Greetings from Tokyo.
It’s been close to a year since I’ve been back to Tokyo. Last time when I visited, my two key takeaways were: (1) Shrinking portions = price inflation and; (2) Watch out CX, competition from budget airlines are for real (see previous postcard here).
For this second postcard, I’m going to split it into two sections.
- Musings on Shake Shack, Blue Bottle and Square
- Finds – Ramen and Sneakers
Shake Shack, Blue Bottle and Square
For this trip, the key images that have stuck in my head are the following:
The top two images are from Shake Shack, the bottom two are from Blue Bottle.
What do they have in common? Yes, the burgers are delicious and the coffee is good but that is not it.
What I’ve been wondering was why are all these cool brands choosing Japan as their initial expansion point in Asia?
Don’t they know that Japan has an ageing population and has been mired in a 2.5 decade funk since the bursting of its real estate bubble in 1989? What about the language issue and doesn’t Japan follow civil law instead of common law?
So, this got me thinking.
What is the addressable market?
Population – Japan has a population of 126mn, roughly 38% the size of the US. By comparison, China has a population of 1,379mn. If we were to compare cities, Tokyo and Osaka have populations of 13mn and 8mn versus Hong Kong’s 7mn and Shanghai’s 24mn.
How well off are they? Japan has a GDP per capita of US$42,700. This is 28% lower than the US’s HK$59,500 per capita GDP. At the city level, Hong Kong has a GDP per capita of US$61,000 versus Tokyo’s US$44,000.
While Hong Kong has a very high per capita GDP, it also has a very big wealth gap. Hong Kong’s has a gini coefficient of 53.7 versus Japan’s 37.9 and the US’s 45. So while Hong Kong’s per capita GDP is very high, it might also be very skewed towards a small group of the population.
The right age group? The millennial appeals seems unlikely to be what drew the cool brands to Japan. Japan’s median age of 47 is one of the highest in the world. The US and China have median ages of 38 and 37 years respectively. But incidentally, Hong Kong is not that far behind as its median age of 44 is only three years younger than Japan.
If we look at age structure, Japan has a very skinny middle. Those between 15-54 only make up 47.1% of its population. By comparison, this age group accounts for 52.8% of the USA, 55.1% of Hong Kong and 61.3% of China.
While it’s possible that they see a hidden market in some cool grandma’s sipping coffee and having a burger, there must be some other explanation beyond demographics.
It’s real estate
Hong Kong and Tokyo are both gateway cities with affluent population. So, why do all the cool brands go to Japan before they come to Hong Kong? (Note: the first Shake Shack in Hong Kong will open later this year and Shanghai will get theirs in 2019. Tokyo opened in 2015 and Seoul in 2016).
I think one reason is REAL ESTATE and rental costs. In Hong Kong, the leasing market is tilted much more in favour of the landlord. In Japan, much greater protection is given to the tenant. As Hong Kong leases are typically marked-to-market every three years, even if you have found the right addressable market, your outsized profits will probably go to the landlord upon lease renewal.
As you can see above, Tokyo retail rents are quite stable.
On the other hand, Hong Kong’s retail rents are incredibly volatile. Imagine yourself as a country manager who is responsible for pulling the trigger on expansion. If you signed a bunch of leases at the end of 2013, you would have subsequently seen market rents drop by 40-50%. How would you justify that to head office? What about if you signed your leases in 2011? Then the question is why didn’t you expand more and lock in cheaper rents. At this juncture, with prime rents having returned to 2010 levels, the career risk of making a bad real estate decision is greatly reduced.
I can only hope that Burger King is as wise as Shake Shack. This way, I won’t have to go to Bangkok for my Whopper fix.
Finds – Ramen, Tsukemen and Casual sneakers
Like my trip to Bangkok, the weak US dollar has made everything more expensive. Normally, I’m a creature of habit but for this trip we actually tried some new restaurants so I can’t really gauge if the portions of Kobe beef have continued to shrink.
So with the USD now at around JPY105, what are the good deals? Here are my three finds for this trip.
Ramen – The Yuzu Shio Ramen at Afuri probably takes the crown for the best deal of the trip. At JPY980, this is cheaper than a bowl of Ramen at Ippudo in Hong Kong (HK$88-92).
Tsukemen – This is a cold dipping noodle. Unlike cold soba which is dipped in a clear soya sauce, the dipping sauce for Tsukemen is very thick. This costs JPY1,000 and with a choice of a large noodle portion, I ate it at 11am and was still full at 5pm.
Casual sneakers – I used to always buy a pair of running shoes when I visited Tokyo. However, with the stronger exchange rate (as well as potentially a price hike), a pair of Kayano 24 now costs around JPY16,500. Although this is still 12% cheaper than in Hong Kong, I have trouble justifying paying US$160 for a pair of running shoes that will last me 6-9 months.
On the other hand, I was drawn to the casual sneakers. With a larger selection, a wider availability of sizes as well as many limited offerings to choose from, this may become one of my regular visits.