Coronavirus spurring change and innovation in Japan’s restaurants and retail sector

The coronavirus has hit the world hard and it’s not slowing down. While the number of confirmed COVID19 cases in Japan has been relatively low compared to some other countries, the impact on the Japanese economy has been significant and has been spurring significant changes in the food service and retail industries over the past few months. Many of these changes are likely to have long-reaching impact.

Above: Family restaurant chain Saizeriya now offers delivery as well as other measures to reduce staff and customer interaction.

Food delivery services are booming in Japan

As people refrain from going out, Japanese consumers have increasingly started to use food delivery apps such as Uber Eats. Uber Eats had about 1.6 million users this January, but jumped to almost 2 million by March and even higher in the following months. Other delivery apps include Demae-can, dDelivery and Rakuten Delivery, and the competition in the delivery market has been fierce. In response to the growing number of people using restaurant delivery services, family restaurant giant Saizeriya decided to start delivery too this month. As recently as the end of last year, the president of Saizeriya said that he was not considering offering a delivery option- the impact of the coronavirus has been enormous enough to cause a 180-degree turnaround in corporate policy.

The online supermarket industry has a very small share of food sales in Japan, but new consumer shopping habits brought on by corona have provided a tailwind for this industry. According to a recent survey, about 60% of online supermarket users say that the frequency of their online supermarket use has increased in the last three months (January to March, 2020). As the number of users grow, retailers have started to focus more on their online supermarkets. The largest retail company in Japan, AEON, has announced that it will increase its online supermarket sales by 50% YoY by early next year, which would grow online sales to about 10% of its in-store food sales. Supermarket giant, Ito-Yokado has also just started full-scale operation of its online supermarket app. These market leaders’ moves are worth paying attention to as they could well inspire other players and bring significant changes to the online supermarket industry.

Infection control measures are changing the restaurant and retail landscape 

There are currently no standardized Japanese government requirements for infection control in stores, so shops and restaurants are on their own to find ways to make consumers feel safe. To ensure that guests feel comfortable eating, many restaurants have taken various measures against coronavirus. This can include plastic shields between the tables or a reduced number of chairs to prevent customers from getting too close to each other. What the major food service chains do always draw attention. Some are trying fairly analog ideas – Saizeriya has stopped having staff take orders and started letting customers to fill out their own orders on paper to minimize the contact between customers and staff.

Kichiri, however, is more extreme. Kichiri is an izakaya pub chain with around 40 restaurants in Japan. A walk-through sanitizing gate was installed at the entrance. When customers pass through, hypochlorous acid water (HAW) is sprayed all over the body from four pipes installed at both ends of the gate. The number of customers entering the restaurant is checked through a monitor. Customers are then asked to take a piece of paper with a map of the restaurant with table numbers written on it and move to their seats by themselves. Customers can then use their smartphones to order food by scanning a QR code on the table to access a website and check a menu.

There are changes on the retail side as well. Lines are drawn on the ground at regular intervals in front of the cash register to encourage social distancing. Transparent shields hang in front of cash registers to prevent infections between clerks and customers. But the most significant change has been the rapid shift to cashless payment. While Japan’s government had made some effort to promote cashless payment systems before corona arrived, Japan has been I famously reluctant to give up its love of cash and had been lagging in the Asian region in terms of cashless payments. But once again, coronavirus is pushing the adoption of new technologies. Various prepaid smart cards and mobile phone payment apps are accepted in stores, taxis and restaurants, with some even offering discounts for using cashless options.

Izakayas have been forced to venture into new business models and revenue streams

Coronavirus has had an impact on all types of restaurants, but the impact on izakayas has been particularly significant. Significant enough that some izakaya chains have even decided to branch out into new services. For example, Watami, the second largest izakaya chain in Japan, with many different izakaya brands in its portfolio, has entered the human resource staffing business. As a result of corona, Watami closed its outlets for a period of time, leaving many of its employees without jobs. To support these employees, Watami is planning to arrange placements for 780 of its full-time and 10,000 of its part-time employees with supermarkets, farms and elderly care facilities which are facing labor shortages. Another example is the Ap Company which runs Tsukada Farm, an izakaya chain operating mainly in the Tokyo metropolitan area. Since the sales of izakaya dropped significantly, Ap Company has decided to reduce the number of izakaya and start something new. Tsukada Farm has opted for a full renovation of some of its izakayas from pubs into a teishoku set-meal restaurant concept called Tsukada Shokudo.

Retail innovation includes a growth in unmanned convenience stores

Another corona era innovation is seen in JR East’s launch of unmanned convenience stores. The advantage of unmanned convenience stores is that they do not require face-to-face interaction with customers, as they use a camera in the store to identify the products customers pick up. At the exit, details of the purchase will be displayed on the touch screen and customers just need to hold a prepaid transportation card over a device to complete the payment and the exit gate will open. The company plans to expand its store network to 100 stores within four years, taking advantage of growing desire for less contact with people at stores. The first store was opened at Takanawa Gateway Station, the newest station on Tokyo’s central Yamanote Line in March of this year.

With the coronavirus showing no signs of settling soon, we expect the Japan restaurant and retail industries will be forced to continue to innovate and react quickly to the changing market.

Bees, Wines and Rice: Three Japanese Agtech Start-ups to Watch

At the recent Nikkei Ag/Sum Agritech Summit, Tokyo welcomed agtech and food tech start-ups from around the world to exhibit and present.  However, some of the highlights were Japan’s own homegrown start-ups, who may have gotten less attention because less information was available in English.

In the global agtech universe, if you mention Japan, the immediate association is usually hydroponic vertical farming technology (called “plant factories” in Japanese) and robotics/drones. This is not surprising. Japan is a country where nearly 50% of the country lives in one of three densely packed metro areas (Tokyo-Yokahama, Osaka-Kobe-Kyoto and Nagoya). In rural areas, the number of farmers is dropping dramatically, farm land increasingly lies uncultivated and the average age of a Japanese farmer is 66. Japan’s food self-sufficiency rate is now less than 40%.

Japan’s tech, engineering, machinery and robotics industries have been increasingly active in agtech R&D, aiming for potential solutions to the hot button Japanese issues of decreasing farm production, aging farmers and food security.  Hydroponic farming, led by names such as Spread and Mirai, and robotics and drones being developed by universities and research institutes as well as companies like Yamaha, Fujitsu or Panasonic, have received significant media attention.

But indoor farming and drones are far from the only agtech innovation in Japan. Below are three interesting  Japanese start-ups that recently exhibited at Nikkei’s Ag/Sum Agritech Summit.

ad-dice Co., Ltd.’s Bee Sensing

Bee Sensing offers an IoT sensor device that allows bee keepers to remotely monitor bee health and activity. Through a smartphone app, beekeepers can check temperature, humidly and how active bees are as well as receive alerts and record memos.  Bee hives are often placed in distant or remote areas, making it difficult for farmers to visit them every day. This IoT sensor system is expected to increase beekeeper productivity by freeing them from constant patrolling of distant beehives. It will also allow timely reactions to changes in bee health and decrease beekeeper worry about the health of their remote apiaries.  It also creates honey production data records to share with customers who are increasingly interested in the differences in local honeys and their different tastes and colors.

Bee Sensing’s patented technology was a collaboration between Japanese IT company, ad-dice, founded by Daisuke Ito and featured as one of Toyo Keizai Magazine’s Top 100 Ventures That Will Change Japan in Feb 2017, and innovative beekeeper Hideki Matsubara from Hiroshima.

Bee sensing technology may be a niche industry within agtech but these emerging technologies can serve an extremely important industry. According to FAO statistics, honey production is around 1.2 million metric tons globally, mainly concentrated in China, North Eastern Europe and the US.  It is a high value industry. For example, the US retail price of natural honey is around 5-7 US$/pound and bee by-products, like propolis, are even more expensive. In addition to those products, the bee industry itself is also creating extremely important economic value – pollination.

There are now number of bee hive remote monitoring technologies being developed around the world, from the UK, US and Bulgaria among others as interest in this high value agricultural industry increases.

Kisvin Science’s Sap Flow Sensor

Kisvin Science’s sap flow sensor was developed to support the grape-growing and wine making industry. Japan may be better known for its beer or sake, but Japan actually also has a significant wine industry, centered in Yamanashi prefecture.  The sap flow sensors monitor grape stem heat and soil moisture.

Co-founder Kazuhiro Nishioka originally established a small sap flow sensor manufacturing company, Nissy Instruments, as a side-business when he was a PhD student. He then created Team Kisvin, an initiative with two wine grape farmers (Hitoshi Ikegawa of i-vines and Yasuhiro Ogihara founder of the Kisvin winery) to study and improve viticulture in Yamanashi.  They have been using the with sap sensors to produce premium wine grapes now for 10 years ago.

With the increasing number of cooperative farms, they have released their own branded Kisvin wines.  In 2015, Team Kisvin decided to found Kisvin Science in order to support other wine grape farmers and wineries around the world. Their first new market target is California.

There are several sap flow sensors in the market, but Kisvin Science feels its strength is its low cost achieved with cutting-edge printing technology, Nishioka and his team’s aggregate knowledge of plant physiology and its relationship to wine grape farming. His team is aiming to raise its next round of funding soon, and is considering whether to target Japanese or US funds.

Rice Technology Kawachi’s Rice Gel

Some of the best inventions are accidents. Dr. Junichi Sugiyama unintentionally developed a new food ingredient – a type of rice gel – when he was a senior researcher  under the Ministry of Agriculture, Forestry and Fisheries. He found an innovative way to convert cooked rice into a gel-like paste which retains moisture well. Since retiring from the institute, Dr Sugiyama has dedicated his energy to commercializing this product, with the strong support from the local rice-growing community in Kawachi, Ibaraki, and leading agriculture machinery manufacturer Yanmar.

Dr Sugiyama’s rice gel is a smooth white paste, which can be produced in any level of solidity or density, depending on customer needs. The product is made only from rice and water, so it is free from major allergens.

This rice gel food technology addresses two major problems the food industry in Japan and overseas has found when using rice flour.  First, rice flour has low absorption capacity for water, meaning most rice flour breads and cakes also have add wheat in order to improve moisture absorption. Second, rice flour usually is also more expensive than wheat or other flours, as rice production costs are high.

However the rice gel retains moisture, meaning bakers can eliminate wheat, which can be an allergen for some consumers. It has been particularly attractive to cake and confectionery bakers who aim for moist, fluffy creations.

In addition, Kawachi is able to produce for a competitive price, because they use rice which is high in amylose (a type of starch component that forms a solid gel at room temperature) which is a high yield type of rice. High amylose rice production for non-table rice can currently receive subsidies under the rice acreage reduction policy of the Japanese government which is helping Kawachi Rice Technology maintain lower costs than rice flour producers.

Full disclosure, Nikkei Ag/Sum event was not the first time Meros has encountered Kawachi rice gel.  Last year Team Meros’ Lucia Vancura discussed the product as a panelist on NHK World’s Biz Buzz Japan when the gel was still in its R&D stage. This is why we were even more pleased to get an update from Dr Sugiyama and see his progress in commercializing this product.  There is hope that this ingredient will have opportunities in the global baking industry, especially in the gluten free baking market, where rice flour is usually too expensive to use as the main substitute for wheat flour.

View from Japan: Where is Agtech Investment Headed?

The May 23-25 Ag/Sum Agritech Summit in Tokyo brought together start-ups, agtech consulting and investors from overseas with start-ups, food and agri-industrial companies, IT companies, banks, government representatives from Japan.

This was the third start-up event organized by Nikkei, and this time it focused on agtech and “the ways that disruptive technology is fusing with agriculture to share our future.”  The event drew hundreds of participants– large symposium sessions, workshops and an innovation stage, all going at the same time for three days.

The strength was that the event brought well-known international agtech players to Japan, many of whom had never been to Japan before and did not know much yet about the Japan agtech or food innovation market.

Considering Japan’s potential as both a funder as well as a source of global food and agtech innovation, this event was an important opportunity for the audience (80% Japanese by our estimate) to hear directly from some of these industry leaders.  Key US and EU participants included AgFunder, Rabobank Start-up Innovation, RWA/ Agrotech Innovation Lab. Speakers and exhibitors also attended from Israel, India, Singapore, Vietnam and Australia.

The event provided some insights on key topics of interest to our clients and partners here in Japan:

  1. Agtech is a hot topic- but where are we going and is there an agtech bubble?
  2. What are some of the technologies that are receiving interest among the Japanese industry and investors?
  3. What is the role of Japanese investors going forward in the agtech space? Where are the gaps between expectations in Japan and overseas?

We’ll outline some of our impressions below.

Where are we headed?

The event was a showcase for many of the hot topics in the industry.  Several VC and investment advisors gave their ideas on the key areas to watch in the next 4-5 years.

  • Doug Cameron from First Green Partners mentioned: food waste, protein, urban food (not only vertical LED farming), healthy soils, better herbicides and water issues.
  • Rob LeClerc from AgFunder is looking at: robotics and digital agronomy/smart phone farming in emerging markets such as China and India. With AgFunder about to launch its own investment fund, it will be interesting to see how it acts on these trends in the coming months.
  • Sanjeev Krishnan from S2G Ventures in Chicago noted several social and demographic issues with major impact on agtech – the impact of social media on supply chains in terms of traceability pressure, the decline of the megabrands in nearly all food retail categories and the market power of millennials and aging consumers.
  • Austrian Cooperative RWA’s Agro Innovation Lab saw the main EU agtech innovation trends as 1) smart farming (M2M, IoT, optimization of resources and cost); 2) Irrigation (especially in Europe, where summer is becoming hotter and winter is becoming less rainy); 3) Urban farming; and 4) Innovative Business Model (e-commerce, machinery sharing, etc)

It was interesting to note that “the future” is not defined as a specific type of product or technology, but as the trend of current technologies adapting to new markets and social trends, and being applied to critical environmental issues.

Foodtech: Alternative proteins, molecular biology and the Japan market

The diversity of alternative proteins and food ingredients was striking and particularly of interest to many of the Japanese participants. These included insect protein start-ups like Ynsect and Go-Terra. While they admitted that marketing insect protein for human food products still has challenges, insect protein is intriguing to the aquaculture industry. Already nearly 50% of the seafood consumed in the world is from aquaculture and it is an important industry for Japan. Current sources of protein for fish meal, such as meal processed from wild catch of smaller fish, are not a sustainable source of protein for a growing industry. This makes insect protein an attractive idea.

In addition, companies ljke Miraculex and MycoTechnology offer natural biotechnologies that can reduce sugar content and Algama offers high protein microalgae. For a country like Japan, where food tech innovation is already strong and where an aging population is inspiring food manufacturers to develop new products that appeal to this demographic’s health needs, these food technologies appeared to be particularly interesting to Japanese attendees.

Investment Strategies: Where is Japan now in agtech investing?

Global ag investment watchers expressed interest in seeing more seed and Series A investors in agtech. It was mentioned that many of the larger, more mature (and therefore lower risk) companies have already been fully invested.

However, Japanese investors, including the large trading conglomerates and banks who attended the conference, are infamous for their low tolerance for risk. The traditional Japanese investors also have few experienced funds or teams looking at  small scale seed investing in agtech.

Japanese investors were criticized by some for their lack of engagement in early stage, seed, incubation, acceleration ventures. Two of the start-up VCs we talked to dismissed Japanese investors as partners because of their image that Japanese investors are not interested in fostering innovation, only in safe late-stage investments.

This image may not be entirely correct, but it impacts the development of potentially interesting partnerships between Japanese investors and overseas partners.

Nevertheless, investors worldwide now are looking for evidence that agtech investing can yield the kind of returns they are looking for.  AgFunder mentioned that the agtech industry now needs to see some successful EXITS of first round investors. Without some successful, profitable exits it will become harder to attract new investors.  And without more successful exits, the 1 billion valuation of The Climate Corporation (acquired by Monsanto) will likely continue to be an exception in the agtech industry.

What we’d love to see at the future Agtech Summits in Japan

The focus on the event for the foreign players was seed investments, innovation and start-ups.  However, Japanese attendees, especially ones from large corporations tend to be more familiar with medium and large size investment and they are still nervous about supporting early stage projects. Other large Japanese companies, some of whom presented in workshops, are mostly focusing on internal innovation (Kubota, Fujitsu etc).

We would love to see more chances to connect these worlds.

  • Bring in discussions from major Japanese players experienced in funding seed companies (in non-agtech sectors as well)
  • Invite some of the more experienced, successfully funded US companies (Farmers Network, FarmLogs) to discuss their path from start-up to mid-size.
  • Bring in the global ag majors who are the counterparts of the Japanese ag and tech powerhouses, to discuss their experiences in developing external or internal technologies from seed to maturity.

Ag and food technologies are not limited to one market or language, but they do face differences in agricultural industry issues and investor expectations in different countries.  We look forward to more agtech summits in Japan that allow even deeper comparisons and discussions about Japanese models and challenges in agtech versus lessons of success from overseas markets.