Nobody in the world beats Yamazaki Baking Co. when it comes to product innovation. Each year, Japan’s largest wholesale baking company introduces 5,000 new products. No, that’s not lost in translation. While some of them are line extensions and others are seasonal items, it still translates into more than 415 new items a month or almost 14 products a day. In sheer volume, Yamazaki may roll out more new products than the entire U.S. snack food and wholesale baking industry introduces on a yearly basis.

For Nobuhiro Iijima, president and CEO of the Tokyo-based company, launching 5,000 new products is no big deal. In fact, it’s expected. At Yamazaki Baking, new product development is not simply an R&D function. Rather, Iijima expects everyone, from general managers and plant managers to supervisors and even line operators at its 25 plants, to be involved in the process.

Just do the math, says Iijima, who is obviously delighted at the foreign reporter’s evident look of being overwhelmed. It’s not that many when you add it all up, especially considering the size of the business. Indeed , Iijima suggests, the company could produce a lot more.

“With 300 production lines, if two new products were produced monthly, then it would be 7,200 new products in a year,” he says.

Specifically, Yamazaki introduced about 1,200 new bread products in 2003. It rolled out nearly 900 Japanese and Western confectionery and sweet goods, and around 3,000 sandwiches, rice products, side dishes and other prepared foods made with grain-based products.

To test the viability of a new product, Yamazaki goes directly to the consumer. Typically, the plant introduces the product in its local market and evaluates its performance. If it’s a local hit, the company rolls the new product out to nearby markets. If the item continues to perform successfully it will join Yamazaki’s portfolio of standard products and be sold nationwide. About 20% of new products were successful last year.

Organizationally, nothing is small when it comes to this company. In its fiscal 2003, ending December 31, the Yamazaki Group, which includes both Japanese and international operations, made about $6.6 billion in consolidated net sales. (All yen sales numbers in this article have been converted into U.S. dollars, unless otherwise stated.)

Food sales, mostly derived from bakery, snack or confectionery products, accounted for 92% of total revenues. Yamazaki also operates several chains of convenience stores and bakery/cafés, which contributed 7.7% to the top line. Other businesses made up the remaining revenue. In a report published in December, Chicago-based research firm Euromonitor International ranked Yamazaki Group among the Top 25 packaged food companies and the fifth largest baking company in the world, trailing only such behemoths as Danone Group, Barilla/Kamp, Kraft and Kellogg Co.

Outside Japan, Yamazaki Group manages operations in seven nations. This includes its Vienna, Va.-based Vie de France Yamazaki, which runs a chain of bakery/cafés and a $75 million wholesale baking operation that supplies European-style breads, croissants and sweet goods to the in-store and foodservice bakery channels. Yamazaki also operates business groups in France, Hong Kong, Thailand, Taiwan, Malaysia and Singapore.

Yamazaki Baking has 14,000 full- and part-time production workers, 12,000 employees in sales and distribution, and 3,000 more in accounting, administrative and personnel departments.

From its plants, 3,600 trucks deliver products twice a day to 100,000 stores throughout Japan, except in the Okinawa prefecture. Geographically, its market is about the size of the state of California, but Japan has a population of 127 million compared with 34 million in California. The bulk of its distribution goes to 92,000 supermarkets, C-stores and other retail customers who account for about 84% of its sales, according to its latest annual report. The remaining stores, which combine for about 16% of sales, are C-stores that the company owns or licenses under the Daily Yamazaki, Y Shop and Sun Etoile names. The company also operated about 152 Vie de France bakery/cafes last year.

In serving the often difficult and always demanding Japanese market, innovation is truly the mother of necessity. Japan is not only home to some of the world’s most demanding consumers, Iijima says, it’s also a nation that has struggled economically for the last decade. Yamazaki has had to survive in an economy beset by a recession, deflation, an aging population, slow birth rate, increasing competition, soft pricing and a skeptical consumer who has been turned off by a number of scandals in the food industry over the last three years. (See accompanying story on “AIB provides Aid.”)

While U.S. bakers worry about the impact of low-carb and other fad diets, Yamazaki has had to find a way to succeed in a business environment where there are fewer consumers with less disposable income and less inclined to buy processed food products. Again, do the math. It’s not a pretty situation

“It’s not been easy,” Iijima explains. “But we believe in using the best raw materials to make the best-tasting products. Making a [premium] product costs more money, but we believe in putting quality first and the customer first and having a fair price that provides value. We like to put those strengths first.”

Actually, providing quality at a reasonable price and putting the customer first has been the philosophy of the company since Iijima’s father, Tojuro, founded the company in 1948. Initially, the start-up operation had only a brick oven and six employees who worked 18 to 20 hours a day in a post World War II economy where good food was hard to get and rationing was the norm.

Even back then, innovation was the key to survival. To buy bread, consumers would exchange their ration of flour for bread that would be baked two to three days later. Tojuro Iijima figured out a way to exchange hot bread for flour, which created a huge demand with lines of consumers going around the block.

Over the years, the company has taken calculated risks, one of which was to build the largest and most modern wholesale bakery facilities as the company expanded across the nation. Nobuhiro Iijima notes that his father, despite not speaking English, traveled to the United States and Europe during the early years, and visited such operations as Love’s Bakery in Honolulu and Burnie Brothers in Chicago. From his travels, he observed and later adapted many American business concepts and imported the most state-of-the-art equipment available at that time from the United States.

Back then, he also imported many U.S.-influenced products, including Pullman bread, buns and such “western” products as Swiss rolls and donuts. One brand of bread was even called “BP” bread — named after the Baker Perkins line that it was made on. (For more history, see page 24)

“My father wanted to incorporate the best of the American and European ways of baking and introduce them into the Japanese market,” says Nobuhiro Iijima, who’s celebrating his 25th year as president of the company. “In many ways, he wanted to be the Continental Baking Co. [the largest wholesale baker in the U.S. at its time, now Interstate Bakeries] of Japan.”

Moreover, the company adopted the management philosophies of Peter Drucker, the leadership guru who has been consulting with top management and teaching the principles of business for some 50 years. For a number of years, Nobuhiro Iijima, a devout Christian, sat on the advisory board of the Peter Drucker Foundation and attended Drucker’s annual conferences. Fundamentally, following the words of his father, the spirit of the company is to provide the “best quality and customer service with true value,” Iijima says. The mission of the company is “to earn the customers’ satisfaction by giving the best value,” he adds.

He has also weaved the Bible, his spiritual beliefs and what he calls “The Way to Life” into managing a modern business and even solving the many challenges that it faces.

“What I have found is that The Way to Life can show us how to solve problems by identifying them from the start,” Iijima says. “It then shows you the way to find solutions, but you can’t solve problems if you don’t know where to start.”

The company’s new product strategy is a classic example. By using the quality ingredients and providing unique items that differentiate it from the competition, Yamazaki is seeing top-line sales rebound in 2003 after tough sledding in the previous three years.

“In order to produce good results, we need to develop innovations,” he says, following Drucker’s principles and incorporating them into Biblical terms. “A key to innovation is to try not to be brilliant, but to be simple. If you try to produce brilliant results, you tend to use big seeds. It is better to sow small seeds and make them bear big fruit.”

Iijima notes that change takes time, and the company is in the midst of a multi-year turnaround that is indeed bearing fruit in 2003, despite the harsh economic conditions that have wreaked havoc with many Japanese businesses over the past few years.

The company has taken decisive steps to bolster profitability, such as instituting a new system of income-based profit management not only of product lines, but also of individual products. Because of the economic downdraft and competitive environment, many of Yamazaki’s sales divisions were relying too heavily on the crutches of promotion and offering discounts that were simply unprofitable, Iijima says. In some cases, it was simply maintaining market share at any cost.

To eliminate unprofitable practices and improve product profitability, the company empowered its production managers to work with the plant’s sales staff to ensure that pricing was appropriate.

“These products are all very good. I wanted to know why we were losing money on them,” Iijima says. “The production people were the ‘start’ of the New Way to Life for Yamazaki Baking. They calculated the amount from the beginning and made sure that the product fit the promotion system. They determined if a promotion was necessary. If a promotion was needed and the product wasn’t profitable, maybe we should introduce a new product where we don’t need a promotion.”

By introducing new products and managing profitability down to a product level, Yamazaki took the initial small steps to eliminate the eroding of market share and strengthening its No. 1 position in the long run.

Turning around a business like Yamazaki is no small task, Iijima says, because nothing is small with Yamazaki. In rolling out the income-based profit management system, Iijima spent months traveling to each plant to ensure the workers implemented the process accurately from the start. Additionally, the company installed a new computer system to provide the tools to enable the production and sales staff to monitor everything from the price of production to the impact of promotions on the bottom line.

“From the beginning of 2002, it took six months to add the new information technology system to all of the plants nationwide, and it took another six months to refine those systems,” Iijima says. “To manage by ordinary profit, we needed to monitor the different parts of production, production lines, business conditions, chain stores and other aspects of our company to understand where the problems lay. Then, such [departments] as production or sales, [would be encouraged to] work together to promote business improvements, quality enhancements, and to control expense and personnel costs. They’re also looking for ways to increase capacity, review the sale price so it’s appropriate and look for ways to make improvements in the product.”

For example, in the bread category, Yamazaki stole a play out of the U.S. baking industry’s game plan. Its top-selling Ultramellow, a Pullman bread, was selling well in supermarkets, but was struggling against one of Yamazaki’s competitors in the convenience store channel. Instead of getting into a costly price battle, Yamazaki developed Cho-Hojun Tokusen or Ultramellow Special Selection, a super-premium version of the standard brand using higher-quality flour and butter.

“We can sell that special product now without selling it on promotion,” Iijima says.

Last year, Yamazaki’s bread and sweet bun businesses totaled more than $3 billion and accounted for 48.5% of the company’s consolidated net sales.

More conventional-style sliced Pullman and other sliced breads rose 1.1%, the first time in years, taking in about $800 million, or about 12.2% of company’s consolidated net sales in 2003.

Among the top-selling varieties were Ultramellow with $250 million in sales, Double Soft at $125 million. Sales of Double Soft, which received one of Japan’s highest awards for a new product when it was introduced some 16 years ago, rebounded with the help of the new Double Soft Kokuto-Iri or Double Soft with Natural Brown Sugar, which is aimed particularly at health-conscious consumers. In addition, the company has rolled out Calcium bread and other nutritionally enhanced baked goods to meet consumers’ needs.

“These new products brought about positive growth for the first time in the bread category for years,” Iijima says.

Yamazaki’s largest category is what it calls “sweet buns,” which include everything from bean-paste filled buns and soft dinner rolls to baguettes and other bread-type products. In some ways, the sweet buns category is a misnomer because it’s a catchall, convenience-driven, grain-based food category that also includes on-the-go savory items.

Iijima says the sweet buns segment “performed well.” Sales in the category rose 4.0% to more than $2.37 billion, and it now accounts for 36.3% of company sales. Sales were driven by the Usukawa brand of small, thin-crust, filled buns, and specifically, the bean paste-filled version. Like Americans, Japanese consumers are constantly looking for convenience foods that they can eat on the run. As a result, sales of Yamazaki’s Lunch Box line, which features buns filled with egg salad and tuna salad, soared.

Japanese-style confectionery items saw sales rise 2.0% to $581 million, or 8.9% of revenue. Sales of kushi-dango (four sweet rice dumplings, sometimes with hoisin sauce, on a skewer) remained strong. Many of the Japanese-style items in this segment are filled with ANKO (sweet bean paste). Some top-selling products are mushipan (a soft, bean-paste filled snack with a steamed rice crust), yaki-gashi (pancake-style sweets) or daifuku (filled rice cakes).

Iijima says the challenge for Yamazaki is developing new products that fill contemporary needs while preserving the traditional fine taste of Japanese sweets.

Yamazaki is expecting its other divisions to experience a turnaround this year. Perhaps more familiar to U.S. bakers are Yamazaki’s Western Confectionery products, which saw sales slip 3.9% to $765 million or 10.6% of company sales. Despite solid sales of its Swiss rolls, snack cakes and especially its Yawaraka Tamago no Chiffon Cake (Soft Egg Chiffon Cake), the category results were hurt by sagging sales of mainstay fresh cakes and cream puffs.

Two other categories also saw sales slide. Yamazaki’s Processed Bread, Prepared Rice and Side Dishes experienced a 3.0% sales slip to around $900 million or 13.9% of sales. Sales of Hitokuchi Sando (One-Bite sandwich) and other processed bread products remained strong. However, a challenging retail environment and shifting trends in the deli arena pushed down sales of its bento (Japanese lunchbox) offerings. Yamazaki is reacting to supermarkets being open later, and night-time sales being shifted from the convenience store channel.

Finally, Yamazaki’s Biscuits, Crackers, Sembei and Other Merchandise had basically flat sales, which slipped 0.4% to around $700 million or 10.2% of total company revenue. The introduction of Bits Brando (Bits Sandwiches), a new product from subsidiary Yamazaki Nabisco Co. Ltd., sparked a recovery in the biscuit category, but sales of its beverages and canned drinks were hurt by cool summer sales.

By adding innovation to its product lines, Yamazaki is addressing a number of consumer trends. Just as in the U.S., Japanese consumers are looking for more healthful, convenient, portable and value-added baked goods, and Japan’s largest wholesale baking company wants to be all things to all people.

“Yamazaki’s strategy as the top bread producer is to take a multi-branded, multi-price strategy,” Iijima says. “We have a lineup of products from value prices to premium prices that satisfy various consumer preferences. Consumers want breads that are soft, sweet goods that are sticky or crunchy or health-oriented. They want mini-breads or half-sized loafs. It is the role of the nation’s leading baker to have all of these assorted products available to meet every consumer need.”

For example, the company has introduced products with fewer calories and lower fat content to boost cake and pastry sales. The company has added low-calorie chocolate chips and more natural ingredients, such as fruit cookies made with unsweetened juices, to create better-for-you products.

While health is increasingly critical, “The main requirement is still taste and the good feeling that you get from eating our quality products,” Iijima says. “Since the beginning, our basic product policy for consumers is to offer good quality and at a fair price.”

To produce the highest-quality products, Yamazaki partners with its key suppliers to ensure that ingredients exceed the company’s specifications. In addition, the company is vertically-integrated and produces many ingredients in house.

“Do you know why we have the best bean paste? Because we make it ourselves,” Iijima says. “We control the quality because we control the entire process. We also have a very good relationship with many of our suppliers of cream and other raw material. We buy a lot and get a good price.”

Going forward, he adds, the company plans to push the envelope on innovation. He talks about energizing the company and motivating employees through his speeches and by being more hands-on in day-to-day operations.

Noting a speech from the Peter Drucker convention, he talks about the difference between laggards and pacesetters. Laggards are slow workers who criticize any idea, even when one is good. Pacesetters find the root of a problem and create a solution.

“The pacesetter is a person who doesn’t worry about the competition or about criticizing other people. As the Bible says, ‘Judge not and you will never be judged.’ No, a pacesetter is a person who will always concentrate on what he should be doing. He is focused on finding a starting point in solving a problem or finding a way to improve a product or a process,” Iijima says. “That’s how a successful business should be run. That’s how you bear good fruit from the beginning.”