International Business : Japanese Pizza War: Domino’s, KFC in a Fast-Food Family Feud

If there’s a big cheese in Tokyo’s fiercely competitive pizza business, it is Ernest M. Higa.

Higa courted pizza magnate Thomas Monaghan in the mid-1980s, and walked off with exclusive franchising rights in Japan for the Domino’s Pizza Inc. chain. Since then, he has clawed his way to the top of Tokyo takeout, with home deliveries of sushi and smoked-eel pizza within 30 minutes or less.

Now, though, the Higa (pronounced Hee-guh) success story could come in for some serious revision, thanks to competition very close to home. Higa’s brother-in-law is Takeshi Okawara, the head of Kentucky Fried Chicken (KFC) Japan, this nation’s second-largest fast-food chain.

About 18 months ago, KFC acquired from Pepsico Inc. the right to duplicate the Pizza Hut restaurant concept in Japan, and it has already opened about 50 Pizza Huts for a trial run.

KFC is weighing a major expansion that could mean 300 outlets opening in the next few years. Higa’s Domino’s has 102 locations.

“What’s awkward about all of this is that (Okawara) has been my mentor for this industry,” said the 41-year-old Higa, although he describes the rivalry as a friendly, family one.

Moreover, Okawara’s wife and Higa’s sister, Aiko Okawara, run JC Foods Inc., which supplies pizza ingredients to Domino’s. While cross-linked family businesses are common in Asia, American executives who do business with the firms see the family feud as a little jarring. “It isn’t an ideal situation from a conflict-of-interest standpoint,” said Joel Silverstein, a vice president of Pepsico’s KFC International unit. “In the United States it would be unheard of.”

The turf battle between Higa and Okawara is an interesting twist in the history of what has been described as Tokyo’s first family of fast food. Over the years, the Higa clan has made a fortune importing enshrined bits of Americana to Japan.

Descendants of Hawaiian sugar-cane farmers, the family moved to Japan after World War II. Patriarch and entrepreneur Yetsuo Higa, now 78, brought U.S. baseball teams to Japan for exhibition games in the 1950s. He also bought a Pepsi-Cola bottling franchise and played a big role in introducing the beverage in Japan.

Some 30 years later, Ernest Higa decided he wanted a slice of the pizza market after he read that a pizza fortune had helped finance Monaghan’s purchase of the Detroit Tigers baseball team in the early 1980s.

Indeed, Higa’s journey to the top of Japan’s $8.8-billion fast-food business started just outside Tiger stadium in Detroit, where Monaghan had dispatched a helicopter to whisk the aspiring entrepreneur to the Domino’s home office in Ann Arbor, Mich.

A year later, Higa walked away with exclusive franchise rights for Japan. He opened his first Domino’s in 1985.

Higa had a devil of a time, however, persuading his bankers, as well as his own Japanese executives at his Y. Higa Corp. trading company, that the venture would fly. At the time, the only Japanese familiar with pizza were college women, according to Higa’s research. Pepperoni was unheard of in Japan.

Higa succeeded by sticking closely to the Domino’s formula and making just a few changes to suit Japanese tastes. For starters, he shrunk the diameters of the pies to 10 inches and 14 inches from 12 inches and 16 inches.

In addition to American-style toppings such as Italian sausage and pepperoni, Domino’s Japan also offered local favorites such as squid, scallops and corn.

Higa almost single-handedly created a booming business in pizza. Higa’s Domino’s franchises average about $1 million a year in sales--about twice the U.S. average. Higa would not disclose profits, but his pizza business was growing 20% to 40% annually until last year, when recession curbed demand.

And fending off the Pizza Hut assault won’t be a cinch.

For one thing, Domino’s meteoric success has attracted plenty of newcomers. About 20 major pizza chains in Japan are now discounting prices to draw customers amid the current economic slump.

Some of the firms “might even go bankrupt,” said Toshiko Binder, an analyst for S. G. Warburg, the British brokerage house.

So far, Domino’s hasn’t budged from its standard pizza price of roughly $17.85, though the chain is running promotions of side dishes and drinks.

Also, Higa will be at a decided disadvantage to brother-in-law Okawara when it comes to financial resources. Privately held Higa Corp.’s sales are close to $300 million, but publicly traded KFC Japan’s revenue is more than twice that.

Executives back at Domino’s home office aren’t too concerned, however. “(Higa) is really a beacon for Domino’s, and flies to the United States at least once a year to pick up a boatload of awards at our annual franchise meetings,” a Domino’s spokesman said. “If we could clone Ernie Higa, we would.”