Description

Low cost Japanese karoake chain expanding to fill the shortage after COVID with attractive unit economics.  Long runway of growth as they look to double their market share of karaoke rooms, while improving unit economics.  

Background

Koshidaka is one of the largest karaoke chains in Japan.  Their karaoke business is called Karaoke Manekineko.  Manekineko means ‘beckoning cat’ in japanese, and is thought to bring good luck.  You may have seen it in restaurants or other establishments.  

One of the unique things about Karaoke Manekineko is that they let you bring in your own food and drinks, this is in contrast to most other karaoke chains.  So Karaoke Manekineko is a very affordable option.  At least one person in your group has to have a membership in order to book a karaoke room.  The cost of a membership is 220¥ (up from 200¥).  This is a quite reasonable fee, ~$1.50 USD.  

While you can bring your own food and drink, they do still have food and drink options inside the store that you order using their app.  Previously you used to have to order through the karaoke system, which was a hassle as that meant it disrupted the singing flow.  

There is a shortage of karaoke bars as demand returns back to pre-pandemic levels

During COVID a number of karaoke stores closed down, so now there is a shortage.  Koshidaka is looking to expand to fill this need.  Furthermore they have been able to raise prices as demand has returned.  It appears there is still runway to return to pre-COVID karaoke visitor levels.  Their long term plan is to ~2x their karaoke room count while grow the sales per room by bringing new customers and features to the rooms.  

During COVID and the lockdowns the number of karaoke visitors dropped sharply.  The number of karaoke rooms available also dropped as smaller operators lost money and shut down.  This leaves an opportunity for operators like Koshidaka to expand and fill the gap.  

Karaoke is only at ¾ the level of what it was pre-pandemic.  So there is still room for returning to pre-pandemic levels.  

Here is some Google Trends data against one of their top competitors (Big Echo).  You can see that surpassed Big Echo slightly before the pandemic, but has rebounded much more strongly than they have post the pandemic.  

Blue is Manekineko Karaoke, Red is Big Echo Karaoke, Yellow is Big Echo.  

Japan CPI tracks Karaoke prices.  

Karaoke prices have risen over time.  Notice the jump in 2022 after being flat for a few years.  And how Karaoke prices have continued to rise since then.  This is an area with pricing flexibility, not an area that has trouble raising prices.  

This is not a seasonally adjusted series, so the spikes you see are just the popularity in the month  

Koshidaka long term plan is to grow to 100B¥ via karaoke room growth and improved unit economics

Koshidaka has plans to reach 100B¥ in sales annually by growing both the number of karaoke rooms and the sales per room.  Below is a graphical representation of this initiative.  The sales per room on the y-axis is on a monthly basis.  

One of the keys to expanding the sales per room is that they are trying out different initiatives to bring in more customers and during “off-hours.”  During these non-peak times, you can offer discounted prices while still being margin accretive.  So for example you can see below their initiative to offer free booking charges for high school students.  

Another initiative they have is to offer morning karaoke which is at very cheap rates.  This can have the benefit of bringing new customers into their membership.  However this may also explain why the average spend per customer has been flat, if there is increased uptake in these off-peak sessions, even though the overall impact to margins should still be positive.  

They are continuing to add locations.  They added 26 net new locations (28 new locations, 2 closures) in the 1H FY24.  They are focused on premium locations near train stations or major shopping malls, and not suburban locations.  

They are focused on places where they are under-penetrated and in Tokyo.  They currently estimate that they have 17.2% of the karaoke rooms in Japan, and their long term plan is to grow that to 30%.  

The plan is to continue to aggressively open new stores, while improving profitability and unit economics.  This does involve investing more in their employees including increased salaries.  

In 2022 Koshidaka took an investment from Advantage Advisors, a Japanese PE firm.  The investment was in the form of convertible notes and warrants, which are equivalent to 10.4M shares at 675 yen per share.  This capital was used to accelerate their plans to reach 100B yen in sales, their long term goal.  

Same store sales have flattened out the last few months.  The price increases that they implemented in Feb of 2023 lapped so the average spend per customer dropped.  This was likely also impacted by some of their initiatives to raise off-peak revenue.  However the number of customers continued to increase at a healthy clip.  

Stock is not well covered by the sell-side, room for upside if they execute on their expansion plans

Very little coverage.

On a forward P/E basis this is trading at the lowest of the last 2 years.  

There is an opportunity to get this back to teens multiple even if we account for the Advantage Advisors shares as they execute on their long term growth plan and with improved margins.  

Catalyst

Continued expansion of karoake rooms.  Improved unit economics.  Operating leverage as revenues grow.