Nichirei Fights Lonely Battle（Issue 1581）
|February 13, 2007
Report by Mikio Sato, Chief Editor,
Cutting back on retail sales promotion expenses backfires
on frozen food manufacturer.
Nichirei Foods Inc., one of the biggest manufacturers of
frozen food in the Japanese market is struggling with its
product sales. Manufacturers like Nichirei have long given
out monetary incentives to retailers (kyosankin) to ensure
solid representation of their products on the store shelves.
This has been a widespread business practice for many years,
but now this once-cozy relationship has become lopsided. Nichirei's
sales have been suffering greatly because the retailers have
resisted their attempt to address the problem, and consequently
Nichirei's products are losing their share on the store shelves.
It is difficult for frozen food manufacturers to ensure profits
as the market chronically depends on excessive discounts of
up to 40 - 50% off the suggested retail price. In addition,
rising manufacturing costs due to growing global demand for
food materials have put additional pressure on shrinking profit
The industry has reached a general consensus that breaking
down the vicious cycle and establishing a new order are the
most significant issues. This has not been widely translated
into open action though because manufacturers fear a cutback
of their products in retail stores. There are also concerns
that those who try to change will give their competitors an
advantage while they battle with retailers.
Nichirei started addressing the problem at the end of 2005
by cutting back on kyosankin and by launching new product
lines focusing on higher quality, not just lower price. In
spite of the promotional cutbacks, in 2005 Nichirei made a
profit due to improvements in production efficiency. In 2006,
however, a drop in sales of 7.9% between April and September
turned from bad to worse in the third fiscal quarter (October
to December), falling to 13%. "The drop was more than
we anticipated", said Mr. Mitsudo Urano, president of
Nichirei. "This is our rock-bottom. Now it should take
an upward turn", said another company spokesperson.
Nichirei's efforts to reshape the relationship between retailers
and manufacturers have been welcomed by many others. But because
there are no manufacturers following them outright, Nichirei
is fighting alone as the only challenger. The frozen food
industry stands at a critical crossroads, and the choices
of industry participants will be closely watched.
Frozen food manufacturers share common
aspirations for the restructuring of their industry（Issue
|February 27, 2007
Report by Mikio Sato, Chief Editor,
[This is a sequel
to the article "Nichirei Fights Lonely Battle"
published February 13.]
Many in the industry responded to the first article. Some
voiced their desperation to end the practice of promotional
expenses (kyosankin), while others, apprehensive of causing
more trouble, were hesitant to challenge the current structure.
Another group of respondents, while hopeful and supportive
of the idea of restructuring, were suspicious of drastic changes.
Some even questioned whether Nichirei really fights all alone.
"We (manufacturers) all suffer from the decline in profits.
There is a common desire within the industry for structural
Ajinomoto Frozen Foods Co., Inc., in an attempt to reshape
the profit making structure with the retailers, went to battle
using its market-leading product, gyoza dumplings, as a tool
of change. Ajinomoto improved the quality of gyoza and then
raised the price, subsequently succeeding in making a profit
without having to give kyosankin to the retailers.
Prior to this success with gyoza, Ajinomoto had already tried
new trading strategies to end the kyosankin practice but these
only ended up causing further struggles. The lesson they learned
from that experience was that no change could be made without
providing some benefit for all involved parties including
the retailers and distributors. To ensure those benefits,
Ajinomoto experimented with a number of quality improvements
for gyoza that could be matched with a desirable price.
Katokichi Co., Ltd., another manufacturer, is now increasing
the number of their products that are exempt from kyosankin
practice from 41 to 70- 80. Other manufacturers like Nippon
Suisan (Nissui) and Nichiro Corporation will have to act in
concert with Nichirei and like-minded companies, in order
for their current business structure to improve. Although
no sweeping changes have yet been achieved, the battle continues
in a time ripe with opportunity for progressive restructuring.
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