Piping hot business: Rakuya Onsen and Aqua Japan Tokyo redesign a tradition

Japan, Inc., Wntr, 2006 by John Dodd

Ask a foreign tourist the one place they enjoyed the most during their stay in Japan, and they will likely respond an onsen (Japanese natural hot spring). The steamy bath, beautiful scenery, communal sharing of the tub with strangers, and outstanding meals and service-these add up to the essence of old Japan.

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But onsen are not just a foreigner thing with which the modernity-obsessed Japanese have no truck. In fact, a recent 2005 industry survey showed that after a nearly 15-year downturn, the good times have returned for domestic hot springs, and that more than 70 percent of adult Japanese prefer to stay at onsens when traveling for leisure.

Recovery

One reason for the resurgence is the rebounding economy. The Nikkei 225 stock market index has risen by more than 60 percent in the last 24 months, and consumers are starting to enjoy a trickle-down effect from their employers. The media is even reporting the popularity of the luxury onsen, citing weekend stays at the Kyushu resort Yufuin for [yen]300,000 (US$2,600) per person.

Another reason for the resurgence was the fallout from SARS and terrorism in 2003. Both kept Japanese tourists home that summer and the next. People who could afford overseas travel turned to quality onsens and ryokan (traditional Japanese inns). Many became repeat customers.

Turnaround Funds

In 2001 new things started happening to the tradition-bound onsen. Firstly, onsen-specific private equity funds appeared, a prominent one being Hoshino Resort, established in Karuizawa, Nagano, in 1991.

The Hoshino fund did its first buyout of a resort hotel in Yamanashi Prefecture in late 2001, taking time to learn the onsen hotel business before buying out a number of other establishments, in Fukushima and Hokkaido. Then, with that experience under its belt, the company formed a joint venture with Goldman Sachs in October 2005. It plans to invest [yen]30-50 billion (US$260-430 million) into 50 establishments over the next three years. That will make the new group a major player, with expectations of managing about 1,500 rooms through a central sales and marketing operation.

Before the tie-up with Hoshino, Goldman Sachs had already targeted the onsen for investment, and earlier in 2005 committed to a [yen]220 billion rebuilding program for the Komaki Hot Springs Village in Aomori. According to press reports, Goldman Sachs plans to market the onsen to customers elsewhere in Asia.

Separately, Hoshino has been successful as an independent operator. Its Karuizawa hotel, for example, had an occupancy rate of 90 percent in September 2005 and by October around 80 percent of its rooms were booked for New Year's Eve and New Year's Day, in spite of the price for a family of four for two nights being [yen]200,000 (US$1,700)!

Definition and Geographic Distribution

The temperature of the water in an onsen bath ranges from 27 to 43[degrees]C (80-110[degrees]F). The water must have a composition of total dissolved solids (TDS) exceeding 1,000 milligrams per liter (less than for seawater), and must meet or exceed the specified concentration of at least one of 18 naturally occurring minerals. Hot springs are classified by one of nine dominant mineral combinations found in Japan, and also according to their temperature, osmotic pressure, acidity (pH), and hardness or softness.

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Most onsens are grouped in thermally active areas near major population centers. The distribution of onsen types around Tokyo reflects both demand and availability. These maps are used to plan new onsen facilities near a population base that will support a full operation. According to Aqua Japan Tokyo, a super sento (see below) requires a market of around 300,000 people to succeed.

Market Segmentation

Despite the recovery in the economy, not everyone is able to afford [yen]200,000 to take the kids to a mountainside onsen for a couple of days; yet hot spring bathing is deeply rooted in Japanese culture. So establishments at the low end of the market have been sprouting up. The market segments into four major categories: super sento, kenko (health) land centers, traditional onsen villages, and higaeri onsen.

1) Super sento. The super sento, started in Nagoya in 1989, caters to the mass market. These are an evolution from the local sento (neighborhood baths), and combine function with low cost. The balance of the two is achieved by large-scale operation, drawing more than 8,000 to 10,000 visitors a week per establishment! Typically a super sento has 15 to 20 different types of baths, including Jacuzzi tubs and steam and dry saunas. The baths in super sentos, with few exceptions, do not use natural hot springs most of the time. These facilities are recognizable by the sheer number of vehicles parked outside their massive buildings. They charge about [yen]500 to [yen]650 per weekday visit.

2) Kenko land. These pick up where super sentos finish; they include attractions for the rest of the family while grandma and grandpa chat with friends in the bath. Typically the facilities include banquet and catering services, karaoke, game centers, and massage chairs. Kenko land centers cost about twice the price of super sentos, running at around [yen]1,500 to [yen]2,600 (US$10-20) per visit. Kenko land operators have been losing customers to the super sento.