The sun sets on a retail empire - Wada leads group from ...

Mariko Hayashibara

Driven by religious fervour and a love of China, a Japanese retail group chief nurtured an expansionist dream. But the dream turned into a nightmare and now, writes Mariko Hayashibara, Wada's core company is filing for protection from creditors.

On a rainy Monday afternoon, deputy managing director of Yaohan Food Processing & Trading (YFPT), one of the Yaohan group of companies in Hong Kong, sits in the company's conference room and points at the empty wooden wall.

'There used to be a picture of Mr Wada [there],' he says with a sad smile.

The portrait of the Yaohan group's charismatic chairman, Kazuo Wada, was taken down from the wall last March, signalling the possible collapse of a retail empire and the demise of one of the industry's best-known names in Southeast Asia.

Nakayama, 51 who has worked with Wada for almost 26 years, says he was sad to see the chairman's picture removed, but felt obliged to accept what was seen to be good for the group. Yaohan, which was founded by Wada's parents in 1930, is having liquidity problems in its Japanese homeland. To save the company from the receivers, the group began restructuring its international operations earlier this year in an attempt to generate cash. It paid particular attention to its Southeast Asian operations.

As part of the scheme, Yaohan in Hong Kong sold 31% of its holdings in YFPT to food processor Four Seas Mercantile Holdings in March. Four Seas now controls 40% of YFPT.

The group's restructuring effort did not help much. Six months after the sale of YFPT, Yaohan Japan Corp, a core company of the Yaohan group, filed for court protection under Japanese bankruptcy law with debts of more than 160 billion yen (about US$1.3 billion). It was the latest in a series of large-scale bankruptcies in Japan and the first bankruptcy among listed retail companies.

Last month, Jusco Corporation, one of the top three retailers in Japan, announced it would support Yaohan Japan, a move that took analysts and economists by surprise. It is not yet clear how Jusco will help.


Mitsumasa Wada, Yaohan Japan's president and the brother of Kazuo, says Yaohan Japan's failure was due to its excessive investment both in Japan and overseas. He says this made it impossible to redeem 40 billion yen in convertible and other equity-linked bonds. The group, he says, also suffered from the effects of deregulation, which brought greater competition in the retail market in Japan.

With its aggressive business expansion in Asia, Yaohan became a top Japanese brand in the region over the past decade. Even Beijing pop-singer Ai-Jing sang in her early nineties song, 1997, that she wanted to shop at Yaohan after Hong Kong's return to China. In China and Southeast Asian countries such as Singapore and Malaysia, the name Yaohan became a part of local culture.

According to a recent survey conducted in Hong Kong by market researcher Asia Market Intelligence, 26% of 1,000 respondents had been to Yaohan within the previous week. Of those who had been, 76% had made a purchase -- the highest figure among the department stores surveyed, which included Jusco, Wing On and Sogo.

The high recognition of Yaohan's brand in China, Hong Kong and Taiwan was helped in no small way by Wada's late mother, Katsu, whose struggle to establish Yaohan in the immediate post-World War II era inspired a Japanese TV series that has remained popular among viewers in those areas.

Yet most Japanese are unfamiliar with Yaohan. Despite having the 46th-highest turnover of the 500 or so retailers listed on the Japanese stock market last year, the middle-sized supermarket chain has only about 60 outlets in the country, most of them in Shizuoka prefecture. It is not unusual for the Japanese to shop at a Yaohan store for the first time in another Asian country.

The group's relatively small size and lack of solid strategy made its speedy expansion in Asia 'quite unheard of', according to Howard Smith, retail analyst with ING Barings, Tokyo. In the past decade, the group opened 54 outlets in Hong Kong and mainland China alone. This compares with the nine stores opened by Jusco in the same region.

In 1990, a year after the Tiananmen Square killings, Wada made headline news in Hong Kong when he moved the group's headquarters to the then British colony. Last year, he moved the headquarters once again -- this time to Shanghai. The chairman also committed the group to opening 1,000 outlets throughout China by 2010 and appeared to have banked the group's future on tapping the seemingly unlimited potential of that country.

These ambitious plans catapulted Wada to the forefront of tycoons in Hong Kong and China, where he was revered as a model foreign investor.

Close aides say that behind Wada's almost single-minded pursuit of success in China lay a deep personal affection for the country. He is widely known to be a hard-core Sinophile and an admirer of the entrepreneurship of overseas Chinese businessmen, particularly Li Ka-shing, Hong Kong's charismatic property tycoon. He was so influenced by the overseas Chinese businessmen that 'a lot of Western analysts thought he was Chinese', says Smith of ING Barings.

'China was Mr Wada's dream,' says Nakayama. 'Good or bad, once he had a dream, he did everything to achieve the dream.'

Fall in share price

Many retail-market analysts and executives of rival Japanese stores were sceptical of Wada's aggressive strategy and blame the overseas expansion plan for straining the group's management resources. 'Too many executives were sent overseas, so that its domestic business was neglected,' says Toshiko Binder, retail analyst for HSBC. She says Yaohan was at first successful because it had few competitors, but 'once bigger supermarket chains started their business in the [Southeast Asian] region, the fall of Yaohan began'.

However, not everyone blames overseas expansion for Yaohan's demise. 'People say that Yaohan collapsed because of its aggressive overseas expansion, but it's not necessarily true,' says one director of a large Japanese retailer. 'I think bad merchandising strategy was the main culprit.'

Certainly, customers appear unsure of whether Yaohan outlets are department stores or general merchandising stores. Analysts say Yaohan was too deeply mired in selling local products and local franchises, and that it did not have the reach to succeed against department stores with a more international flavour, such as Takashimaya and Sogo.

Despite warnings from within his own camp, a close aide says Wada never once wavered from his ambitions. In 1995, he opened Nextage Shanghai. At 108,000 square metres, the shopping centre was equivalent in size to Macy's in New York or Harrods in London. This over-ambitious venture was the beginning of the end for Yaohan.

After that, the company's collapse was just 'a matter of time,' says Binder. A year ago, Yaohan Japan's financial woes became apparent when it failed to redeem 12 billion yen in outstanding debt instruments. As Yaohan's share price fell, the company found it increasingly difficult to raise funds by issuing convertible bonds and other debt instruments -- its main source of new capital. Wada's constant refusal to face up to the problem only resulted in its financial problems snowballing. ING Barings' Smith believes Wada's personality exacerbated the problem. Unlike most Japanese companies, Yaohan had never developed a close relationship with one main bank and therefore never had access to the kind of investment advice readily available to other Japanese companies.

As late as early September this year, Wada and his brother Mitsumasa continued to deny rumours that the company was facing imminent bankruptcy. They assured nervous staff, suppliers and investors that the restructuring was going fine and that the company's return to profitability was expected soon.

But instead of making a financial recovery the company plunged deeper into the red, frequently delaying paying employees' salaries and bonuses. Wada was pinning his hopes on a 20 billion yen loan from a Hong Kong business group. The loan never materialised.

Meanwhile, the group had been hit hard by a change in Japan's rules governing retailers. For 25 years, competition in the sector had been restricted by municipal laws that gave protection to existing small and medium-sized retailers in any particular region. It was nearly impossible for newer, larger retailers to gain a foothold in the market.

The change in the law phased out these restrictions in stages over a number of years. Medium-sized supermarket chains such as Yaohan faced stiff competition from larger national retailers. Yaohan seemed to be losing the battle, along with many less well-known regional retailers.

Uncertain future

In Hong Kong, most of Yaohan's businesses were set up as joint ventures with Wada's Chinese friends. In the past seven years, all five of the Yaohan group's Hong Kong companies were listed on the Stock Exchange of Hong Kong. These companies now face an uncertain future.

'We have been so busy negotiating with tenants and suppliers now,' says Toshihiko Kitao, executive director of Yaohan Hong Kong (YHK). Kitao admits that some suppliers have stopped sending products to Yaohan outlets in Hong Kong, although Hiroaki Kawai, managing director of Hong Kong-based Yaohan International Holdings Ltd (YIH) and Wada's son-in-law, has written to them explaining that the problems at Yaohan Japan will not affect the Hong Kong operations.

Economists and analysts are sceptical of these claims. 'Yaohan's cash flow is so complicated and invisible,' says HSBC's Binder. 'It's difficult to ascertain their relationships.'

Kawai has announced that the group will concentrate resources on its core business of department stores and supermarkets, and Yaohan has disposed of some of its property and share investments in Hong Kong to reduce its involvement in non-core activities. The proceeds from these transactions were mainly used to strengthen the cash position of the group and provide additional working capital, he said.

The sale of property interests in Macau and Hong Kong has already brought in approximately HK$1.05 billion (US$ 136 million) and the group's sale of its interest in Yaohan International Caterers (YIC) and YFPT netted about HK$215 million. However, as one analyst at Nomura Securities in Hong Kong says, the Yaohan group of companies in Hong Kong will still have difficulties getting loans from banks because of the damage done to their reputation.

When the news of Yaohan's application for bankruptcy protection broke, trading in the shares of the five Yaohan companies listed on the Hong Kong Stock Exchange was suspended. The companies are undergoing restructuring.

'These companies are suspended only because they have Yaohan in their names and it's not fair to their shareholders,' says Glenn Chen, managing director at YIC, which operates 25 restaurants and 56 bakery shops in Hong Kong. YIC has announced that it will drop Yaohan from its name.

Yaohan, like many other department stores and supermarkets, has been hit by the sluggish consumer market in Hong Kong caused by the decline in tourists and high rents.

YHK, which mainly operates supermarkets and department stores, has been in the red since 1995. According to Nomura Research, however, it has already reduced its losses by 40% and is likely to turn around this year. Executive director Kitao attributes the loss to an increase in rent. The rent at one outlet went up 500% in three years.

Kitao says the company is considering a number of cost-cutting possibilities, including lay-offs.

Amid all this gloom, an unlikely rescuer has emerged in the form of Jusco. Last month, the Japanese retailing giant announced it would help prevent Yaohan employees from losing their jobs in order to minimise the economic impact of Yaohan's collapse in Shizuoka prefecture.

Analysts think Jusco's ultimate aim is to get a foothold in the prefecture, where it has no outlets at present -- a claim Jusco denies. 'We are not expecting to expand to Shizuoka prefecture,' says Akihito Tanaka, managing director of Jusco Stores (Hong Kong). 'There are so many prefectures where we don't have stores such as Hokkaido, Wakayama, Kyushu and Shiga.'

An analyst with a Tokyo think-tank that specialises in the retail sector believes Jusco is after Yaohan's talented young employees, who joined the company after being promised overseas postings.

Whatever the reasons behind Jusco's move, it seems unlikely that the white knight would be interested in Yaohan's outlets. Earlier this year, Daiei, the largest own supermarket chain in Japan, bought 16 of the top-performing Yaohan stores. The remainder are not an attractive prospect. 'I don't understand why Jusco would want Yaohan stores,' says HSBC's Binder. Worries about the insolvent company's workforce do not appear to be the first priority in Hong Kong, where the Japanese directors of Yaohan companies wait to hear their fate. YFPT deputy managing director Nakayama seems more worried about the company's good name than his future.

'We have decided to drop the name of Yaohan. After all, this is the best for us in order to keep operating our business,' he says. But he adds: 'No matter what happens, I want to protect the name Yaohan in department stores in Hong Kong. I want to defend this to the last.'

Yaohan's Profit and Loss for the past five years

(Loss)/Profit after taxation of recent years
Company 1993 1994 1995 1996 1997
(Year ended 31st March/Unit HK$,000)
Yaohan International Holdings Ltd. 231,142 373,925 224,793 156,989 28,285
Yaohan Hong Kong Co., Ltd. 53,434 30,045 (45,258) (164,389) (102,099)
Yaohan International Caterers Ltd. 101,436 92,599 100,015 94,780 78,997
Yaohan Food Processing & Trading Co., Ltd 34,303 38,940 59,467 10,085 (28,906)
Whimsy Entertainment Co., Ltd. 22,822 27,251 75,693 32,361 (32,355)

Sources: 1997 Annual Report of each company

Yaohan Group Company Structure

Yaohan International Co., Ltd. (Wada family)
| |
Yaohan International Holdings, Ltd.--------------------------------- Yaohan Japan Corp.
| | |
|-- Yaohan Food Processing & Trading Co., Ltd. Yaohan Shanghai |- Nextage Department Stores
|-- Yaohan International Caterers Ltd. |- Big Eight Discount Stores
|-- Yaohan Hong Kong Corp., Ltd. |- Yaohan Finance
|-- Whimsy Entertainment Co., Ltd. |- Yaohan Singapore
|- Thai Yaohan
|- Malaysia Yaohan
|- UK Yaohan
|- US Yaohan
Note: It's subject to change.