Global food service giants are making inroads into the nation’s office and hospital cafeterias, triggering mergers and acquisitions in the world’s second-largest institutional meal market.

The meal catering industry for institutional clients has long been dominated by small-scale operators, as the top 10 providers in Japan only have a market share slightly above 10 percent.

Now the world’s top three food services are gearing up to grab a bigger share of Japan’s 4 trillion yen market.

The industry shakeup started in January 2002, when Compass Group PLC of Britain bought Seiyo Food Systems Inc., a major domestic provider of food on contract. Compass Group is the world’s largest food service, with annual consolidated sales of £10.6 billion, or some 2 trillion yen.

“So far, it has been a relatively uncontested market, but we expect to see rapid industry consolidation from now on,” said Takeshi Kohjima, president and CEO of Seiyo Food Systems and also president of Compass Group Holding Japan K.K.

Compass Group’s U.S. rival, Aramark Corp., which has been in the Japanese market for nearly three decades through Aim Services Co., a joint venture with Mitsui & Co., has also stepped up its operations here.

Jointly with Mitsui, Aramark, the world’s third-largest caterer, with annual group revenues of $8.77 billion, bought up almost all of the outstanding shares of Aim Services traded on the market last August.

“It’s the second-largest contract food market in the world, (and there are) good opportunities,” said Michael Cronk, Aramark executive vice president of food and support services and overseer of the Japanese operation.

Upon completion of their purchase of all Aim shares in the near future, Aim sales in Japan will start contributing to Aramark’s sales directly and will double its international sales of $1.2 billion posted in 2002.

French giant Sodexho Alliance, the world’s second-largest food service, with annual group revenues of 12.6 billion euros, or some 1.44 trillion yen, entered the Japanese market through a minority stake in Sodexho Japan Co.

It has expanded its operations by buying four smaller rivals last summer, including one from the troubled supermarket chain Daiei Inc.

At a glance, the domestic institutional food catering market would appear to be a shaky proposition for these hungry global giants.

According to Food Service Industry Research Center, food catering for the nation’s office, school and hospital cafeterias has been flat or even declining in recent years, amounting to 3.93 trillion yen in the fiscal 2001.

As the nation’s industries restructure, there are fewer office workers. What’s more, cafeterias are facing greater competition from restaurants luring the lunch crowd with ever lower prices.

Yet, Yoshimasa Ikazaki, analyst at Daiwa Institute of Research Ltd., said that despite such a bleak overall market, there are still many opportunities for the carnivorous caterer.

“This is a highly fragmented market, where no one has yet to claim a significant share,” he said.

Under cost-cutting pressures, large businesses are also increasingly unloading in-house cafeteria operations.

Aim Services has acquired the catering units of Isuzu Motors Ltd. and Toyo Trust & Banking Co.

Yoshiaki Hatanaka, president of Aim Services, also pointed to the enormous Chinese market looming over the horizon as another factor whetting the appetites of the global giants.

“The Japanese market is very large, but I don’t think it alone will be that important for them,” he said, noting some firms regard Japan operations as a preliminary round in Asia.

Japanese officials of the big three global players said the local units largely maintain their autonomy in menu selection to satisfy local tastes, noting some potential clients were initially concerned that Western-style fast food would be served.

The foreign and domestic meal providers are also offering various office cafeteria attractions rivaling theme-based restaurants. One popular draw is a live cooking performance, including making sushi and “soba” buckwheat noodles. Some even bring in a whole tuna to cut up.

Hatanaka said one of the greatest advantages of the global titans over domestic competitors is their massive funds. “We have managed to finance M&As by ourselves so far, but (Aramark and Mitsui) say they are willing to financially back us up in future cases,” he said.

Seiyo Food Systems’ Kohjima said the global link is the greatest benefit his firm enjoys as part of Compass Group, which operates in more than 90 countries.

He said Compass provides strong marketing tools for the group’s local operators to attract institutional clients with multinational operations that want “one package service.”

Seiyo Food Systems in the process has secured a contract with a major U.S. computer company to begin providing food at its Japanese offices in April.

Kohjima, who declined to name the new client, said the deal was made between the global headquarters of Compass Group and the computer firm. “We are the only group that does global marketing,” he said.

Their domestic competitors are no less aggressive in their pursuit of market share.

Green House Co., a major domestic caterer, has been one of the most active in buying the in-house catering units of corporations not in food services.

In the last four years, it acquired nine such operations, including those of Nissan Motor Co. and Oki Electric Industry Co.

“We have experience and expertise in such M&A cases, and I think sellers have evaluated us highly (in managing the acquired units),” said Masashi Komamba, the firm’s general manager. “At least in this field, we are not going to be outdone by foreign firms.”

Shidax Corp., the nation’s second-largest provider of food on contract, has been beefing up its sales operations.

To consolidate its domestic businesses, the firm sold its U.S. subsidiary last March and has doubled its domestic sales personnel to around 100 over the past three years.

“There are big opportunities emerging here for us to expand, and we have to get ready by strengthening our sales force,” said Kinichi Shida, Shidax president.

As part of its efforts to cultivate new fields ahead of its rivals, the firm last April set up a separate sales division devoted to school lunches.

Many of its rivals have shied away from school meals, especially public schools, where local-level competitors, strict regulations and long holidays make it less appealing for large operators.

While admitting the financial clout of the global giants is intimidating, Shida said he does not view the current market as simply one of domestic vs. foreign players.

“The situation surrounding the market is changing rapidly, and it’s not simply a matter of fending off foreign competition,” he said. “We also have to compete with restaurants and convenience stores.”

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