Slurping Up Profits at Ajisen

The ramen restaurant chain is winning devoted fans—and earning millions—by opening up noodle shops across mainland China

by Hiroko Tashiro and Bruce Einhorn

In Japan, there aren't a lot of growth opportunities for businesses that specialize in ramen. The noodles, typically served in a hot broth and topped with sliced pork, seaweed, or chopped green onion, are sold at some 16,000 restaurants around the country. Not only is there plenty of competition, but with Japan's population getting older there are fewer young people for the companies in the $3.5 billion ramen industry to target.

For Ajisen, a moderately successful family-owned ramen chain from Kumamato in western Japan, the growth market is in China. There, a new generation of Chinese diners is spurring remarkable growth for Ajisen (China) Holdings. The Hong Kong-based holder of the Japanese brand's Chinese franchise, Ajisen (China) can't seem to open ramen shops fast enough to meet surging demand. Last year, Ajisen (China) posted earnings of $16.3 million, compared with $6.6 million a year earlier. Sales, which were just $18 million in 2003, rose by a third, to $81.6 million. What's more, following a successful listing on the Hong Kong stock exchange that raised $210 million in March, its stock price has increased 42%, valuing the company at $1.4 billion.

"The potential for the company is so great," says Alan Zheng, Ajisen's Shanghai-based chief financial officer. A year ago, the company had 120 restaurants in China, and by the end of this year it will have 200. And the growth will continue, he promises. "For the coming year, we feel confident that we will do better than 320," he says.

More Opportunities for Growth

That performance has helped the company, which ranks as the No. 5 fast-food outlet, to the top spot in BusinessWeek's Asia Hot Growth survey for 2007. "Ajisen has succeeded in building a brand in China. They're regarded as the representatives of Japanese ramen and Japanese fast food in general," says Naoki Izuo, a researcher at Yano Research Institute in Tokyo.

Indeed, with 192 Chinese shops today, Ajisen (which means "a thousand tastes" in Japanese) already has more restaurants in China and Hong Kong than in Japan. And while Japan's $3.5 billion ramen industry is large, there are few opportunities for growth compared with China, where spending on eating out is increasing at over 15% a year, according to China Investment Consulting. Ajisen, which got its start as a noodle maker and now operates noodle factories in Shanghai, Shenzhen, and Hong Kong to supply its restaurants, is flush with cash following the initial public offering.

Since the company's three factories are almost fully utilized, Zheng says Ajisen plans to open a $13.7 million noodle factory in Shanghai next year that will be big enough to supply noodles for 500 restaurants. He says two additional factories are on the drawing board for 2009. "We are talking to local governments to buy another two pieces of land," he says. When all the new factories are online, "we'll be able to support another 1,100 restaurants."

A Difference in Taste

For all that, Ajisen's rapid expansion into China isn't an overnight success. In 1994, Takaharu Shigemitsu, who developed Ajisen's noodle recipe in the 1960s and founded Shigemitsu Industry to mass-produce Ajisen's Kumoamoto Noodles, plotted an expansion into Taiwan and opened 20 restaurants.

But the restaurants slumped, partly because local franchise holders changed the recipe, believing Taiwanese wouldn't like the salty taste of Japanese ramen. "We didn't have experience or knowledge of overseas operations and couldn't provide the same quality as in Japan," says Shigemitsu's son Katsuaki who replaced his father as chief of Shigemitsu Industry in 1997 and also sits on the board of Ajisen (China) Holdings.