TT-789 -- Kameda's "Marys Gone Crackers" Acquisition 2 Years Later On, ebiz news from Japan

* * * * * * * * TERRIE'S TAKE - BY TERRIE LLOYD * * * * * *
A weekly roundup of news & information from Terrie Lloyd, a long-term
technology and media entrepreneur living in Japan.
(http://www.terrielloyd.com)

General Edition Sunday, January 25, 2015, Issue No. 789

- What's New -- Kameda's "Marys Gone Crackers" Acquisition 2 Years Later On
- News -- Is Japan's debt problem less severe than thought?
- Upcoming Events
- Corrections/Feedback
- Travel Picks -- Driving Mt. Haruna, Tobacco Museum in Shizuoka
- News Credits

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+++ WHAT'S NEW

Back in March 2013, in Terrie's Take 700, we wrote about a
little-publicized rice cracker company called Kameda Seika, which had
just bought an upstart gluten-free cracker company in the USA called
Marys Gone Crackers (MGC). We thought it would be interesting to
revisit this deal two years on, and see if the company's strategy of
buying both a business and a business marriage (i.e., founder Mary
Waldner was and still is the face of the company), as well as letting
the founders stay on as managers, actually worked.

Kameda Seika may not be well known outside Japan, but here at home it
is a specialty foods powerhouse, holding about 28.5% of the JPY240bn
domestic cracker market. It is a classic Japanese manufacturing
company that makes money both by innovating new products and by
squeezing every drop of juice it can out of its facilities and
workers. Several of its innovations have been pretty good, such as the
inclusion of rice-based K-1 and K-2 probiotics in food, as well as low
protein rice packages for consumers with kidney disease.

But even with this winning combination, Kameda like most other
Japanese food producers has been facing one harsh reality -- the
decline of the population of local consumers. So, like many other
mid-sized Japanese companies, they have decided that they need to
expand overseas. Luckily when they first came to this conclusion the
high yen ensured that they could get large, low-cost loans to fund
their foreign adventures. They were conservative at the beginning.
However, once they met Mary and her co-founder of MGC, husband Dale
Rodrigues, they decided that they had found a likely target.

The rest is history, and in March 2013, Kameda bought out MGC for
around JPY2.4bn. At the time we looked at the deal and the background
to the company, and we were disturbed by the seemingly cavalier
approach by the founders to operations basics. This comment isn't
intended to detract from the quality of their contributions to the
company -- such as coming up with a non-gluten product and making it
highly appealing, but, the operations were an obvious problem, as
evidenced by Immigration Department raids on illegal workers who were
helped with documentation by the company itself, and by exploding
ovens.

Kameda for some reason were in a hurry to get a deal done, Due
Diligence was glossed over, and today Kameda is now the proud owner of
an iconic brand in a strongly growing market -- that of gluten-free
and natural snacks, but which also came with a lot of unexpected
baggage. As a result, the new acquisition has become a multi-million
dollar drag on the parent company and it's clear that something needs
to be done about it, quickly.

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[...Article continues]

Kamedai's stock code is 2220, and looking at their most recent
half-year filing, we can see that while the sales revenue of other
overseas subsidiaries is increasing, MCG appears to be causing losses
of at least JPY400m+ per year (and perhaps more, as we explain in a
moment). So that isn't good. Kameda doesn't directly admit in their
financial reports that there is a major problem at MCG, but they do
acknowledge in the notes that they have to place more investment in
the company.

What is more worrying than the accounted-for losses are the less
transparent larger numbers. For example, looking at their FY2013
results, the balance sheet shows a couple of weird items that may
indicate hidden costs. For example what is the entry of "Electronic
Recording Liability" priced at JPY2bn, which suddenly pops up in that
year? Our guess is that this line item could hide some legal
liabilities they are reluctant to label on face value. We, at least,
have never heard of this type of liability before and would be happy
for any readers to enlighten us about this item.

As we have said, Kameda is basically a well-run company here at home.
However, they are simply not equipped to deal with international
challenges, as they are starting to find out. For a start, although
the company has joined the 21st century by re-doing its board and
bringing on some outside directors (some serious heavy-hitters,
actually), there isn't a single non-Japanese among them. This is just
not logical behavior for a company that says publicly it wants to
become a "Global Food Company". There appears to be very little global
about it at the Niigata head office.

At the time of the acquisition, Kameda at least seemed to understand
its international limitations, and so made the decision to let the
existing owners, Mary and Dale, continue to run the business. Now, if
MGC had had more professional senior managers, then possibly this
would have been a reasonable decision to make. Unfortunately, from all
indications, and we speak only as outside observers of a very
non-transparent company, the founders appear to have been more of the
bootstrap mentality, and were used to corner-cutting and homemade
solutions to keep up with growth. Nothing wrong with that so long as
you don't have any "accidents". But with the immigration and safety
issues, this weakness has suddenly been exposed. Now, instead, serious
money and expertise need to be invested, and from what we can see this
will take Kameda another couple of years and probably another ten
million dollars to do.

To turn things around, the company has assigned a new rising star on
the international side of the business -- one Toshi Iseki. His Linked
In profile is pretty impressive, he has Kellog training, and maybe he
will be the guy to get things back on track. Certainly we hope so,
because Kameda deserves a better result.

http://www.linkedin.com/pub/toshi-iseki/21/2b8/b25

What's ahead of Iseki-san?

Firstly he will need to manage Mary, who will probably need to be
slowly eased out of the company in some way, or risk conflict between
her founder's vision and the hard realities of an efficient
manufacturing operation. We imagine that the staff will mostly be
loyal to her, and certainly the customers identify with her. So this
means some very firm but diplomatic negotiation to get her to continue
to perform a public-facing role for the company while not having her
actually run it. The good news is that she holds a master's degree in
clinical psychology and is a licensed marriage and family therapist,
so maybe she will get with the program rather than feel bad about it.
Either that or Kameda will need to look at replacing her with a
manufactured character, much like Betty Crocker or Aunt Stella.

Secondly he will need to continue the manufacturing upgrade work that
has no doubt been going on so far, to improve the production lines and
R&D and safety processes. These are all things that Kameda knows how
to do and will probably just be a matter of time. They need to move
quickly, though, because there is a real possibility of another
product or quality scandal hitting the company and upsetting their
public reputation much more than anything that has happened so far.
For example, we've been seeing comments on a number of forums about
the Sticks & Twigs line causing people to break their teeth. There was
talk of a class action against the company for these injuries,
although this doesn't seem to have happened yet.

Lastly, if Iseki-san does manage to sort things out in the USA, his
toughest job will probably be when he returns to Japan. For he will
surely have to convince Kameda's senior management that if they really
want to be a global company, they will have to change from within as
well. That means foreigners on the Board, faster adoption of global
best practices for accounting, and the integration of their foreign
marketing and sales teams with those in Japan. If he is able to do
that, then rather than learn through business school case studies of
others, Iseki himself will probably himself become an example of how
Japanese firms can learn from a foreign misstep and become stronger
for it.

We wish him the best of luck.

...The information janitors/

***------------------------****-------------------------***

+++ NEWS

- Cool new fashion virtualizer
- More rice imports in TPP compromise
- Amazon Japan raided for child porn
- Tourists going for cosmetics
- Is Japan's debt problem less severe than thought?

=> Cool new fashion virtualizer

Toshiba showed off a cool new system at the Consumer Electronics Show
in the USA that realistically renders clothes you want to buy, modeled
on you to the correct size while you stand in front of the camera.
Although there are other products like this in the pipeline,
apparently Toshiba is much further along in bringing it to market and
will have several working locations in Japan before the end of the
year. ***Ed: This will be a huge boon for men with laced shoes who
hate having to repeatedly tie-untie at changing booths while trying to
find a pair of trousers that actually fit... :-)** (Source: TT
commentary from bbc.com, Jan 23, 2015)

http://bbc.in/1C0tTVE

=> More rice imports in TPP compromise

While we are wondering if TPP will ever happen, at least Japan and the
USA are going through the motions. The latest announcement is that
Japan will increase the tariff-free quota on rice, allowing some tens
of thousands of tons in from the USA. Outside the tariff-free imports,
which Japan will probably simply turn around and offer as aid to other
countries (it's done this before), the tariffs on rice will otherwise
remain as they are. ***Pathetic dickering to protect a sector that has
already been overtaken by wheat consumption (in the form of bread).**
(Source: TT commentary from reuters.com, Jan 25, 2015)

http://reut.rs/15A0vI2

=> Amazon Japan raided for child porn

One of the problems with Amazon's huge level of automation is that
sometimes the online retailer doesn't know what it is selling. Such
was the case this week, when Amazon's Tokyo headquarters, an
affiliate, and its Chiba distribution center, were each searched for
photo books of nude females under the age of 18. This is not the first
instance of Amazon being brought to task for selling porn online,
having seen its Odawara distribution center raided in November 2014.
***Ed: Actually, we were alerted by a reader back in October last year
of child porn being offered by a video production affiliate seller on
Amazon. How she found the titles was that she entered "candy" into
Amazon.co.jp's search bar, hoping to find a candy supplier for
Halloween for her kids. She definitely wasn't prepared for the graphic
kiddie porn images that came up after the search. She alerted Amazon,
but it seems they paid her no attention. We hope this police action
will change their attitude to user feedback. It will certainly be
cheaper for them to do so.** (Source: TT commentary from
japantimes.co.jp, Jan 24, 2015)

http://bit.ly/1EHROYh

=> Tourists going for cosmetics

It isn't just cameras and rice cookers that Chinese tourists are
buying by the suitcase in Japan, they are also snapping up women's
cosmetics. Fancl for example has experienced a 230% increase in sales
in the last 12 months thanks to tourists. Japan prices are about 40%
lower than in China and are extremely tempting. Kose reports that its
Sekkisui skin care line sales have increased 350% since the products
were publicized on Chinese and Taiwanese blogs. The government's Japan
Tourism Agency (JTA) reckons that 38% of foreign tourists buy
cosmetics, and their average purchase is around JPY20,000. (Source: TT
commentary from the-japan-news.com, Jan 24, 2015)

http://bit.ly/1CHDujg

=> Is Japan's debt problem less severe than thought?

Interesting blog on Bloomberg asserting that the Japanese public debt
is not nearly as bad as one might imagine. Although it is true that
gross debt to GDP is now an unprecedented 245%, the writer makes the
point that Hidetomi Tanaka, a professor of economics at Jobu
University has refined work done by Columbia economics expert David
Weinstein, and has found that if one nets off Japan's assets with
liabilities, and if you consider the BOJ holdings of government debt
as inconsequential (since it can continue indefinitely), then in that
case net debt relative to GDP falls to just 41%. ***Ed: Interesting
take on why there is no notable panic about the size of the public
debt so far.** (Source: TT commentary from forbes.com, Jan 18, 2015)

http://onforb.es/1CpIMiZ

NOTE: Broken links
Some online news sources remove their articles after just a few days
of posting them, thus breaking our links -- we apologize for the
inconvenience.

***------------------------****-------------------------***

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-----------------------------------------------------------

***------------------------****-------------------------***

+++ CORRECTIONS/FEEDBACK

=> In TT 787, we made our predictions for 2015, and commented on how
the Japanese will take a lot of personal pressure before finally
reaching breaking point. A reader has comments that they may never
reach that critical point. He also comments on the recent government
funding to Columbia University.

*** Reader Says: Thanks for your always interesting newsletter. I've
been reading it for years and find it especially informative now that
I no longer live in Japan. This is the first time that I've felt
compelled to comment on a couple of items.

Regarding your first reason for your first prediction, it seems to me
you are saying that those in power will keep beating down the lower
and middle classes until they learn to hit back. I find it optimistic
to think that the Japanese people will turn against their own economic
oppressors. Rather, I fear that they will be turned against perceived
outside oppressors. Abe's current actions seem to be just another
rebranding of the failed "trickle down" economics of U.S. Republicans.
It saddens me to see the Japanese right become more like the right
here in the U.S., combining fatten-the-rich economic policies with
frighten-the-poor military and social ones.

My second issue is regarding the funding of Japan studies courses at
Columbia U. I seriously doubt the Abe administration will have any
control or even influence on the content of the courses and related
hiring other than it being Japan related. Unlike Abe's economic
policies, I see this as a soft power move much like the JET program,
which I believe is, as much as it is an education program for
Japanese, an attempt to maintain the number of educated and
potentially influential foreigners who have some knowledge, and
hopefully affection, for Japan.

***------------------------****-------------------------***

+++ TRAVEL DESTINATIONS PICKS

=> Mount Haruna, Gunma
A driver's experience

After you've left the inner city limits behind, the first thing that
strikes you as you set out for Mt. Haruna is the vastness of the vista
before you. The snow-capped mountain ranges of Gunma, covered in old
conifers in various stages of undress depending on the season, rise up
about you on either side of the road and combine with the low skyline
to create an overwhelming sense of elemental nature.

Even before you start the ascent proper, it's single-lane driving with
small-hold farms and babbling brooks on either side. However, it's not
long before you reach the start of the incline and you start to doubt
whether you can squeeze enough power out of your sub-compact to get to
the summit! Not long after that the gradient begins to increase, you
are well amongst the conifers, which seemed so inconsequential earlier
and now tower above as you navigate the narrow asphalt corridor.

http://bit.ly/1yYUu1S

=> Kakegawa Ninomaru Museum, Shizuoka
Why tobacco pouches are like iPhone cases

Kakegawa is a pleasant but small place, with not many sights to detain
visitors. That said, those it does have are definitely worth visiting
and the Ninomaru Museum is a case in point. The idea of a museum
dedicated only to pipes and tobacco pouches might not immediately grab
the imagination, but I found it much more interesting than I expected,
both for the objects themselves, and for what they represented.

It's next to the castle and neighboring palace hall and is built to
blend in with them, with a long, low, clean design. The lobby is
pretty spacious, and gives an idea of what you'll see in the museum
rooms. There's a diorama of Kakegawa as it was in the past, and
displays of pipe cabinets and cases, tools, pipes, and seals for
tobacco pouches.

There are two exhibition rooms filled with display cases full of
centuries-old smoking paraphernalia, from delicate pipes to decorated
cushions that people clearly sat on while puffing away. One thing that
struck me was the variety of styles: even just the pipe cases could be
carved from ivory or wood, or some of them were lacquered or even
cloisonneed, making me think that those ones must have belonged to
samurai or noblemen.

http://bit.ly/1xTMIU0

***------------------------****-------------------------***

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+++ ABOUT US

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Written by: Terrie Lloyd (terrie.lloyd@japaninc.com)

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