Message from the Chairperson

An experiment leads to reaffirmation

In January 2025, I conducted an experiment during my online New Year’s greeting, which I delivered to all Group stores and employees. I will admit, I might have caught people off guard. When delivering my New Year’s greetings, I usually do not prepare a speech in advance, instead simply speaking what is on my mind at the time. For this occasion, I tried creating my entire speech using generative AI. After going back and forth with the generator about how to create a New Year’s greeting that would resonate with employees at all Group stores, the resulting text covered all the key points fully and was a rather good piece of writing. I was curious to know how employees would react when they heard it. Many commented that; “something seemed off” or “it felt a little odd.” (After reading my speech, I did reveal that the greeting had actually been created by AI.) I suspect the reason the message didn’t resonate with employees, who receive regular greetings from me, is that the AI, while very good at compiling publicly-available information and organizing it into text, is still limited to “public information” that anyone in the world can access.

At the heart of our business is a close connection with “undisclosed information”—the spectrum of human emotion felt by employees and customers that varies from day to day. Even with how AI is evolving, it will be a long time before it can truly capture this feeling. One of our fundamental strengths is to provide this undisclosed information through hospitality, and that is something that AI will not replace anytime soon. I believe that this experiment was a reaffirmation for me and all Group employees, that we must pursue this strength as the true essence of our business.

Digitalization as a way to gain a competitive edge

I am not saying that we do not need digitalization—we do. The key question here is whether or not digitalization is a way to gain a competitive edge.

To gain this, we need two ways of thinking. The first way is to consider the value creation process for your business and business model. The restaurant and hospitality industry is a fusion of art and science. One is not separate from the other, but I would say that long-running, popular restaurants and Michelin-starred restaurants have a strong artistic element, while fast food and similar restaurants lean more toward the scientific. The value creation process for art is steeped in the imagination and originality of people. Conversely, the value creation process for science is largely rooted in logical systems. Working from this premise, in art, value is created through the power of human beings, so it stands to reason that digital technology is best used in a supporting role. In a scientific approach, however, value is created by digitalizing the business process itself, essentially a logical system. Ultimately, I believe the method of digitalization comes down to the nature of a company’s specific value creation process. In the case of Royal Host, we create value through the power of our people. Therefore, it is important for us to digitalize processes such as ordering food and closing the register, since this helps us create conditions where employees can provide true hospitality when serving customers person-to-person.

Second, you need to think in terms of timeline. For instance, Japan is currently facing a serious labor shortage. This is why digital technology can provide such a competitive edge at the moment. However, in the future, once this technology becomes ubiquitous and normalized, that advantage will be lost. When that happens, the competitive edge will ultimately go to those with the power of people. This is why we must ramp up investment in human capital right now. As a result, I believe that the way digital technology is utilized will change depending on the value creation process and timeline of each business or industry. Therefore, we need to think carefully as to how we incorporate digital technology into our business and how people can wield digital technology to create value.

Overcoming the COVID-19 pandemic as a leaner and stronger company

While our business performance was hit hard at the beginning of the COVID-19 pandemic in 2020, even before that 2018 and 2019 had brought two consecutive fiscal years of higher sales but lower profits. I believe one of the reasons for this was that prior to these two years, we had a streak of both higher sales and profits, which had made us complacent and led us to become somewhat blind to a variety of costs. During the pandemic, we implemented various measures to help lean out the company again. Thanks to this effort, after the pandemic, not only did our sales recover, we were also able to generate solid profits. The challenges that existed before the COVID-19 pandemic were a major obstacle, but it was overcoming the truly dire crisis of the COVID-19 pandemic that made us a much leaner and stronger company in the end.

One action we have taken is evolving how we manage our business portfolio. We are better prepared for changes in the Group’s business environment. If the yen continues to weaken, for example, the Restaurant Business segment will be hit hard by rising raw material costs, but hotels and airports where this segment operates will see greater inbound demand. So, one advantage we have is a wide range of businesses, which we can bring together in response to such external changes. There are always ups and downs in a business environment, so it is important to offset these with a diverse portfolio, and I think this approach is working well at the moment. On the other hand, we must always keep in mind that all of our businesses were suspended due to the COVID-19 pandemic as we try to piece together our next business strategy. This, I believe, is an ongoing challenge with no end in sight.

When we look at changes in Japanese society over the longer term, it is clear that population decline is inevitable. With declining birthrates and aging population looming large and speeding up, we cannot achieve the growth we need in Japan alone. This means that boosting the Group’s Overseas Business has been renewed as a theme in our new medium-term management plan. However, this is not a case of strengthening the Overseas Business because we cannot grow domestically—we will also pursue steady growth in Japan. That being said, we cannot achieve the level of growth that will fully meet stakeholder expectations on the back of domestic business alone, so it is important that we also build up our business overseas as another engine for growth. During the pandemic, our top priority was defense. Now that the pandemic has lessened, the shift to offense, both domestically and overseas, will become an important element of our new medium-term management plan. For our attack, we will need to revitalize investment in the Overseas Business and take on bolder challenges than ever before.

Beyond what must change and what must not, the crucial point lies in the way we change

One of the ideas stated in our newly-formulated Management Vision 2035 is that the Royal Group will conduct business by ascertaining what must change and what must not. An important element is how we make these changes. With certain stakeholders such as customers and employees, change must occur over a period of time, not in one fell swoop. When we think of people and technology in the manufacturing industry, there is an “or” relationship, where people can be replaced. If an entire production line is replaced with machines, people will no longer be needed. In other words, people or machines do the work. In the service industry, however, people and digitalization have more a complementary “with” relationship. In this kind of relationship, change takes time because both customers and employees need some time to adjust. In a replacement-based “or” relationship you can make the change right away, but this isn’t the case in a complementary “with” relationship.

The Third Industrial Revolution centered on automation for manufacturing, replacing humans in favor of machines. What we are seeing now is more of a case of scalability and complementation as humans work with technology to combine their respective capabilities. What matters here is how we make these changes over a certain period of time; I do not believe that simply introducing more and more machines and reducing the number of people is necessarily the right approach. For the Royal Group, it is important to take advantage of technology as a way to complement human beings and scale business to establish an environment where people can create value on the ground. One of our strengths is that our employees are willing to showcase their abilities, as long as they have the right conditions to do so.

How to achieve a positive trading relationship between economic and social value

Taking a page from the Royal Credo, the Group promotes sustainability management with the goal of being a company rooted in the local community and society, with the empathy and support of all stakeholders. While a comprehensive approach is necessary to solving social issues, it is also important to start with issues that are closest to our core business. I believe this is the more sustainable approach and the one that will satisfy stakeholders.

For us, reducing food waste is one such example. In addition to our part in the mottECO consortium, an industry-government-academia alliance, we are working to establish circular economies on the local level by taking vegetables grown with compost made from food waste and using them as ingredients in our Group’s factories. I believe that expanding upon these kinds of local ecosystems will be an initiative unique to the Royal Group.

In the coming era, the key will be how we trade the relationship between the economic and social value we create. Furthermore, there are limits to what a single company can do to resolve social issues. While it is difficult to form collaborative ties between companies in terms of economic value, companies do work together in the pursuit of social value. When companies face a common social issue, they are more likely to work together to resolve that issue. A company does not become truly great on the back of profits alone; to be the company of choice for all stakeholders, it must create both economic value and social value. In industries where a few companies dominate the market, the major players are increasingly working together, but this is more difficult in industries with a wide range of supporting sectors such as the restaurant and hospitality industry. So, I believe an important first step is to set up mechanisms that will make working together easier.

The company of choice, for all stakeholders

I believe that the most important thing in running a company is making sure it is a going concern, or more simply, that it makes enough money to remain afloat for the foreseeable future. Risks to being a going concern include supply constraints such as labor shortages and raw materials procurement. We are starting to see these risks come to light. To resolve these supply constraints, we must take advantage of digital technology, of course, but we must also become the company of choice not only of customers and shareholders but of employees and business partners as well. For this to happen, we will have to work to capitalize on our economic and social value going forward. Therein lies our goal—we will achieve growth with a balance of economic and social value, with a fair distribution of profits for all stakeholders, and thereby become that company of choice.