Deal focus: J-Star maneuvers Japan’s restaurant lull

Private equity investments in traditional brick-and-mortar businesses always seem to generate a few sideways glances in coronavirus-racked markets, regardless of their fundamental supports. J-Star, however, has little time for that kind of short-termism.

The Japanese private equity firm has agreed to buy fast food-style teppanyaki restaurant chain Pepper Lunch via its fourth middle-market fund, which typically deploys in a range of JPY1-3 billion ($13-40 million). The deal extends a restaurant sub-theme in the firm’s broader consumer strategy that started in late 2017 with gastropub and fast-casual operator Echigoya and continued with Section Eight, a bar operator that targets young singles.

J-Star declined to comment specifically on Pepper Lunch, but Gregory Hara, the private equity firm’s CEO, frames the current local restaurant space in the same pre-virus terms that underpinned his previous investments. Unemployment is in general decline, with women in particular seen as benefiting from rising disposable income yet with less time to cook. Amid COVID-19 conditions, the best restaurants are posting 60-70% of their normal sales, but such fluctuations can be easily absorbed in a PE timeframe.

“I don’t think the sales numbers we’re seeing right now are the new normal,” says Hara. “It may take one or even three years to get back to normal life, but I would still call that the near term. We are factoring reasonable discounts into every deal we do because the impact on valuations of a potential second wave has become a regular discussion item in every industry. But we are slowly, surely seeing more customers coming back to consumption.”

Part of Pepper Lunch’s appeal is its low price point, which insulates the company to some extent from the effects of the current economic climate. This goes hand in hand with a strong focus on accessing customers in shopping mall food courts. These venues are seen as a more cost-efficient setting from an operator’s standpoint because customers don’t need to be as closely managed and tables and chairs are a shared concern.

Pepper Lunch also benefits from a more diversified branding and geographic profile than J-Star’s previous forays in the sector. The company runs six differently branded chains parallel to its flagship stores, with 181 locations in Japan and 333 overseas. Local operations are a mix of owned and franchised locations, while foreign outlets are all franchised out.

By comparison, Yoshinoya, a regionally popular quick-service restaurant that is considered a natural homologue for Pepper Lunch, has more than 1,200 locations in Japan alone.

“We like the franchise model when there is room to grow, and having decent scale to attract employees is a differentiating factor on the hiring and operational side,” Hara says. “A lot of the mom-and-pops that the chains are competing against are experiencing difficulties, so there is a chance to take advantage. We’re selective about specific differentiating factors and scale – we’ve passed on many mediocre chains, such as those only with 10 outlets.”  

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• Topics
• North Asia
• Consumer
• Buyouts
• Japan
• J-Star
• covid-19
• coronavirus