Nisshin excelling in difficult business environment
November 01, 2008
by Arvin Donley
Nisshin Seifun Group, Inc., Japan’s largest flour miller and one of the country’s leading food manufacturers, has continued to increase its domestic market share and seek expansion opportunities abroad despite facing a challenging business environment.
Although the Japanese economy has slumped in recent years and grain prices have skyrocketed in recent months, the 108-year-old company, which includes 48 subsidiaries and 15 affiliated companies, has prospered under the leadership of Nisshin Chairman Osamu Shoda.
World Grain traveled to Japan in March 2008 to visit Nisshin’s new flour mill in Kobe (see article, page 40) and interview Mr. Shoda and other Nisshin executives in Tokyo, where the company is based. Mr. Shoda said the company’s most pressing concern was (and continues to be) the meteoric rise in global grain prices, particularly wheat, which affects nearly all of its nine business divisions: Nisshin Flour Milling Inc.; Nisshin Foods, Inc.; Oriental Yeast Co., Ltd.; Nisshin Pharma Inc.; Nisshin Petfood Inc.; Marubeni Nisshin Feed Co.; Nisshin Engineering Inc.; NBC Inc.; and its "Others" division, which includes grain storage assets.
In Japan, the price of wheat is set by the Ministry of Agriculture, Forestry and Fisheries (MAFF), the government body that purchases imported wheat for Japanese companies.
Since the government introduced its new market-linked wheat pricing system in April 2007, the prices for imported wheat rose by an average of 1.3% in April 2007, 10% in October 2007, and 30% in April 2008. Yet another large increase — perhaps as high as 20% — may be coming later this year, according to recent news reports. About 90% of the wheat used by Japanese milling companies is imported.
"The negative impact of the increase, effective April 1, 2008, to Nisshin will amount to 30 billion yen ($283 million)," Mr. Shoda said.
Even with the 10% increase in wheat procurement costs in October 2007, Nisshin was able to post an overall net sales increase of 3.3% in fiscal year 2007, which ended March 31, 2008, compared to the previous year, according to the company’s annual earnings report released in May. However, ordinary income fell 2.8% due to a decrease in the company’s equity in earnings of a compound feed affiliate, which the company said was affected by soaring grain prices.
The report noted that Nisshin "continues to aim to develop low-cost operations to ensure that earnings are more resistant to the possibility of future wheat market deregulation. Nevertheless, the company remains exposed to the risk of changes in raw material prices and higher costs for distribution, including packaging, due to oil prices rises. The resulting sharp rises in purchasing costs could make it impossible for the company to achieve cost reductions."
Although Nisshin is looking to cut costs in some areas, Mr. Shoda said the company will continue to spend money in two key areas: construction of new, more efficient state-of-the-art production facilities and food safety. He emphasized that since 2001, Nisshin has made capital investments of $106 million into a number of food safety initiatives.
Nisshin continues to strengthen its position as the dominant player in the Japanese flour milling industry, increasing its market share during the past 10 years from 32% to 38%. Nisshin’s flour milling segment, which has long been the company’s core business, posted positive results in 2007, as sales increased 6.3% over the previous year due to the increase in wheat prices and feed values, and operating incomes rose 4.7%. Mr. Shoda added that this was also attributable to increased flour shipments by tapping into new market needs through the introduction of five new product lines, and promoting "relationship-based marketing" to strengthen relations with customers.
New wheat flour products include the company’s latest innovation, Super Fine flour. Super Fine is whole-grain flour made from hard and soft wheat. It contains whole wheat contents but is ground very fine to give it more of "white flour taste."
Mr. Shoda said that while Japanese consumers are not as enamored with whole grain products as some parts of the world, demand for products containing whole grain is starting to increase, leading the company to believe that Super Fine has a bright future.
He said Nisshin’s flour milling subsidiaries in North America and Thailand have been performing exceptionally well, with revenue increasing significantly due to the implementation of aggressive marketing strategies to expand sales.
Rogers Foods Ltd., which has mills in Chilliwack and Armstrong, Canada, sells flour both to the domestic market as well for export to Asian countries such as Korea, Hong Kong, and Thailand. It also has a pre-mix production facility that makes breading and batter mixes for distribution in Canada and the West Coast of the United States. Nisshin also has a pasta manufacturing plant, Medallion Foods, in Tacoma, Washington, U.S.
"We are confident that flour milling, pasta and pre-mix are our most competitive and high technically-supported businesses to expand across the entire Pan-Pacific region," Mr. Shoda said.
He noted that Nisshin has assigned a number of its country-based staff to the West Coast of North America, southern Asia and China "to accelerate overseas business development."
Nisshin-STC Flour Milling Co., Ltd. in Thailand is working to increase shipments of wheat flour from Thailand as part of its Pacific Rim strategy, according to the annual earnings report. PROCESSED FOOD
As in its flour milling segment, Nisshin revised upwards its prices for a wide range of products in its processed foods business due to the surging price of raw materials.
Nisshin said shipments of householduse flour, pasta and prepared mix, etc., increased in 2007 over the previous year due to aggressive promotional activities and anticipatory demand prior to the raw materials price increase. However, profitability declined because the price increases were not swift enough to absorb the rise in procurement costs.
Overall, sales in the processed foods segment, which also includes its healthcare foods, yeast and biotechnology business units, increased 2% in 2007, but rising procurement costs and a decline in sales of highly profitable products for the biotechnology business led to a 6% yearover-year decrease in operating income.
Overseas, sales of prepared mix products increased in 2007, as a new prepared mix plant in China began full-scale operation, stabilizing the supply of products. Also, a research and development center was launched in January 2008 in Thailand to step up efforts to create new demand for prepared mix.
Nisshin’s near- and mid-term strategy for growth in processed food includes:
• emphasizing product development with 30 new products expected to be introduced during the current fiscal year;
• ramping up productivity, which will be achieved, in part, by the recent start-up of a large-scale pasta production line in 2007 and the scheduled start-up of new pre-mix production lines in 2010;
• developing menus that include prepared dishes using Japanese Agricultural Standards (JAS)-certified organic vegetables and expanding the sales reach of these products.
EXPANDING INTO NEW MARKETS
With per capita flour consumption in Japan staying flat in recent years, in part due to an aging and slower growing population, Nisshin is looking outside its borders to expand its business.
"In (the Japanese) market it is very difficult for us to increase our market share significantly," said Mr. Akihisa Sasaki, president of Nisshin Flour Milling Inc. "A one percent increase is very big."
Nisshin already has two flour mills in Canada, including a relatively new one in Chilliwack, which began operating in December 2004 and has a total milling capacity of 7,650 cwts per day.
"We have space at the Rogers mill and we hope that eventually we will expand capacity there," Mr. Shoda said.
The company has a pre-mix operation, Thai Nisshin Technomic Co., Ltd., near Bangkok, Thailand, that has been in operation since the early 1990s. In an effort to strengthen its product development and response to customer requests, Nisshin built a new, 550-square-meter research and development center in downtown Bangkok in January 2008. Most importantly, Nisshin said expansion allowed it to increases it research and development staff to 25.
China is another important market for Nisshin, which in 2002 entered the Chinese market with the formation of Qingdao Nisshin Seifun Foods Co., Ltd, a pre-mix business. When sales nearly reached capacity after only three years, Nisshin decided to double the production capacity and create a new mix company called Shin Nisshin Seifun Foods (Qingdao) Co. The new company began operation in December 2006 with an annual production capacity of 4,500 tonnes per year, based on an eight-hour operation day.
Nisshin also established the Jinzhu (Yantai) Food Research and Development Co., Ltd. in November 2005 in an effort to analyze and evaluate the food safety of raw material in China. It is a 50-50 joint venture with Nichirei, the largest Japanese frozen food company. Nisshin, which during the past five years has opened offices in China and Belgium to gather information on investment opportunities in those regions, said China remains the company’s top priority in expanding its flour milling business.
"The Chinese people appreciate a good quality product and they have a very distinct taste," Mr. Sasaki said.
"Besides China, we recognize Southeast Asia as a very attractive market, and we will search for opportunities to expand our business there."
One option for expanding Nisshin’s flour business that the company is not considering, Sasaki said, is increasing the amount of flour it exports from its Japanese mills, which is currently about 5%.
"Export is not our main business," he said. "We’d rather expand by building facilities overseas."
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