Japanese Develop a Taste for U.S. Franchising : Craving for New Business Ideas Goes Way Beyond Just Fast Food

When Peter J. Shea negotiated a deal for a Japanese firm to franchise his Stained Glass Overlay outlets, the talks took a surprisingly short time--90 days. But when the Irvine businessman arrived in Tokyo, his Japanese counterpart at General Management was taken aback by Shea’s 50-page final agreement.

“He had a check for $800,000, and I had this agreement,” said Shea, president of the international group of Stained Glass Overlay. “He just couldn’t understand why I had this huge agreement and asked, ‘why couldn’t we do it with a handshake?’ Just before the press conference, I threw the agreement in the trash can and we shook hands. We ended up with a three-page agreement, which my attorney was very unhappy about.”

Shea is one of a growing number of U.S. pioneers to take non-traditional franchise concepts to Asia. The initial wave is hitting Japan because cash-rich businesses there are rushing to find new opportunities and to take advantage of the yen’s high exchange rate against the dollar.

Today, American franchises offering a variety of services and products ranging from vinyl repair to portraits on chocolate are making their debut in Japan. Stained Glass Overlay is selling its method for transforming a piece of solid glass into colored glass that resembles the traditional stained, cut glass in two Japanese outlets.

“Historically, the only thing that worked in franchising in Japan until two years ago was fast food like McDonald’s,” Shea said. “Now they are getting into service and other franchises.”

Seek New Ideas

“The trend follows very closely what happened in the United States,” explained Anne Hayashi, assistant vice president of Link Consulting Associates in New York, who said that franchising in this country boomed with fast food and then branched out into other businesses. “They are overdosed with fast food. They know franchising is a form that is successful. They are not just buying a franchise with a name; it has to be something of substance.

“They are looking for . . . innovative ideas, especially those with a particular or unique know-how,” said Hayashi, whose Japan-based consulting firm matches up Japanese investors with U.S. franchise companies.

Some American firms, however, are initially dubious about the Japanese. “As soon as they get over the initial paranoia of feeling the Japanese people are copying their idea,” Hayashi explained, U.S. companies see they can protect their expertise through licensing and raise money at the same time.

Heian Housing, an Osaka company, recently paid $850,000 to Western Vinyl Repair for the master license to market the Denver company’s patented method for repairing vinyl and leather. Pearle Vision Centers, an eyeglass frame retailer headquartered in Dallas, has opened 13 outlets through a joint venture with Iris Optical, one of Japan’s largest retail eye wear chains.

Double Rainbow Gourmet Ice Cream of San Francisco and Le Croissant Shops of New York now serve their fare in Japan. Chocolate Pix of Utica, N.Y., has licensed its technology to transfer photographs onto chocolate with powdered sugar. Other American franchisers going to Japan include American Speedy Printing Centers of Birmingham, Mich., and Docktor Pet Centers of Wilmington, Mass.

Many of these companies already are looking beyond Japan to franchise in South Korea, Thailand, Malaysia and Singapore.

To establish themselves in Japan, these companies typically sell a master license for their franchise to a Japanese company or partner familiar with the Japanese market.

The Japanese company, in turn, may sell sublicenses for different geographic areas--Japan has 47 prefectures or states--to other Japanese firms.

After General Management purchased the master license for Stained Glass Overlay, for example, it sold sublicenses for three or four prefectures to Nippon Steel. The giant steel company will sell franchisees to store operators, which in some cases might be some of its retirees, according to Shea.

“Basically what is happening in Japan is the dream of lifelong employment is changing,” Shea said. “Just like what happened in the United States 10 to 15 years ago, the big Japanese businesses, like steel and car companies, have not added new jobs to the marketplace. So what is starting to happen in Japan is that we have small entrepreneur companies of $50 million to $60 million looking to get out of their core business and develop new business and revenues. . . . They have adopted franchising as a way to create jobs and things that they can consume.”

Franchising, according to Hayashi, also fits well into the retail structure of Japan. “Japan is a series of mom and pop shops. To convert these kinds of operations into franchisees is ideal.”

Most U.S. franchise concepts, however, have to be adapted to the tastes and ways of the Japanese market. “Just because something works a particular way here, you can’t be so rigid as to say if works in the United States, it should work the same way in the Pacific Rim,” Shea explained. “So you give them the ground rules or the product and tell them ‘this is how we do it’ and why it works here. They take it and adapt it to Japan.”

Adjusted Recipe

The Japanese bakers at the Le Croissant Shop in Osaka made adjustments in their croissant recipe to use ingredients available in Japan because the cost of American-made yeast and flour are prohibitive, according to Arnold Rivera, director of operations for the New York-based chain. The product also is smaller but tastes the same, he said.

The Japanese must have liked it. Le Croissant’s Osaka opening in early May posted first day sales of $3,500, “which we consider very, very good. It may be a little higher than we expected, but it is similar to average store sales in the United States,” Rivera said.

Other adjustments come in layouts of the stores. Carl M. Youngman, chairman of Docktor Pet Centers, the largest pet store chain in the United States, said: “We’re having to look at changing the format of our store” because real estate is so expensive in Japan.

Youngman also cautions against making too many assumptions about the affluent Japanese consumers. “They have a great deal of disposable income, but they also have traditional uses for it. We have to be cautious in assuming that the buying patterns of the Japanese consumer are the same as the U.S. consumer’s.”