Pachinko Hits the Jackpot <!--mstheme-->Yoshiyuki Yasuda wants to come clean.
by Jared Lubarsky
<SMALL>Jared Lubarsky is a longtime resident of Japan who contributes to many international publications. (c) copyright 1995, Intersect Japan. </SMALL>
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It's a little hard to imagine him truly overwhelmed by his problems, though: Mr. Yasuda is in the pachinko business, a recreational gambling industry unique--so far--to Japan, that rings up gross receipts of $194 billion a year. Pachinko accounts for 23 percent of all Japanese spending on leisure, and fetch in more, collectively, than the domestic automobile market. With that kind of cash flow, how bad can things be for Mr. Yasuda and the 8,000-odd pachinko hall owners and operators who share the profits with him nationwide?
Not too bad, really. His problems are pretty much those of any mature industry in a developed industrial society: technological obsolescence, changing consumer demand, government regulation, and the depredations of organized crime.
Pachinko, so the story goes, was born just after World War II when a group of manufacturers in western Japan found themselves saddled with an awkward surplus of ball bearings--the factories to which they would ordinarily have been sold lay in ruins, and so another market would have to be discovered. What emerged were halls filled with a kind of upright pinball machine, with cups or pockets, each protected by an array of deflecting pegs. The player bought a handful of ball bearings, fed them into the machine, and tried to flip them one by one so they dropped through the pegs and into the pockets. For every ball that did, the machine would pay off some multiple--usually twelve for one. The successful player could take the accumulated balls to a counter in the hall and redeem them for merchandise: cigarettes, foodstuffs, pulp magazines, toiletries, household sundries.
Pachinko was an instant smash hit, not least because of a practice almost immediately attached to it called kankin, or cash redemption. Somewhere off the premises--down an alley, around a corner, upstairs over the noodle shop next door--there would be a little booth with a shuttered window where the winner could take his prize merchandise and sell it--minus, of course, a small commission. The problem was this put pachinko in the category of gambling, most forms of which are illegal in Japan; the government allows its citizens to wager only on horse, bicycle, and motorboat races, and even those only under very stringent regulations. Much like Prohibition in the United States, however, the law was never really enforceable, and early in the postwar period the National Police Agency (NPA) decided more or less to ignore the practice of kankin--as the country's most popular victimless crime, it would be tolerated as long as it did not get out of hand.
For the pachinko halls to be directly involved in this side of the business would overstep the line, so the little kankin booths were separate enterprises, collecting their commissions and selling the merchandise back to the hall operators to be redeemed again and again. Like anything else in an area so gray, this was an opportunity for the Mob: a substantial percentage of kankin operations--three in ten, by some estimates--came under the control of yakuza crime organizations. The hall owners may not have liked it--the Mob was an inconvenient bedfellow, given to demanding protection payoffs as well--but with 90 percent and more of their customers redeeming the prize merchandise for cash, there was nothing much they could do about the situation.
And there the matter stood for over thirty years. The pachinko business grew, and grew: from just under 8,000 halls in 1960, as the Japanese economy began to take off into double-digit growth, to some 10,000 in 1980, clustering in the amusement quarters of every major city, around every interurban and commuter railroad station and subway, along the truck routes and strip cities of every outlying prefecture. The pachinko hall even spawned an architectural idiom, a lavish abuse of neon lighting to rival the worst excesses of Las Vegas. Halls got bigger, from an average of 140 machines in 1965 to just over 200 in 1989. The first primitive pinball machines, with manual flippers, gave way to marvels of electric engineering with flashing lights, fantasy themes, and ever-more complicated payoffs. (The Heiwa Company, the nation's largest developer and manufacturer of pachinko machines, is listed in the Second Section of the Tokyo Stock Exchange; last year it reported sales of 96 billion yen, or $960 million.) By 1982, the average customer was playing pachinko about twice a month and spending 32,500 yen ($325) a year--bringing total gross receipts to the industry of over 4.7 trillion yen ($47 billion).
In the meantime, nothing essential about the business had changed. Pachinko halls were incredibly noisy, cacophonies of clanking machines and loudspeakers blaring wartime military marches. The air was filled with tobacco smoke, the floors littered with cigarette butts and food wrappers. The clientele was almost exclusively male--middle-aged or older men who had nothing better to do with their afternoons or evenings, and looked it. The counters and shelves were lined with seedy, low-end merchandise, never intended for any purpose but redemption for cash. External competition from other leisure industries was slow to develop. Pachinko operators competed essentially with each other and the number of halls continued to grow, from 10,000 in 1980 to a current high of 18,036.
The market itself began to shrink--but slowly, and not by much: in 1994, over 30 million customers (28.1 percent of the population) were still dropping in at least once a year. Regulars were playing about 25 percent more often, and spending more than twice as much, but competition was taking its toll.
Good locations were getting more expensive and harder to find; start-up costs were getting higher. "In the early 1980s," comments Yasuda, "you could easily open a new parlor for about 600 million yen ($6 million)--including the land. Now you would need over 1 billion yen." Yasuda is vice president of Dragon Corporation, which operates six parlors in the Togane area of Chiba Prefecture. Roughly typical of the small enterprises in the industry, it operates some 1,300 machines and employs 90 people full- and part-time. "Payroll costs kept getting higher, too," adds Yasuda. "And the turnover on equipment was even worse."
The pressure to offer newer and more elaborate machines, with more exciting payoffs, forced pachinko operators to gut whole sections of their halls and replace equipment almost constantly. The Dragon Group, for example, did this three times a year--in spring, summer and winter. More recently, as Yasuda points out, the equipment makers have rendered the whole idea of cyclical replacement irrelevant. "It's a mistake to think there's a buyer's market working here," he observes. "The big companies like Heiwa and Sankyo are in the stronger position. They develop new machines all the time, and all they have to say is 'Are you buying, or not?' We don't have the time for market research, to see if our own customers are going to like something. If we make a bad choice, we have to dump the machines in two or three months."
A costly mistake: pachinko machines today, with their state-of-the-art computer electronics, can cost as much as 200,000 yen ($2,000) each--nearly three times what they did a decade ago. Caught in the cycle of rising costs and increasing competition, pachinko parlors could only watch with dismay as profit margins continued to shrink all through the 1980s.
It fell to a new breed of owners and operators to respond. "The first generation grew the industry," observes Yutaka Kojima, youth representative for the Tokyo Federation of Amusement Center Associations. "Our task in the second generation is to improve it quality-wise."
One response was the introduction of high-tech modern management. Today, computerization allows the halls to monitor literally every facet of their operations: to keep track of every ball in every machine; to chart cash flows and redemption rates and inventories; to know which machines are paying off, and how much. (Jackpots are good for the house, of course, just as they are in Las Vegas; word gets around to the pachinko aficionados, and brings in new trade. Machines that pay off a little too generously, on the other hand, will need to have their pegs or internal programs adjusted.) Supplying this high-tech equipment became an industry in its own right: the Tokyo-based Mars Engineering Corporation, established in 1974 as a general developer of computer systems, shifted its client base in the 1980s from banks and other financial institutions to pachinko, and has now become the industry leader--ringing up sales in 1993 of nearly 10 billion yen ($100 million).
With modernization came the realization that pachinko was overdue for an image change. The industry would have to broaden its market base--and that meant, among other things, changing the kinds of merchandise it held out to the hopeful player. Pachinko parlors are prohibited from offering prizes worth more than 10,000 yen at retail. Within that limitation, payoffs have already moved a long way upscale from cigarettes, chocolates, cheap watches and soft-porn magazines. Individual owners develop their own sources of supply, and tailor their merchandise to the tastes of local clientele. Showcases nowadays feature CD players, family computer game consoles, and pocket cameras. Parlors in the countryside, where housewives account for a substantial percentage of the business, have refrigerator cases stocked with popular frozen foods. Big-city parlors line their shelves with upmarket cosmetics, and convincing copies of designer label scarves, billfolds, and leather handbags. Yuppies in Tokyo can find parlors where 350 balls will fetch them a bottle of Beaujolais, and 800 a modest little Chablis. The Serbo Group of seven pachinko parlors in Saitama Prefecture employs a full-time buyer to shop for imported goodies; the redemption corner in its flagship "Gemstone" parlor, with chandeliers and gilt moldings, Empire tables and pilasters and floral centerpieces, aspires to the condition of a rural Harrod's: jackpot winners can convert their ball bearings to French perfumes, gold jewelry, English bone china, and crystal stemware. In this regard, the pachinko industry is trying to do what horse racing has already done with remarkable success: to make itself not merely respectable but fashionable. No segment of the Japanese consumer population has as much disposable income, or spends it as freely on leisure, as young single women--it was only natural that pachinko would eventually attempt to appeal to that market. Virtually every new hall to open in the last five years has a "Ladies Only" section; some also have machines with double seats for dating couples. Pachinko halls have become cleaner, quieter, trendier: last year, the theme of "women and pachinko" inspired Kazuyo Sejima--one of Japan's most promising young women architects--to create a hall in Hitachi, Ibaraki Prefecture (the "Golden Carriage"), which won a national award for commercial building design.
Magnetic cards, which came in early with the industry's move into high-tech modernization, were also designed especially to appeal to women. Only one cash transaction is involved: the purchase of a card something like a prepaid telephone card (an increasingly voguish device, in soft pastels and designer motifs), which can then be used in all the hall's dispensing machines to buy balls, snacks, and soft drinks. Marketing maneuvers like this have already paid handsomely. By 1991, single working women and housewives already accounted for 24.2 percent of the pachinko industry clientele--nearly six million players--and the number continues to grow. The next step, points out Yasuda, is the "membership" system, with a card that can be used not only to buy balls but to automatically record the holder's winnings and debit itself for merchandise. Much like a department store credit card, the membership card system is intended to lock in consumer loyalty.
The new image of pachinko is not merely gender-coded but culture-conscious; the second generation of owner-operators wants you to know that pachinko is good for you, and good for your neighborhood. The industry has spawned a dozen or so firms, for example, that specialize in the design and construction of pachinko halls; one of them, Tokyo-based Tamaki Design, has brought some 1,600 of these halls into being in the last five years alone. Its aim, it asserts, is to build facilities "in harmony with the local environment, that usher in and energize new urban spaces, and create true communities." If the claim is somewhat exaggerated, it only reflects the pachinko industry's intense new desire for respectability, its concerted effort to craft a new, clean, socially responsible role for itself.
How high-tech, how green, how committed can a pachinko hall get? Only the "Data Robot" knows. A device soon to make its debut in halls all over the country, the Data Robot looks like the isolation booth from an old quiz program, a glassed-in shell with an interactive, multimedia computer terminal that puts the user onto the information superhighway. You step in with your electronic membership card, on which your winnings have been registered; you insert the card in a slot, and a display of organic vegetables, picked fresh that day, comes up on the screen. You make a selection and hit a button. Your order is transmitted directly to the farm, your card is debited the cost, and your eco-correct spinach or radishes are delivered directly to the hall. The Data Robot prototype is on display now in Nagoya, in the Daikoku Denki Company showroom--the firm also developed the sales network with a local consortium of organic farmers.
When all is said and done, however, organic spinach will still have less appeal to pachinko players than folding green: the NPA estimates that some 90 percent of the winners continue to exchange their prizes for cash--and cash payouts are by no means trivial. University student Yoshiaki Kobayashi confesses that he will occasionally cut a whole day of classes to play at one of Mr. Yasuda's "Dragon" halls; on a good day he pockets as much as $1,000 (100,00 yen). Tax-free, naturally. With some two-thirds of gross receipts flowing back in cash redemptions to players like Kobayashi, the biggest issue that still faces the industry is the reform of the kankin system itself, and the grip that organized crime maintains on it.
Under the 1948 Act to Control Businesses which may Affect Public Morals, notes the Tokyo Federation's Kojima, the government's notion of control over the pachinko industry was essentially one of guidance--as one would train and socialize a potentially wayward child. Practically speaking, that guidance was left to the industry's network of self-regulating business associations. Kojima himself, after trying to cut the ties yakuza groups had established with his own halls, recounts being beaten up by half a dozen thugs. "That's when I first realized," he says, "that it wasn't going to be up to the police to handle this problem--we were going to have to do it ourselves." He tried to operate for six months without offering patrons the opportunity to redeem their winnings for cash; his business fell off the edge. "Pachinko," he ruefully admits, "doesn't exist without kankin."
"Except for the yakuza problem," comments Yasuda, "It's actually a lot easier for us to just keep the system the way it is. Changing it would just create an opportunity for big business to move in." A number of Japan's major retail giants, he explains, have already cast a hungry eye on the pachinko industry's cash flow. "They've only been holding off because they don't like the idea of getting involved with the underworld." Ironically, the cleaner pachinko gets, the more vulnerable it becomes: an ominous sign of that vulnerability appeared in 1994, when the Seiyu supermarket chain (part of the even larger Saison and Seibu Department Store conglomerate) announced it was setting up a subsidiary pachinko operation.
In October of last year, a private, blue-ribbon study commission, convened by the NPA and headed by an emeritus professor at Yokohama National University, recommended the legalization of kankin. The little back-alley exchange operations would be replaced by an independent public agency running redemption counters in the pachinko halls themselves, exchanging winnings for cash and collecting a premium, which would then go into the public coffers for charitable purposes. The ostensible aim of this proposal, which has the backing of a group of Diet lawmakers concerned with revision of the Public Morals Act, is to cut this business off as an income source for organized crime. Critics point out, however, that the new public agency would also create cushy jobs for retired police officials; the practice, called amakudari, is deeply rooted in Japanese society, and bureaucrats at all levels commonly find second careers in the private sector, with companies and industries they once regulated.
The practice, observes Yasuda, already sits heavily on industry. In Chiba Prefecture, he explains, the police will not let any pachinko operator establish a card membership system unless he joins (and pays fees) to a private-sector "card service management" company called J-Net. There is no law that says so--the directive comes under the heading of "administrative guidance," which the police can enforce through vaguely worded injunctions against "seeking windfall profits" or "creating disorder." J-Net issues a think booklet, explaining the benefits it confers on its clientele. In reality, says Yasuda, "they don't do a thing for us. It's just an extra layer of administration we have to put up with." Not surprisingly, J-Net is run primarily by ex-police officers. Bureaucracy and not the underworld, is his industry's biggest problem. "There's a regulation on the books somewhere," he observes, "that pachinko computer components can't have more than eight bytes of memory. I don't have any idea why, and nobody can explain it. The real cost of those machines we pay 200,000 yen for is maybe 70,000 yen--probably even less, if some American company could start making them and selling them over here. I read about all the pressure that the United States puts on Japan to deregulate, and to open out markets, and I think how nice it would be if some of that worked for us."
Indeed - Pachinko Hits the Jackpot
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