[DongleDongle] The Many Tricks of Japanese Companies Fighting the '30-Year Deflation'

Japanese Companies Reduce Volume to Suppress Prices
Increase Variety to Restrain Price Reduction Demands
Improve Profitability Through Regional Price Differentiation

"This is not an honest management method. It is voluntary to maintain the price while reducing the quantity sold, but it is necessary to inform consumers accurately."

On the 28th of last month, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho's sharp remark has prompted a reconsideration of 'shrinkflation,' which has deeply penetrated our lives. Shrinkflation refers to the act of reducing the size or quantity of a product while maintaining its price. It is a kind of 'trick' to raise prices while avoiding consumer criticism.

This trick by distribution companies is not unique to Korea. Neighboring Japan is also facing similar issues, with recent posts on the media and social networking services (SNS) pointing out shrinkflation. The tricks Japanese companies use to survive in an economy trapped in deflation for 30 years are on a different level. Today, we will explore what strategies Japanese companies have adopted to cope with prolonged deflation.

[Image courtesy of Bloomberg]

Japanese Companies Unable to Raise Prices Amid Deflation... Reduce Quantity and Cut Costs

Japan's food industry has used the method of reducing product size rather than raising prices as prices and wages remained stagnant for 30 years. Since consumers' purchasing power did not increase and raising prices would attract consumer attention, companies resorted to a kind of deception.

Japanese confectionery company Garubi began reducing the weight of its products by 10% starting last year, and bakery company Yamazaki Baking decided to reduce the contents of its cream bread product 'Usukawa Pan' from 5 pieces to 4. When this news spread, there was an outcry on SNS, with many expressing disappointment particularly toward Yamazaki Baking. Usukawa Pan, launched in 2001, had been a so-called 'national bread' loved by many, which seems to have caused a national sense of disappointment.

Yamazaki Baking's Usukawa Cream Bread. Since last year, Yamazaki Baking has been selling the bread with the number of pieces per bag reduced from 5 to 4. [Image source=Yamazaki Baking official website]

While some companies announce such changes publicly, others reduce product weight quietly. As Minister Choo pointed out, it would have been better to inform consumers when reducing size, but the situation seems similar in both Korea and Japan.

According to a 2018 survey by the Japan Consumer Affairs Agency, 82% of consumers felt that the quantity or weight of products had decreased over three years. About 25% of consumers said they switched to other brands or stopped purchasing due to the reduced quantity.

Recently, SNS posts by netizens suspecting shrinkflation, such as "the quantity of convenience store lunch boxes is decreasing" or "the contents of bagged snacks seem to have shrunk," have been continuously posted.

Experts explain that prolonged deflation forced companies to resort to such tricks. Companies were unable to raise prices due to consumer sensitivity.

In fact, according to the Nihon Keizai Shimbun, Japan's 'markup' ratio?the proportion of net profit to sales?has not increased for 20 years. This means that as costs rose, companies cut expenses elsewhere to suppress product price increases as much as possible. Because Japanese society is so averse to price hikes, companies decided to reduce product quantity when it became difficult to cut costs beyond a certain level.

Expanding Product Lines and Regional Price Differentiation... Defending Against Price Reduction Demands

However, Japanese companies did not overcome difficulties solely through tricks like shrinkflation. They also faced the challenge of defending against consumers' demands for price reductions amid prolonged economic stagnation. As a result, companies began launching diverse product lines.

Japanese KitKat [Image source=CNN]

For example, Nestl?'s chocolate product 'KitKat' is a global brand but is uniquely released in various flavors only in Japan. While only 10 flavors are sold in the UK, where KitKat was first launched, Japan has released as many as 450 flavors, including matcha and sake flavors.

This is analyzed as a strategy to increase demand through product diversification. Professor Akijo of Waseda University explains that selling various types of products is a survival method unique to Japanese companies. It is a strategy companies adopt to block consumers' demands for price reductions and encourage continuous product consumption during economic downturns.

Recently, more companies have adopted a strategy of setting different prices by region. In economics, there is the so-called 'law of one price,' which states that goods are sold at a single price. Companies are breaking this principle, which has been accepted in the market, to improve profitability.

Japanese dining company Skylark Holdings introduced regional price differentiation last year at its family restaurant chain Gusto. Gusto divided Japan into four regions?core cities, urban areas, regional cities, and Kyushu/Yamaguchi Prefecture?and set different prices accordingly. The farther from urban areas, the fewer menu items saw price increases and the smaller the price hikes.

Family restaurant Gusto in Japan
[Image source=Skyrock homepage]

McDonald's Japan introduced a new pricing system in July for 184 stores in three cities with high rent burdens: Tokyo, Nagoya, and Osaka. For example, the Big Mac is sold at 450 yen in regular stores, but prices were raised to 470 yen and 500 yen in suburban and urban stores, respectively. Stores with the new pricing system account for 6% of all McDonald's stores in Japan.

In this way, Japanese companies have employed various strategies to cope with low growth and low wages under deflation. Currently, Korea faces a stagflation crisis, where prices rise but the economy stagnates, unlike Japan. However, since both countries' companies must defend against consumers' demands for price reductions while improving profitability, the essence of the strategies they must adopt seems similar. Just as Japanese companies devised various measures such as product diversification and regional price differentiation, it is hoped that Korean companies will find innovative strategies rather than resorting to tricks.

This content was produced with the assistance of AI translation services.