When announcing the asset-light business model at your first-half results briefing, President Nishii mentioned that you would partially launch it in FY2018. Is your newly announced downward revision of your FY2018 earnings forecast related to the asset-light model? If so, how much of the downward revision is attributable to the asset light model?
The asset-light business model that President Nishii talked about has yet to have any effect on our reported earnings. Such effects will occur from FY2019 onward.
(Q: Would you say that you turned the corner with the impairment losses that you booked in the third quarter? President Nishii said you would start implementing an asset-light model on an expedited basis from FY2018 while taking into account the earnings impact of doing so.)
In terms of turning the corner, we intend to take intensive action. We booked as much impairment loss as we could and happened to report them now. In light of this, we will quantify the adverse FY2019 earnings impact of implementing an asset-light model in conjunction with further concentration of management resources into selected businesses on the assumption that problems rooted in our business operations will be resolved in the process. We are currently determining the extent to which the asset-light model’s impact and growth driven by existing organic drivers will factor into our plans for FY2019. We intend to explain in more detail when we report fourth-quarter earnings in May.
Regarding the Japan frozen foods business, you previously said you were aiming to regain market share through such means as launching new products, including Gyoza (Chinese dumplings) products, in the second half. Were the new products unsuccessful? If so, what was the fundamental cause in your opinion? And what is your timeline for recovery?
We took action to rectify the domestic frozen foods business’s poor performance in the first half of FY2018. In retrospect, however, we recognized that Gyoza sales were already growing at a double-digit rate but we thought we could further increase their growth rate. We upgraded an existing product and launched two new products, but sales growth fell short of our expectations, partly due to cannibalism. Additionally, from a revenue standpoint, the existing Gyoza product’s upgrade was accompanied by a de facto price increase. When the price differential between our products and competitors’ products narrows, consumers have less incentive to buy our products even if the price change does not prove problematic with supermarkets. Gyoza sales growth was consequently weak. We tried to boost sales of cooked rice products and fried chicken also, but I believe those efforts have regrettably failed. We are taking such failures seriously. We are making packaging changes and rolling out new products in the fourth quarter of FY2018. For cooked rice products and fried chicken, both of which are key products, we aim to first bounce back during FY2018. We will work on getting their sales back on an even keel from FY2019.
(Q: Does your weak performance in frozen foods stem from a sales force issue or is there a problem with your products’ price-quality balance?)
Our Gyoza, cooked rice products, and fried chicken have historically captured large market shares, so we have had confidence in both our products and our sales capabilities. Recently, however, retailers’ freezer cases are crowded with a broad assortment of items due to competitors’ frequent quality upgrades and sales promotions. Our relative advantage may have diminished amid such a retail landscape.
(Q: Do you have a clear idea yet of what to do to turn around the frozen foods business?)
With the home-use frozen foods market growing at a 3% rate, we think double-digit growth in Gyoza sales is a strong position to be in. For cooked rice products and fried chicken, we will expand our product variety and gain competitive advantage with respect to product refinements and price flexibility.
Even excluding the impairment losses, you lowered your FY2018 earnings forecast substantially and the downward revision was your second within a short period. I doubt your operating environment has drastically changed over such a short timeframe. Did you fail to accurately assess recent conditions?
Our biggest mistake was that the corrective measures that we implemented from mid-FY2018 with the aim of driving the Japan frozen foods business’s recovery from its poor first-half performance were not as effective as we initially expected. Additionally, seasoning markets in the countries we call the Five Stars underperformed our growth assumptions. Their growth stagnated because we neglected to take action to stimulate market growth as the market leader.
I would like to hear about your frozen food pricing strategy in Japan. You explained that your efforts to increase Gyoza sales growth were unsuccessful due to price differences between your products and rival products. Are you going to re-price your Gyoza closer to parity with competitors’ prices? In the cooked rice product market, what are your thoughts on the de facto price increases recently announced by competitors?
We saw Gyoza price differentials narrow from where they were previously. Our new product launches, one of our measures to boost Gyoza sales growth, were well received by retailers and consumers. In terms of overall Gyoza sales, however, the new products cannibalized our other Gyoza products’ sales. We need to better control the items we roll out. We may need to lean a little more toward individual items. In the cooked rice product space, we discontinued some products when we expanded sales of THE ★CHA-HAN as competitors were launching new products. Our presence in the fried rice section of retailers’ freezer cases consequently weakened. Launching one or two strong new products leads to the next opportunity. We are already working on new opportunities.
We will maintain our existing Gyoza prices because our products are competitive enough to withstand price competition even now. For cooked rice products, we will spend enough on marketing to compete effectively with frequent in-store promotions.
Why was overseas seasoning markets’ growth weak? Which countries were most affected? I would like to know the specifics.
Flavor seasoning sales growth was weak in Indonesia and Vietnam in particular. The biggest reason for its weakness was competitors’ aggressive promotions in not only the home-use but also the restaurant market segment. Another major factor was we lacked products that could be sold in the restaurant and industrial-use market segment also. On the whole, I think we were beset by a tough competitive environment.
(Q: What actions are you taking in response to the situation?)
In Indonesia, we insourced production, upgraded quality and raised prices of Masako flavor seasonings in December 2018. By doing so, we strengthened profitability and product appeal. These measures should start to pay off from the fourth quarter. In Vietnam as well, we are planning product upgrades and price revisions from April 2019.
You said that the Ajinomoto Foods North America (AFNA) impairment loss was due to an erroneous five-year profitability forecast. What is your benchmark for five-year profitability?
When we acquired AFNA, we formulated a plan to narrow its product line down to three strong categories–Asian foods, appetizers and Mexican foods–and consolidate its production facilities. We have since been executing the plan with a target of expeditiously achieving a business profit margin in the vicinity of 10%. Asian foods and appetizers are highly profitable, growing markets. We were planning to achieve our target by leveraging our strengths in these two categories. However, before we reached the stage of consolidating production facilities and launching new products, we incurred production losses due to production-line startup delays. We also encountered logistic cost increases. We now expect our 10% business profit margin target to take longer to achieve than initially anticipated. We plan to achieve the target one way or another in the second half of our next Medium-Term Management Plan’s term. This is the basis we used to value AFNA when conducting impairment testing.
Another factor that reduced AFNA’s valuation was an increase in weighted-average cost of capital due to higher U.S. long-term interest rates.
From 9.4% to 11%.
Will your approach to M&A change as a result of the large impairment losses booked in the third quarter?
We recognize that we must straightforwardly face the fact that a major acquisition or equity-method investment became impaired relatively soon.
We will decide where and how to invest in pursuit of future growth based on a new mindset of concentrating management resources in selected businesses, including through an asset-light approach. We intend to proactively invest in the domains on which we decide to concentrate. To do so, we plan to concretely formulate the next iteration of our M&A strategy after first hastening to designate core business domains and clarifying them internally and externally by expediting our next Medium-Term Management Plan.
You said that in Indonesia you insourced production of flavor seasoning ingredients and raised prices in response to weak sales growth. How will raising prices in December amid intensification of competition lead to resurgent sales?
Our flavor seasonings are a top brand in Indonesia. We have long been continually improving product freshness. Most recently, we upgraded our products in December. We raised prices to coincide with the product upgrade. We will increase profitability while delighting customers.
(Q: Was the third quarter’s subpar sales growth partly attributable to your throttling back on shipments of old products ahead of the product upgrade?)
No, we continued to sell the old products because the product upgrade was delayed a bit. In the interim, I believe that our flavor seasonings were perceived by distributors and consumers as less appealing than products of competitors that were aggressively running promotions, including discounting of seasonings packaged together with free gifts.
How severe was the weakness in Indonesian and Vietnamese flavor seasoning sales, both your sales and market-wide sales?
Flavor seasonings are AJI-NO-MOTO®’s successor as a growth driver. Their sales have been growing solidly. In Indonesia and Vietnam, the flavor seasoning market’s YoY growth rate in weight terms is currently in the vicinity of only ±0% or +1%. Our sales, by contrast, are down modestly YoY in both Indonesia and Vietnam. While market growth has slowed somewhat, our sales have weakened to a slightly greater extent. We recognize that such weakness is an issue we need to address.
(Q: The market environment in Indonesia and Vietnam seems to be changing. Has such change been accompanied by acceleration in menu-specific seasonings’ growth rate?)
We see two structural changes happening. First, market demand is shifting away from all-purpose seasonings such as AJI-NO-MOTO® and flavor seasonings toward convenient but less versatile menu-specific seasonings. Our menu-specific seasonings sales are growing at a double-digit pace. Second, from the standpoint of home-use market versus the restaurant market, the concept of dining out was previously not as well established in Indonesia and Vietnam as in other ASEAN countries. Recently, however, dining out is becoming increasingly prevalent and sales of products for the restaurant market have been growing. Meanwhile, our products have not made sufficient inroads into the Indonesian and Vietnamese restaurant markets. We realize this is something we need to work on. We intend to make adjustments, including to our product mix strategy, to focus more intently on the restaurant and food service markets in particular, both of which still have substantial growth potential, by broadly capturing opportunities across diverse food consumption settings.
What were the factors behind the impairment loss on your investment in Promasidor Holdings? How much has its operating environment deteriorated? And what will happen to it going forward?
Promasidor operates in 36 countries, only five of which are big countries: Angola, Nigeria, Algeria, Ghana and the Democratic Republic of the Congo. All five have problems due to exogenous factors. For example, Algeria imposed a ban on imports of raw materials while Angola has a shortage of foreign reserves. Angolan business activity has been contracting. Nigeria, being an oil-producing country, has a shortage of foreign reserves due to the decline in crude oil prices. The shortage, compounded by multiple other factors, has caused economic stagnation that is affecting domestic demand in Nigeria.
Meanwhile, Promasidor’s businesses have likewise been affected. They have consequently underperformed our initial plan. Such underperformance was one factor behind our impairment loss. Additionally, the valuation multiple we use to value our stake in Promasidor has changed substantially in response to interest rate movements and an increase in country risk, leading to a reduced valuation.
(Q: How high is Promasidor’s cost of capital?)
Our valuation model is solely multiple-based. The situation is a bit different than in the US.
You have been too slow to take corrective action in every area. You appear to wait until problems arise before addressing them. Management seems to be flying by the seat of its pants. An asset-light business model is important but how will you respond swiftly to changes in the environment? How are you identifying issues and what fundamental changes are you working on? Do you already have measures ready to implement?
We used to be proud of our competitive strategy. We thought it was important to be able to swiftly take action at the “Delegated Front,” but we failed to keep abreast of major changes. Our “Governing HQ” has not done a good enough job of identifying changes in our operating environment in a timely manner and staying on top of countermeasures, strategies and major resource allocations. In our core businesses, we will sharpen our decision-making so we can course-correct in response to market developments. We are motivated by a sense of crisis.
Is it correct to assume that your organization will change once you implement the asset-light business model?
We have yet to internally discuss such matters in detail, but we will end up with business units that can be nimbly managed in our winnowed-down business domains, together with organizational units to support the business units. For example, in the key seasonings business, we plan to execute a global strategy on a unified basis, without the existing distinction between Japan and international operations.
Are your existing staff and management capable of implementing your future plans? Entrusting a reorganization to a management team that has fallen behind the curve is incomprehensible to me. What are your thoughts?
As a basic mindset, we recognize the importance of making decisions at an organizational level in proximity to the market. However, it is also important to allocate key resources, including technology, product design and human resources, to necessary business domains from a big-picture perspective. We have been adhering to the former approach. As a result of having acquired AGF, spun out the frozen foods business as a separate company in Japan and diversified group companies into full-line/full-function companies, we are now rethinking decentralization.
We need to continue investing in businesses that we want to grow, including Gyoza and menu-specific seasonings, but our businesses are decentralized because they are diversified. We will definitively identify the sectors in which we are ranked in the global top three, assess markets and expeditiously allocate requisite resources with a stronger business-unit model. We will make required investments in business domains we want to grow. Concentrating on business domains in which we have a competitive advantage will enable our highly experienced personnel to manage effectively. Consolidation of operations is inextricably linked with our human resources in our view.
Are you thinking of initiating business changes at the people level through reassignment of human resources with specialized skills?
We will assign our most skilled and experienced personnel to the business domains on which we decide to focus. We will pursue a professional approach across all business domains.
Ajinomoto moves too slowly. Even if you decide to proceed with the restructuring or transition to an asset-light model that you are openly talking about, I imagine that execution would take a long time. While you are discussing your plans, your competitors are sharing all the information and building defenses against Ajinomoto. This may be contrary to workstyle reform, but I hope that you spend time when doing so is warranted, act more swiftly and by all means persevere during this challenging phase.
We will speed up our response to drastic changes. We intend to act swiftly from the top down, under President Nishii’s leadership.