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This week’s Voices on the Ground features Atsushi Hosoda, Market Leader for Advantage Japan, providing his perspective on how the pandemic is developing and impacting the Japanese grocery industry.

Q1 - Convenience stores account for the 2nd largest share of modern trade grocery. How have these players adapted to the changing environment over the past six to seven months as the pandemic has occurred?

Despite fundamental issues of convenience before the crisis, e.g., lack of labour, reduction of 24 hour-opened stores, the Japanese government was criticized by citizens for their slow response to COVID-19, compared to other nations. When the crisis first started, instead of shutting down businesses and moving into lockdown, the government only ‘strongly recommended’ that businesses close and citizens stay at home. Eventually, businesses had no choice but to shut down to help curb the spread of COVID-19, and citizens became concerned about their health and chose to stay at home to reduce commuting activity within major cities. Eventually, this caused the nation’s GDP growth rate to slow to the lowest rates in over a decade.

On the other hand, suppliers and retailers in Japan have experienced much growth in the past six to seven months. Since COVID-19 is akin to an emergency, non-perishable and essential items have been in very high demand. Products such as cereals, dry foods and household cleaning products continue to go out of stock very quickly in supermarkets. Products such as pasta and sauce also went out of stock rapidly in the beginning, but demand in this category has become more stable. This has left retailers fighting against the panic of stock shortages, and consumers continually having to wear masks and apply hand sanitizer when entering stores. Since shopping has shifted from proximity to the office to being closer to home, big drugstore chains near office centers have suffered.

The closure of HORECA (hotels, restaurants and catering) businesses, and businesses that rely on a large volume of consumers to stay profitable, such as concerts and nightclubs, have been the most affected in the past period. Restaurants especially have taken a large hit, and reopening is proving to be a challenge. This is because most restaurants in Japan are in dense city areas. With fewer people commuting and teleworking becoming more popular, customer foot traffic has almost vanished. Restaurant owners have criticized government recommendations around closing at 10 p.m. sharp. This leaves only a two to four hour window for restaurants to sustain their daily operations in what is already a tiny amount of space and where it is difficult to distance customers physically. Many restaurants have reopened despite the shortage of city-commuters, as they want to keep their staff on payroll and provide for their livelihood. More than 100 restaurants have reported going bankrupt in Japan, but we suspect that the actual number is much higher.

Q2 - Convenience stores account for a large share of modern trade grocery. How have these players adapted to the changing environment over the past six months as the pandemic has occurred?

The Japanese convenience channel has experienced strong performance during the crisis. There are three major convenience channel players: 7-Eleven, Lawson, and Family Mart. These three retailers account for more than 90% of all convenience channel modern trade. When the crisis began, these retailers were very fast to implement digital and technological solutions to ensure that consumers would feel comfortable to continue shopping, whether it be in-person or online. An example of this is the smartphone application that allows consumers to shop online and is equipped with a QR Code feature that keeps track of shopping history to increase purchase efficiency during in-store visits and generate unique, personalized promotions and loyalty offers.

I have the 7-Eleven application on my smartphone. When I use the application in-store, a store associate scans the QR Code in the app, and all my shopping history is recorded. I usually only buy one to two bottles of tea or cola in a typical visit. However, if I buy five or ten bottles on my next visit, I can get one more drink for free. The ‘buy-one-get-one-free’ scheme is a very typical FMCG promotion method, but what 7-Eleven did was ‘buy-one-get-one-more-free-next-week’ to try to entice shoppers to return to stores frequently.

Additionally, whenever I show my smartphone at the registers, depending on my basket, I can get a free bottle of cola or a pack of sandwiches. I can also collect ‘stamps,’ so I could work towards a free item or sales discount on a future visit. The overall objective is to try to keep customers loyal with quick and highly advanced solutions, paired with innovative promotion and loyalty schemes. Interestingly, the drugstore and supermarket competition was not as fast to adopt these types of loyalty solutions.

Q3 - As more consumers are staying at home, how have suppliers who have been reliant on on-trade or HORECA reacted to the change in consumption habits?

As I noted earlier, while many restaurants have reopened, customer traffic is still low. While restaurants typically have their own home-delivery services, many restaurants, suppliers, and retailers have partnered with delivery services. Home delivery has historically been a critical delivery system in Japan. Uber Eats and a local company called ‘Demae-Can’ (Demae means deliveries) are the two primary food delivery services. They have significant geographic coverage and a wide range of partners, from major food chains like McDonald’s to smaller Japanese restaurants that only serve rice-bowls in little lunchboxes. Customers value speed and convenience of delivery, so we have seen increasing use of these delivery services. However, suppliers were having trouble around plastic packaging because they were constantly running out of the packaging for small lunchboxes. It was rumoured that Uber Eats and Demae-Can have been in discussions around a possible merger or acquisition to strengthen each other’s offerings. As mentioned, there has been a lot of higher, unprecedented demand for some products, and delivery services such as Uber Eats and Demae-Can have placed even more pressure on suppliers and retailers to keep up with production and logistics.

One interesting area impacted by consumers staying at home and virtually socializing is the direct to consumer (D2C) channel. Fish, for example, is the primary ingredient in sushi, a Japanese staple! There has been a surplus of fish caught and delivered to suppliers and retailers, but most major sushi restaurants are still closed. This has been concerning, since raw fish is very perishable, and only so much of it can be frozen at one time. To address this concern, a local online broker was created to provide e-commerce services to sell this raw fish directly to consumers.

Similarly, there are online brokers for produce items such as watermelons and vegetables. Many consumers have even begun to cook more at home, preparing foods such as biscuits, cookies, cakes, and other pastries. Similar to what has happened in North America, baking products such as flour and yeast have gone out of stock at supermarkets. So fast-food chains such as Denny’s have offered to start selling flour directly to consumers online and at the restaurant locations themselves with in-person pickup.

Practically, any agricultural or aquacultural product could be sold and delivered directly to consumers, and this has proven to be a win for suppliers, retailers, and consumers alike. This solution has begun to optimize and digitize the sale of raw ingredients to consumers for consumption at home, and it serves a large role in promoting sustainability initiatives in the D2C channel.

Q4 - What were some of the most significant changes that you saw in terms of collaborative behaviours and actions between suppliers and retailers? Do you expect these changes to stay once the crisis period has passed? 

In our Advantage Japan programs, we have collected some very interesting learnings around supplier-retailer collaboration in a crisis situation. Due to no lock-down being conducted or allowed by law, our targeted FMCG retailers were able to keep opening business as usual, unlike HORECA. Starting with retailers, what retailers need the most from their supplier partners is quick turnaround and execution on decisions based on the fast-paced change in the local environment. For example, health and beauty suppliers and drugstore and prestige retailers have had to adapt to an environment where consumers are not purchasing as many cosmetic products as they used to before the pandemic. This has especially been the case for higher-margin cosmetic products, like lipstick, where sales have fallen flat because masks and face-coverings have practically eliminated the need to apply lipstick.

In turn, retailers have collaborated closely with their suppliers to focus more on products for eyebrows and facial powders, and to deliver these products with specialized in-store and online merchandising tools to try to cover lost sales from lipstick. From the viewpoint of the retailers, this forward-looking activity has resulted in more favourable, positive feedback awarded to suppliers, creating improvements in their ratings. This is a major learning for us, as this has been applicable to large, medium, and small suppliers alike. Sometimes a big company like Kao or Shiseido will have high ratings in the drug channel, but this year, more local and smaller suppliers have been improving their relationships with retailers, working very hard to satisfy retailers’ needs and improving their position in turn.

In areas such as customer service and supply chain, the big theme has been around how to manage product shortages with excellence in communication and information sharing. With the panic and urgency created around products going out of stock, best in class suppliers have been very forward and upfront with their retailers, communicating the timing and stock levels that they would commit to replenishing store and online inventory. These were the actions that received very favourable feedback given by retailers to their suppliers. The key learning for suppliers is to minimize the efforts spent by retailers as much as possible so that they could always focus on the health and safety of their associates and customers. Suppliers who did this, while shifting their production to health essentials such as masks, hand sanitizer, and soap, received a bonus. We saw this in the ratings and qualitative feedback.

Ultimately, I think that suppliers are undertaking a significant shift in leadership and going above and beyond their daily transactional activity, focusing on treating their retailers as if they were consumers themselves. We have had close discussions with the retailers participating in our Advantage program. They have come to realize that while these supplier-driven activities reduce their daily burden in this kind of situation, they believe this type of preemptive action will continue, even after COVID-19 ends.