TOKYO -- Saizeriya, a purveyor of affordable Italian cuisine by way of Japan, has found an eager audience in China, providing a boost to profit margins that could help the company shed its image as just another mediocre domestic-demand stock.
The restaurant chain reported a 20% rise in operating profit from its overseas business for the year through August. Saizeriya's locations outside Japan -- which numbered 411 at the end of August, mostly in China -- now generate nearly half the company's overall profit.
Saizeriya challenges the common East Asian perception of Western food as expensive. The Japanese chain has won fans at home for its signature Milano doria, a baked rice dish with meat sauce that can be had for less than $3.
In greater China, where dishes often are shared by the table, Saizeriya focuses on pizza. It developed a menu that caters to local tastes, with items such as fruit-topped pizza and spicy ma la pasta, with prices near 20 yuan ($2.84).
By contrast, Yum China Holdings brand Pizza Hut, one of Saizeriya's main rivals, has a higher-end image than its counterparts in the U.S. and Japan -- with prices to match.
"We can turn a profit with [prices] 70% cheaper than Pizza Hut's," Saizeriya President Issei Horino said.
Saizeriya's overseas operating profit margin reached 12% last fiscal year, up from 3% in fiscal 2010, when the chain had just 46 stores in Shanghai and Guangzhou. The margin approached 17% in Hong Kong, where sales per customer are particularly high. These figures compare with a 4% margin in Japan.
But in the late 1990s, when Saizeriya grew to almost 300 locations in Japan during a period of aggressive expansion, the operating profit margin hit nearly 20%.
"Its overseas growth now is similar to its rapid domestic growth" then, said Seiichiro Samejima, chief restaurants and leisure analyst at Ichiyoshi Research Institute.
Saizeriya made its first foray abroad in 2003, entering China via Shanghai before setting up a local subsidiary in Guangzhou four years later. Though the company kept losing money there, it refused to give up on the region, moving into Beijing, Hong Kong, Taiwan and Singapore.
"All of our units are finally consistently profitable," said Noboru Nagaoka, head of overseas operations.
Yet the chain's profitability at home has declined even while the number of stores continues to rise. Its Japanese operating profit margin has hovered in the single digits since fiscal 2012, when domestic outlets topped 900. The number of domestic restaurants totaled 1,093 through August.
"When sales reach a certain level, costs go up at the head office -- for example -- and we can't maintain our profit margins," Horino said.
Saizeriya has stayed profitable in Japan by setting up its own production facilities to control costs. But "in China, where regulations are strict and there's not much excess land, we're looking for a different profit model," the president said.
The chain has tapped the brakes on expansion abroad, opening 15 to 30 new locations annually since 2016, in contrast to past years when it added as many as 70. Katsumi Arai, senior analyst at Mitsubishi UFJ Morgan Stanley Securities, called this pace "lacking."
Lessons learned from the home market have made the company leery of expanding too rapidly. But "we aim to keep sales growing steadily and double our store count [abroad] in five to 10 years, even if our operating profit margin goes down 1 percentage point or so," said Nagaoka, Saizeriya's overseas business chief.
Saizeriya's shares have slumped nearly 30% from their most recent peak two years ago. Same-store sales in Japan fell last fiscal year, owing partly to a chain-wide smoking ban, and investors worry about other headwinds such as Japan's consumption tax hike this past October and ongoing protests in Hong Kong.
Maintaining robust profit margins while accelerating its expansion abroad may provide Saizeriya with the ingredients for persuading investors to see it in a new light.