Thinking Points

  • My recent trips to several food processing plants in China and Japan has triggered a few thoughts about the food industry.
  • Frozen food quality is improving. This is likely to drive change in how the industry operates.
  • Investors ought to not only pay attention to frozen food companies, but also companies impacted by frozen food (like distributors).

The title of this article is bold. At the same time, I feel I am well positioned to comment about where the food industry is going. Keep in mind when I say food industry, I am mainly talking about the retail food industry in the first world – food that we see in restaurants, grocery stores, convenience stores, etc.

A bit about our Philippine-based seafood company

Most long-time followers of Kenkyo probably know I am involved in a seafood processing company in the Philippines. Through this company, I’ve had the opportunity to visit several food processing plants in China, Japan, and soon Vietnam.

So far, what has amazed me is how organized, modern, and labor-less the Chinese food processors were. Then in Japan, the application of industrial robots and machine vision in food production caught my attention. To be sure, the production lines I saw weren’t entirely human-less, but much of the labor on the production floor were making sure the machines functioned properly.

Both in China and Japan, the name of the game is “value-add”, which is a term found in about 99% of earnings call transcripts.

Value-add in food processing

In more relatable terms, the “value-add” that both Chinese and Japanese food processing plants were talking about basically boiled down to one question:

How do we create products that reduce labor in the kitchen?

Put another way, the companies are trying to figure out how to take on more of the kitchen work within the processing plants. Assuming the quality of the end product is the same (i.e., the fried chicken you had last week), it is more cost-efficient to cook food in a plant than a home or restaurant kitchen. In more simple terms, the difference is between having a $15 an hour American cook batter and fry your chicken every time you place an order versus having a machine or Filipino cook do the same in a processing plant.

The keyword here is quality. It’s not as simple as frying chicken in the Philippines, shipping it across the world, then serving it at the restaurant. Clearly, the taste and texture of the chicken will suffer with time. This is where our executive chef comes in. With decades of experience at the top of his field, he is essentially a walking database of everything there is to know about food.

Food science and quality

Will frozen food ever reach 100% fresh quality? Probably not, but there’s a huge opportunity in getting frozen food up to 80% fresh food quality.

With food science, a simple 30-minute Japanese Yakitori (grilled skewered chicken in Teriyaki sauce) recipe can grow quite complicated.

How do we marinate the chicken to maximize flavour? How do we marinate faster? How should we freeze the Yakitori so that when it is thawed, the texture remains the same as freshly cooked Yakitori? How do we keep the burns that come with freshly grilled Yakitori when frozen?

That’s only a few questions off the top of my head. The answers come through meticulous and continuous experimentation in controlled environments. Add one step to your cooking process and you are back to experimentation and observation.

The answers are where the value lies.

The future of food

Imagine walking into the kitchen of your favorite franchise restaurant and finding out the whole franchise operation runs on nothing but microwaves and a high school kid. Instead of paying a $15 an hour trained cook for 30 minutes of his time, maybe we can pay a high school kid $10 an hour for 5 minutes of his time. Meanwhile, capital costs required to build and maintain a restaurant kitchen is reduced. Of course, some of the capital cost savings at the franchise restaurant network are offset by increased capital spending at the food processing facility, but you get the idea.

This is the opportunity. This is the future of food.

It is no coincidence that Seven & i Holdings (TSE: 3382) subsidiary 7-Eleven Japan’s new store layout (announced mid-2017) has nearly double the refrigeration space compared to the old layout. Go to any Japanese Family Mart (TSE: 8028) and you will find a frozen food section which wasn’t widely available just 10 short years ago.

What to do as an investor

The first layer is quite obviously taking a look at the folks developing value-added frozen food products. In Japan, these are companies like Nippon Suisan (TSE: 1332), Maruha Nichiro (TSE: 1333), and Kyokuyo (TSE: 1331). The downside as an investor trying to research a company is that you can’t always tell how competitive a company’s products are through publicly available information.

The next layer, which I think is more interesting, is to think about what sort of ripple effect frozen food would have. Nakano Refrigerators (TSE: 6411), a refrigeration equipment manufacturer with significant revenue exposure to 7-Eleven Japan, is a perfect example. Other companies that come to mind include #1 and #2 freezer storage companies Nichirei (TSE: 2871) and Yokorei (TSE: 2874) as well as frozen food distributors like KRS (TSE: 9369), C&F Logistics (TSE: 9099), and Hohsui (TSE: 1352). This is just scratching the surface. Those familiar with the industry may want to consider looking into frozen food ingredients.


Kenkyo Investing
Kenkyo Investing

Kenkyo Investing applies a value investing approach to Japanese equities, providing insights that are often unavailable to non-Japanese speakers.