Q&A from Small Meeting with president (December 9-11, 2020)

First, we established the joint venture with Accenture in April 2020 and have placed the work of Ajinomoto Co., Inc. corporate divisions in the joint venture. This has contributed considerably to streamlining the work of administrative divisions. The effect of this is reflected a little in business performance for the current fiscal year. From now on, we are proceeding to incorporate the administrative operations of each plant and sales branch office as well as the corporate service functions of Group companies, such as Ajinomoto Frozen Foods Co., Inc. and Ajinomoto AGF., Inc., in stages by FY2022. We are progressing steadily toward achieving our target of shared companywide expenses of 2.5% compared to sales.  　

Next, I will speak about business performance in FY2021. Although there was an extremely large change in home-use demand in FY2020 Q1, we expect that the trend from around Q2 in the so-called baseline sales for both home-use and restaurant and industrial-use products will continue in FY2021. In this situation, how we will be able to increase sales of value-added products is a major challenge. To address this challenge, we will shift to products with high unit prices by appealing to customers’ desire for health and nutrition and shift to products such as menu-specific seasonings with high unit prices from the product mix perspective, which will contribute to the upside in the plan.  

However, there could be some fluctuations depending on the COVID-19 infection status. Therefore, rather than relying on that alone, we are considering what level of specific targets we will have for initiatives in SCM, procurement and so forth, and we expect these figures will be added to business performance in FY2021 in the form of cost reductions.  

(Q: I think that implementing the value-added strategy is in line with your strategy. However, income levels will not rise due to the impact of the global economic slowdown, and I think there will be stronger cost consciousness in some regions. I think this is a particular concern in emerging countries. How are you trying to balance the value-added strategy with ensuring affordability and volume as a strategy to address declining incomes?) 

I think that cost consciousness is becoming apparent in consumption in general at the moment both overseas and in Japan. This appears to be the case based on family income and expenditure surveys. However, since consumers are holding back on expenditure in general, there is a trend toward eating a little better at home.

Consequently, the tendency of consumers to use menu-specific seasonings rather than basic seasonings and flavor seasonings to try to expand menu variety has also clearly appeared in our sales. 

I do not know what kind of changes will take place going forward, but our development of basic seasonings, flavor seasonings, and menu-specific seasonings targets groups from the low-income bracket through to the slightly upper-middle income bracket, and our strength is that we can provide value to a fairly wide range of people.

I also think that our product lineup has made a very big contribution to controlling the costs of menus made at home or in restaurants, rather than the unit price of individual items. This is the background to my comment that the baseline has come into view.

(Q: Obviously, at-home dining is more cost effective than dining out. Are we to understand that in this context even though your seasonings category is value added-focused, it leads to savings overall, so it is not affected that much by cost consciousness?)

It is as you say. It is easy to understand if you compare it to finished food products. If you eat gyoza when dining out, it costs \400–\450 per serving but around \250 if you make it by hand. Furthermore, frozen gyoza are purchased for around \180, which is the reason for the very strong performance of frozen foods. Similarly, in terms of seasonings, there is a difference between dining out and meals at home in the menu unit price, so I think this is a strong point.

We will establish a single communication strategy for global health and nutrition and connect it to the marketing strategy in each country, which will translate into an increase in unit prices. These frameworks are now firmly linked. In that sense, the plan is considerably more concrete than when we announced the Medium-Term Management Plan (MTP) in February. One area is the development of low-salt products and so on. Another area is the promotion of salt reduction based on the marketing strategy. These will be implemented in earnest in FY2021.

Initially, there was quite a lot of confusion on the ground as measures only addressed so-called physical health such as salt reduction and poor nutrition. In light of that, we developed the concept of three pillars based on our Nutrition Without Compromise approach. We will not compromise on the three pillars: taste, local way of life, and food access, where people have access to a wide range of foods. I think we have been able to gain considerable empathy with these three pillars. We would like to achieve the unit price increases targeted in the MTP through this strategy, and I think that we can. In other words, we are developing marketing and product development strategies that can provide value to people from the low-income bracket through to the slightly upper-middle income bracket, which we value very highly. This means we have established our concept.   

(Q: For example, what kind of areas are leading the way in the Five Stars?)

Basically, all of the Five Stars are included. I also think we have progressed considerably in countries with a focus on seasonings and packaged food products, for example Malaysia and the countries neighboring Thailand. Frozen foods are not just about nutrition. Right now, frozen foods are a very big trend, and we are concentrating on Asian category frozen foods.

(Q: You say that top-line generation capabilities and the organizational systems are working well. Do you feel confident about solid sales in the medium term?)

Yes. Food service has struggled during COVID-19 and although we are taking various measures, the impact will likely continue for a while. We made very harsh forecasts on sales for both Q3 and Q4 of the current fiscal year, but sales must recover mainly based on home-use demand. This is the area we are focusing on.

At the earliest, it will translate into development of low-salt products during FY2020. We hope this will be rolled out to each country for FY2021. From then on, the communication strategy will change. The idea is to promote the initiative based on the Iwate Prefecture model. In other words, we plan dissemination in partnership with a wide range of stakeholders, including local governments, media, local academia and others. As part of this, we hope to contribute through menu development, marketing, creation of actual sales floors, and supply of products to the market. We are now constructing these local ecosystems. Specifically, we implemented it in Vietnam in the first place, but similar activities have also commenced in Thailand and Malaysia.

For those who answered “No change” regarding frequency of nutrition-conscious dining, we haven’t dug into whether this means that they are already normally nutrition-conscious, or whether they don’t extend their awareness to nutrition. At the same time, about 30% of respondents said their frequency has increased, and about the same number said they want to increase their frequency in the future. We also reported on the frequency of home cooking, but while we note that about half of the respondents reported an increase, I think there is some range in how these respondents perceive home cooking. I think that they are not preparing ingredients like meat and vegetables from scratch, but rather are cooking smartly by also incorporating prepared take-out foods, frozen foods, and other simple ways of cooking. We’d like to take this change in consumers and turn it into an opportunity.

Regarding the use of DX in marketing, the first use is in data analysis. As we examine new lifestyles, subdividing these as much as possible, we’re moving ahead with analysis of how the subdivisions can be categorized as middle-mass market or mass market. As the second use, we’re making efforts to further boost cost-effectiveness for a wide range of communication channels. The third use is in new business creation. Foodtech ventures have launched in a variety of fields. We plan to investigate alliances and, in some cases, investments. While we build relationships among companies, we’ve started initiatives to strengthen our existing businesses and launch new businesses.

(Q. With regard to marketing, should we understand that the Company is not simply making a digital shift from existing media, but in a deeper sense is thoroughly thinking about ways to boost the top line and to achieve higher unit prices?)

Our efforts will focus on nutrition strategies, from a perspective of increasing unit prices. Also, as shown by the questionnaire, under 20% of respondents want to do less home cooking. This may be some sort of cooking fatigue, as more than half of the households reported an increase in opportunities for home cooking. Measures to analyze this situation and keep consumers from getting bored are a very important point for marketing.

In addition, as the small mass market becomes very clear and as channels diversify, we believe that we need to make distinctly separate use of channels for our core product groups and for long-tail variety products, in order to further improve the efficiency of our Sauce and Seasonings and Quick Nourishment businesses. For new long-tail products that we’re considering launching in or after FY2021, the plan is to first test-sell these through e-commerce, watch consumers’ reactions for about six months, then make the decision to expand the products to the mass market, continue selling them as long-tail products, or stop sales.

This has been discussed in various settings, but the major assumption is that we will not return to the pre-COVID-19 world even after COVID-19. I think there are two big trends. The first trend is that it will become a world in which the connections between people are very highly valued. The major theme here is how to incorporate food into that. One of the gateways is health and nutrition, which creates the value of caring for the health of your family as well as yourself and placing importance on nutrition. The second big trend, and this has been happening for some time, is that many people of all generations have experienced getting information online. There have been very big changes in how we shop, communicate and gather information. Therefore, even in the area of food, not simply the taste and the menu, but also the additional information that comes with it, for example, how the food was made, the food culture it is from, the kind of ingredients used, and the nutritional value, is transformed into experiential consumption and translates into consumer purchasing behavior. Meanwhile, real human interaction is not likely to return to its pre-COVID-19 state. Consequently, I think marketing activities that translate into the “experience of eating” will be very important in each country and region.

(Q: Does responding to such changes fit with your MTP?)

I think there is a good fit. People’s increasing health and nutrition literacy, which is the first trend, fits well. Moving on to specific purchasing behavior, we can provide solutions through a choice of products and menus at a wide range of prices. The challenge for us is the area of consumer purchasing behavior through digital technology. The new channels such as e-commerce, home delivery, and D2C do not account for a large amount of our sales yet and have only just started. As much as we can, we must run trials during the period of living with COVID-19 to develop new channels and create points of contact with customers.

We are reviewing the value of seasonings again. In the past, we have profited by selling our leading products and long-tail product varieties. However, in the COVID-19 environment, consumers have started ordering directly through e-commerce. E-commerce is suited to long-tail products, but I think that brick-and-mortar stores are no longer a business format that is suited to long-tail products. Consequently, we need to pursue efficiency in brick-and-mortar stores by promoting menu proposals for our core products (e.g., for HON-DASHI®, we make proposals for preparing a wide range of menus, not just Japanese cuisine), and create an environment in which consumers accept the proposals. Meanwhile, we will provide long-tail products using D2C such as e-commerce to meet the needs of consumers who seek variety. I think that we need to change to this model for seasonings. I believe that we can adjust adequately.    

(Q: When there are seasonings with an excellent brand and a wide range of price brackets, it is easy for consumers to buy them at brick-and-mortar stores. With direct sales, I think that demand will increase for higher value-added frozen foods and items that are closer to end products rather than seasonings. If this is correct, I think how you develop your packaged food products will be more important. What do you think about this?)

Seasonings and packaged food products are both important. In a September survey in Japan, more than 50% of respondents said their frequency of home cooking had increased. Moreover, 10% intended to increase it further. This is a really big development, and there has also been a dramatic increase in the number of visits to our menu search site. I think what has happened is that the number of people who have increased their home cooking but who are not satisfied with their usual repertoire has risen. Consequently, it seems menu proposals using menu-specific seasonings or existing seasonings, which people have not considered before, now have value. Both basic seasonings and menu-specific seasonings are underpinned by strongly rooted demand, so I think what I have just described is what is happening. Sales of menu-specific seasonings have increased in the countries which are our main markets overseas as well. We presume that the same thing is happening overseas and not only in Japan.

(Q: How much is the growth in menu-specific seasonings?)

The growth is nearly 20%.

(Q: Are we to understand that your menu-specific seasonings and new product concepts have hooked consumers?)

I think that the appeal of both seasonings and packaged food products in the past was mainly in the ease of reducing preparation time. However, the more time people spend at home, the more idle time they have. Amid a decrease in entertainment, I think that the number of people who are enjoying cooking itself has increased. Consequently, I think products that broaden the range of home cooking and information to support this, rather than creating trends based on convenience as in the past, will give rise to big demand. 

(Q: Is it possible you will be able to gain market share from rivals after the COVID-19 pandemic when you have the range of menu proposals and technology to create deliciousness?)

There are still many menus we cannot provide. In particular, the menus that professional chefs and the restaurant industry provide exceed our home-use menu variety. I think we have the opportunity to promote services and ways to use products that allow consumers to create new menus by themselves.

The development of a vaccine is very big news. It has been developed at miraculous speed, and I think it was around six months faster than initially expected. However, there is varying information on the rollout. I hear that 50–60% of people in Europe and the United States say they do not want to be vaccinated. It seems that people who need it will be given priority for the vaccine. I think this means medical professionals, people with diseases, and the elderly. However, to be honest, I cannot imagine what will happen when there are serious side effects. COVID-19 infections have been spreading again in the United States, and California also entered a lockdown just the other day. The virus had also appeared to have settled down in Brazil at one time, but there have been reports that it is spreading in rural areas. Consequently, the situation is still unpredictable. We plan to operate a lean business based on the assumption that COVID-19 will take all of next year to settle down and it will be FY2022 when things return to normal as in our initial forecasts.

(Q: Is it the correct perception that there will be no significant changes to the business environment in which regular seasonings, menu-specific seasonings, and Asian category frozen foods are robust until at least the first half of FY2021?) 

We think the positive conditions will continue. However, our concern is that cooking fatigue will also set in as at-home cooking increases. Nearly 20% of people would also like to decrease home cooking. Although I think that the baseline will remain high, the point will be to engage in marketing that empathizes with those kinds of people and can propose cooking methods that do not feel like a burden. 

(Q: I think that even though things appear the same, there are differences if you change your perspective. Do you think there is a new opportunity here?)

That is correct. On the other hand, we expect that demand for frozen foods will still continue in the United States, where infections are widespread, as there are few opportunities to cook at home in the first place. The challenge for us is that we were unable to supply sufficient products up until Q3 of the current fiscal year, and we will resolve this in Q4. We would like to include this investment as a positive factor for next fiscal year. 

Regarding our spending on sales promotion expenses and advertising expenses, there were times when we couldn’t release new products or make communications investments under the pandemic. As a result, marketing expenses decreased in the first half of FY2020. Issues also arose. Specifically, some seasonings and packaged food products in Japan lost market share to low-priced private brands, something we are now taking steps to address.

In FY2021, we need to strengthen sales promotions to regain market share. As we were unable to carry out promotions in Q1 of FY2020, I think that FY2021 marketing expenses will naturally be higher. At the same time, as we move ahead with digitalization, more efficient operations are also appearing. We want to have solid control of this.

Under conditions that caused us to refrain from discount sales throughout Q1 and Q2, our share fell due to a widening of the price difference with private brands and other competing products. In the second half, we want to return sales promotion activities to the norm and work to recover market share. As we were nearly unable to release new products that were scheduled for autumn launch, we’re now making launch preparations for 2021. We’ll announce new products in January, which will require marketing investments for introductions in February and March. These will mainly be communications expenses and in-store sales promotion expenses. We expect these to be significant in Q4 of FY2020.

We managed to implement transformation steadily throughout the first half even in the COVID-19 environment. Although asset reduction stalled for about six months, which was a concern, we have been able to get back on track and catch up. 

As for what we did not accomplish, amid a commitment to fulfilling our responsibility for stable supply of products, some businesses experienced stock outs and supply shortages and were unable to achieve adequate supply. In this regard, I think there are areas in which we have not yet established mechanisms for prioritizing the product portfolio, ensuring supply capacity for core businesses, and reflecting demand forecasting in production in a flexible manner.  

With regard to the appropriate use of marketing expenses, the idea of establishing marketing strategy based on the previous year’s experience is still ingrained. The decrease in selling, general and administrative expenses in the first half was observed due to COVID-19 rather than being intentional. I think that we must engage in a thorough review, visualize any waste in the business, and create a management system that uses the expenses appropriately. This remains an issue.

FY2020, particularly Q1, was an extraordinary period, and we did not use much advertising and sales promotion expenses. Therefore, Q1 of next fiscal year is unlikely to be the same as this year. Consequently, we will use expenses appropriately to win the competition while holding a solid baseline. We will factor this firmly into our business performance forecasts, and we will use other expenses efficiently while monitoring conditions this year.

(Q: Are we to understand that you do not envisage a large increase in selling, general and administrative expenses from FY2021 Q2 compared with the previous year?) 

That is basically correct. However, it will not be the case in areas with particularly tough competition.

As noted in the presentation materials for the FY2020 first half financial results announcement, our forecast for FY2020 is ¥33 billion in existing expenses. Growth investments, such as those for DX, are in addition to this, so the total is ¥36.7 billion. For FY2022, existing expenses are shown in a bar graph. I hope you can gain insights from that.

We are examining this closely at the moment. Unlike the factors associated with resource-saving fermentation in the past such as main raw materials and sub raw materials, supply chain and procurement operations have become extremely complex, and many employees are involved in the business. There are areas of overlap, and we cannot separate and organize supply chain management or procurement on their own. I would like to take more time and be able to give a firm announcement when we make the plan for next fiscal year. However, we are at the stage where it has become quite clear where and how much margin there is likely to be for improvement.

(Q: In your opening comments, you said there seem to be prospects for asset reduction. You say the profit outlook for next fiscal year will be higher and there will be cost synergies, but there will be sales promotion expenses. Business profit this fiscal year could be as much as \110.0 billion, and you have said previously that the image for FY2022 is around ¥120.0 billion. Is my understanding correct that achieving this figure next fiscal year will be difficult?)

I apologize, but I cannot discuss the figures at the current stage. I would like to communicate with you on this topic again.

 

With the latest upward revision, the actual value of business profit is approaching but has not yet completely reached the level of business profit when the FY2020–2025 MTP was initially formulated. Consequently, I think that the current fiscal year forecast of around ¥100.0 billion is close to the current actual capability. However, there are more positives and negatives than when the MTP was formulated, and the biggest factor is the impact of COVID-19. Faced with the extremely challenging environment of COVID-19, our six core businesses really have become the source of our earning capability, and this capability has been demonstrated.

(Q: You say that ¥100.0 billion in business profit is the target based on the current actual value. However, considering FY2021 and beyond, are we to take the view that the question is how much can be added to this ¥100.0 billion?) 

I cannot mention any specific figures, but we would like to be able to add to it. I think we are now able to predict to a certain extent both the positive and not so positive direct level of impact from the spread of COVID-19 infections. Going forward, there are multiple factors of concern. In other words, I think that certain risks still remain with some level of probability with regard to geopolitical risk, events connected to COVID-19 and disasters, and economic trends in emerging countries. We will monitor such risks thoroughly. In any event, there is no change to the prospect that it will be FY2022 when society is completely unaffected by the impact of COVID-19. We would like to find further cost reductions to secure the baseline under any conditions, and to exceed it if possible. 

DX really signifies transformation rather than digital. Basically, it means that we visualize work in all departments, stop any inefficiencies and introduce digital technology when making operations more efficient, and the approach is cross-departmental transformation utilizing digital technology.  

The main themes are as follows. The first theme is SCM. The second theme is work innovation in administrative departments, which includes procurement. In particular, procurement includes the theme of inventory reduction in addition to work innovation. The third theme is marketing, which we will visualize and transform into more efficient activities in order to increase so-called marketing ROI. The fourth theme is R&D in which it may be possible to double the speed of development. We are just starting an initiative that will replace all the previously analogue development processes with digital processes and visualize them with the aim of greater efficiency through company-wide sharing of processes. The fifth theme is increasing work satisfaction and engagement of human resources, which is a very important area. To achieve this, we have introduced the global engagement survey and have analyzed the results. This is the second year since we began conducting the survey annually. In particular, I think that increasing the number of employees who feel they are contributing to enhancing ASV and customers will undoubtedly contribute to business performance. We are working to visualize the survey using digital mechanisms.

Finally, there is the creation of new business models although it is still at the trial stage. In this area, we will collaborate with people who have introduced cutting-edge digital technology primarily in external D2C, agritech, foodtech and areas around healthcare. And we will invest in some cases.

First, the major premise of DX is the visualization of operations before digitalization. Therefore, we visualized SCM and procurement from that perspective. Doing this made it clear that there are some trade-offs among the relationships of cost reductions, optimization of operations to achieve them, and ensuring governance.   

In terms of operations, departments such as production, sales, business divisions and procurement each conduct demand forecasting and ordering based on their own discretion. From the governance perspective, it is required to pursue traceability and competition among multiple companies in both procurement and supply chain management in order to uphold compliance. With operations divided as I described above, we have not managed to pursue overall efficiency. Through visualization, we have begun to understand where we can make improvements. We are now carefully examining this and working toward incorporating cost reduction goals from next fiscal year onward.   

(Q: What are the specific areas where cost improvements through DX have been seen?)

I think the biggest results are in the supply chain management and procurement areas. DX is proceeding in a variety other fields, such as marketing, R&D, and improving employee engagement, but the supply chain management and procurement areas are likely to be the big ones from the perspective of cost reductions.

(Q: Does this mean that you will accelerate efforts from next fiscal year onward in the themes of marketing, R&D, human resources, and new business models?)

Improving marketing ROI and doubling the speed of R&D are still at the trial stage. The real results will come in and after FY2022.

 

 

I think that the significance of DX is in the aspect of transformation and work innovation rather than in the digital aspect. In the marketing field in particular, I think the significance of DX will be improving ROI. 

I think the important thing is to develop marketing activities that include not just products but also information with consumers divided accurately into segments. Product strategy and communication are also included in this. Consequently, we are now able to find best practice although we may not manage to present it concretely in figures. Going forward, I would like to share this with you through presenting case studies.

We are not particularly concerned about a fall-off in home-use demand in FY2021. To put it in a nutshell, the increase in home-use demand is a value and behavior that has become established during the COVID-19 pandemic. We think that the shift from dining out to at-home dining, which includes prepared meals, is a trend that will remain very strong. As for R&D innovation, in recent years, for example, following umami, we have identified and formulated kokumi (richly flavored) substances, which we have applied to products (e.g., to make gyoza delicious, to make commercial seasonings delicious, to increase the rich flavor of dairy products in the Solution and Ingredients business.) Using kokumi substances has enabled us to strengthen the range of our seasonings business and our packaged food products.

The development of kokumi substances took 15 years, and I think this is a problem. As part of DX, we are working on whether we can halve the time from the search for ingredients through to the creation of the final formulation and development of applications to solve the issues of end users. I think this is the potential of innovation in R&D. Our kokumi substances are original, so I think this is a growth driver that has been very powerful during the COVID-19 pandemic.

(Q: Although I think that home cooking itself is taking root in Japan, I would like you to explain whether marketing transformation in Asian countries will be able to secure your advantage compared to previously from the perspective of the competitive environment.)

The menu-specific seasonings category, which accounts for approximately 10% of overseas seasonings, consists of products we have developed ahead of the competition and are very strong brands, so product recognition is extremely high. Seasonings is a category in which we basically have a first mover advantage, so I think the fact that our products came to be used in many homes during the COVID-19 pandemic is likely to be a very big foothold. Menu-specific seasonings have experienced nearly 20% growth in sales, and we hope to take advantage of this momentum.

On the other hand, foodservice has faced extremely challenging conditions, and large packages of products including AJI-NO-MOTO® and flavor seasonings RosDee® and Masako® have struggled with this impact. However, the small package category has grown more than 10%, and we would like to firmly capture demand in this area through menu development.

From the perspective of competition, we cannot relax completely because our competitors’ market share positions and our positions in basic seasonings and flavor seasonings vary depending on the country. I think it will be necessary to take firm steps to respond to competitors in Vietnam and Indonesia which have similar market share to us. We would like to win without being caught off guard.

There are several factors behind the rapid progress of asset reduction measures in animal nutrition. Firstly, I think that the animal nutrition business is related to national policy on agriculture in the region. Consequently, while funding for the industry overall is definitely very tight, I think regional and government support can be obtained. Secondly, the gap between the real economy and financial markets is widening, and I think that movement of funds generally becomes more active at such times as well. Nevertheless, we are about six months behind, but I want to share with you the fact that we are making enough progress to make up for this.

The businesses targeted for structural reform are the major factor in sales and profit decline, and this decline will be reduced. In addition, if we sell those businesses, we should be able to increase capital efficiency as well as making cost savings. Although the topline will inevitably go down, you can expect that we will be stronger in terms of business structure.  

After asset reduction, we want to concentrate on activities that leverage the functionality of amino acids in solutions for the early detection and prevention of diseases in the healthcare field, to solve food and health issues. Specifically, these will be things like menu proposals and supplements. We will personalize solutions through digital marketing, present optimal menus and nutritional value, and offer supplements to complement these. Currently, we face shortages of development capabilities, design capabilities, and human resources with digital literacy. In those areas, we’ll carry out human resource development through joint projects with venture companies, academia, and so on, and will create our next business models.

In late October 2020, we began offering new services added to AminoIndex® Risk Screening (AIRS®). It has become clear that the field of improving diet to prevent metabolic syndrome and the field of improving diet to prevent cognitive decline are fairly close to each other. We want to clarify the causal relationships to focus on the development of solutions that prevent the onset of disease, and turn this into a new business.

Forms of distribution vary from country to country. We engage in traditional trade (TT) as well as modern trade (MT). We appoint wholesalers in some areas, and sell directly in others. I think a characteristic of the Company is that our sales force is building optimal forms of distribution. The situation is quite different for competitors, who only have some supervisors working with wholesalers or who have dedicated MT teams. Our approach is that if TT markets are closed, we will shore up MT, and if convenience stores are growing, we will shift personnel to those and will flexibly create dedicated teams. In that respect, I think we can fight a strong ground battle.

E-commerce is also active in places including Southeast Asia and Brazil, so we’re making steady efforts to supply products. At present, our core products are what tend to sell through e-commerce, which has become a necessary channel for securing a certain level of market share. At the same time, shipping charges are an issue. Even in the Five Stars countries, we believe there will be certain limits on how stores and consumers will make use of e-commerce while bearing shipping charges. As such, I hope you will see flexibility as one of our strengths.

We are also very worried about Thailand. As we originally forecasted, we think that Thailand’s recovery will be the most delayed. The main industry is tourism, which is connected to the foodservice demand. Even now, large packages of Ros Dee®, which accounts for a large proportion of seasonings, has not come back. Demand for small packages is strong, but we believe that overall sales exceeding the previous year’s level will not take place until FY2021.

While we think that tourists will gradually return, there are also concerns about the political movements, demonstrations, and protests that are taking place. We hope that negative effects of these will not remain in FY2021.

HON-DASHI® and Cook Do® are leading products within domestic seasonings. Stable supply of these was difficult in Q1 in particular; price differences from private brands appeared due to our inability to undertake special sales promotions, resulting in a small dip in market share. However, the price differences are gradually shrinking, and demand is returning. Looking overseas, while the competitive environment differs by country, so far we have not received any reports of loss of market share due to price differences in home-use products, and I think there is no trend toward this. Sales of home-use seasonings for all main overseas affiliates have grown by about 10% on the basis of local currencies. In our view, it is mainly the Japanese market that is facing an environment of intensifying competition.

Looking at packaged food products, Knorr® soup is a leading product in Japan, but not much of a price difference from private brands has appeared. We recognize that product supply is stable and that sales are turning toward growth. Overseas, Birdy® makes up a large proportion of sales in Thailand, but was hit hard by stay-at-home restrictions. Demand has fallen at locations such as roadside convenience stores in particular, and a difficult situation is continuing through Q2. The low-sugar type of Birdy® is doing very well, and is making up somewhat for the shortfall. We see no signs at present that the competition will launch a significant price offensive as in the past.

(Q. What about frozen foods in Japan?)

Despite the impacts of COVID-19 and offensives by competitors, the market share for frozen foods as a whole in Japan is not moving much. Accordingly, we understand that our growth did not exceed the market, and neither did the competition’s.

Overseas, even the Five Stars are not showing a trend toward large share fluctuations. In Vietnam, however, where we lost share in FY2019 due to competitors’ offensives, competition is continuing in flavor seasonings, and we recognize that share has not returned.

(Q. Are you saying that growth in menu-specific seasonings remains tangible, but the Company’s position there has not changed significantly?)

I would like you to see it that way. As menu-specific seasonings is an extremely diverse field that includes things like soy sauce and traditional seasonings, it’s difficult to talk about our market share in broad generalizations.

Menu-specific seasonings made with oyster sauce and fried chicken seasonings are examples of areas where we are strong, commanding the top spots in the categories. The categories are growing by nearly 20%, so I think the top brands are driving the market.

 

It is about 10%. However, some liquid seasonings can be used for both general-use and menu-specific products, and we cannot distinguish between them here. If we include liquid seasonings, the percentage is 15%.

(Q: What is the percentage of menu-specific seasonings in Japan? Also are we to understand that growth has been 20%, the same as overseas?)

Menu-specific seasonings in Japan account for around 30% of all seasonings. The growth rate in Japan is not as high. 

 

In the countries where we do business, I think the biggest support consists of unemployment compensation in the US and relief payments in Brazil. Regarding the US, I think there will not be a problem with stamina even if compensation continues for a long period, but there are specific concerns about Brazil that require us to pay close attention.

However, there is likely a bit of difference between the categories for which consumption is boosted by relief payments, and the categories of our seasonings, which are daily necessities. If consumption declines even for seasonings, this would be a phase of increasing anxiety about the country’s economy itself, or some other perspective. In that sense, I think there’s no need to take it too negatively.

Overseas, people who until now bought and ate finished foods or who focused on convenient foodservice have now experienced opportunities for cooking at home. It’s a very significant thing that these consumers have become aware of seasonings and packaged food products that enable easy cooking.

Already nine months have passed since the COVID-19 pandemic began. Looking at Southeast Asia alone, it may appear that the risk of infection there is declining compared to Japan and other countries. In reality, however, in Indonesia and other countries, it’s possible that there are more infected people than the governments have announced, and that infections are still expanding. In Vietnam, too, where new infections had once stopped, cases are on the rise again, and the government is moving to place very strict restrictions on going out. In Thailand, people have yet to return to eating out. So, until the vaccine reaches emerging countries and interactions among people return, we will have to continue our lives of back-and-forth progress for quite some time.

Under these circumstances, we expect that new lifestyles will take root among a lot of consumers. Even if these consumers go back to eating out, they’ve experienced new menus at home, and will likely be more conscious of nutrition-aware and health-aware low-salt cooking and cooking that prevents poor nutrition. We think that the result will be an improvement in the international consumer food products baseline, which we see as a great opportunity to instill our strategies for solving food and health issues.

As you note, I think that in the first half of FY2020 there was an increase in high-unit price menu-specific seasonings due to the pandemic. This includes a degree of impact from successfully raising prices on main products in some countries, even under an environment of economic deterioration. When we formulated the FY2020–2025 MTP, we factored in improvement of the product mix through double-digit growth in menu-specific seasonings, but consumption exceeded that under the pandemic. How we make this entrenched is becoming an important theme.

At the same time, increasing unit price through the provision of added value to address health consciousness is something we haven’t yet fully carried out. As our reduced salt- and poor nutrition-focused marketing strategy is finally coming together, especially in the Five Stars, we will concretely roll this out in FY2021 and launch products that contribute to salt reduction and address poor nutrition. Through this, we want like to counteract the slowdown in unit price growth that is expected to occur when the effects of COVID-19 have subsided.

(Q. Regarding health consciousness, are there actually consumer needs in places like the Five Stars countries of Indonesia and Vietnam, in terms of maturity of the economies? Should we understand there has been some response?)

We’re starting to feel a considerable response. When we announced the FY2020–2025 MTP, we heard from investors who had misgivings about it. With respect to this, the environment under COVID-19 has been a tailwind. It’s said that the most important measure against COVID-19 is keeping the immune system strong. In terms of diet, this is synonymous with eating in a way that does not lead to metabolic syndrome. Salt intake is particularly high in the Five Stars and their neighboring countries, and movements are gearing up to take action against this. Brazil is urging labeling on packages of processed foods that are high in salt. There are efforts to foster similar movements in Southeast Asia, centered on governments and WHO-related organizations. I think the impact will be even larger next year than this year.

At Tokyo Nutrition for Growth Summit 2021, which will be held in Tokyo in December 2021, improvement of nutrition will be a major theme. The United Nations is also planning a Food Systems Summit where the issue of salt reduction will likely be taken up. We think this movement will become quite strong.

With respect to brick-and-mortar stores, we aim to sell efficiently by narrowing down items to our core products and increasing the number of menu items that we propose through our core products. Conversely, with respect to e-commerce and D2C, we want to adopt the style of running as we try, developing long-tail products while we pioneer channels. Amid this, we want to work a strategy of catching the next wave of demand and developing with the middle-mass market and mass market.

From the standpoint of increasing our product lineup, I think this will mean strengthening low-salt products and packaged food products that supplement poor nutrition.

(Q. So, should I understand your approach as not widening the category itself, but rather expanding the lineup on your own in fields where the Company already has know-how and R&D?)

The basic idea at this stage is to do it ourselves.

Frozen foods are ahead of schedule because in the MTP we did not anticipate such an increase in demand for Asian category frozen foods due to COVID-19. Meanwhile, demand in commoditized categories has not changed very much. Amid the increasing health consciousness and the shift in demand to Asian category frozen foods, we must also make sure that we implement asset reduction.

Also, the proportion of our business from restaurant-use products is quite high in Japan, and the decline in restaurant-use products is more severe than in the United States. In terms of improving efficiency in restaurant-use products, this was an issue that we originally had to reform during Phase 1 in FY2020–2022, and I think we have been unable to resolve it. Reform is needed by the end of FY2022 because if we have not dealt with this issue by the time COVID-19 situation settles down, it will impact profitability as well as ROIC.

(Q: Although the acceleration we are seeing now in top-line improvement is above the target of around 1% ROIC planned for FY2022, are we to understand that the acceleration is not fast enough to meet the 5% target for FY2025?)

I agree with you about the speed. However, with regard to 1% ROIC, which is the target for FY2022, I think we can treat it as a minimum that we can exceed by improving the gross profit structure, including a review of the production system that will also lead to a supply chain aimed at Japan, rather than achieving it as a result of the increase in profit because of the boost from COVID-19.

The Asian category retail market for frozen foods in North America is growing more than expected due to the pandemic, with 36% growth forecast for FY2020. By contrast, we forecast growth of about 15% for our Asian category, and we’re aware that our share position is declining. As we can boost production capacity in Q4 to address this, we’ll stage a comeback going into FY2021. This is not simply an increase in production; we are doing this within our efforts to convert commoditized areas of our Italian and Mexican category products into Asian category products, and will also move ahead with asset reduction as planned.

Regarding the switch to OEM, that’s a matter for Japan. In the Japanese market, the competitive environment varies considerably by category, from fields with a lot of room for growth to fields that have become commoditized. For those commoditized fields, our thinking is to shift to fields where we can build barriers to entry through higher added value. As a result, our in-house production will shrink, and we will shift some production to OEM.

(Q. Do you mean that, for North America, you don’t plan to decrease the in-house production ratio?)

Yes, you can understand it that way.

First, I will discuss electronic materials where we recently revised the forecasts upwards. In terms of the major trend of 5G-related data center expansion, user side enhancements have been announced that will feed through to semiconductor manufacturers, and this should continue next fiscal year and beyond. Meanwhile, the baseline of demand for PCs has risen due to COVID-19, and it will be necessary to monitor this because it is thought that demand will shift from PCs to mobile terminals or that demand for servers will increase if there is a certain level of PC proliferation.  

With respect to contracted development in the Bio-Pharma Services business, the pharmaceuticals market is currently extremely active, and this is also leading to the strong performance of amino acids for pharmaceuticals. On the other hand, the major pharmaceutical manufacturers have implemented a considerable shift toward development of a COVID-19 vaccine, and there have been delays in the development of ordinary pharmaceuticals. These delays are due to delays in development by manufacturers as well as the fact that the authorities that grant drug approvals are unable to conduct onsite inspections. With vaccine rollout expected, we think the conditions in FY2021 should be better than in FY2020. 

Even under the pandemic, the specialty chemicals business is benefiting from increased demand for 5G and data center server applications. The business is not only benefiting; it is also undertaking co-development with customers, aimed at goals five or ten years ahead. This doesn’t raise any concerns over a return to volatility in a few years.

We position our electronic materials business as a major contributor to the “Live Well” part of “Eat Well, Live Well.” In our business model, too, we’ve acquired the adaptability needed for high-speed development of the sort that we’d like to incorporate in other B2B businesses. We are certain that, as we head toward 2030, this business will function as one that drives growth and meets the expectations of investors and shareholders.

Investment in tangible assets is primarily capital investment. This has shrunk by about ¥30 billion from the three years of the FY2017–2019 MTP. Our aim is to make effective use of investment in tangible assets by concentrating on our core businesses.

For investment in intangible assets, R&D investment is about ¥87 billion and marketing investment is about ¥94 billion, nearly the same as in the FY2017–2019 MTP. What we have added are investments in DX, new business model development, and human resources, making up about ¥26 billion.

In response to the first half financial results, we believe that we can achieve the three-year operating cash flow of over ¥400 billion that we forecast at the beginning of the period. With the excess, we may be able to speed up investments in foodtech and DX a bit.

(Q. Will the content of R&D investment and marketing investment undergo changes?)

On the whole, these too will shift toward core businesses. In R&D, we will also direct investment to the area of new business creation and in marketing, we will change to investment that will promote DX and improve marketing ROI.

Our shareholder return policy is as promised in the MTP. At any cost, we want to protect a total shareholder return of over 50% for the three years from FY2020 to FY2022, with a single fiscal-year dividend payout ratio of 40%. When we have good financial results, I would like to reflect those in the dividend.

We recognize that the greatest topic concerning climate change is greenhouse gases. It’s true that mass production and consumption of meat emits large amounts of CO2, which places a higher burden on the environment. However, humans eating vegetable protein won’t solve all of our environmental problems. Our thinking is to work with an emphasis on avoiding release of the greenhouse gases that are the source of the issue, and on recovering the gases.

In this area, we’ve undertaken concrete initiatives aimed at Scope 1 and Scope 2 of TCFD. Regarding direct discharges from factories, we plan to shift as much as possible from fossil fuels to renewable fuels like biomass, and to connect this to RE100. I think Scope 3 is an important area where we can make contributions. Support systems differ by country and region; we want to clear TCFD targets by participating in something like an ecosystem. We plan to disclose our specific activities and numerical targets by the end of FY2021.

(Q. Do you intend to position the area of vegetable protein, including meat substitutes, as a growth driver?)

Vegetable proteins are becoming a big market. We have B2B business relationships with manufacturers handling meat substitutes, and this is now becoming an important business in our Solution and Ingredients Business. I’d like you to understand that if the market for vegetable proteins expands, that will also mean great opportunities for our B2B business.

Regarding our development of foodtech, on July 1, 2020, we appointed a Chief Innovation Officer (CIO) and organized our related structure. Since then, I’ve met with top management of venture capital firms and venture companies while staying in touch with outside parties. Exchanging information with these, I’ve found that innovators are entering the food industry field very rapidly. Regarding our integrated accelerator program, we began recruitment in June and received applications from 148 companies. There will be six companies in the end, and we’ll enter the process of exploring concrete collaboration.

Broadly speaking, this involves three areas. The first is agritech. Things like cultured meats and plant-based meats will move to a large stage. We want to find points of contact with businesses like our Solution and Ingredients Business. The second area is personal nutrition. There is still a lot to be done in the field of preventing diseases amid everyday living habits, and we believe that we can provide major solutions in combination with our amino acid technologies. While we can now measure personal condition through means such as AminoIndex, what sort of solutions should be provided to whom is not clear. This should become clearer through digitalization. In the area of designing business, there are activities by digital designers and digital engineering unthinkable in terms of our knowledge so far. We want to tie up closely with foodtech partners and create a large business in the field of improving personal life habits. The third area is digital technology in channels and communications that deliver products and services. In these three areas, we want to explore many points of contact and engage in development together, while making small-scale investments from our corporate venture capital (CVC).

(Q. What do you envision as the benefit to be gained by the Company as a first mover in personal nutrition?)

Incorporating the functions of amino acids into foods and receiving compensation through products and services is our specialty. We want to create a structure that will let us earn a solid profit through this.

We made the decision to change our institutional design to that of a company with a Nominating Committee, etc. after about two years of discussions with long-term investors and asset owners. The biggest point is that the Board of Directors will be centered on Outside Directors and will be able to exert its full capabilities by gaining insights into the growth of the Company and indicating directions. The executive team will be given full responsibility and authority to achieve that major policy, and will do so in monolithic fashion under the CEO. The team will take responsibility for any failure to execute. In the Board of Directors, the composition ratio of Outside Directors will become larger than that of Internal Directors. This will let us execute with discipline, which I think is a good point.

Conversely, if we move ahead without outside directors having a good understanding of the Company, I think there will be a gap between outside directors and the executive team. Accordingly, relationships of trust within the Board of Directors will be very important. I want to move ahead solidly in this area and enhance the effectiveness of the Board of Directors.

I think it will be vital for the Sustainability Advisory Council, taking the standpoint of outside multi-stakeholders, to suggest to the Board of Directors areas in which the Company can take initiatives aimed at sustainability from 2030 onward. As such, we established the council in a form that is directly connected to the Board of Directors.

(Q. Do you expect that management of asset reduction will progress further under these changes in institutional design?)

We created the FY2020–2025 MTP by backcasting from our ideal vision for ourselves in 2030. The plan places particular importance on execution of organic growth and improvement of ROIC. Accordingly, we are now moving ahead in management with a strong will to achieve ROIC of 8%, the average value in the global food sector, in FY2022. If the new Board of Directors decides that further acceleration is needed here, the executive team will fully carry out their responsibility to make it happen.

Regarding whether we’ve become more open, I think we have to continue looking at this. But what has definitely become a positive factor is increased engagement with the Company. In particular, the score for “ASV as own initiative” was 55% until last year, but it improved by 9% in this year’s survey. At the same time, 36% of employees have yet to achieve this “ASV as own initiative,” which I take to mean that issues exist for organizational management.

However, there is no doubt that we’ve taken actions toward improvement. This year, in our management cycle to enhance ASV engagement, we’ve held dialogs across the organization with the CEO on the management plan (53 times in total, targeting about 3,000 employees), dialogs with general managers, setting of organizational goals, and meetings for sharing personal goals. We’ve confirmed through joint research with outside parties that improvement of engagement is highly correlated with improvements in sales, profits, and ROA. As such, we believe that this will work in a positive direction in the future.

(Q. Do you have the impression that employee engagement has improved and has started to move, or that the actions of management have improved?)

I think the biggest thing is that all employees are presenting their personal goals, and the management team is becoming aware of these—that is, that communication has become better.