Current Situation and Strategies Contracted Food Services The environment surrounding meal services has changed drastically, as witnessed by the fierce price competition and inroads into the Japanese market made by foreign-based food service providers. However, our contracted food services aim to increase profits through unique strategies. TRENDS IN THE CONTRACTED FOOD SERVICES MARKET An increasing number of foreign-based meal service providers have set up operations in Japan, the world s second largest market, as part of their global expansion plans. The Japanese meal services market was estimated to be worth 3. trillion as of the March term, of which an estimated. trillion is accounted for by business facilities, and billion by schools. But the ratio of outsourced meal services for business facilities has already reached 9%, a figure that cannot be increased much further. In addition, the amount of meals provided to these business facilities are likely to decrease as our customers restructure their businesses, and at the same time, these companies are reducing welfare costs. Given that situation, the shrinking of the market cannot be stopped. However, the market shares of the top ten service providers, which include SHiDAX, have only been around 0%. Therefore, major service providers have only just begun to enlarge their shares. Given this situation, leading foreignbased food service providers have quietly advanced into the market, making the competition quite fierce. Reorganization in the meal services industry has also accelerated. Before long, there will be a clear demarcation between companies that have grown their shares and companies that will be absorbed by bigger competitors. In this regard, the Company has an advantage because of our long years of successful business as a meal services provider to business facilities, and because of our accumulated know-how. GOOD QUALITY SERVICES AND LOW PRICES SHOULD ENABLE OUR CONTRACTED FOOD SERVICES TO SUCCEED The Company has prepared menus and recipes that are segmented for different types of business and users, and has analyzed nutrient values, making use of a database built from information collected from, branch offices nationwide. With this approach, we have strived to appropriately respond to the meal needs of all of our customers. In this age of price decreases, we will never satisfy our customers simply by Contracted Food Services Market in Japan billion,3,7,3,9,0 Sales of Contracted Food Services million 37,4 4,70 0,74,37 7,3 Number of Full-time Workers and Part-time Workers in Contracted Food Services people,30,93 9, 9, 9,3,47 7. 4.3..7.7 49 49 47 4 44 3.4,44,40,30,3,7,7 97 9 0 9 0 0 /4 /0 0/4 0/0 0/4 0/9 Business facilities Schools Source: Food Service Industry Survey and Research Center Part-time workers Full-time workers Ratio of part-time workers(%) 0
providing high quality services; they must be provided at ever lower costs. So the points that need to be considered are the personnel and foodstuffs costs. To reduce personnel costs, we plan to raise the ratio of part-time workers to 90%, thereby significantly decreasing over several years the ratio of personnel costs to sales, which currently ranges between 40% and 0%. In other words, we have attempted to entirely revamp the conventional wage system. At the same time, we will improve our shared menus and other systems so that even part-time workers can effectively provide safe and delicious dishes to our customers. When it comes to food material costs, the amalgamation of the food services and restaurant and karaoke businesses has further increased the economies of scale, in terms of the integrated distribution system. That has enabled us to purchase better quality foodstuffs at lower costs. In addition to the above, we regard business expansion strategies through M&A to also be important, making use of funds obtained by selling our U.S. subsidiary. These efforts to improve quality and price, as well as the aggressive expansion policy, should allow us to succeed despite the ferocious competition. Year ended March 3, NUMBER OF BRANCH OFFICES NATIONWIDE (Contracted Food Services) Hokkaido Akita Aomori Yamagata Niigata 9 34 Iwate Gunma Nagano Toyama 4 Ishikawa Fukui Gifu 3 Miyagi Shiga Fukushima Kyoto 3 4 Tochigi Hyogo 3 33 Ibaraki Hiroshima Tottori 3 04 Saitama Yamaguchi Okayama 3 Tokyo 4 7 47 Fukuoka 30 9 Chiba Saga 7 0 34 0 Kanagawa 3 Yamanashi Shizuoka 3 Aichi Mie 9 offices 0 Nara Nagasaki 4 Kagawa Wakayama 0 49 offices 3 Ehime Osaka 0 offices 4 Oita Tokushima Kagoshima Miyazaki Kumamoto more than offices Okinawa
Current Situation and Strategies Medical Food Services Medical facilities are expected to increase their use of outside contractors for food services, and our medical food services are poised to win a significant share of this new business. TRENDS IN THE MEDICAL FOOD SERVICES MARKET The medical food services market is estimated to account for. trillion of Japan s meal services market, as of the March term. The number of hospitals has decreased. However, the ratio of outsourced meals for hospitals has only been about 40%, with the remaining 0% still being provided by inhouse meal services. The revision to the National Health Insurance (NHI) drug prices and revision of medical treatment fees and other factors have made the situation even more difficult for hospital management. In response, hospitals are increasingly outsourcing meal services, and meal services to hospitals have remained a market with large potential. In addition to hospitals, children s nurseries also represent a market with great potential. Even though the birth rate is declining, the number of working women has steadily increased, causing a rise in demand for nurseries. As with hospitals, nurseries are also characterized by a relatively low use of outsourced meal services. Therefore, nurseries are another market with great potential for growth. AIMING FOR NO. POSITION IN MEDICAL FOOD SERVICES INDUSTRY Personnel with professional know-how are indispensable for meal services provided for hospital patients. The Company employs more than, certified nutritionists, and they have tried to share the results of their research activities through regular in-house meetings. In addition, we have regarded the securing and training of certified nutritional administrators to be among the important topics for consideration. We have developed and supplied special foods for patients, such as boneless fish meat. At the same time, we have developed and provided hospitals with our SHiDAX Medical Cafeteria (SMC) system, which responds to the detailed taste requirements of patients while fully giving consideration to nutrient balance. We have also developed a new Medical Food Services Market in Japan billion,074,073,079,0,07 Sales of Medical Food Services million, 3,9,93 9,0,7 Number of Nutritionists and Nutritional Administrators in Medical Food Services people,3,0 40 93 0 4 4.7 97 9 0 9 0 0 Hospitals Social welfare facilities Source: Food Service Industry Survey and Research Center -time workers Part-time workers Nutritionists Nutritional administrators
system that allows us to understand patients needs online and respond to them. The new system has already been adopted at some hospitals. We became the first food services provider to adopt the HACCP system, long before it became the standard. High level safety manuals have been adopted at all office locations, and we are taking further steps to enhance safety and hygeine management. For the rapidly growing medical food services market, the Company will aim to attain the second largest share in the industry within three years, by providing the above series of measures for personnel, organization, systems and foodstuffs. Year ended March 3, NUMBER OF BRANCH OFFICES NATIONWIDE (Medical Food Services) Hokkaido 3 Ishikawa Akita Yamagata Niigata Gunma Nagano Aomori Iwate Miyagi Fukui Shiga 4 Fukushima Kyoto Hyogo Tochigi Hiroshima 9 Ibaraki Saitama Yamaguchi Okayama 74 Tokyo Fukuoka Chiba 9 7 Saga 4 Kanagawa 4 0 Yamanashi Shizuoka 3 4 Aichi Mie 9 offices Nara Nagasaki 4 Kagawa Wakayama 0 9 offices Ehime Osaka 30 49 offices 30 Oita Tokushima Kagoshima Miyazaki more than 0 offices Kumamoto 0 0 4 3
Current Situation and Strategies Restaurant and Karaoke Businesses Even though the karaoke market has become an established part of culture, our restaurant and karaoke businesses aim to employ new concepts to grow market shares and spheres of operation. Karaoke Market in Japan and Sales of SHiDAX COMMUNITY Corp. 4.4. 39,,030 4,4,040 94 9 9 97 9 Sales of SHiDAX COMMUNITY Corp. million Gross karaoke customers people Number of karaoke rooms in Japan TRENDS IN THE KARAOKE MARKET 39. 0,,70.4 0,,790 The karaoke market peaked around -97, and the numbers of users and rooms have decreased each year since then. On the other hand, the number of rooms per karaoke hall has increased each year. This fact suggests that the number of large karaoke halls has increased, although the karaoke market itself has shrunk. Small karaoke halls have been eliminated through a selection process generated by fierce price competition. Today, customers are not satisfied with karaoke halls that merely provide facilities for singing. In the near future, the winners and losers in the market are likely to become more apparent. The Company has tried to maintain clean and pleasant karaoke rooms, offering menus that surpass those being served at many family restaurants and high quality services. With these measures, contrary to the market trend toward contraction, we have increased the number of our outlet karaoke halls. Additionally, based on our own marketing.7 9.,0,0 4,0, 4,0 30.3,90 3,0 Source: Karaoke Industrialist Association and Institute for Free Time Design 0 34.,0 0 43.0 strategies, the launching of new outlets has brought increased sales and operating income, in spite of the sluggish operating environment for karaoke halls. RESTAURANTS ARE OUR COMPETITORS We cannot avoid competing with restaurants and pub chains if we are to pursue the concept of karaoke halls offering delicious food. Since our foundation, we have accumulated professional expertise in food through our meal services. Now, our karaoke halls can share this expertise in providing dishes of a quality that surpass those of family restaurants and pub chains. In addition to two menu renewals a year, we have trendy, seasonal, banquet and other menus that are far broader in variety than those of ordinary family restaurants. It might be more accurate to call our facilities individual dining rooms with karaoke. Whether our restaurant and karaoke businesses succeed or not depends on whether we can expand the range of our customers and fans. For this reason, we have established a system that allows our staff to check the level of services, to use customer opinions as feedback, to compare our halls with those of competitors and analyze them, and to take the necessary action promptly. Some of our karaoke halls have adopted lunch menus and ladies packs that feature cakes and other sweets. These are part of our strategies to raise the operating ratio of karaoke halls, which tend to be used only at night and on holidays. These strategies of SHiDAX have won support from a Gross Number of Guests and Ratio of Drinking and Eating to Sales,3 9 39.9,4 43.,94 4.,3 4.3 0,3 Gross number of gueststens of thousands of people Ratio of drinking and eating to sales% 0 49. 4
In-Room Dining with Karaoke Entertainment broad customer base, and have resulted in securing repeater customers. SCRAP & BUILD STRATEGY Ten years have passed since we started our restaurant and karaoke businesses. Until now, we have chosen locations in Average Revenue per Guest Visit 903 3 43 3 779 73 9 0 0 Room operating revenue Drinking and eating revenue Other operating revenue 3 77 7 9 7 7 regions with more than 0,0 residents within a -minute drive. We have made sure that each new outlet maintains a certain profit ratio on the investment, and there has not been a single instance of closure. But we will draft new standards for possible renewal and changes in the forms of operation for fifth-year outlets, for which the lease term is about to expire, in order to improve the return on our investment. The range of commercial districts changes from time to time, for a number of different reasons. That is why we will apply the standards to outlets we have judged as being unable to return any additional investment. Meanwhile, we will be more selective when it comes to the locations of new outlets while Year ended March 3, NUMBER OF RESTAURANT AND KARAOKE OUTLETS Years ended March 3 0 Number of outlets New outlets Accumulated 40 Number of rooms New rooms Accumulated 7, Yamagata Niigata Gunma Nagano Toyama Gifu Hokkaido Aomori Iwate Miyagi Ishikawa 3 Fukui Fukushima Kyoto 3 9 Tochigi Hyogo 0 Hiroshima 9 Ibaraki Tottori 4 Saitama Yamaguchi Okayama 4 Tokyo Fukuoka 3 Chiba Saga 4 3 Kanagawa Yamanashi Shizuoka 9 Aichi Mie Kagawa Nara 3 Wakayama 9 outlets Oita Miyazaki Osaka 0 9 outlets Kumamoto 34 74,79,97 Okinawa 39 3,97 0, developing halls that can be built with lower initial costs. With these measures, we plan to open 40 to 0 new outlets each year. more than 0 outlets
Current Situation and Strategies Foodstuff Distribution Business The SHiDAX Group has formally launched a distribution business for foodstuffs. SLOGIX, which will play the central role in this business, intends to make the division blossom into Japan s largest distributor of foodstuffs, which encompasses sales to purchasing divisions within the Group and to outside restaurants. THE BIRTH OF SLOGIX CORP. In general, large-scale retailers possess their own distribution centers, and convenience stores have also established their own distribution networks with vehicles used exclusively for that purpose. However, looking at distribution systems for restaurants, foodstuffs are still being distributed inefficiently, via wholesalers. In other words, wholesalers and/or producers of meat, fish, vegetables and other foodstuffs receive orders separately for each item and deliver them. It is also inefficient for materials to be delivered separately for each temperature range, namely frozen, chilled and dried. These distribution systems have not been able to fully respond to orders placed via the Internet, day-one orders, bulk distribution, HACCP and other user demands. Our Group studied the issue for seven years, in response to a need to procure foodstuffs more promptly and at lower costs. We arrived at the conclusion that we needed to build our own distribution system so that we can radically change the conventional inefficient distribution systems. The result of this conclusion is SLOGIX. SLOGIX SYSTEM Butchers Fish Dealers Grocery Stores Bulk Distribution Three temperature zones (frozen, chilled, dried) Vegetable Stores SHiDAX COMMUNITY CORPORATION Family resturants Pub chains Hotels etc. SHiDAX FOOD SERVICE CORPORATION
EFFECTS WITHIN THE GROUP The basic mission of SLOGIX is to reduce food material costs by purchasing large volumes of foodstuffs in bulk. SLOGIX also has a menu development task force that develops basic recipes and narrows down the foodstuffs that need to be purchased in order to minimize the costs of purchasing foodstuffs. The distribution system has also enabled daily shipment of foodstuffs in three temperature zones at minimum units. Overall, our distribution system is now substantially more efficient. In addition, the system of SLOGIX can handle bulk ordering and delivering using the Internet, thereby reducing the tasks associated with ordering and inspection. We regard the system as truly revolutionary. EXPANDING THE EXTERNAL DISTRIBUTION BUSINESS We will sell PB foodstuffs (the King Star series) that we have developed, which feature low prices through the purchasing of materials in bulk, not only to our Group companies but also to family restaurants, pub chains, hotels and other customers. As the business grows, economies of scale should also increase. In other words, we plan to develop SLOGIX into Japan s largest shared purchasing and distribution system of foodstuffs for business use by sharing NATIONWIDE DISTRIBUTOR OF FOODSTUFFS SCHEME the purchasing system with other companies. In addition, we have aggressively pursued sales so that profits from SLOGIX wholesaling would make a marked contribution to the growth of the Group. Kanto, Kansai Hokkaido Tohoku Kyushu Main Region Chugoku, Shikoku Schedule In-service November January 3 February 3 March 3 7