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Tuesday, Nov. 6, 2007
MISMANAGEMENT IN DEFIANCE OF MARKET REALITY
Nova fall just simple math: it bled red
A 330-sq.-meter office with a double bed, sauna and tea room was where Nozomu Sahashi, ousted president of Nova Corp., worked as the language school chain steadily teetered near bankruptcy over the past few years.
Unveiled to the media last week, the spacious presidential suite on the 20th floor of Nova's head office in Osaka cost the company ¥2.7 million a month to rent and about ¥70 million to redecorate.
The posh office is yet another example of the reckless way Sahashi ran his firm, which filed for court protection under the Corporate Rehabilitation Law on Oct. 26.
Court-appointed administrators are hoping to come up with a new sponsor by the end of this week, which will allow about 7,000 unpaid teachers and 300,000 paid-up students to return to their schools.
Some experts see Nova's sloppy management as well as huge investment in TV ads as key reasons for the firm's failure, for which warning signs were seen starting around 2000.
Tsutomu Kuji, author of "Nova Shoho no Maryoku" ("The Magical Power of the Nova Business"), has tracked Nova's rapid expansion in the 1990s, when it took advantage of the burst in the bubble economy and consequent land price plunge to acquire and rent classrooms at low cost. Then came another economic slump, but the chain continued to pursue expansion and splurge on ads, as Sahashi pursued his extravagant lifestyle.
Nova was investing huge amounts of its resources on TV commercials.
The firm's advertisement fee rose from ¥4.6 billion in business 1996 to ¥8.9 billion in business 2002, according to Kuji.
In the business year to March, Nova spent ¥7 billion on ads, or about 12 percent of its total sales of ¥57 billion.
Kuji wrote how Nova attracted new students with eye-catching commercials, talked them into paying tens of thousands of yen for lesson tickets for up to three years in advance and then short-changed refunds to students who grew dissatisfied with what they had paid for.
This prompted students to sue Nova for reimbursement.
In April, the Supreme Court ruled Nova's contract cancellation policy as illegal and ordered it to repay about ¥310,000 to a man who canceled his English lesson contract in 2004 but was offered a much smaller refund than promised.
Nova, however, was not the only company whose business suffered due to sloppy management.
There was a time in the early 1990s when many language schools went bankrupt, prompting an industry group to draw up regulations.
In 1994, the Japan Association for the Promotion of Foreign Language, which has 66 language schools or chains as members, came out with a regulation stipulating that only a year's worth of lessons could be prepaid for.
"In many of those bankruptcy cases, companies used prepayment money to invest in real estate and golf course memberships, causing them to (run out of cash and) go bankrupt," said Mihoko Fujimoto, the association's spokeswoman.
Member companies are obliged to comply with the regulation. But Nova, Japan's biggest language school chain, did not join.
Now rival language schools fear the Nova collapse may trigger a bankruptcy domino effect or a considerable drop in sales as distrust of the industry mounts.
There is speculation that Nova's downfall, which was set in motion by the Ministry of Economy, Trade and Industry's partial business suspension order, contributed to the bankruptcy of the ABC Language School chain.
Osaka-based ABC Language, a small English-school chain, filed for court protection from creditors in July.
Gaba Corp., listed on the Mothers market for startups, said its net profit for the business year to December is expected to plunge 53 percent to ¥387 million.
Gaba said it has not been able to attract as many new students as expected this year because of the Nova meltdown.
But according to Yano Research Institute Ltd, the language school business has been declining since 2003 as the market became saturated.
The market peaked in 2003 with ¥375 billion in combined sales but it shrunk to ¥346 billion in business 2006, according to Yano Research.
The market is expected to drop 4.7 percent to ¥330 billion by the end of March, it said.
In 2003, the Ministry of Health, Labor and Welfare began to slash grants for vocational education, including language courses, causing the market to shrink, said Mika Fukuoka, a researcher at Yano Research.
Grants for such courses started in 1998, allowing those who had paid job insurance premiums for five years or more to apply for the grant to cover 80 percent of lesson fees — up to ¥300,000.
In 2003, however, the ministry limited the grant to 40 percent, or up to ¥200,000, after it determined some grant recipients had not been entitled to them.
The grant cut led to a decline in students and the industry began to shrink.
"Frankly speaking, I don't think there is any language school whose business is on solid footing," Fukuoka said.
Language school chains Gaba and Berlitz Japan Inc., which target high-end customers, are the few still relatively successful, Fukuoka said.
"During the bubble economy, many housewives who had time and money took English lessons as a hobby," she said. "But now, only those who really need to study English will take lessons."