The other day we passed by one Onsen town by train. The town was very famous and popular that we as kids in Japan went there many time with parents on holiday to enjoy the hot spring and local foods. There were many shiny and new hot spring hotels some of which were with swimming pools.

 

Today the town has been full of decay of hotel buildings with broken glass windows, some almost falling into the river nearby. The colorful and bright town in my childhood memory is now the dark and grey concrete buildings.. 

 

We sometimes talk to the local governments of these "left behind" towns to initiate the tours to visit these broken and deserted bankrupt hotels. As many are fan of these old and deserted buildings called "Haikyo mania". In our local media fixer services, we met many of the foreign media people who are into shooting these deserted houses and buildings outside Japan. But the governments in Japan are still reluctant to do such tour because of uncertainty and possible danger. It is not clear sometimes who owned the buildings and if permission needed, who should give such a permit and if any problem happens, who will be responsible etc. Yet, we think it is a waste of great resource for tourism in Japan. It can potential earn quite good source of income for the local governments and towns.

 

In recent months, a wave of closures and bankruptcies has swept through Japan’s regional hospitality sector. Once-thriving traditional inns and hotels in places like Hanamaki, Morioka, and Kumamoto are shutting their doors, even after decades—sometimes over a century—of continuous operation. At first glance, the pandemic appears to be the final blow, but a deeper analysis reveals a complex web of financial missteps, structural vulnerabilities, and strategic inertia. This article breaks down these cases and examines broader implications, both inside and outside Japan.

 

Case 1: Watarino Onsen in Hanamaki – A Peak That Couldn't Be Maintained

The Business at Its Height

Watarino Onsen, composed of Hotel Satsuki and Villa Kaede, served thousands of guests annually. At its peak in the 2010s, it attracted 80,000 overnight stays per year. With 101 rooms in total, large banquet facilities, and scenic open-air baths, its infrastructure was impressive. Annual revenues exceeded 1 billion yen (about 6.5 million USD), indicating strong cash flow during good years.

What Went Wrong

While the parent company MiK had invested heavily in acquiring the real estate in 2004, Fine Resort took over operations in 2009. The issue wasn’t necessarily poor demand—rather, the business became severely understaffed after the pandemic, operating with only 35 employees, a third of the previous number. Rising labor costs and inflation compounded this issue, especially as guests began to expect pre-pandemic levels of service.

Mathematically, if operating costs (labor, maintenance, utilities, etc.) consumed 70% of revenue in peak years, and revenue dropped by 40% post-COVID while fixed costs remained constant, the business would quickly shift into negative margins. Even a 10% drop in occupancy from 80,000 to 72,000 would cause a loss of nearly 100 million yen in yearly income—enough to turn profitable years into deficit.

Outcome

With the real estate slated for sale, continuing operations was no longer viable. The hotel will permanently close in July, with the company’s other facilities continuing operations under a centralized management plan.

 

Case 2: Hotel Taikan in Morioka – Bankruptcy to Save a Legacy

Hotel Taikan, a flagship property in Morioka’s Tsunagi Onsen, filed for bankruptcy with over 1.3 billion yen in liabilities. Despite its local prestige, it succumbed to similar issues: pandemic-driven demand collapse, tax delinquency, and high operational costs.

Interestingly, rather than liquidation, the plan is for the hotel to continue operating under new management—namely, a public-private fund. This echoes business continuation models seen in the U.S. and Europe where distressed assets are bought and rehabilitated, preserving jobs and local economic impact.

 

Case 3: Chomeikan in Kumamoto – The Hidden Risk of Tradition

Founded in 1914, Chomeikan was not just a hotel, but a symbol of local heritage. At its peak, it earned nearly 85 million yen per year. A major renovation in 2007 aimed to revitalize its image. But then came the 2008 financial crisis, which reduced demand from domestic business groups. That was followed by stagnation, and finally, COVID-19.

The hotel’s 2023 revenue dropped to 50 million yen—just 59% of its former peak. With rising debt and no recovery in sight, the management filed for bankruptcy.

Three Structural Issues

1. Bad Timing of Investment
   A large loan-backed renovation in 2007, followed by an economic shock, led to a common trap in regional hotel finance: high debt with low return. Debt service obligations (estimated at 5–7 million yen annually) overwhelmed declining cash flow.

2. Over-reliance on Group Travel
   Many of these inns thrived on school trips and group tours. As individual travel and online bookings became the norm, they failed to pivot.

3. Resistance to Innovation
   Unlike new hotel chains that integrate digital booking, AI-based concierge services, and social media marketing, these traditional inns lagged behind. Some still operated without effective online presence or multilingual support.

Global Comparison: Similar Trends Beyond Japan

This is not a uniquely Japanese issue. In Italy, centuries-old family-run hotels in Tuscany and Venice closed due to similar patterns: aging infrastructure, generational handover failures, and failure to adopt digital tools. In the United States, small-town historic hotels collapsed under the pressure of chain competitors and online platforms.

In all these cases, the core problem is not demand per se. Tourists still want authentic, local experiences. What’s lacking is the business model innovation to deliver them sustainably.

 

What the Online Community Is Saying

Japanese social media platforms like X (formerly Twitter) and forums like 5channel are filled with emotional reactions to the closures.

• Some lament the loss of “local soul” and “healing spaces” from their childhood memories.

• Others criticize the government for not intervening in time, or the owners for being “too proud to change.”

• More savvy voices are calling for new models: shared ownership, digitalized reservation platforms, or even conversion into remote work resorts.

Tourism professionals on LinkedIn and hotelier communities are discussing how private equity or foreign investors could rescue these assets, rebrand them for modern travelers, and even convert them into digital nomad destinations.

 

Lessons for Mergers and Acquisitions Professionals

From a mergers and acquisitions (M and A) perspective, this is a textbook scenario of distressed asset acquisition. Professionals in this field should be watching closely for opportunities in:

• Asset-light acquisitions: Buying operating rights without owning property.

• Turnaround strategies: Injecting digital tools and rebranding toward international audiences.

• Post-merger integration: Managing staff expectations and ensuring local compliance.

Understanding why these legacy businesses failed is essential to rebuilding them for modern tourism. Buying a traditional ryokan is not about preserving it as a museum—it is about upgrading the guest experience while respecting the heritage.

 

The collapse of inns like Chomeikan, Watarino Onsen, and Hotel Taikan is not just a financial story—it is a cultural one. These failures remind us that even the most trusted traditions must evolve. In an age where artificial intelligence, smart tourism, and global travelers reshape expectations, the hospitality industry must embrace both innovation and identity to survive.

 

For merger and acquisition professionals, there is both risk and immense potential. The key is not just in acquiring the business, but in reimagining what it can become.