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Nichirei Fights Lonely Battle(Issue 1581)

February 13, 2007
Report by Mikio Sato, Chief Editor, Director

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 margins.

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 1583)

February 27, 2007
Report by Mikio Sato, Chief Editor, Director
[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 reform."

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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