Morinaga & Co., Ltd. was established in 1899 and is the fourth largest confectionery manufacturer in Japan in terms of revenue. The company was the first to produce caramels and other Western confectioneries in Japan, greatly contributing to the popularization of these treats within the country. It also played a key role in modernizing Japan’s confectionery industry by introducing mass production methods and employee welfare initiatives. Today, while the company’s founding business of manufacturing candies, cookies, and chocolates forms a solid foundation, its growth drivers are Frozen Desserts (launched 1956), Health Products (1983), and the US business (2008).
Food & Staples Retailing
Executive summary
Long-established confectionery manufacturer focusing on Frozen Desserts, Health Products, and the US business
Morinaga & Co., Ltd. (“Morinaga”) was established in 1899 and is the fourth largest confectionery manufacturer in Japan in terms of revenue. The company was the first to produce caramels and other Western confectioneries in Japan, greatly contributing to the popularization of these treats within the country. It also played a key role in modernizing Japan’s confectionery industry by introducing mass production methods and employee welfare initiatives. Today, while the company’s founding business of manufacturing candies, cookies, and chocolates forms a solid foundation, its growth drivers are Frozen Desserts (launched 1956), Health Products (1983), and the US business (2008).
In FY03/21, Morinaga posted revenue of JPY200.0bn and operating profit of JPY19.2bn (OPM of 9.6%). Until the early 2010s, the company had unprofitable businesses such as the restaurant business and loss-making brands, resulting in operating profit hovering around JPY3.0bn with an OPM of 1–3%. In FY03/15, it shifted focus from revenue and market share to operating profit to strengthen its management base and secure resources to implement its growth strategy. Efforts to consolidate sales bases, restructure production bases, pare down unprofitable brands and products, ensure profit orientation from the product planning stage, and curb promotion expenses by focusing on mainstay product lines have resulted in growth in operating profit and OPM.
The core Food Manufacturing segment (95.9% of revenue and 98.1% of operating profit in FY03/21) consists of Confectionery & Foodstuffs (54.4% and 33.4%, respectively), Frozen Desserts (23.5% and 37.0%, respectively), and Health Products (18.0% and 27.7%, respectively). It is our understanding that while Confectionery & Foodstuffs for the domestic market is fundamental to Morinaga’s structure, the business is unlikely to see much growth over the medium to long term. The company therefore aims to invest in the US business (in Confectionery & Foodstuffs, Frozen Desserts, and Health Products), where it expects growth and profitability.
Confectionery & Foodstuffs for the domestic market centers on long sellers that have been on the market for decades (10 to over 100 years). In this business, Morinaga manufactures candies such as HI-CHEW, cookies such as Morinaga Biscuits, and chocolates such as DARS, Carré de chocolat, and Chocoball. This business category has lower profitability than others due to severe price competition and low production efficiency caused by high processing requirements. Shared Research believes that the domestic confectionery market is mature, so room for growth is limited. Accordingly, the company aims to boost revenue only slightly by expanding its lineup of well-recognized, long-selling products. At the same time, it intends to focus on bolstering profits by improving productivity through more efficient promotion.
In Frozen Desserts, Choco Monaka Jumbo (suggested retail price: JPY140), an ice cream sandwich, accounts for about 40% of revenue. Choco Monaka Jumbo is the leading brand in the frozen desserts market, generating at least JPY15.0bn in revenue on the sale of over 100 million units per annum. The frozen treat’s unique crispy texture achieved with the company’s proprietary confectionery processing technology is one of the reasons behind its 20 consecutive years of growth in sales value. The company has pared down its Frozen Desserts lineup to focus on Choco Monaka Jumbo, which has led to relatively high profit margins for the business.
In Health Products, the company focuses on “in Jelly” (suggested retail price: JPY200), a gelatinous energy drink containing vitamins, protein, and other nutrients. The in Jelly lineup, comprising products that have pleasant tastes and textures despite being packed with nutrients, has maintained the top share of the jelly drink market for 26 years.
While many Japanese food manufacturers focus on China and Southeast Asia, Morinaga targets the US market for two main reasons. First, US consumers are willing to pay higher prices, ensuring profitability. Second, the company is attracted by the market’s large size and growing population.
In the US, as of December 2021, the company focused on the sale of HI-CHEW. HI-CHEW is a chewy candy characterized by its soft texture and delicious fruit flavor. There are currently no similar products on the market. The company believes it is possible to expand the business by introducing a variety of products with different flavors and textures. Morinaga has aggressively marketed HI-CHEW to local retailers since 2015, when it began manufacturing the product at the group’s US factory and was thus able to ensure a stable supply. Revenue has grown at a CAGR of 21.4% from FY03/16 to FY03/21. The US business recorded revenue of JPY7.2bn in FY03/21 and maintained operating profit. In February 2022, the company launched "Chargel," a gel drink that provides both energy and nutrition. It intends to develop Chargel into its second core product in the US market, following HI-CHEW.
The retail value of snacks and confectionery in Japan in 2020 was JPY3.2tn (-6.0% YoY). Although the market had been expanding due to an increase in unit prices, it shrank in 2020 as consumers had fewer opportunities to spend time outside the home due to the COVID-19 pandemic. Shared Research believes that Japan’s confectionery market is likely to shrink in the near future as the population declines. Given this, many confectionery manufacturers including Morinaga are working to control costs and maximize profits by focusing on mainstay products in the domestic market. Many companies are also developing health products and seeking growth opportunities overseas.
Looking at the overseas development of competitors, Meiji Holdings Co., Ltd. (TSE1: 2269) sells chocolate and yogurt in China and other Asian countries, and also manufactures and sells antibacterial drugs and vaccines in Japan and overseas. Meanwhile, Ezaki Glico Co., Ltd. (TSE1: 2206) focuses on the sale of Pocky, mainly in Asia.
Earnings trends
In FY03/22, revenue was JPY181.3bn (+7.7% YoY), operating profit was JPY17.7bn (-7.8% YoY), recurring profit was JPY18.2bn (-7.8% YoY), and net income attributable to owners of the parent was JPY27.8bn (+107.0% YoY). Revenue increased because each segment recovered from the effects of the COVID-19 pandemic and because business areas in the focused domain category designated under the 2030 Business Plan grew. Operating profit fell because of a surge in the prices of raw materials and crude oil and an increase in depreciation expenses associated with capital investment for future growth.
For FY03/23, the company forecasts revenue of JPY190.0bn (+4.8% YoY), operating profit of JPY16.5bn (-6.7% YoY), recurring profit of JPY16.9bn (-7.4% YoY), and net income attributable to owners of the parent of JPY10.7bn (-61.5% YoY). Although the company expects revenue to increase thanks to a recovery in demand for "in Jelly" and strong performance of the US business, profit is likely to decline because of an increase in material costs.
The company announced a new three-year medium-term business plan in May 2021. In the final year of the plan, FY03/24, it targets revenue of JPY190.0bn (CAGR of 4.1% from FY03/21 on the new accounting standard basis), operating profit of JPY21.5bn (CAGR of 3.9%), and OPM of 11.0% or higher (versus OPM of 11.4% in FY03/21). In addition, the company aims to achieve an overseas revenue ratio of 9.0% or higher (7.0% in FY03/21), an increase in the ratio of revenue from the focused domain category of 5.0pp or more, ROE of 10% or higher, and a dividend payout ratio of 30% (30.0% in FY03/21). Morinaga plans to generate cash in the basic domain category including Confectionery & Foodstuffs, and invest for growth in the focused domain category consisting of the “in-” business, Direct Marketing business, US business, and Frozen Desserts.
Strengths and weaknesses
Shared Research thinks that the company’s strengths include: (1) a stable revenue base resulting from product development centered on long sellers, (2) differentiated products in Frozen Desserts and Health Products underpinned by confectionery processing technology, and (3) its pivot toward and thorough implementation of a management policy emphasizing profit and efficiency. We see the company’s weaknesses as: (1) the difficulty of improving profit margins in the mainstay confectionery business, which accounts for more than 50% of revenue; (2) limited room for growth in Japan due to the already high domestic market share of many of the company’s mainstay products, and the difficulty of creating new ones; and (3) the time required to increase the ratio of overseas revenue (see the Strengths and Weaknesses section below).
Key financial data
Note: Figures may differ from company data due to differences in rounding methods.
Recent updates
Announcement concerning dividend of surplus for FY03/22
On May 13, 2022, Morinaga Co., Ltd. made an announcement concerning dividend of surplus (dividend increase) for FY03/22.
The company will propose a year-end dividend of JPY90 per share for FY03/22, an increase of JPY10 from the previous forecast, at the general meeting of shareholders to be held in June 2022.
Product price increases
On May 12, 2022, Morinaga & Co., Ltd. announced a plan to increase product prices.
Morinaga will increase the prices of some products starting in July 2022. Ingredient and packaging material costs and distribution expenses have continued to increase in recent years. The company has sought to absorb the rise in costs while maintaining quality by implementing measures to improve production efficiency and reduce costs. However, it now expects the factors underlying such rises to extend into the medium to long term. Accordingly, the company decided that it would be difficult to sustain current product prices solely through its cost reduction efforts.
Overview of price increases
Product price increases
On March 15, 2022, Morinaga & Co., Ltd. announced product price increases.
From May 31, 2022, Morinaga will start implementing price increases in stages for some of its products. Ingredient and packaging material costs and distribution expenses have continued to increase in recent years. The company has sought to absorb the rise in costs while maintaining quality by implementing measures to improve production efficiency and reduce costs. However, it now expects the factors underlying such rises to extend into the medium to long term. Accordingly, the company decided that it would be difficult to sustain current product prices solely through its cost reduction efforts.
Overview of price increases
Acquisition of treasury stock; sale of investment securities and booking of extraordinary gains; revisions to full-year forecast
On February 28, 2022, Morinaga & Co., Ltd. announced its resolution regarding the acquisition of treasury stock, the sale of investment securities and the booking of extraordinary gains, and revisions to its full-year forecast.
Resolution regarding acquisition of treasury stock
At its board of directors meeting held on February 28, 2022, the company reached a resolution regarding the acquisition of treasury stock.
Reason for acquiring treasury stock: To enhance shareholder returns and improve capital efficiency
Class of stock to be acquired: Common stock of the company (up to 3,000,000 shares in total)
Total acquisition cost: Up to JPY10.0bn
Acquisition period: March 1, 2022 to February 28, 2023
Method of acquisition: Market purchase on the Tokyo Stock Exchange
Sale of investment securities and booking of extraordinary gains, and revisions to full-year forecast
The company has resolved to tender a portion of the common shares it currently holds in Morinaga Milk Industry Co., Ltd. (TSE1: 2264) when Morinaga Milk Industry acquires its own shares through the off-auction own share repurchase system (the ToSTNeT-3 trading system) on March 1, 2022.
Overview of transaction: At 08:45am on March 1, 2022, Morinaga Milk Industry will place a consigned purchase order with the Tokyo Stock Exchange off-auction own share repurchase system (the ToSTNeT-3 trading system) at the closing price on February 28, 2022.
Shareholding before and after the transaction
Shareholding before tender: 6,289,777 shares (including 1,040,000 deemed held shares; 12.70% of the total number of shares outstanding, excluding treasury stock)
Number of shares to be tendered: 4,300,000 shares
Shareholding after tender: 1,989,777 shares (including 1,040,000 deemed held shares; 4.01% of the total number of shares outstanding, excluding treasury stock)
Shareholding policy and reason for sale: The company's policy is to reduce strategically held shares. It holds shares in Morinaga Milk Industry for the purpose of maintaining the integrity of the Morinaga brand and strengthening business transactions, but it has decided to reduce its shareholding to less than 5% of the total number of shares outstanding in order to improve asset efficiency. Regardless of the shareholding ratio, the two companies will continue to share the Morinaga brand and maintain a good relationship in order to increase medium- to long-term value through sustained growth and promote the strengthening of business transactions.
Impact to performance: The company has revised its forecast as it expects to book extraordinary gains of JPY21.9bn (estimated) in Q4 FY03/22 from the above sale of investment securities. Its forecasts for revenue, operating profit, and recurring profit are unchanged, but it has raised its forecast for net income attributable to owners of the parent by JPY15.2bn to JPY28.0bn.
Trends and outlook
Quarterly trends and results
Note: Figures may differ from company data due to differences in rounding methods.
Note: The company adopted the Accounting Standard for Revenue Recognition at the beginning of FY03/22; YoY changes for FY03/22 are calculated by retroactively applying the accounting standard to FY03/21 figures.
Note: Figures may differ from company data due to differences in rounding methods.
Note: The company adopted the Accounting Standard for Revenue Recognition at the beginning of FY03/22; YoY changes for FY03/22 are calculated by retroactively applying the accounting standard to FY03/21 figures.
Note: Figures may differ from company data due to differences in rounding methods.
Note: The company adopted the Accounting Standard for Revenue Recognition at the beginning of FY03/22; YoY changes for FY03/22 are calculated by retroactively applying the accounting standard to FY03/21 figures.
Note: Figures may differ from company data due to differences in rounding methods.
Note: The company adopted the Accounting Standard for Revenue Recognition at the beginning of FY03/22; YoY changes for FY03/22 are calculated by retroactively applying the accounting standard to FY03/21 figures.
Note: Figures may differ from company data due to differences in rounding methods.
Note: The company adopted the Accounting Standard for Revenue Recognition at the beginning of FY03/22; YoY changes for FY03/22 are calculated by retroactively applying the accounting standard to FY03/21 figures.
Full-year FY03/22 results
Revenue increased because each segment recovered from the effects of the COVID-19 pandemic and because business areas in the focused domain category designated under the 2030 Business Plan grew. Operating profit fell because of a surge in the prices of raw materials and crude oil and an increase in depreciation expenses associated with capital investment for future growth.
Confectionery & Foodstuffs
Japan
Revenue in Japan was JPY156.3bn (+5.3% YoY).
Revenue from mainstay brands decreased. Among mainstay brands, revenue from DARS (domestic sales down 5% YoY), Chocoball (down 7% YoY), Morinaga Amazake (down 12% YoY), and Morinaga Cocoa (down 13% YoY) all declined YoY. However, revenue from Morinaga Biscuits was up 8% YoY due to strong performance of seasonal products in addition to regular products. Revenue from HI-CHEW rose 2% YoY thanks to the enhanced texture (one of the main appeals) of Suppai Chew and Hi-Chewlicious. Revenue also grew 2% YoY for Carré de Chocolat. Among other brands, revenue from Morinaga Hotcake Mix was down YoY as home consumption demand stabilized. Revenue from Koeda Chocolate, which marked its 50th anniversary this year, exceeded the FY03/21 results.
Overseas (January–September 2021)
Overseas revenue was JPY16.4bn (+39.5% YoY). The ratio of overseas revenue increased by 2.1pp YoY to 9.1%.
In the US, revenue exceeded the FY03/21 results thanks to increasing sales of HI-CHEW and a high inventory turnover. In China, revenue also exceeded the FY03/21 results because of successful sales promotion of HI-CHEW at convenience stores. In Taiwan, revenue from Milk Caramel, which celebrated its 60th anniversary this year, was strong.
Frozen Desserts
Ita Choco Ice performed well, recording its highest purchase rate ever, even though it has only been two years since the product was made available all year around. Revenue also increased for Paxiel as a result of content collaboration initiatives. Meanwhile, revenue declined for mainstay Jumbo products (-3% YoY) and ICEBOX (-6% YoY) partly in reaction to a revenue surge in FY03/21.
Health Products
Revenue from mainstay “in Jelly” increased 22% YoY. The growth was helped by suggestions for new scenarios for consumption, increased demand for substitute meal products when people are not feeling well, and the launch of new products to meet new market needs, such as fruit-flavored items. Revenue from "in Bar" grew 1% YoY as consumers looked for products to help protein intake and for snacks while working at home.
Revenue in the Direct Marketing business increased. Sales of Morinaga Collagen Drink (+20% YoY) were boosted by sales promotion activities, which led to an increase in the number of regular customers.
Other segments
Food Merchandise
Real Estate and Services
FY03/23 company forecast
Note: Figures may differ from company data due to differences in rounding methods.
Note: The company adopted the Accounting Standard for Revenue Recognition at the beginning of FY03/22; YoY changes for FY03/22 are calculated by retroactively applying the accounting standard to FY03/21 figures.
Note: Figures may differ from company data due to differences in rounding methods.
Full-year FY03/23 company forecast
The company, in order to achieve medium- and long-term growth while contributing to the realization of a sustainable society, will expand its business scale and improve profitability by shifting its business portfolio and focusing its management resources on businesses with high profitability and growth potential. The company will further promote management efficiency through structural reforms to generate stable investment resources and strengthen investments in R&D and digital technology to build a foundation for medium- to long-term growth.
The company expects that the prices of raw materials and crude oil will remain high over the medium term. The company will implement flexible and appropriate price revisions, reduce costs, streamline operations, and improve investment efficiency, in response to these risks.
Actual results versus initial forecasts
Note: Figures may differ from company data due to differences in rounding methods.
Note: Due to the Great East Japan Earthquake, the company announced its FY03/12 initial forecast at the Q1 FY03/12 financial results briefing.
2030 Business Plan
In May 2021, Morinaga announced its long-term business plan, 2030 Business Plan, ending in FY03/31.
Note: Figures may differ from company data due to differences in rounding methods.
Note: FY03/21 is the base year for CAGR calculations.
Note: The ratio of revenue in the focused domain category in FY03/21 (approx. 40%) is the average for the period of the 2018 Medium-Term Business Plan (FY03/19 to FY03/21).
Numerical Targets of the 2030 Business Plan
Numerical targets for FY03/31 are as follows.
Vision of the 2030 Business Plan
The vision laid out in the 2030 Business Plan goes “The Morinaga Group will Change into a Wellness Company in 2030.” The company defines a wellness company as one that continues to provide customers, employees, and society with mental, physical, and environmental health. It aims to support the wellness of all generations around the world by deepening the trust and expanding the technology it has cultivated over its more than 120 years of history.
Morinaga’s initiatives for becoming a wellness company are as follows.
Deeper exploration of mental health aspects: Scientifically ascertain the emotional value (sense of happiness) embodied in Morinaga’s corporate philosophy of “delicious, fun, and healthy,” which the company believes contributes to mental health, and leverage this knowledge to enhance customer satisfaction. For example, the company plans to work with external research institutions to scientifically explain the reasons why the crispy texture of Choco Monaka Jumbo gives a sense of comfort, and utilize this information in product development.
Accelerate improvement of physical health: Accelerate the growth of “in Jelly” and “in Bar” as consumers become more health-conscious in their food choices.
Shift from mental health to physical health: Work to reduce unhealthy ingredients in products, such as lowering the amount of sugar used, while adding healthy ingredients, such as increasing the amount of protein. Strive to develop food products with function claims.*
Basic approach for achieving the 2030 Business Plan
In order to concentrate management resources on businesses that are expected to grow and create new markets from the perspective of wellness, Morinaga plans to 1) “improve profitability via business portfolio optimization and structural reforms,” 2) “build business foundation linked with business strategies,” and 3) “promote diversity.”
(1) Improve profitability via business portfolio optimization and structural reforms
Concentrate management resources on the focused domain category that offer growth potential and profitability, increasing the ratio of overall revenue that these areas account for to 60% or higher by FY03/31 (versus average of approximately 40% in FY03/19–FY03/21).
Focused domain category (“in-” business, Direct Marketing business, US business, Frozen Desserts): Focus management resources to drive growth
Basic domain category (Confectionery & Foodstuffs, domestic subsidiaries, Taiwan business): Aim to generate stable cash to fund investment in the focused domain category by expanding revenue and improving profitability while curbing investment
Exploration & research domain category (overseas businesses other than the US and Taiwan businesses, new businesses): Aim to create new businesses, develop wellness products that meet the tastes and needs of various countries and regions, and foster new businesses that will shoulder next-generation growth
Through these efforts, Morinaga will implement structural reforms mainly in functional departments (procurement, manufacturing, logistics, and sales) to prepare for management risks while creating resources for investment in the focused domain category with the aim of improving profitability.
(2) Build business foundation linked with business strategies
Build business foundation linked with business strategies
Human resources strategy: Strengthen human resources management based on a global perspective.
R&D strategy: Develop key technologies to support growth in the focused domain category.
Financial strategy: Conduct financial management that contributes to the enhancement of enterprise value.
Digital transformation: Strategically introduce and utilize digital technologies to strengthen the business foundation and business competitiveness.
(3) Promote Diversity
Based on the concept of “leveraging each person’s individuality,” the company will build an environment and culture in which diverse personnel can play an active role and create new value that leads to the resolution of social issues.
2021 Medium-Term Business Plan (FY03/22–FY03/24)
Numerical targets
Numerical targets for FY03/24 are as follows.
Strategy overview
Morinaga positions the 2021 Medium-Term Business Plan as the first stage in achieving the 2030 Business Plan targets. During the three years of the plan, the company will strive to build a new foundation for rapid progress. The company expects the business environment to remain severe owing to a long-term trend of soaring raw material costs and rising labor costs. That said, it will 1) work on the focused domain category to drive growth, 2) generate stable cash flows in the basic domain category 3) create new businesses in the exploration & research domain category, 4) implement structural reforms, especially at functional departments, and 5) build a solid management foundation. Morinaga plans to concentrate management resources on the focused domain category and increase the ratio of revenue from these areas.
(1) Work on the focused domain category to drive growth
To build a highly profitable business structure, the company plans to concentrate management resources on the focused domain category.
“in-” business
The company’s vision for the “in-” brand in FY03/31 is to become “No. 1 brand among foods supporting health of mind and body pivoting around sports.” It plans to step up investment to achieve its FY03/31 revenue target for the business of JPY50.0bn.
in Jelly: Leverage the company’s brand power and technological capabilities as the player with the top share in jelly drinks. Target growth by expanding target customers to include women, children, and seniors, and also by proposing new scenarios for enjoying the beverage, including for health management, concentration enhancement, and as a countermeasure against heat stroke. Through these efforts, Morinaga will work to expand its market share and sales channels by further increasing its share of the jelly drink section of convenience stores, its main sales channel, from the current level of somewhere above 30%.
in Bar: Develop products that respond to the growing trend toward convenient eating and the growing demand for protein. Increasing the protein content of bars tends to adversely impact the taste, but the company is able to achieve good-tasting protein bars by using processing technology cultivated through the production of confectionaries. Demand is on the rise, and Morinaga will establish a system to increase production and promote growth.
New products: Morinaga is developing new products that will lead to “food creation of the future” based on the “in-” brand, which will showcase the company’s transformation into a wellness company.
Direct Marketing business
The company’s vision for the Direct Marketing business for FY03/31 is to evolve into a healthcare business that supports customer wellness. It plans to step up investment to achieve its FY03/31 revenue target for the business of JPY20.0bn. Revenue for Morinaga Collagen Drink, which is sold only through direct marketing, has trended upward due to an increase in the number of regular customers. The company plans to utilize its customer base to provide services tailored to customers and explore the possibilities for new products and services.
US business
Morinaga’s goal for the US business in FY03/31 is to achieve business growth through the expansion of the HI-CHEW brand and the creation of a jelly drink market. The company will work to increase the number of stores handling its products and expand its product lineup. It targets revenue of JPY10.0bn by end-FY03/24 and JPY30.0bn by end-FY03/31. With the stabilization of production at the local factory, the company has been able to step up sales activities. Revenue in the US business has been on an upward trend as the number of stores handling HI-CHEW grows.
Currently, HI-CHEW is the only Morinaga product sold in the US, but the company plans to start selling jelly drinks during FY03/22. Products customized for the US market will first be sold in a limited number of areas and channels, and will be expanded based on the customer response. Jelly drinks supplying energy, vitamins, protein, and other nutrients do not exist in the US, so the company will work to create a new market. As this process is still in the initial stages, the company has not factored in revenue contribution from the jelly drinks during the period covered by the 2021 Medium-Term Business Plan.
Frozen Desserts
The company’s goal for Frozen Desserts in FY03/31 is to expand the business in a stable manner by focusing on differentiated products employing confectionery technologies. It targets revenue of JPY50.0bn for the business in FY03/31. Morinaga will focus on Choco Monaka Jumbo and other brands to secure profits efficiently. The company will also work to develop new products using its confectionery processing technologies.
Since the mainstay Choco Monaka Jumbo is already handled by nearly 100% of major retailers that sell frozen desserts, Morinaga will work to develop sales channels to retailers that have only handled a limited number of frozen desserts. The company will work to grow revenue by evolving its product development with a focus on freshness, in addition to expanding the target customers and proposed scenarios in which its products can be enjoyed.
(2) Generate stable cash flows in the basic domain category
Concentrate management resources on mainstay brands to grow revenue and improve profitability, generating funds to invest in the focused domain category.
The company’s vision for FY03/31 is to transform its product category portfolio to build a highly profitable earnings base. In Confectionery & Foodstuffs, Morinaga aims to achieve an OPM of 10% in FY03/31. The company has worked on consolidating sales bases, restructuring production bases, reducing unprofitable brands and products, pursuing thorough profit orientation from the product planning stage, and curbing promotion expenses by strengthening mainstay products. Profit margins have improved thanks to these initiatives.
Morinaga will focus on expanding sales of highly profitable candies and cookies to further improve profit margins. For chocolates, the company plans to increase revenue by clarifying the target customer base and conducting cost-efficient promotional activities using social media. It plans to promote cocoa and amazake (sweet rice wine) by appealing to their respective health benefits.
(3) Create new businesses in the exploration & research domain category
The company will search for promising new businesses to undertake, focusing on creating business models in line with the advancement of digitalization and developing wellness products in overseas markets.
Investment in digital transformation: Promote research into the utilization of customer data, and build infrastructure for data utilization.
Overseas (other than the US and Taiwan): Promote business activities in China, Southeast Asia, Oceania, and Europe. In addition to cultivating sales channels in countries and regions that are expected to be receptive to HI-CHEW, the company will investigate the marketability of health products, such as jelly drinks, and explore the possibility of their commercialization.
(4) Implement structural reforms, especially at functional departments
Procurement: Rebuild the supply chain management foundation using digital technology to improve the efficiency and sophistication of operations. Find substitutes for existing raw materials and review product specifications to curb the increase in the raw material cost ratio and achieve sustainable raw material purchasing.
Manufacturing: Aim to convert factories into smart factories through the use of Internet of Things (IoT) and other digital technologies.
Logistics and sales: Optimize logistics and sales bases to reduce costs and improve productivity.
(5) Build a solid management foundation
Bolster the governance system to strengthen group management and risk management, and implement strategies in various areas.
Human resources strategy: Aim to maximize human resources.
R&D strategy: Renovate the research center in 2022, enhance the sophistication of mass production technologies, and strengthen collaboration with external research institutions.
Digital transformation strategy: Aim to improve profitability through the use of digital technologies. Undertake business reforms that utilize IoT and Robotic Process Automation (RPA).
Financial strategy and cash allocation
Morinaga forecasts operating activities will provide a total of JPY72.0bn in cash for the three years of the 2021 Medium-Term Business Plan, exceeding the three-year total of JPY54.0bn under the 2018 Medium-Term Business Plan. The company plans to achieve this target through growth in the focused domain category and improved profitability in the basic domain category. It will allocate cash to capex, shareholder returns, and growth investments, while raising funds as necessary.
Capex: JPY45.0bn
The company plans to invest a total of JPY45.0bn over the three years under the current medium-term plan (versus roughly JPY39.0bn during the 2018 Medium-Term Business Plan) in Frozen Desserts (Takasaki No. 3 Factory), in the “in-” business, in the confectionery business (to expand cookie production lines), and in a new research center, as well as in countermeasures to restore aging factory facilities.
In 2022, the company will establish a new research institute on the premises of the Tsurumi Factory. It will strengthen basic research, update key technologies, conduct research on wellness, including mental health, research wellness products that meet the needs of local consumers, and speed up the development of new products and the improvement and upgrading of existing products. Morinaga will also set up a pilot factory for manufacturing products (a factory with almost the same functions as a typical factory, positioned between the experimental and standard production stages) at the research institute, which will make it possible to shorten the time from trial production to the establishment of mass production technology for a given product line.
As a result of the increase in capex, the accumulated depreciation over the next three years will increase to JPY33.0bn (JPY19.9bn during the three years of 2018 Medium-Term Business Plan). The company expects to incur JPY10.6bn of this amount in FY03/22, and similar or higher levels in FY03/23 and FY03/24.
Shareholder returns: JPY12.0bn
Morinaga plans to pay stable dividends amounting to JPY12.0bn over the three-year period, and targets a payout ratio of 30%. The company will also keep in mind its goal for the total shareholder return ratio.
Investment in inorganic growth
Capex in the focused domain category is a top priority, yet Morinaga will also strengthen investment in inorganic growth to realize the vision set out in the 2030 Business Plan. The company plans to use fundraising as necessary. In the past, Morinaga has only looked into tie-ups and M&A on a case-by-case basis as they were proposed to the company. Moving forward, however, the company intends to actively and flexibly initiate such deals. It plans to invest in companies that can contribute to product development and sales channel expansion, those with strength in digital applications, and those likely to create synergies in the focused domain category.
Investment in intangible assets
The company will work to strengthen advertising activities, R&D, and digital transformation to build a foundation for medium- to long-term growth. For the period of the 2021 Medium-Term Business Plan, the company plans a 10% increase in advertising expenses versus the amount spent during the 2018 Medium-Term Business Plan, a JPY1.0bn increase in R&D expenses, and a 40% increase in investment in digital transformation. Further, the company will allocate more advertising budget to the focused domain category. It also plans to use the human resources freed up through improvements in operational efficiency driven by digitalization to pursue value-added operations.
Business
Business overview
Morinaga is a well-established confectionery manufacturer founded in 1899. It was the first company in Japan to establish a factory specializing in Western-style confectionery. The company’s main business is the manufacture and sale of confectionery (caramels, cookies, chocolates), food products (cocoa, cake mix), frozen desserts (ice cream), and health products (jelly drinks).
Company history
The company’s founder, Taichiro Morinaga, was a ceramics merchant from Imari, Saga Prefecture. He first encountered Western confectionery in San Francisco, where he was selling his wares. After studying confectionery manufacturing techniques in the US for 11 years, Morinaga returned to Japan in 1899 and founded Morinaga’s Western Confectionery Shop in Akasaka, Tokyo, which manufactured and wholesaled Western confectionery.
Based on Morinaga’s desire to deliver nutritious and delicious confectioneries to the people of Japan, the company manufactured and sold caramels, chocolates, cookies, candies, and other products with high sugar and fat content and high nutritional value to the masses. The company started manufacturing caramels in the early days of its history, and has sold them under the name Morinaga Milk Caramel for over 100 years since 1913, while continuously improving the quality and packaging. The company’s innovations, such as the use of waxed paper for individual packaging to maintain quality and the introduction of pocket-sized paper cases for convenient carrying, created significant buzz and laid the foundation for the company’s subsequent rapid growth.
Pioneering initiatives in the early years
Taichiro Morinaga and Hanzaburo Matsuzaki (a former trader who later became the company’s second president), who joined the company in 1905, worked closely together to promote the spread and expansion of Western confectionery and the modernization of the confectionery industry. While gaining the trust of retailers and consumers for their quality products, the pair were ahead of their competitors in introducing new measures such as the establishment of a mass production and mass sales system, the implementation of advertising activities, the introduction of employee welfare initiatives, and trademark registration.
Initiatives since Japan’s period of rapid economic growth
Western confectionery grew in popularity during Japan’s period of rapid economic growth, giving birth to a series of long sellers such as Chocoball, Koeda Chocolate, Choco Monaka (the predecessor of Choco Monaka Jumbo), and Ramune. Revenue grew owing to the success of these brands and diversification of Morinaga’s business. In the 1990s, revenue was generally in excess of JPY200.0bn. In fact, the company recorded its highest ever revenue in the mid-1990s.
In the 2000s, over 100 years since its founding, the company withdrew from unprofitable businesses and products, causing revenue to turn downward. Revenue for FY03/12, affected by the Great East Japan Earthquake, came in at JPY147.2bn.
Under the 2012 Medium-Term Business Plan (FY03/13–FY03/15), the company shifted its focus to securing revenue. Although it succeeded in expanding revenue, profitability remained flat such that operating profit was around JPY3.0bn and OPM 2–4%.
Under the 2015 Medium-Term Business Plan (FY03/16–FY03/18), Morinaga shifted its focus to securing operating profit. As a result, OPM trended between 6–10%, and operating profit exceeded JPY10.0bn for the first time in company history.
Under the 2018 Medium-Term Business Plan (FY03/19–FY03/21), the company continued to focus on securing operating profit. In the confectionery business, Morinaga promoted efficiency by concentrating its management resources on mainstay brands. In the overseas business, the company withdrew from the unprofitable Indonesia business and focused on the US market. The US business turned into the black as a result. OPM trended between 9–11%, and the company established an earnings base capable of generating operating profit of JPY20.0bn per annum.
Products
The company focuses on long-selling brands in Confectionery & Foodstuffs, Frozen Desserts, and Health Products.
In FY03/21, revenue in the main product categories was as follows: candies, including HI-CHEW, JPY27.3bn (13.7% of overall revenue); cookies, including Morinaga Biscuits, JPY25.9bn (13.0%); chocolates, including Chocoball, DARS, and Carré de chocolat, JPY23.1bn (11.6%); amazake (sweet rice wine), including Morinaga Amazake, JPY6.2bn (3.1%); frozen desserts, including Choco Monaka Jumbo, JPY47.1bn (23.5%); and health products, including in Jelly, JPY35.9bn (18.0%).
Product portfolio
Comparison with competitors
Many snack/confectionery manufacturers specialize in a particular category, such as Calbee, Inc. (TSE1: 2229; potato snacks), Kameda Seika Co., Ltd. (TSE1: 2220; rice crackers), and Kanro Inc. (TSE1: 2216; candies).
That said, while Meiji Holdings and Ezaki Glico have narrowed down their confectionery categories to mainly chocolates, they also manufacture and sell a wide range of food products, including dairy products, retort-pouch foods, and products for infants, in addition to frozen desserts. Morinaga’s food product lineup is comparatively limited, as it does not manufacture or sell dairy products.
A small number of high-performing brands
Morinaga focuses on brands that are well known and have a high market share in their respective categories. The company’s basic policy is to avoid selling imitation products of those in which competitors have a high market share.
Product strategy
Product development centered on long-selling brands
Morinaga has many long-selling brands. Prior to World War II, Western-style confectionery was a luxury item mainly targeted at adults. During the period of rapid economic growth from the 1950s to the 1970s, Western confectionery became a product to be enjoyed by children as well, which helped the market to expand. Morinaga released products such as Chocoball, Koeda Chocolate, and Choco Monaka Jumbo during this era, all of which have gained support from consumers over the years as they underwent a series of improvements in quality. Long sellers tend to generate stable revenue because many consumers buy them out of habit. Moreover, their high recognition allows for lower advertising and selling expenses, and thus long sellers tend to be highly profitable.
Among long-selling brands, mainstays such as Morinaga Biscuits, HI-CHEW, Carré de chocolat, DARS, Chocoball, Morinaga Amazake, Choco Monaka Jumbo, and in Jelly account for more than 50% of domestic revenue.
Morinaga has different sales strategies for each major brand according to its stage of growth. For example, as the chocolate market is mature, it is difficult to expect a significant increase in revenue from DARS and Carré de chocolat. Therefore, the company plans to maximize these brands’ contribution to profit by improving their profit margins while expanding revenue through efficient advertising. On the other hand, Morinaga plans to increase selling and advertising spending to promote growth and increase profit for Choco Monaka Jumbo and in Jelly, for which the company expects revenue growth due to the expansion of target customer groups, as well as for HI-CHEW, whose sales are expected to expand in the US. Morinaga intends to maximize profit through such efficient resource allocation and strategic product development.
Curbing the development of new brands
From the 2000s to the first half of the 2010s, when the company focused on increasing revenue, it developed and sold as many as five to 10 new brands every fiscal year. However, while this required a large amount of R&D and advertising expenses, only a few of the products became hits, and many of them ended up selling at a loss, resulting in poor investment efficiency and pressure on operating profit. Against this background, in recent years Morinaga has narrowed down the number of products it developed, and concentrated development and advertising expenses on a small number of products to increase the probability of new products becoming popular. In terms of advertising activities, rather than simply conducting large-scale promotions using TV commercials as it did in the past, the company uses social media to narrow down the target audience while controlling advertising expenses and improving efficiency.
Expanding mainstay brands
Even as the company restrains the development of new brands, it has expanded its mainstay product lineups to keep consumers happy and stimulate demand. While it takes time and money to develop new products, the company can expect a certain level of revenue from mainstay products even with limited promotion expenses.
Expanding product lineups
The company tries to attract a wide range of age groups by selling varieties of mainstay products with different tastes, textures, packaging, and price points. For example, while the HI-CHEW stick packs are aimed at children, Premium Hi-Chew is priced at a relatively high unit price, and targets high school students and older consumers. Morinaga also periodically introduces limited-time products with new flavors and textures to stimulate demand.
Crossovers of mainstay products
The company expands its lineup by selling products that are crossovers of well-known mainstay products. These tend to spur purchasing behavior among consumers.
Pursuing wellness
“Health” has been a keyword in the food industry in recent years. In addition to developing foods with function claims, many confectionery manufacturers sell lower-calorie versions of existing confectionery and products with health benefits. Morinaga focuses on developing foods that support health. The company’s flagship health product, in Jelly, has maintained the top share of the jelly drink market for 26 years as a product that provides nutrients in a convenient and tasty way. Leveraging the strength of the in Jelly brand, Morinaga has expanded its lineup to include protein bars under the in Bar brand. The company also focuses on research into the health functions of ingredients in its cocoa and amazake products.
Generation of stable cash through food products
Food products account for approximately 15% of sales value from the company's Confectionery & Foodstuffs business (both in Japan and overseas). Within this business, the company focuses on products with consistently high shares in mature markets, such as Morinaga Amazake, Morinaga Cocoa, and Morinaga Hotcake Mix. The profit margins associated with the company's food products tend to be high, as many products in this category are standard items with high brand recognition and generate stable revenue even when the company cuts back on associated spending (advertising, etc.).
Food products are included in the basic domain category under the 2030 Business Plan. The company intends to generate stable cash while maintaining revenue of sufficient scale and pushing forward with efforts aimed at improving its OPM. It plans to use this cash to fund investments in the focused domain category, which includes "in-" business.
Morinaga Amazake: Launched in bottles in 1969 and cans in 1974, Morinaga Amazake has captured the top share in the amazake (sweet rice wine) market. The company sells products included under this brand at room temperature and in a variety of other forms, including chilled, freeze-dried, and powdered versions. It also sells limited-time-only Morinaga Amazake products in a variety of flavors. Although sales volumes associated with this brand have trended downward since the amazake boom of the late 2010s, the company has been conducting academic research regarding the health properties of amazake and developing products that take advantage of the health value that amazake products provide.
Morinaga Cocoa: A long-selling product launched in 1919, Morinaga Cocoa has captured the top share in the cocoa market. The company has conducted extensive research regarding the health effects of cacao polyphenols, a primary ingredient in cocoa, and is implementing product development that appeals to its health benefits. It recognizes Morinaga Cocoa as having high added health value and views them as key products in terms of achieving the vision of its 2030 Business Plan (transformation into a wellness company).
Morinaga Hotcake Mix: Launched in 1957, this long-selling product has been on the market for over 60 years. The company plans to curb promotional activities for this brand while preserving its high profitability and maintaining the current scale of corresponding sales.
Production
Raw materials
The company’s products utilize a wide variety of raw materials, including flour, dairy ingredients, cacao beans, nuts, sugar, fats, oils, mizuame sweetener, and packaging materials. In addition to market conditions for each raw material, the company is affected by forex fluctuations, ocean freight rates, and the price of crude oil for plastics used in packaging, as most of its raw materials are imported.
Purchasing routes vary by raw material. The company sources some, such as cacao beans, through trading companies, while purchasing others, such as chocolate liquor, dairy ingredients, and flavorings, directly from manufacturers. Morinaga procures major raw materials from multiple countries and companies to ensure stability in procurement and lower purchasing prices through competition. In selecting suppliers, the company places importance on stable procurement, safety, and price, and as a result, many of its transactions are with major companies in each respective industry. In order to deliver safe and secure food products to consumers, Morinaga requires its suppliers to submit specifications describing the ingredients and the storage and management systems of raw materials used. The company also conducts on-site inspections of the production and management systems of key raw materials.
Production
Production bases
The company’s domestic production bases include the Mishima Factory (Mishima, Shizuoka Prefecture, inherited in 1920), the Tsurumi Factory (Yokohama, Kanagawa Prefecture, established in 1925), the Chukyo Factory (Anjo, Aichi Prefecture, inherited in 1942), the Oyama Factory (Oyama, Tochigi Prefecture, inherited in 1942), the Takasaki Factory (Takasaki, Gunma Prefecture, established in 2011), and the main factory of consolidated subsidiary Morinaga Angel Dessert Co. Ltd. (Yamato, Kanagawa Prefecture), and the main factory of consolidated subsidiary Morinaga Dessert Co. Ltd. (Tosu, Saga Prefecture).
The company has three overseas production bases: the main factory of Taiwan Morinaga Co., Ltd. (Taipei, Taiwan, established in 1941), the main factory of Morinaga (Zhejiang) Co., Ltd. (Zhejiang, China, established in 2011), and the main factory of Morinaga America Foods, Inc. (North Carolina, US, established in 2015).