logical buyer given its experience as owner of Domino’s in the US. But he believes private equity – a concept born and bred in the US – requires just as much customization as a pizza chain. Sourcing and exiting deals is contingent on strong local networks, while post-investment management is doomed to failure if execution is not influenced by cultural understanding.

“In the US, they buy a business and parachute in a CEO who is motivated by stock options and financial compensation. It’s not the same in Japan,” he observes. “The owners of family businesses are often unwilling to sell because of an emotional attachment and a lack of familiarity with private equity. Larger corporates have tended to hold on to non-core subsidiaries because running those businesses is often the retirement plan for people in head office. You have to find a way to work with these people.”

It is Higa’s view that foreign investors are doing a far better job in this area than a decade ago. Their approach is more collaborative, with an emphasis on driving topline growth – often by leveraging their global networks – rather than cutting costs and headcount. He identifies Longreach as a firm that has the right balance between local and foreign capabilities, or cultural sensitivity and global value-add.

Crossing cultures

Their partnership was indirectly initiated by an on spec phone call from the US embassy in Tokyo. Some Wendy’s executives were in town and they wanted pointers on how to make a Japan strategy work, having failed on two previous occasions. Higa offered free advice, nothing more. But as they talked further over dinner, he became intrigued. Wendy’s could apply some of the same adaptions that had worked for Domino’s At the same time, this was an eat-in dining concept, so high-traffic locations were needed. The best way to get those was through acquiring an existing chain. Why not First Kitchen?

“I did some market research on the existing stores and the synergies were clear,” he explains. “At First Kitchen, the clientele was 70% female. At Wendy’s it was 60% male. First Kitchen had great locations but a weak brand image. Wendy’s had a strong brand identity and a signature product, but not a lot of locations. And neither had that Starbucks concept – a place to drink coffee and charge your mobile phone. We thought if we could incorporate that into the stores it would increase business substantially.”

Negotiations with Wendy’s were bumpy to begin with, but they eventually agreed on how to move forward. And in Longreach, Higa found a willing partner. The acquisition of First Kitchen from Suntory delivered 136 restaurants, of which about 50 have now crossed over to the new concept. It occupies the value-to-premium casual dining segment, closer to Starbucks than McDonald’s in terms of ambience, comfort and décor. Wendy’s First Kitchen represents a more visual combination of global and local than Higa’s previous ventures, but the underlying themes are largely unchanged.

“We are still arbitrating the cultural gap between the US and Japan. Even today they are so different. You can’t just take a concept or product from the US and make it work in Japan,” he observes. “Through experience you get a feel for it, you understand both cultures, and you can identify what is key to the brand in the US, and then what do adapt and what not to adapt.”

Although Higa buys into the philosophy, he is wary about its wider execution. Foreign private equity firms need local experts, who bring industry knowledge and entrepreneurial zest, to drive on-the-ground operational improvement. There are more of these people available now than 30 years ago, but supply is still limited. Higa blames the culture of the 1980s and 1990s, which saw Japan’s brightest and best gravitate from the University of Tokyo to jobs in government or with large corporations. The misfits became entrepreneurs.

“Over the last 25 years we have gone from recession to deflation and the one positive was the government and large corporations downsizing. It was harder for the brightest and best to get jobs, so more of them had to start their own businesses,” he adds. “Now we have a labor shortage, those individuals can go back into the large corporations, but I think the genie is out of the bottle. Entrepreneurship is viewed positively and there are some great examples of guys who have found success.”

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• North Asia
• Consumer
• Investments
• Japan
• The Longreach Group Limited
• Bain Capital Asia