Japan's Rising Costs:

 https://mainichi.jp/english/articles/20211006/p2a/00m/0bu/034000c

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TOKYO -- Japan's restaurant industry, which has been hit hard by the COVID-19 pandemic, may be seeing the light at the end of the tunnel at last as the state of emergency was entirely lifted on Oct. 1. However, some owners have been struggling with a separate set of challenges that overshadow their hopes to bring their eateries to a pre-pandemic state -- ingredient price hikes.

Jun Sakaguchi, 41, of Tokyo-based Five Group Corp., who manages the beef cutlet chain Gyukatsu Motomura, looked up to the ceiling and groaned, "So it's going to rise again."

Beef tongue costs have risen virtually month by month since around February this year, with the price for procurement in July having grown to 1.8 times that of February. Sakaguchi had no choice but to raise the price for the popular beef tongue cutlet set dish from 1,600 yen (about $14) to 1,800 yen (about $16).

Ideas:

So yes, while the emergency measures are being eased or completely lifted now there a new set of challenges that restaurants and other places need to be concerned about.

Most likely the rising prices are related to costs rising among suppliers and they've been reluctant to pass on the costs to those down the line and they know, whether other businesses or the final consumer, if prices keep rising the next group in line might try to find substitutes or stop buying.

So restaurants and other places now have to figure out what is the correct price because they know that some consumers are very sensitive to price increases and if its too much might choose to go to another restaurant, buy at a supermarket etc.

The problems or challenges with rising prices are that consumers salaries are probably not rising at the same rate as supply inflation in the Japanese economy. As such now consumers are constrained even more if prices related to food, supermarkets, or restaurants keep going up.

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Amidst all this, Sakaguchi had been notified of a further price hike from the purchasing personnel. "We can't raise the price any higher," he said. The company was left with no other option but to decide to suspend selling its beef tongue cutlet set meal.

Due to the coronavirus pandemic, the company reduced the number of establishments it ran in and outside Japan, from around 30 to 19. Sakaguchi dropped his voice and said, "I'd like customers to return in around December, but it's tough with the shackles of the procurement price."

Shinsui Furuya, 49, who manages a branch of the karaage fried chicken shop Torisho in Yokohama, has also faced a drastic surge in procurement prices. Following the spread of the coronavirus, the number of customers had temporarily fallen by 20 to 30%, and the establishment devoted itself to home delivery services to recover lost profits. The shop succeeded in having earnings nearly return to the original state. Despite this, expenses for procuring ingredients have piled up, and overall profits are said to have decreased by 10 to 20%.

Ideas:

Food supply prices ,which are past on to the customers or next next in the chain,  seem to be going up much faster than salary increases, if any increase at all.

The Bank of Japan would prefer to see demand inflation and not supply side inflation, which is happening now.

Companies, under profit pressures have no choice but to increase prices even though they know they might lose some customers as the customers will seek out substitutes or  alternatives

The companies that have to increase prices have to find the right balance between a price that keeps them profitable but not too high that they lose too many customers.

Finding alternative sources of income, such as home delivery services is what every restaurant should do if its possible.

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Cooking oil has seen an extreme price hike. One 18-liter drum cost about 3,000 yen (about $27) at the beginning of the year, but the latest price is 1.5 times higher. The cost is expected to increase further in November. Furuya grimaced and said, "Mayonnaise, containers for takeout food, eggs, vegetables and all sorts of things are increasing in price, and I'm sick of it."

What rubs salt in the wound is the reality that the eatery is unable to raise its sales prices despite an increase in procurement prices. Furuya said, "Customers come to our store because of the current price. If we raise the price, I'm afraid that we'll return to a state like when customers suddenly decreased due to the coronavirus." The shop manager is troubled over what to do with its sales prices that have not changed since the shop opened in December 2017.

It is not only the restaurant industry that is being directly hit by a rise in raw material prices. According to the Bank of Japan, the corporate goods price index, which measures the price development of goods traded among companies, has indicated an approximately 5% rise in the last several months compared to the same month of the previous year. A price hike was noticeable in various categories, such as food products like vegetable fat, oil and beef, as well as petroleum and coal products, plastic and other chemical products, metal and wood.

Ideas:

Most restaurants and probably most mom and pop businesses operate on very slim profit margins, meaning the difference between their costs and profits if very small.

So any kind of increases in the supplies they have to procure for their business, most likely have to passed on the the customer or as much of it as they can.

But has mentioned above, customers might come to a specific restaurant because they like the price and if the price change is too much they might not return and look for alternative restaurants, if they can.

Its interesting that so many products or supply resources have all been increasing at the same time or maybe they've been rising for a while but restaurants and other places are now beginning to feel the pressure from the continued increase in prices.

But again, if worker salaries were increasing at the same rate, then maybe customers would not be too worried about the increase in prices at their favorite or regular restaurant.

The Bank of Japan has been trying, it seems forever, to get companies to use the huge sums of cash they have sitting in banks and pay their workers more.

But the Japanese companies today are under the quarter to quarter expectations from shareholders instead of like the past, when they took a long term approach and actually cared about their employees. But today is not the 80's, the 90's or even the early 2,000's.

If the companies would pay their workers more than maybe demand inflation would increase meaning there is more buying of things in the economy, and restaurants and other places wouldn't have to be so stressed when they have to increase prices.

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The Sugino-gomu chemical plant in Tokyo's Katsushika Ward, which manufactures construction material and anti-vibration rubber, has been suffering from a price hike in the raw material of rubber. President Yukio Sugino, 72, commented, "Major buyers do not respond to negotiations for price rises."

So why are raw material costs on the up? Hideo Kumano, chief economist at Dai-ichi Life Research Institute, said, "China has been leading a recovery in demand after the spread of the coronavirus was contained at an early stage, and following this, prices for resources in general have been on the increase in the United States and other countries as well." Another factor is hindrances to production brought on by poor crop harvests due to abnormal weather conditions observed worldwide, and difficulties in accepting foreign laborers in various countries due to the pandemic.

It is difficult to shift raw material price rises onto the sales price. "In Japan, where deflation has been continuing for a long time, consumers have greatly rejected price increases. Therefore, companies have no choice but to absorb them themselves," said Tsuyoshi Ueno, senior economist at NLI Research Institute.

Ideas:

Its unfortunate because of market power, that some companies take advantage of other companies and say you have to take the price as is. And some companies become prices takers only and is not really a market competition situation any longer.

So there are many factors, besides those related to the virus situation that have caused supply prices to increase in the past year.

And yes, as have been mentioned above its not easy to pass on the raw material prices onto the sales price, as maybe some companies and some retail customers will try to find substitutes or alternatives to the higher prices.

And was also mentioned up above, some might stop buying some raw materials such as raw beef and or might even not sell a certain product but if they do and pass on the price to the customers they might not be able to sell it and now they are stuck with a lot of expensive beef they can't sell.

So companies have to absorb the higher supply prices and some customers might reject the higher prices.

So companies then have to choose what they can sell for a reasonable profit and what products they can no longer sell as they can't make any kind of profit with that profit.

And the possibility is they continue to sell the product at the lower prices, at loss, and hope the customer buys some other items such as beer, wine, or other things to make up for the loss.

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So how long will this situation continue? Bank of Japan Gov. Haruhiko Kuroda said at a Sept. 27 press conference that the spread of the coronavirus is estimated to "pass a peak within this year at the earliest, and early next year at the latest, leading to an increase in outings and dining, making it easier to shift price rises onto consumers."

However, according to a survey conducted in August by research firm Teikoku Databank Ltd., about 70% of firms predicted they will see a rise in procurement unit prices one year later, while only around 40% estimated that there would be an increase in sales unit prices.

Teikoku Databank pointed out that there are many companies that have been taking a careful stance while the outlook on whether the coronavirus will be entirely contained is unclear.

Ideas:

Most likely because of the present challenges and uncertainty in the global economy and the Japanese economy, companies most likely will continue to see prices in increases for the rest of this year and into next year.

As more and more people become vaccinated and they begin to feel comfortable going out again, demand might begin to increase.

But the problem as they venture out they might be shocked at the increase in prices and it cause some kind of demand or buying shock and they will think twice about what to buy or not buy.

Yes, there is no exact guarantee that the virus situation will be entirely contained as for example Russia is now under a severe situation again. And in China there are new outbreaks, and even in the UK there seems to be new surges with the Delta+ variant.

One solution which might help the Japanese economy, which the Bank of Japan has been trying is to get companies to use their huge sums of cash they have in banks and increase the salaries of their employees.

In that way workers will feel better about their salaries and their extra income or disposable income and maybe they won't be so concerned about the increases in prices at their favorite restaurants.

But unfortunately there are other prices increase that workers now have to worry about such  the increase gas prices for their cars and the increases electric or energy prices in their homes.

For example, talking to a source in Japan said his home energy costs increased from 6,000 per month to 20,000 in just one month.

So if this is the same for many households in Japan, that is less extra or disposable income a person or family has to spend in stores or restaurants. And then you add in the prices increase at restaurants and it get even more stressful for everyone in the Japanese economy.

So then everyone every company in the economy has extra pressure. The customers, then the retail or restaurants, and then the suppliers and so on up the chain.

Have a nice day and be safe!