Staying ahead of the curve in satisfying sweet tooths and picky palates, Japan’s Morinaga Group enjoys a well-deserved reputation as one of the leading manufacturers of consistently high-quality confectionary products for almost 120 years. As President & CEO Toru Arai explains, tastes are changing in international markets for not-so-sweet snacks with a healthier kick to them, and Morinaga is well positioned to satisfy the needs of this growing snack sector.
What in your view makes Morinaga different from other manufacturers of confectionary, foodstuffs and health products?
Morinaga was established over 117 years ago and pioneered the Japanese confectionary market, bringing Western-style confectionary on to the market. Today, we have become one of the most familiar brands of Japanese people, and whenever you look at brand rankings, we are always in the top.
Throughout our 117-year history, we have consistently been at the forefront of innovation, always bringing new products and new concepts to the Japanese customer. Morinaga was the one of the first companies to bring Western confectionaries into Japan, as before that the market only offered Japanese confectionaries. Since then we have introduced a wide variety of products to the Japanese citizen, such as instant coffee, soup and tea. Products that had never really existed in Japan before have become much more accessible items, and Morinaga contributed to the spread of such products amongst the Japanese people.
Confectionaries have been our main focus, however we have not just been copying Western confectionaries, we have also been producing original Japanese confectionaries too. For example, about 50 years ago we introduced a product called Hi-Crown, which was highly successful. It was chocolate packaged in what looks like a tobacco package; it was something very modern, something that became very popular and that can be enjoyed by everybody, men, women and children. I believe that Morinaga has built some solid foundations to spread a wide variety of products of this kind across Japan.
Throughout its long history Morinaga has consistently been confronting challenges and providing new value to its customers, and this is one of the reasons why we are so loved by our Japanese consumers today.
Over the past year the company’s share price has doubled from 300 to 600 yen per share, and for the nine months ended December 31, 2015, operating income was up more than 120% yoy. What have been the core drivers behind such an impressive financial performance, and how does Morinaga hope to sustain such growth over the long term?
We have tremendously increased our productivity in our domestic locations, particularly over the past three years. Up until now, we’ve been releasing many new products, however regarding our financial performance in this industry we have been in pursuit of stability. Since I became president in 2013, we have observed that there have been plenty of growing business opportunities in the overseas market and we have been pushing forward with new challenges.
I believe our performance has risen due also to our corporate mentality, which is to embrace new challenges and always go forward to unleash the potential of Morinaga. This mindset has also contributed to motivating the employees, and as a result has contributed to the reduction of management waste. Originally my goal was to set up global operations with better performances, but then the reality is that the overseas market has not been consolidated enough for profitability yet. This for me is something very exciting to work on.
The company’s management has set targets of net sales of more than 200 billion yen along with an operating income of more than 8 billion yen by 2018. What are the strategies in place to achieve such ambitious targets?
Regarding our operating income, we’ve actually almost reached our target, and are in the midst of readjusting our 2018 target for that reason. This is obviously a positive readjustment. Our target profit forecast has been raised and therefore now we are considering what else can be done to deliver and achieve this. I believe part of the answers lies in the overseas market.
When looking at the competitiveness of the industry, how does Morinaga compete with bigger and more established names, such as Nestlé and Meiji, and in how do you aim to add value to your products?
One of our competitive advantages is undoubtedly the refined quality that you find in Morinaga’s products. This is very obvious, but Japanese products in general are extremely quality-focused, and extremely tasty. Morinaga in this regard really stands apart from its competition.
As part of its future growth strategy, Morinaga is considering entering the health business. Indeed, in today’s consumer society, most basic needs are already satisfied, materialistic needs are already saturated, and therefore there needs to be a keyword that should be pushed forward, and this is ‘health’. Each of our competitors will have their own unique strategies for competing in the ‘health food’ business, and so will we.
Recently when I went to the United States I went to a supermarket, and I noticed many more health-bar types of products were displayed beside the cashier than before, and I imagine that this market has more growth potential than typical ordinary chocolates. This healthy food trend and health-focus will surely grow in importance in Japan as well, and going forward, I believe that healthiness is something that will have to be provided in the products that we sell as well, so we have to start thinking of how we can add such kind of value in our products. I believe that there is still potential for further market growth with this sort of added value in our products, which ultimately will enable us to meet our new customers’ needs.
The image of chocolate has been successfully re-established as a healthy snack that has strong health benefits and the emerging popularity of premium chocolate is also expected to support chocolate sales growth in the mid-term. One of the company’s slogans is “delicious, fun and healthy.” What focus does Morinaga implement on the health aspect of not only its chocolates but of its product lines?
Cacao products in Japan have witnessed a booming popularity recently. Even regular consumers know of the health benefits of the polyphenols that are in the chocolate, in the cacao. Manufacturing healthy and on top of that high-quality chocolate products in Japan, I believe that Morinaga has a lot of growth potential in this market. My generation was actually the first generation that was introduced to the joy that you can have from consuming chocolate. The older generation was eating Japanese confectionaries. This generation is exactly the generation that supported Japan’s high growth in the past. The lifestyles of these people were such that they didn’t even bother to go to the supermarkets because they were so busy working. These people have slowly started to retire and they’re starting to go back to the supermarkets with their wives. If you look at the background research of chocolate market, the generation and the demographic that had the highest growth rate are both senior male citizens now. I believe that there are two factors to this. The first is that people are becoming increasingly aware of the health benefits of chocolate. Secondly, people from this generation are slowly going back to storefronts and having the opportunity to take a look at these products.
Morinaga has made significant steps in terms of diversification of its product lines and with that its customer base as well. The company has operations from the confectionary and foodstuff base to frozen desserts and health products. Can you take us through your diversification plans with a focus on your intentions within an ageing society in the health segment?
I believe that throughout our history, the high level of quality our products have has in turn allowed us to offer a wide range and variety. Global confectionary companies have the tendency to specialize their products: if they produce biscuits, they only do biscuits and if they produce chocolate, they only produce chocolate. I believe that Morinaga has the strength to offer a full lineup of products. This full lineup is something that we’re going to continue to do; health will be a common denominator across all these fields.
Earlier on, I mentioned that in the past three years we have attained tremendous growth – one of the main contributors to this has been our jelly products “Weider in Jelly”, as well as our ice cream, chocolate, and other products. I know that in the United States, such jelly products are not widely accepted especially in the health area, but in Japan such pouch products sell really well. This is something that Morinaga created and we’re the ones who established a market for this. We still maintain our position as having the number one share.
Japanese people always have had a culture leaning towards food products, especially those that have a soft, jelly-type texture. Back in the days, consuming jelly-type texture has always been part of Japanese culture. My impression is that people from the United States are not familiar with this kind of texture. In Japan a lot of people will eat Weider in Jelly for breakfast, because a biscuit-type thing will just dry up your mouth and make you feel uncomfortable, so this is very popular as a breakfast item.
In Japan we have what we’ve established as the number one brand, a specific kind of product, and we established a market where we are trying to go forth surrounding this brand with the concept of health. We call this the “Snacking”. Recently you see a lot of people who eat between meals, and end up eating five to six meals per day. We see new storefronts laid out for people like this and we’re going forward in making new products and of course offering more options for them.
You have a very close connection to your customers and the communities in which you operate, and a company that improves the lives of children worldwide. What measures do you take to aid you in improving the lives and communities of children worldwide?
Supporting children has always been a very core principle that runs in Morinaga’s DNA, and that we have been embracing since our foundation. Our founder initially traveled to the United States to study confectionary techniques and bring them back to Japan. When he came back to Japan, he realized that the health conditions and the nutritious conditions of children were poor, and so he decided to found a company that could address this.
Much of our CSR activities today still remain domestically focused on Japan, but we have been slowly expanding globally as well. Overseas we have an activity going on that is called “One Chocolate, for One Smile.” For every chocolate purchase that has been made in Japan, the profits go to the construction of schools in cacao producing countries. We’re partnering with NGOs in this regard.
In a global sense, there is a school in Japan that I would like to mention. There’s an international school that allows its students to manage, organize and run their own school. With such schools we have established a partnership. These participants have a global students’ network and these students are able to come up with temporary solutions that address issues, such as health issues, that are prominent in the world and societal issues that can be addressed through the production of such new confectionary products and come up with how to improve the situation. These students are holding meetings globally and are trying to move forward with new solutions. We will keep supporting these kinds of activities and we’ll keep on expanding.
I mentioned that our domestic industry is relatively larger than anybody else, but I’d like to raise one unique activity as a case study. As part of our CSR activities, we have been taking children to uninhabited islands. Because we live in such a materialistic society, where everything is so reachable and convenient, children face many challenges and their problem-solving skills have been deteriorating. Once they arrive at the island, they have to take care of all the food by themselves too, so they catch fish by themselves and they have to boil seawater to get the salt out of it. When people arrive at the airport and the parents of these students greet them, most of the time you see the parents taking care of the children’s luggage. Once these students came back from these uninhabited islands to Tokyo, the parents tried to take care of the luggage, but the children wouldn’t let them. They also said that the airports were too bright.
In the US, Morinaga’s aim is to grow sales by 400% over the next five years. How do you hope to achieve such ambitious targets?
We have been selling our Hi-Chew candies in the United States for about five years now, and it has proven to be an extremely popular product. The juiciness and the fruitiness that you find in Hi-Chew, as well as the chewiness that it offers, is something that is really appreciated by the consumers. The storefronts that offer this product are still very limited, but you can find Hi-Chew at grocery stores such as Cost-co, as well as Seven-Eleven and Walgreen’s, and we are expanding our distribution network continuously. In Japan this has been causing quite an amount of gossip. Major League Baseball, like players from the Red Sox and Dodgers, has been fighting over this product. The high-ranking athletes place these types of products on the benches, but then they just love it and end up taking the whole box home.
This high-quality and soft, juicy and unique texture that Hi-Chew offers is actually quite rare to find in the United States. This kind of sweet, but not too sweet flavor is very specific, and we see an extremely high potential for this type of product.
About 20 years ago, I actually took this to the United States and let people try it. I was given feedback that the product needs to be a lot sweeter, it needs to be a lot larger and the color has to be a lot more vivid. Now American consumers are starting to accept the appeal of products that are not too sweet and have subtle differences in flavor, much like Japanese cuisine. I think not only in the United States, but also countries in ASEAN, China, and Europe are entering an era where they are slowly starting to understand the subtlety of this kind of taste. The feedback that I’m getting makes me start to understand the quality and appeal of our products. The fact that there are an increasing number of people who understand is a true sign of globalization.
You mentioned the vivid colors and changes you’ve had to make in terms of marketing products. What is the strategy to raise further awareness about your products especially in the US market?
As I mentioned earlier, Hi-Chew is extremely popular with Major League Baseball players, and I believe this can provide a strong entrance for us to the market. We have also been entering local gatherings and distributing large amounts of Hi-Chew products there.
In Japanese, the name “Hi-Chew” and the word “Chew” signifies the sound of kissing. In the US market, where social networking services and additional marketing can be quite effective in this scope, we’ve launched a campaign on social media where you can post photos of your face doing the kissing face. Recently we’ve been seeing Major League Baseball players joining in on this trend as well.
Slowly we’re expanding the distribution network and increasing the number of storefronts that offer Hi-Chew as well as expanding our distribution areas. In addition, we are also pushing to further utilize digital as well as social network initiatives as part of our marketing efforts. We have also been using TV commercials as a part of our promotion strategy in hopes that this will more effectively convey the quality of our products to the U.S. market. In North Carolina we opened a factory last fall, which will allow us not only to manufacture, but also to operate sales directly from the U.S.
In terms of growth strategy in America, how are you looking at potential partnerships or M&A to aid you in breaking into new frontiers?
As of now we intend to go forward with this independently. Not to say that we are completely neglecting the possibility of future partnerships, but as of now we intend on continuing producing our original products, on establishing new distribution networks, and continuing with our own marketing efforts, to deliver quality Japanese products to the US audience. In Japan we are already partnering with Kellogg’s, and are actually the vendors of their Pringles product in Japan. If we find a good partnership opportunity, we’ll go forward with it, but as of now we intend to take forward this initiative by ourselves.
You have been part of the Morinaga success story for over 40 years and successfully guided the company in your role as president since 2013; what does the future of Morinaga look like after your tenure is complete?
On a global level Morinaga is able to provide high quality products, and this is very important. I believe that can be said for Japanese products in general, not just our products, and not just our Hi-Chew product. We have a huge potential on the global scene if we keep on introducing these types of Japanese high-quality products, and I believe we’ll be able to trigger strong business opportunities this way.
In the future, Morinaga aims to become a truly globalized corporation and brand. Starting from the United States, which is our number one goal, and from there expand in variety of markets and keep on introducing more high-quality products. This is our goal and our dream.
One more unique product that I’d like to bring forward is our baked chocolate “BAKE”. As you can tell, the outside has a hard shell, but the inside is very soft. This product doesn’t melt in the summer, even if you hold it in your hand, which is a great characteristic to sell in Asian markets, which often have hot humid climates. BAKE is a very unique product. We embrace and possess many unique products like this, so we intend to quickly spread this kind of product across the global market.
In conclusion, what would you like to tell your global audience about Morinaga and Japan?
I believe that we are able to provide superior healthy products with Japanese-standard quality, with a wide product line. Consumers around the globe should further familiarize themselves with the Japanese products that we offer, and realize their quality and differentiation points. The jelly products might be unfamiliar to the global community, but I want people to keep on trying different Japanese food products. Just like sushi has become a truly global food, I believe that Japanese confectionaries also have the potential to become global food items.