Monday, September 15, 2008

The Japanese recession explained!

Japan has been in a prolonged stagnant economy since I first arrived here 17 years ago. Even the global economic boom of the mid 2000's didn't help. The Economist says that the never-ending financial funk is because "the other main pillar of demand -- private consumption -- seems in no position to take up the slack... contracting by 0.5% in the second quarter." Hey, don't blame the consumer! Blame it on the daily practices of local businesses, who seem to be the only on the planet who have never heard the catch phrase, "Volume, volume, volume!!"

One of the unique things about Japanese consumer goods is that they rarely aim at volume sales. Instead, most stores aim at selling just a few products, but at a ridiculous profit margin. Need proof? Check out the price of this Mango, which I found at the airport this year down in Kagoshima (southern Japan).

Yes, you're seeing that correctly -- that's $200 for a freakin' mango! And it doesn't contain a hidden diamond or a small stash of cocaine. It's just a beautiful, perfectly overpriced piece of fruit. And somebody will pay for this insanely value added item to bring as a souvenir to impress some boss who probably doesn't even like mango. But it's expensive, which in Japan, means it must be good.

OK, that may be a bad example. Most people don't buy this kind of fruit any more. So let's look at something more normal. Take pizza, for example. A large pizza here at any delivery place typically costs about $US30. Even for my relatively cheap all-time favourite, Ham and Pineapple, it's $27. That's a lot of money for discount pizza compared to the rest of the world. This is particularly true for for students and pathetic bachelors, the target audience of any respectable pizza place. This would explain why I've never been to a home party where people just order pizza. It's too expensive.

Enter my old friend Saki, who used to work for an ad agency. On a group ski vacation, she once asked the foreigners in the group for an idea of how to make her client, Pizza Hut, more competitive in Japan. As we guessed, they had the same slumping sales as every other pizza place. Why? Because they have virtually the same menu, pricing structure and promotions as every other pizza place in town. So we suggested they do 2-for-1. Try to win the market share by going for lower profit margin, but with huge volume sales -- which was very successful for many smaller pizza places in North America. "No, we can't do that here in Japan," was the only answer we got. And so the recession rolls along unimpeded. And we continue to order our pizza at COSTCO, where we get a extremely tasty HUGE pizza for about $US13.

Eventually, I started seeing "W" (double) sizes on menus and pitchers of beer in bars. "Things are looking up, " I thought. But when we did the math, we saw that a 0.5 liter beer was 500 yen. And a 2 liter pitcher was 2,000 yen. Hmmmm, isn't that just the same price? Yes, they get you to drink more -- but there's no incentive to buy a huge beer that will sit and get warm on the table. So nobody does.

Ditto at restaurants. For example, I just took this yesterday at Saizeriya, a popular chain of Italian restaurants. First, the cost of a normal order of Mozzarella and Tomato Caprese.

And now the price of the double size (which, as it turns out, is not even double in size). The astute reader with reasonable math skills will notice that 598 yen is exactly double to price of 299. So in this case, the "double" applies only to the price. PAY MORE, GET LESS. Now there's a motto to live by.

There is hope, however. While Japan is painfully slow at taking on new ideas and trying to "go it alone" to beat the competition, things are changing thanks to pressure from the increasing number of foreign companies or their Japanese reincarnations. Coffee as a consumer good changed thanks to Starbucks. Before Starbucks entered the scene, we had ONLY American and Blend coffee, and both tasted like boiled sock water. Now we have about 80% of the selection available abroad. But it wasn't until after Starbucks was everywhere and most local coffee shops had gone bankrupt that people finally stopped saying, "Starbucks will not last because Japanese people prefer Japanese style coffee shops." Clearly the Japanese are unfamiliar with the plight of the dodo bird.

I reckon that the same pressure to change will happen as Japanese retail outlets see COSTCO and other companies continue to overflow with customers from the moment they open till the moment they close, 7 days a week. Eventually Japan Inc. will start realizing that they need more customers parting with their hard earned money, and the only way they'll do that is by offering deals and giving the consumer a break on the ridiculous prices being charged. In the end, everybody wins with volume sales.

I just hope the change comes soon, because I would love to live on pizza!!