Cheap imports compounding deflation shock

Asahi Shimbun

March 23, 2001

Globalization may have its fans and its foes, but one thing about the trend cannot be denied: It is exacerbating Japan's deflation shock.

Prices of goods are falling and the government finally admitted on March 16 that the nation is indeed experiencing deflation.

Clothing prices are declining sharply. Men's clothing retailer Aoyama Trading Co., for example, opened a store called The Suit Company in Tokyo's fashionable Ginza district on March 7. The store sells suits that traditional shops price at 60,000-70,000 yen for as little as 19,000 yen.

While most customers are in their late 20s, many middle-aged and older men also patronize the store.

Aoyama Trading controls the entire value chain from raw-material procurement to manufacturing and sales. The company sends Japanese and Italian cloth to factories in China, where it has its garments made up to keep prices low.

Since The Suit Company's first outlet opened in Tokyo's Nihombashi business district last November, sales have been 1.5 times higher than expected. The Ginza branch was one of three stores to open this month, and a spokesman at Aoyama Trading said the company aims to have as many as 20 outlets within three years.

Retail chain Uniqlo has swept the market over the past few years with stores selling inexpensive clothing. The company derives its strength from controlling all stages in the production chain, including product planning, material procurement, processing, garment-making and sales. For cutting and sewing, it uses factories in countries like China because of the low labor and overhead costs.

Aoyama Trading's new chain shows the Uniqlo business model is expanding into other areas, such as men's suits.

The trend toward the inexpensive is not confined to clothing. Cheap vegetables and fruit from overseas are flooding into supermarkets. A bag of Thai onions sells for as little as 198 yen, paprika from the Republic of Korea (South Korea) for 129 yen and broccoli from the United States for 128 yen.

Fruit and vegetable prices used to be volatile due to factors such as domestic weather conditions, but imports are pushing prices toward world standards.

According to the Saison Research Institute, which surveys major supermarkets to compile a sales price index, prices dropped to 94.6 in 1999 from a base of 100 in 1995. Fresh vegetables dropped 10 points, fruit 14.4 points, and seafood 11.6 points.

Restaurants are passing on the benefits of declining food prices to their customers. One such restaurant, Es Gusto, in Akasaka, Tokyo, is so popular that on weekday lunchtimes long lines form outside. The restaurant is the first in a new Skylark Co. chain that will compete for the lunchtime market in downtown areas. The most popular item on the menu is the 390 yen Salisbury steak set meal, ordered by half of the restaurant's 500 customers a day. Prices are about 20 percent lower than at restaurants in the company's suburban chain, Gusto.

Imports account for more than 60 percent of the ingredients used at Es Gusto. Skylark has also slashed its food costs by taking advantage of Internet auctions.

It is not only prices for final consumables that are falling. The same trend is being seen in the case of primary products.

Tokyo Steel Manufacturing Co. cut the sales price for its hot-rolled steel by 30 percent this year. The company was forced to counterattack after South Korean steelmaker Pohang Iron and Steel Co. and Taiwan's China Steel Corp. shook up Japanese and other Asian markets with aggressive pricing. Steel prices have been further driven down by excess capacity at Japan's five major steelmakers.

After the bubble economy collapsed, asset values sank as land and stock prices plummeted. Companies and households alike tightened the reins on investment and consumption, further deflating assets. Inexpensive, high-quality foreign products flooded the market, adding to deflationary pressures.

More recently, French retailer Carrefour SA and other superstores have entered the Japanese market, leading to cutthroat price competition. Supermarkets now try to attract customers with daily discounts.

Supermarkets that lack direct trading arrangements with low-cost manufacturers and do not have end-to-end control like Uniqlo are stepping up their demands for discounts from wholesalers. The pressure is so intense that some have even told some wholesalers to provide their new products for free.

One wholesaler of everyday goods said current discounts are possible because manufacturers, wholesalers and retailers are making sacrifices. However, deflation is threatening retailers with huge debts and overextended facilities.

Low prices are possible through bulk procurement and mass production. This means it is leading retailers that create trends and in effect determine market prices. Laggards have to match prices set by the likes of Uniqlo and McDonald's Corp., but for them, creating low-price systems is an uphill battle.

As one clothing company source said, in the end, inefficient businesses will be ruthlessly weeded out.

http://www.asahi.com/english/asahi/0323/asahi032301.html

-- Martin Thompson (mthom1927@aol.com), March 24, 2001