In this fictional case study, the protagonist Riku Nakamura relocated from Tokyo to San Francisco to spearhead the launch of Kenzo rice crackers into the U.S. But, two years later, the fledgling American offshoot is still losing money and can’t seem to break out of the “ethnic” aisles at American grocery stores. Should he consider private label deals that would boost the bottom line but perhaps diminish the brand? Or is there a better way to kickstart Kenzo’s global growth?

ROMUALDO FAURA

Cheetos! Let’s get Cheetos!” Riku Nakamura’s daughter, Akari, lunged toward the grocery store shelf. Riku’s wife, Aoi, sighed. “Remind me: Why are we walking down this aisle again?”

“I wanted to see how chips and crackers are displayed. I don’t understand why our 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 kick-start growth and globalization plans.1 It wanted to become the next Kikkoman, which had so successfully 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 had liked the idea of being a stay-at-home mom for a while and had agreed to put her teaching career in Japan on hold so that Riku could take the promotion.

CASE STUDY CLASSROOM NOTES

1 Consumer packaged goods companies seeking international growth have several options: create a foreign subsidiary to sell the original product abroad; establish a new brand for the new market; acquire a local brand; partner with another brand for distribution and marketing; and produce for a local company under its brand (in an original equipment manufacturer or private label deal).

However, their planned U.S. stint had turned into a stretch—because Kenko USA hadn’t taken off as hoped. Sure, the business was chugging along, with sales increasing by 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. 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:2 Kenko’s crackers with Patty’s branding. Rebecca Bairstow, Riku’s number two, was advocating strongly for the partnership. She believed it would help American consumers see Japanese rice crackers as a healthful, gluten-free 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 would fail to establish the Kenko brand in the United States.

2 According to According to research from Nielsen, deals in which manufacturers produce goods for another brand are most successful—in terms of increased sales and market share—in commodity-driven, high-purchase categories.

Riku’s mentor at headquarters, Fusao Saito, was pushing 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.3 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.

3 Should Riku’s personal life factor into his decision about which strategy to pursue?

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.

“Papa? Cheetos?” Akari asked.

“Let’s find Papa’s crackers first,” Aoi said, extracting the bag from her daughter’s grip.

When they arrived in the World Foods aisle, Akari strode up to the Kenko shelves and reached for her favorite sweet flavor—mizuame,in the pale yellow package.4

4 Snack food names and packaging can have a significant impact on sales. For example, Angie’s Kettle Corn Snack food names and packaging can have a significant impact on sales. For example, Angie’s Kettle Corn changed its name to Boomchickapop and redesigned its bags in 2012. Specialty Food magazine reports that sales grew 12-fold over the following four years.

Riku and Aoi laughed. “We have plenty at home,” Riku said. “We just wanted to find them on the shelves.”

Akari furrowed her brow until Riku winked at her. “Don’t worry. I saw some Cheetos at the checkout.”

Pushback

“It comes down to demand,” said Dave Knight, chief snack buyer for Clementine’s, a major West Coast grocery chain. Riku and Rebecca had secured a coveted face-to-face meeting with him at the company’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-Lay5 for something that isn’t a proven seller.”

5 Frito-Lay Frito-Lay dominates the savory snacks category in the U.S., according to data from IRI, a Chicago-based market research firm. The company has a 60% market share in potato chips (Ruffles), a 72% share in tortilla chips (Doritos and Tostitos), an 87% share in cheese snacks (Cheetos), and a 62% share in other salted snacks.

“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 popular snacks?”

“Because the packaging, the flavors, the brand message are Japanese. We think that’s great, and there’s a niche market for your product—in the Asian section. You’ll confuse people if Kenko is in both places.”

“But you have salsa in snacks and in the Mexican section,” Rebecca said.

“Salsa is different—it’s American too now!” Dave gave a hearty laugh.

“I think you’re missing an opportunity,” Riku replied. “More and more people are eating gluten-free6 and avoiding fried food. Consumers want different snack options, and Kenko can be one of them. But you’re hiding us in the World Foods aisle.”

6 Data from Statista shows that food allergies and intolerances are driving demand for gluten-free foods, particularly in the United States. A $2.6 billion category in 2015, it is expected to grow to $7.6 billion Data from Statista shows that food allergies and intolerances are driving demand for gluten-free foods, particularly in the United States. A $2.6 billion category in 2015, it is expected to grow to $7.6 billion by 2020

Rebecca jumped in. “What about experimenting in a few stores? Put us with 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 ran experiments for you, I’d have to do it for every other new brand.7 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 that hasn’t proven itself. It’s just not realistic.”

7 According to information gathered by According to information gathered by Mintel GNPD (which is used by the United States Department of Agriculture), 21,435 new food and beverage products were introduced in the U.S. in 2016, with 14.8% of those in the snack category.

Riku glanced ruefully at Rebecca.

“You have to demonstrate demand,” Dave continued. “Maybe work with stores to do more sampling—say, every weekend for a month or two? You could also start a coupon program.”

“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.8 Bumping it from 30 cents per pack to 50? Then I could make a case to my boss.”

8 A slotting fee is a sum paid by a vendor or manufacturer to a retail establishment for warehousing a product, displaying it on store shelves, entering the product data into an inventory system, and programming its computers to recognize the product’s bar code. In the U.S., slotting fees often run $50,000 a year or more, per A slotting fee is a sum paid by a vendor or manufacturer to a retail establishment for warehousing a product, displaying it on store shelves, entering the product data into an inventory system, and programming its computers to recognize the product’s bar code. In the U.S., slotting fees often run $50,000 a year or more, per product per store

Riku wondered whether paying retailers more for a certain period would make sense. But such a move would cut into already-low margins and exacerbate profit losses, so he knew his superiors would most likely disapprove.

“Our data shows that the demand is there,”9 he said. He hoped he sounded more confident than he felt.

9 What customer segment would be the most promising for Kenko’s rice crackers?

Time to Debrief

Before heading to the office, Rebecca and Riku stopped at Starbucks to get a bite to eat and debrief.

“Well, that was rough,” Riku said, downing his Americano.

“I think we need to get serious about the private label deal,” Rebecca said, sipping a green tea. “Just look around you.” She gestured to the food on display. “So much of this is made by other companies for Starbucks. Patty’s Pantry has huge reach, and the company is ready to place a $4.5 million order with us. We’d have to cut our per-pack wholesale price, but we’d avoid 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.”

“But at that point Kenko wouldn’t be special. Patty’s crackers would have the same quality. And how would we explain that to our current 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.”10

10 Is Rebecca right in her assumption that Kenko can use a private label to its advantage? What are the potential downsides to pursuing the deal?

A Recommendation

Back at home that night, Riku sat in front of his computer screen, looking at his colleagues sitting around a conference room 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 revenue 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.11 People should want Kenko in their pantry too.”

11 U.S. imports of agricultural U.S. imports of agricultural products from Japan totaled $641 million in 2016, data from the Office of the U.S. Trade Representative shows. Leading categories include snack foods ($65 million), wine and beer ($62 million), tea ($46 million), vegetable oils ($43 million), and processed fruit and vegetables ($32 million).

“Funny that you use the word ‘pantry,’ Kato-san,” Riku said. “I’ve mentioned Patty’s Pantry before. It’s a fast-growing chain that provides high-quality food at low prices. They have offered us a private label deal that could quickly make us profitable.”

Some of his colleagues seemed to perk up, but others, including the CEO, looked disappointed. “I know that establishing Kenko USA is a big part of our globalization strategy,” Riku said. “But perhaps we can bring the cracker first, then the brand.”

Fusao 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 extensive sampling, not just at grocery stores but also at parks and events. They also tweaked their packaging to be more appealing. Those 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 our grassroots efforts.”

“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.12 Had they lost faith in his ability to make Kenko USA successful?

12 Does Riku need more help than he realizes?

“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.”

“Of course. I’ll talk to my team and give you one by next week.” After the goodbyes, Riku shut off his computer and walked to the bedroom. Aoi was still up. “Did I hear 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 branded marketing push to his executive team? The Experts Respond

Tetsuya Fujisaki is the president of Kameda USA.

If Kenko’s goal is to become a successful national brand in the United States, I would advise Riku to rethink and expand the division’s marketing efforts instead of pursuing the private label deal.

At Kameda—which, like the fictional Kenko, is a leading cracker company in Japan working to expand abroad—we have experience with both approaches to brand building. In 1989, we invested in the U.S. market with an ownership stake in Sesmark Foods (now TH Foods), a private label manufacturer that sells specialty crackers and snack mix components to industry giants like Nabisco. The business model is a profitable one, but over the past five years, we’ve seen TH Foods struggle to launch its own branded products.

In 2008, we created Kameda USA with the intention of bringing the Kameda brand to the American market, and the Kenko story is loosely based on our own experiences. We currently sell two of our own lines in the United States: our traditional rice crackers (Kameda Crisps) and a sweet, frosted version (Kameda Frost), but we, like Kenko, have had some difficulty getting retailers to understand this new category of consumer packaged goods and where it should be displayed in stores. Shoppers, too, have needed an introduction to our crackers.

It didn’t happen overnight for Kikkoman, and it won’t for us.

One successful strategy we implemented was to sell Kameda Frost in the checkout lines of TJ Maxx—a nontraditional food store, but one with a mainstream following—alongside other new and trendy impulse-buy snacks. We have also successfully pushed to have this product introduced as a new option in the “rice cake” section of grocery stores. With Kameda Crisps, we’ve experimented with new packaging and various retail placement: Asian, snacks, even nuts. The key is to help grocery store executives and customers better understand when and how to eat our crackers. At the same time, we are committed to maintaining our Japanese identity. To compete with other U.S. snacks, we know we can’t be too foreign. But we also believe our authenticity is a big differentiator. In the coming years, Kameda plans to ramp up our branded market efforts, including pushing more customer tastings. We believe that the combination of taste and healthfulness we offer can be as competitive in the United States as it is in Japan. But we know that even achieving a position of number three or four in our subsegment will take a long time. It didn’t happen overnight for Kikkoman, and it won’t for us.

One additional strategy that Kenko might consider is an acquisition. In 2013, Kameda USA took a majority stake in Mary’s Gone Crackers, a California-based maker of organic gluten-free snacks. That company has never considered a private label deal, preferring to keep its well-regarded recipes under its own brand and to preserve its advantage as a first mover in a category that is now embraced not just by those on special diets but also by mainstream consumers. The Mary’s Gone Crackers acquisition helped us get a foothold in and learn about the branded market in the United States, which should help us as we work to build our own brand in this important market.

In this case, Riku seems to be losing patience. But he should separate his personal decisions from his professional ones. In my experience, Japanese companies rarely expect expatriate assignments to carry on indefinitely. They understand that executives, particularly those with children, will want to come home. So Riku should feel comfortable recommending the right course of action for the business—continuing to push the Kameda brand in the U.S.—even if it means that a successor might spearhead the effort.

Carlos Canals is the CEO of Ciao Bella.

Anyone with a branding background will be skeptical of private label deals. But in this case I would encourage Riku to consider the partnership with Patty’s Pantry, for a few reasons.

First, this retailer seems like a Trader Joe’s equivalent, which means that most of its offerings are private label, with little to no branded competition. I wouldn’t advise Kenko to sign a similar deal with a traditional grocery chain such as Safeway or Albertsons, because doing so would effectively create cut-price competition for its own brand in those stores. But the arrangement with Patty’s avoids this risk while giving Kenko access to the chain’s fast-growing and influential business.

The deal would create a steady revenue stream for the U.S. division.

The deal offers several attractive benefits: It would give Riku a chance to learn from experts in the American snack foods industry about how to position his product for the mainstream. It would put Japanese rice crackers in front of a wide swath of U.S. consumers—and because 80% of Americans shop at multiple grocery chains, increasing familiarity with one retailer should help Kenko’s sales in other outlets, too. The partnership would also allow Riku to prove that his product can be sold alongside other types of snacks—generating data he can share with mainstream store buyers—while staying under the radar of the big consumer packaged goods brands that tend to copycat any successful creators of new categories. Finally, the deal would quickly create a steady revenue stream for the U.S. division: Riku could be shipping product within six months and would have a sense of the sales trends within a year and a half. The influx of cash would not only make those late-night calls with the executive team in Tokyo much easier but would also allow Riku to more easily ramp up his branded marketing efforts when the time is right.

At Ciao Bella, we have a well-established brand as the first purveyor of traditional Italian gelato in the United States. We don’t own our manufacturing, so a private label deal doesn’t make sense for us. But in a previous role, when I was leading the hummus brand Tribe, we followed the same path I’m recommending to Riku. At the time, Sabra was winning our category. We rejected offers from several grocery chains that wanted us to create a product for them, but we said yes to Trader Joe’s because it gave us a chance to leverage our existing manufacturing capacity (as Kenko could with its factories in Japan) and generate steady revenue as we mapped out our branded strategy.

Kenko USA’s offer from Patty’s Pantry would allow the division to quietly establish the success case for its rice cracker product, which it could then replicate under its own brand name in other retail environments.

For Riku, the deal might also allow him and his family to return to Japan sooner, having pulled the U.S. division out of the red. As a Mexican who has lived and worked across South America and in the United States for the past 20 years, I certainly understand the desire to return home. But I wouldn’t advise Riku to cut the deal and run. He should get actively engaged in the development of product and packaging with Patty’s Pantry, oversee the launch, and keep a close eye on early results before he hands the business over to another executive. That’s the best way for him to position Kenko’s brand for a successful future in the U.S. market.