“Cheetos! Please Cheetos!”
Riku Nakamura’s daughter, Akari, lunged toward the grocery store shelf.
His wife, Aoi, sighed. “Remind me: Why are we walking down this aisle again?”
“I wanted to see how rice cakes are displayed. I don’t understand why our rice crackers can’t be in this section, too.”
Aoi nodded at the Cheetos bag Akari was now clutching to her chest. “Maybe you need to add fluorescent cheese dust?”
Riku chuckled, but her joke didn’t lift his mood. He was feeling increasingly anxious about work.
Six years earlier, he had been asked to relocate from Tokyo to San Mateo, California, to spearhead the launch of Kenko USA, the first foreign subsidiary of his employer, Kenko. The largest producer of rice crackers in Japan, the company had $1 billion in domestic sales and hoped to kickstart growth and globalization plans. It wanted to become the next Kikkoman, which had so quickly turned Americans on to its soy sauce and stir fry products. Riku and Aoi had both been excited about the opportunity. Pregnant with Akari, Aoi liked the idea of being a stay-at-home mom for a while and agreed to put her teaching career in Japan on hold so that Riku could take the promotion.
However, their planned U.S. stint had now turned into a stretch — because Kenko USA hadn’t taken off as hoped. Sure, the business was chugging along, with sales increasing a modest 2% per year. But growth was well below projections, and the division, which was supposed to be self-sustaining after five years, was still losing money. The board demanded a compelling plan to improve performance. Riku knew that the key was to expand beyond Asian supermarkets and grocery stores’ “international” sections and get Kenko crackers into the snack aisles of mainstream U.S. food outlets, but his team’s efforts had yet to bear fruit.
Recently, Kenko USA had been approached by Patty’s Pantry, a national discount grocery chain, about a deal to produce a private label line: Kenko’s crackers with Patty’s branding. Rebecca Bairstow, Riku’s number two, was advocating strongly for the partnership. She believed that it would help American consumers see Japanese rice crackers as a tasty, gluten-free, healthy snack choice and would provide the distribution bump the division needed to grow sales and become profitable. But Riku worried that it would be only a short-term fix and fail to establish the Kenko brand in the United States.
Riku’s mentor at headquarters, Fusao Saito, was pushing for more direct-to-consumer outreach. This would take more money and time, but with Fusao’s endorsement, Riku suspected the company would give him that shot.
But he also had his family to consider. Aoi had been asked to pick up classes at the university again. Both of them were getting homesick. And the older their daughter got, the more they realized that they wanted her to grow up Japanese, not American.
Riku had assumed that Kenko USA would be a true success before he turned it over to someone else and returned to headquarters. Now he wasn’t so sure that would be the case.
“Papa? Cheetos?” Akari asked.
“Let’s find Papa’s crackers first,” Aoi said, gently extracting the bag from her daughter’s grip.
When they arrived in the “World Foods” aisle, Akari toddled up to the shelves of Kenko crackers and pointed at her favorite sweet flavor — mizuame, in the pale yellow package.
“How many?” she asked.
Riku and Aoi laughed. “We have plenty at home,” Riku said. “We just wanted to find them on the shelves.”
Akari furrowed her little brow until Riku winked at her. “Don’t worry. I saw some Cheetos at the checkout.”
“It comes down to demand,” said Dave Knight, chief snack buyer of Clementine’s, a major California grocery chain. Riku and Rebecca had secured a coveted face-to-face meeting with him at the grocery chain’s headquarters. “We need to see more people buying your products before we can give you more space. We can’t squeeze our top brands from Frito-Lay to make room for something that isn’t a proven seller yet.”
“Of course we understand your position,” Riku said. “But we’re not asking for more space, just different space. Why shouldn’t rice crackers sit with other crackers or popular snacks?”
“Because the packaging, the flavors, the whole brand message is still Japanese. We think that’s great, and there’s a niche market for your product — but in the Asian section. You’ll confuse people if Kenko is in both places.”
“But you have salsa in snacks and the Mexican section,” Rebecca said.
“Salsa is different — it’s American too now!” Dave gave a hearty laugh.
“With all due respect,” Riku replied, “I think you’re missing an opportunity. More and more people are now eating gluten-free and choosing alternatives to fried food. Consumers want different options in the snack category, and Kenzo can be one of them. But you’re hiding us in the ‘World Foods’ aisle.”
Rebecca jumped in. “What about experimenting in a few stores? Put us with the rice cakes in one, with crackers in another, with gluten-free in another, and see which sells best?”
Dave laughed again. “Honestly, I would if I could. But if I run experiments for you, I’d have to do it for every other new brand. My store managers and stockers would kill me. And my biggest suppliers would ask why I’m giving even a bit of their space to an upstart? It’s just not realistic.”
Riku glanced at Rebecca ruefully.
“You have to demonstrate demand,” Dave continued. “Maybe work with stores to do more extensive sampling — say, every weekend for a month or two? You could also start a coupon program. We’ve sometimes seen that work to stimulate demand for new products.”
“How can we persuade you to try us in snacks now?” Rebecca asked.
“Well, there’s always the option of paying a higher slotting fee. Bumping it from 30 cents per pack to 50? Then I could make a case to my boss.”
Riku wondered whether paying retailers more to win them over would make sense. But as such a move would cut into margins that were already low and exacerbate profit losses, he knew his superiors would likely disapprove. “The demand is there,” he said. “Our market research shows that consumers really like the product.”
Time to Debrief
Rebecca and Riku decided to stop at Peet’s Coffee to get a bite to eat and debrief before heading to the office.
“Well, that was rough,” Riku said, downing his Americano.
“I think we need to get serious about the private label deal,” Rebecca said, sipping her green tea. “Just look around you.” She gestured to the foods on display. “So much of this is made by other companies but packaged for Peet’s. Patty’s Pantry has huge reach, and the company is ready to place a $4.5 million order with us. Obviously, we’d have to cut our per-pack wholesale price, but we’d avoid the sampling, slotting fees, and advertising. Think of the cost savings. We’d be out of the red in nine months.”
“But no one would know the products were Kenko.”
“Well, no. It would be their brand, their packaging, their flavors. Patty’s is keen to try barbecue and Cajun — flavors that can help us adapt to U.S. tastes.”
“What’s wrong with wasabi?” Riku fired back. Americans already loved so many Japanese products. Surely Kenko could sell them on its own recipes.
“Dave wants to see demand. We can do that with the Patty’s deal. Down the road, we can focus on our own brand.”
“At that point Kenko wouldn’t be special. Patty’s crackers would have the same quality. And how would we explain the deal to our current retail partners?”
“We’re talking about different customer bases. And if we show strong sales momentum, we can lobby headquarters for manufacturing in the U.S. We’d have lower COGS, better margins. For me it’s a no-brainer.”
Back home in San Mateo that night, Riku sat at his computer, facing his colleagues, who were sitting around a conference table. It was morning in Tokyo, and he was checking in with the executive team at headquarters.
“Unfortunately, we haven’t seen a major uptick in growth,” Riku told the group. “We’re holding steady at 2% year-on-year with annual revenues of about $5 million.” He felt like a broken record. “But Rebecca and I have been discussing several new ideas.”
Kenko’s CEO, Yuki Kato, nodded. “I do think it’s time for new ideas, Riku. Other Japanese imports are doing so well in America. We need to show people that they need Kenko in their pantry, too.”
“Funny that you use the word ‘pantry,’ Kato-san” Riku said. “I’ve mentioned Patty’s Pantry before. It’s a fast-growing chain known for providing high-quality food at low prices. They offered us a deal that could quickly make us profitable.”
Some of his colleagues seemed to perk up, but others, including the CEO, looked disappointed. “I know establishing Kenko USA is a big part of our globalization strategy,” Riku said. “But perhaps we can bring the cracker first, then the brand.”
Fusoa Saito spoke up. “And what are the other ideas?”
“As we’ve discussed, Saito-san, we could ramp up our grassroots marketing,” Riku said. “Sabra, the hummus brand, did an extensive sampling program, not just at grocery stores but also at parks and events. They also tweaked their packaging to be more appealing. These efforts helped them break into the deli sections of mainstream retailers, and they’ve been going strong ever since. Direct-to-consumer promotions could complement this effort.”
“If we were to implement such a program,” Kato said, “what would be the budget and time frame?”
“I would estimate $3.5 million and two years.”
“And do you feel you could lead that initiative yourself?”
Riku instinctively bristled. Had they lost faith in his ability to make Kenko USA successful? “That is your decision, Kato-san, but I am confident that our team here could execute on either strategy.”
“Thank you, Riku. We’ll discuss these options, but I’d like a formal recommendation from you.”
“Yes, let me consult with the team. I’ll have something for you early next week.”
After the goodbyes, Riku shut off his computer and walked to the bedroom. Aoi was still up. “Did I hear you say two more years?” she said. “Honestly, Riku, I really don’t want us to stay here that long.”
Question: Should Riku recommend the private label deal or the new branded marketing push to his executive team?
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Source: Harward Business
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