1. Background: Supply Chain Turmoil Amidst Intense Competition

The deflation in Japan has sent the restaurant industry into an era of fierce low-cost competition, where beef rice became the preferred quick and affordable lunch option. In 2001, following the liberalization of American beef imports to Japan, three beef rice chain enterprises—Yoshinoya, Sukiya, and Matsuya—swiftly engaged in a price war, aiming to expand market share through low-price sales. The price of a bowl of beef rice dropped from 400 yen (20 RMB) to 280 yen (14 RMB).

Sukiya, a chain under Japan’s Zensho Group, was the first chain brand to lower its prices. Unlike the long-established Yoshinoya, Sukiya was a newcomer to the beef rice market. Founded in 1982, it experienced growth in the 1980s and 1990s by opening stores in Japan’s suburbs.

Sukiya also differentiated itself in terms of taste. Unlike Yoshinoya, which targeted male blue-collar workers in urban areas, Sukiya appealed to a broader consumer base, including families with more dispersed dining times. Therefore, Sukiya’s menu was more diverse, offering toppings such as cheese, spicy cabbage, and cod roe on top of beef rice, providing a variety of flavors while also increasing the average customer spend and, more importantly, boosting Sukiya’s profit margin. In 2004, Yoshinoya’s profit margin was 59.8%, while Sukiya’s was 66.9%. With Sukiya’s price reduction, Yoshinoya and Matsuya also followed suit, lowering their prices to 280 yen.

However, in 2003, the competitive landscape of the beef rice market took a sudden turn. The United States experienced an outbreak of BSE (mad cow disease), prompting the Japanese government to urgently ban the import of American beef. Many beef rice chain enterprises faced an existential challenge.

2. Yoshinoya’s Response

Yoshinoya had always used American beef, and apart from the US, no other country could meet its demand for beef. Beef rice used beef belly, a part with high fat content and low cost. Approximately 10 kilograms of beef belly could be obtained from one cow. A regular-sized bowl of beef rice used 67 grams of beef, and Yoshinoya sold about 450 million bowls of beef rice annually, requiring approximately 30,000 tons of beef belly. Such a massive supply could only be met by the US, as Japan had only 1.2 million cows in total.

In the face of crisis, Yoshinoya had no choice but to completely remove its signature beef rice from the menu starting from 2004. This decision was based on three reasons:

• Australia had around 10 million cows at the time. If Yoshinoya were to source beef from Australia, prices would skyrocket, and Yoshinoya’s profit structure could not withstand a significant cost increase.
• Unlike the US, where beef is sold in separate cuts, the mainstream sales approach in Australia involved selling whole or multiple cuts of beef. This made it impossible for Yoshinoya to obtain only the beef belly needed for beef rice.
• American beef is grain-fed, while Australian beef is primarily grass-fed. The difference in feeding methods would affect the taste of Yoshinoya’s signature beef.

To compensate for the removal of beef rice, Yoshinoya drastically adjusted its menu structure, introducing a range of new products such as pork rice, beef steak rice, sukiyaki rice, curry beef rice, and grilled chicken rice. In 2004, the group acquired Hanamaru Udon, a udon noodle chain, accelerating the expansion of its multi-brand strategy. Ultimately, Yoshinoya’s revenue declined by about 10% between 2004 and 2006, with a deficit in 2004, but it returned to profitability in 2005. The signature beef rice was reintroduced in limited supply after September 18, 2006, and it was not until 2008 that beef rice was fully restored to the menu.

3. Sukiya’s Response

When Yoshinoya abandoned the sale of its signature beef rice, Sukiya also removed beef rice from its menu in February 2004, but reinstated it on September 17 of the same year. This move allowed Sukiya to surpass Yoshinoya successfully, becoming not only Japan’s largest beef rice chain but also laying the foundation for its parent company, Zensho Group, to become Japan’s leading restaurant group in the future.

Following the decline in beef supply, Sukiya quickly established a supply chain in Australia, switching its beef supply to Australian beef. It adjusted the beef rice recipe according to the characteristics of Australian beef, reducing the gaminess of grass-fed beef. Additionally, the variety of toppings at Sukiya effectively masked the drawbacks of beef.

Sukiya’s decision to use Australian beef was based on two reasons:

• Zensho Group’s multi-brand nature aligned well with the sales approach of Australian beef, which involves selling whole or multiple cuts of beef. In addition to the Sukiya brand, Zensho Group also owned the steak chain “Big Boy,” the hamburger chain “COCO’S,” and the barbecue chain “Tairyo.” The menus of these channels could consume multiple parts of beef, not limited to beef belly.
• Sukiya’s cost structure and pricing made it impossible for Yoshinoya to compete. Due to the diversity of its menu and unique toppings, Sukiya had a profit margin 8 points higher than Yoshinoya’s, allowing Sukiya to accept the higher price of Australian beef. As a result, Sukiya raised the price of beef rice from 280 yen to 350 yen, just enough to lock Yoshinoya out of profitability even if it introduced Australian beef, thereby securing the price range of the battlefield.

In 2005, Zensho Group’s revenue surpassed Yoshinoya’s, and in 2010, it surpassed McDonald’s Japan to become Japan’s leading restaurant group. According to the former procurement director interviewed by Kiseki Capital, after the BSE crisis in the US, Zensho Group significantly strengthened its management of the upstream supply chain, forming the following three core characteristics:

Food Testing Laboratory: A team of about 50 people whose main task is to scientifically study the composition of ingredients, processing methods, and hygiene management, and develop ingredients based on this scientific information. For example, adding a trace amount of calcium silicate makes apples cut crisper than any other brand.

Food Safety Mechanism: The procurement department has its own food safety certification mechanism and an internal safety inspection team, a function typically outsourced by other restaurant companies. Each procurement department head is accompanied by a food safety inspector responsible for sampling and testing all ingredients and checking their certificates and reports.

Increased Procurement Authority and Flexibility: Procurement department heads have higher incomes than their counterparts and have a certain degree of budget autonomy. These experienced department heads are familiar with the sources and qualities of various ingredients, enabling them to quickly find the desired ingredients. Flexibility determines the company’s sensitivity to introducing new quality and supply chain. In contrast, other Japanese restaurant listed companies have inexperienced individuals in procurement, with relatively low status within the company and limited budgets.

Marugame Seimen is a direct-operated udon noodle chain under Japan’s Toridoll Corporation. Established in 2000, Marugame Seimen became Japan’s largest udon noodle chain by offering high value for money and freshly made dishes in-store, a unique feature in a market previously lacking branded udon chains.

The brand’s operational efficiency allows it to handle high customer volumes during peak times. With an average customer spend of 26 RMB, its stores serve an average of 630 customers daily (including takeout). During lunch rushes, it took customers only 18 seconds to place orders and receive their food. Currently, Marugame Seimen has 833 stores in Japan, generating revenue of 5.05 billion RMB.

1. Background of the Problem

Starting in 2005, Marugame Seimen experienced a decade of rapid growth, expanding from a few stores to approximately 600. However, as stores grew, founder Takaya Kuwata saw a ceiling to the company’s growth. The company was transitioning from a simple restaurant business to a more formalized dining group, bringing in a batch of executives from consulting firms to manage the original entrepreneurial team.

Founder Takaya Kuwata

Following the suggestion of a new executive, Marugame Seimen began introducing limited-time seasonal products, launching new items every quarter, or even monthly. Given that udon is a frequently consumed item in Japan, with many people eating it 2-3 times a week, leveraging this high repurchase rate through special products to increase average spend became a growth engine for the company.

The seasonal product strategy quickly proved successful. In August 2014, the launch of a 590-yen (30 RMB) large bowl of beef udon increased same-store sales by 15%. Amid a sluggish Japanese economy where most eateries were engaging in price wars, Marugame Seimen broke the norm by focusing on product innovation rather than price competition, introducing striking new items. This strategy repeatedly proved successful, and from 2015, the company began launching up to 10 new items per quarter.

However, this success was short-lived. While Marugame Seimen’s year-on-year customer numbers were still rising in 2017, they faced a sharp decline in 2018. By March 2018, same-store customer numbers had fallen to 94.3% of the previous year, and the dilemma lasted for about two and a half years. Although new product launches appeared to boost revenue, the actual number of customers per store continued to decline.

The constant introduction of new products is a stimulus for customers but also placed significant pressure on store employees. To cope with the frequent new launches, operational efficiency decreased, affecting both the taste and speed of service. An employee mentioned, “While boiling noodles, I would be called away to prepare other toppings. I couldn’t attend to it in time even if the noodle timer went off, and the noodles was overcooked by the time i was back.” This chaotic kitchen management led to a decline in customer experience and loss of trust.

Marugame Seimen’s appeal lies in its in-store preparation, with chefs making dough from flour every night and cutting and boiling noodles fresh the next day. In Japan, where frozen udon is prevalent, customers have higher expectations for handmade udon. If these expectations are not met, repeat purchases decline.

2. Marugame Seimen’s Response

Facing performance challenges, founder Takaya Kuwata makes the following operational adjustments:

• Reducing the Number of New Products: The number of new products was reduced to 2-3 items, lowering the complexity of store operations and ensuring that the introduction of new products did not impact the efficiency of serving traditional dishes.
• Implementing a Testing Mechanism: Before launching new products, feasibility tests were conducted in the headquarters kitchen. Subsequently, the new items were tested for one month in stores in Shizuoka and Fukuoka prefectures to ensure they did not affect operational efficiency.
• Introducing the “Noodle Master” System: Marugame Seimen’s success relies heavily on the skill of its noodle chefs. While some processes have been standardized, many remain non-standardized. The company introduced the “Noodle Master” system, granting the title of “Noodle Artisan“ to chefs who pass an exam. These artisans receive higher pay, and their names are displayed at the store entrance. Exceptional “Noodle Artisan” become regional technical advisors, helping other store chefs improve their skills.

After these adjustments, Marugame Seimen’s store revenue growth rate reached 104% in 2019, gradually returning to normal levels. Reflecting on this, Takaya Kuwata emphasized that in fast food, where efficiency is key, the number of customers is the most critical metric. In interviews, he stated, “Even for chain stores, each store must earnestly attract customers. In the restaurant industry, the most important focus is not on sales figures but on the number of customers, ensuring more repeat visits.”

The lessons learned from this failure helped Marugame Seimen recognize its competitive advantages. During the three years of the pandemic, Marugame Seimen stood out among several Japanese restaurant groups. This success was attributed to the development of a high-value takeout product line called “Udon Bento,” with prices starting at just 19 RMB. By focusing on increasing the number of customers rather than the average spend per customer and matching products to this strategy, Marugame Seimen attracted a new batch of takeout consumers. This approach increased the previously negligible takeout ratio to nearly 30%.

As highlighted, the restaurant industry is a multifaceted field integrating manufacturing, retail, and service sectors. Due to this complexity, restaurant companies cannot rely solely on a single competitive advantage for differentiation. Instead, success requires excellence across multiple dimensions while significant errors can drastically turn the competitive landscape.

The restaurant industry is like an endless marathon without shortcuts, where lagging competitors are quickly overtaken, and the top contenders continuously strive for superior efficiency, service, and quality.

By Tojiro Kataya, Senior researcher at GenBridge