Working with Adam Richards’ METI numbers on the Eikaiwa implosion in Japan

Preface: Japanese government statistics are often filtered in such a way as to make a point or tell a story, so I do take these with a grain of salt. Already, it’s been fairly well established that the Yano Research numbers are a much more accurate portrayal of “all of English study”—including the electronic dictionaries and the like. But let’s use the METI numbers like Mutant Frog blog’s Adam did and see what is going on.

Adam Richards gave a very good blog post, but I just want to add points and present the numbers a little differently. In particular, I am giving the data on a monthly basis because I think it really shows how the business model worked and where the failures were.

On the chart above, I pick out four key series:

1) The blue line is the amount of sales revenue per class, in yen. This is simply the revenue number reported in the month divided by the number of classes held.

Even though classes were usually paid in advance, I like this series because it shows that a lot of revenue usually came in around March, and then there was a steep drop-off. This pattern continues even to recent times.

2) I give the number of classes reported held, by the 100’s. So we are looking at classes held in the hundred thousands over the months. That’s the spring greenish line.

3) I give the number of students reported for the month, also by the 100’s. That is the yellow line.

4) Finally, there is the pink line, representing the number of outlets, which I assume METI is either counting as branches or stand-alone facilities. This is a straight number.

Click to enlarge the graph, by the way.

Noteworthy: The big upset in the data series is when Nova collapsed in 2007. But apparently even before then, there was a shake-up in overall revenue (probably when the government banned it from taking contracts for a period). Nova was going down, but this obviously finished them.

In prior years, there is a surge in revenue per class each spring, followed by a steady rise in number of classes that hangs there for several months–really almost until the next annual cycle is about to start. (The spring green line stays high while the blue line jerks down.)

In the middle of the 2000’s, this pattern starts to break down. The revenue per class still spikes up in springtime, but the number of classes held starts to trend down. This is when I think Nova just started to sell lesson tickets with abandon, even though it couldn’t provide the classes the people wanted. Folks were just being sold empty promises at the start of the fiscal year, so Nova could keep the ruse going.

Once Nova collapsed (the large swings in 2007), you see several changes:

1) The number of students reported studying at Eikaiwas monthly dropped dramatically,

2) The number of classes held dropped similarly,

3) The number of outlets dropped fractionally (even today, it is still higher than it was in the year 2000); and,

4) The revenue per class cost shot up to numbers slightly higher than the peak months under the old (Nova) era.

Adam suggested that this meant paying more for less quality. But I believe quality is not relevant and in fact what it shows is that fewer students have to cover the rent for the industry. As you can see from the trendlines, after Nova, the number of 100’s of classes, 100’s of students, and the outlets all pretty much trend closer together than before (when the students and classes held were substantially over the pink line of number of outlets.)

So this, arguably, was still an industry stretched like a rubber band, even after Nova. Now that GEOS is out, too, it will be interesting to see what the numbers will look like 6 months from now. If charging 13,500 yen a class wasn’t enough to keep the industry solid in the period 2007-2009, what should this style of education really cost?

Can it actually be delivered on a scale business model at all? Which is my suspicion, that it can’t. Otherwise, you’d this this sort of format for education instruction all over the world, and not just in places where the government needs to dump short-term workers, politically, as part of a youth international exchange.

Now, look at this situation: the average class is maybe holding 12 people. You are charging 13,500 yen to hold the class. Not clear how many of the workforce of some 10,000 or so is being employed throughout the week in the whole industry, but it looks like each participant is paying 1125 yen or so a class if it’s 12.

Probably 1/2 the revenue of the class goes to overhead. So 6750 yen remains.

So to make this work, you need 12 people paying regularly, attending each workday, for there to be 33,750 to pay an instructor. Over 52 weeks in the year, that’s 1.75 million yen. But presumably, this is just for one hour’s work a day. And the workday is 8 hours, so an instructor would be making 14 million yen a year.

Not realistic. Not just for the fact that such a number would only employ 2,400 people. So a lot of that workforce has to be part-time. And again, I just take small exception with Adam in saying that the issue is probably not so much about quality—which I have found varies greatly within all “education establishments”—as [it is] to whether there has been enough business in Eikaiwa even to attract talent.

As I pointed out the other day, Yano Research has been letting people know that the whole English instruction industry in Japan is substantially larger than just Eikaiwa. And it looks like, if you tried to filter out the Eikaiwa Implosion, the English teaching business has been stable.

I will blog a bit more about this one later in the week. But if at the height of the last decade, English teaching was an $8 billion business (of which $2 billion was this Eikaiwa), there was a $6 billion industry outside of Eikaiwa. If English teaching has fallen to something more like $7 billion, of which (pre GEOS) $700 million was Eikaiwa, then that leaves a $6.3 billion industry outside of Eikaiwa! (So, one that actually grew.)

If the government tolerates an industry that is simply looking to squeeze it out of you and then send you home, that’s not exactly the story line you want, is it? If so-called businessmen want to cry about how they can’t afford shakai hoken and the like, you want METI’s numbers in the newspaper, not Yano’s, right?