Geos’ fate sealed by failure to react quickly to rapid drop in demand

The failure of major language-school operator Geos Corp. occurred because the company didn’t trim unprofitable branches fast enough at a time when the industry was facing a drastic drop in students, people in the industry said.

Although the bankruptcy of industry leader Nova Corp. in October 2007 damaged the image of the commercial language school industry, the impact this time is likely to be contained somewhat by the swift response of G.communication Co., another language chain that has offered to take over about two-thirds of Geos’ branches.

“I think the biggest factor was the decline in students,” said Masami Sakurabayashi, director of the Japan Association for the Promotion of Foreign Language Education, a Tokyo-based organization that promotes sound management of foreign-language schools. Geos, the second major language school to fail in the past three years, is not a member of the group.

The Ministry of Economy, Trade and Industry said enrollment at foreign-language schools has plunged from 826,858 students in February 2006 to 335,604 this year.

In its attempt to catch Nova, Geos expanded rapidly only to be caught high and dry by the plunge in student enrollment after Nova imploded, and was probably unable to trim unprofitable branches fast enough, Sakurabayashi said.

G.communication Co., which took over some Nova branches, will take over 230 Geos schools and close 99. Geos boasted about 500 branches during its heyday, while Nova had about 900.

“Rapid expansion is very risky with this business because it is hard to maintain quality service,” Sakurabayashi said, referring to the distrust created by Nova, which collapsed after being penalized by the government for misleading advertising.

The language industry has been in decline for the past several years due to Japan’s economic malaise, the global financial crisis and the fallout from Nova’s bankruptcy.

According to Tokyo-based Yano Research Institute Ltd., sales in the industry fell from ¥826 billion in fiscal 2005 to ¥767 billion in fiscal 2008.

But the failure of yet another major chain doesn’t mean the industry is hopeless, some said.

Running a language school chain is manageable if you don’t make the mistake of expanding too rapidly, Sakurabayashi said.

“This is my personal opinion, but running foreign language schools is a profitable business, although you may not make such a huge profit,” he said, adding that the key is to have a realistic goal.

Atsushi Hamai, a spokesman for the major school chain Aeon Corp., said that while it’s true that new enrollment has been in decline for the past several years, the industry is recovering and the company has not seen much fluctuation in its sales and operating profit.

“When Nova was expanding its presence about 10 years ago, we did put a focus on establishing new branches,” Hamai said. “But we think that increasing the number of branches is not the way our company should go, so we hardly create new schools now. Our strategy is not expansion, but to strengthen the inside.”

Some fear that Geos’ collapse and subsequent bad press will give the entire industry a black eye.

“I’m concerned that this issue might bring negative influence to the industry,” said Kunio Hatanaka, head of the All Japan Linguistics Association, another organization of foreign language school operators that included Geos.

“There are many schools that run healthy businesses and try hard to serve customers,” he said.

But the impact is likely to be smaller compared with Nova, Sakurabayashi said, thanks to the aggressive moves of G.communication.