Gary Troxel 03.01.02
Japan, the second largest economy in the world, is on a decline, as is its population. The Japanese National Institute of Population and Social Security Research (NIPSSR) predicts that the Japanese population will decline from a peak of 127 million in 2006 to 100 million by 2050. Looking further into the future, the institute predicts a 50% decrease to 64 million by 2100. The reason for Japan's population decline, according to NIPSSR, is the tendency for couples, even if married, not to have children due to economic uncertainty and the extremely high cost of education. This population shift, heavily leveraged by an elderly profile, will put additional stress on an already burdened economy. The young Japanese now in their 20's will have to support this aging population, and the pension burden they will be confronted with in the near future will be greater than that of previous generations.
The economy also presents a challenge. The Nikkei Stock Average dove below the key threshold of 10,000 during the first week of February. Investors are reticent due to the increasing uncertainty over the domestic situation in Japan, where the economy is plagued by bad bank loans, decreasing strength of the Japanese yen, deflationary trends, a shake-up by Prime Minister Koizumi of his foreign ministry and a general reluctance to make much needed economic structural reforms.
Compounding the economic uncertainty is the disclosure that a major food company, Snow Brand Food Co., misrepresented imported beef as domestic; the resulting scandal brought down the company CEO. The BSE discovery in Hokkaido, Japan, on October 18, 2001, and the embarrassing disclosure by Snow Brand about falsifying documents has further eroded consumer confidence.
Japan continues to be the most costly nation in the world in which to conduct business, as high taxes, labor and utility costs strangle the Japanese economic engine. A comparative cost of business study, conducted by KPMG Global Services Capabilities this year, reported a cost index of 178 against the 100 base figure for the U.S.
The combination of issues facing Japan is also facilitating a surge in unemployment with many big companies reducing their workforces. In fact, Hitachi, the nation's leading electronics maker, plans to eliminate 4000 jobs in Japan by the end of June as part of an early retirement program. This is in addition to the 16,350 global job cuts already planned this year. The Japanese semiconductor industry is also in a slump with tens of thousands of jobs eliminated to meet competition from foreign rivals.
The unemployment rate is a record 5.5% and as joblessness increases, consumer confidence continues to diminish. Also, retail sales decreased for a fifth straight year. If individual spending does not pick up quickly, economic recovery could be unattainable in the near future.
Currently, Japan is experiencing its worst postwar recession ever and corporate bankruptcies and an emerging need to restructure the Japanese banking system could further aggravate this. But the needed system overhaul may be complicated by the current political climate, in which Prime Minister Koizumi's approval rating has been severely impacted by the recent firing of Foreign Minister Makiko Tanaka, who was very popular with the Japanese people.
The Japanese government must set aside its differences and act now on decisive structural reform within its banking industry. If it doesn't, it could lead to a Japanese economic meltdown that would make the current Argentine crisis pale in comparison.
Regardless of these current economic hurdles, Japan remains the second largest economy in the world and that can't be ignored. So how does a company doing business in Japan position itself to survive and thrive in the current climate?
First, it's important to understand there are some vertical markets with medium and small-size companies that are doing well in spite of the current economic burdens. Second, Japanese consumers are in need of nutraceuticals as Western diet changes infiltrate their culture. Finally, the Japanese dietary supplement industry continues to thrive, growing by 20% in 2001, with the mail order/direct selling channel leading the way, growing at a rate of 34%. The growth surge in this particular distribution channel comes into sharp focus when considering that unemployment is at an all time high, so secondary incomes are becoming more important.
In a recent opinion poll on the lifestyles of the Japanese, 50% of those in their 20's indicated that the hamburger was their favorite food. That the hamburger has become the food of choice is evidence enough of the profound Westernization that once was unimaginable in a culture so homogenous and true to its roots. However, with each generation the trend toward Westernization continues to increase.
Even traditional foods are being impacted. Green tea, once brewed in teapots and consumed during and after meals, is now being consumed in prepackaged and highly processed PET bottles by over 80% of the adult population.
The fundamental changes in the Japanese diet have growing health implications, increasing the incidence of diabetes, cardiovascular disease and obesity. The protective elements of the traditional Japanese diet will eventually evaporate with the generational changes taking place now. Additionally, life expectancy may even drop as Western diets take hold.
This cloud does have a silver lining for nutraceuticals companies as nutraceutical ingredients with proven benefits will find an increasingly receptive market in Japan. This is particularly true as the population continues to age. The elderly, who generally have plenty of disposable income, are willing to pay for fortified foods, beverages and supplements. Furthermore, innovative delivery systems, technology for stabilizing the active components in nutraceuticals and the advent of FOSHU (Foods for Specified Health Use) approval also help to expand the market.
FOSHU, an approval process for nutraceuticals implemented in 1991 by the Japanese Ministry of Health, Labor and Welfare (MHLW), has approved close to 300 functional foods for specific health claims. It is the fastest growing segment in the food and nutraceutical industry with a market size of $2.6 billion. Products positioned for gastrointestinal (GI) health dominate the majority of this business. Other health claim categories include cardiovascular disease, hypertension, diabetes, mineral deficiency, dental health and obesity. Some examples of FOSHU products include coffees fortified with a prebiotic; lacto sucrose for GI health; soft drinks fortified with dietary fiber to maintain healthy blood sugar levels; yogurts fortified with lactoferrin for immune support for children and healthy cooking oils that contain diacylglycerol and plant sterols to improve cholesterol levels.
Although a portion of nutraceutical products have FOSHU approval, 85% of nutraceutical products are sold without it. This fact, combined with the many channels of distribution and smart sales strategies, can open the door to significant market opportunity. Unique and novel branded ingredients, linked with exclusive knowledgeable Japanese marketers, can create markets and market categories.
The right partner and the ability to commit to long term objectives is paramount in developing successful relationships and forging alliances that are effective, synergistic, creative and sure-footed when the terrain gets rocky. The "due diligence" required to educate, introduce and launch new ingredients in Japan is time consuming; it requires full disclosure, consistency in communication and the ability to translate complex biochemistry into understandable consumer benefits.
With branded ingredients the process is even more involved. Trademarks, patents, validated clinical trials and well-crafted marketing campaigns have to be developed in concert with the Japanese partner to make markets and develop critical mass to dominate product categories.
Success in Japan is important to the global picture. Global product launches by major multi-national conglomerates look at three major economic axes: Europe, North America and Asia. If a company can penetrate Japan and create a market category there, its product will have more appeal for those in North America and Europe who want third party validation, especially from a country like Japan.
In summary, the difficult economic times Japan is enduring have not severely impacted the nutraceutical business at this time. However, if major banking reforms don't occur, the economic struggle will undoubtedly broaden and affect all industries in Japan. That's why it is important for the Japanese government to take the bold steps necessary to break the cycle of short term fixes and do what's best for Japan in the long term.
Devaluing the Japanese yen, bailing out banks and focusing on export-generated strengths are not long term solutions. It will take an inward focus and true reform of the banking system where weak links are allowed to perish and the strong survive. Prime Minister Koizumi will have to make the tough decision to break the political encumbrances that have kept the Japanese economy in shackles for over a decade.
If change doesn't happen soon the other economic engine in Asia, China, will dominate as multi-nationals start to emerge from this giant. China has strong ambitions to break into the economic club of export domination via its low wage work force and this competitive environment will make things more difficult for those countries like Japan and the United States, which have traditionally dominated the art and science of global trade.NW
About the author:
Gary Troxel is executive vice president of InterHealth Nutraceuticals, Benicia, CA. An expert in international sales and marketing for the nutrition industry, Mr. Troxel has a bachelor of science degree in international business from Sophia University, Tokyo, Japan. He can be reached at (707) 751-2800; E-mail: gtroxel@interhealthusa.com.
Uncertainty in the Economy
The economy also presents a challenge. The Nikkei Stock Average dove below the key threshold of 10,000 during the first week of February. Investors are reticent due to the increasing uncertainty over the domestic situation in Japan, where the economy is plagued by bad bank loans, decreasing strength of the Japanese yen, deflationary trends, a shake-up by Prime Minister Koizumi of his foreign ministry and a general reluctance to make much needed economic structural reforms.
Compounding the economic uncertainty is the disclosure that a major food company, Snow Brand Food Co., misrepresented imported beef as domestic; the resulting scandal brought down the company CEO. The BSE discovery in Hokkaido, Japan, on October 18, 2001, and the embarrassing disclosure by Snow Brand about falsifying documents has further eroded consumer confidence.
Japan continues to be the most costly nation in the world in which to conduct business, as high taxes, labor and utility costs strangle the Japanese economic engine. A comparative cost of business study, conducted by KPMG Global Services Capabilities this year, reported a cost index of 178 against the 100 base figure for the U.S.
The combination of issues facing Japan is also facilitating a surge in unemployment with many big companies reducing their workforces. In fact, Hitachi, the nation's leading electronics maker, plans to eliminate 4000 jobs in Japan by the end of June as part of an early retirement program. This is in addition to the 16,350 global job cuts already planned this year. The Japanese semiconductor industry is also in a slump with tens of thousands of jobs eliminated to meet competition from foreign rivals.
The unemployment rate is a record 5.5% and as joblessness increases, consumer confidence continues to diminish. Also, retail sales decreased for a fifth straight year. If individual spending does not pick up quickly, economic recovery could be unattainable in the near future.
Banking Crisis
Currently, Japan is experiencing its worst postwar recession ever and corporate bankruptcies and an emerging need to restructure the Japanese banking system could further aggravate this. But the needed system overhaul may be complicated by the current political climate, in which Prime Minister Koizumi's approval rating has been severely impacted by the recent firing of Foreign Minister Makiko Tanaka, who was very popular with the Japanese people.
The Japanese government must set aside its differences and act now on decisive structural reform within its banking industry. If it doesn't, it could lead to a Japanese economic meltdown that would make the current Argentine crisis pale in comparison.
Positioning in a Difficult Climate
Regardless of these current economic hurdles, Japan remains the second largest economy in the world and that can't be ignored. So how does a company doing business in Japan position itself to survive and thrive in the current climate?
First, it's important to understand there are some vertical markets with medium and small-size companies that are doing well in spite of the current economic burdens. Second, Japanese consumers are in need of nutraceuticals as Western diet changes infiltrate their culture. Finally, the Japanese dietary supplement industry continues to thrive, growing by 20% in 2001, with the mail order/direct selling channel leading the way, growing at a rate of 34%. The growth surge in this particular distribution channel comes into sharp focus when considering that unemployment is at an all time high, so secondary incomes are becoming more important.
In a recent opinion poll on the lifestyles of the Japanese, 50% of those in their 20's indicated that the hamburger was their favorite food. That the hamburger has become the food of choice is evidence enough of the profound Westernization that once was unimaginable in a culture so homogenous and true to its roots. However, with each generation the trend toward Westernization continues to increase.
Even traditional foods are being impacted. Green tea, once brewed in teapots and consumed during and after meals, is now being consumed in prepackaged and highly processed PET bottles by over 80% of the adult population.
The fundamental changes in the Japanese diet have growing health implications, increasing the incidence of diabetes, cardiovascular disease and obesity. The protective elements of the traditional Japanese diet will eventually evaporate with the generational changes taking place now. Additionally, life expectancy may even drop as Western diets take hold.
This cloud does have a silver lining for nutraceuticals companies as nutraceutical ingredients with proven benefits will find an increasingly receptive market in Japan. This is particularly true as the population continues to age. The elderly, who generally have plenty of disposable income, are willing to pay for fortified foods, beverages and supplements. Furthermore, innovative delivery systems, technology for stabilizing the active components in nutraceuticals and the advent of FOSHU (Foods for Specified Health Use) approval also help to expand the market.
Areas of Growth
FOSHU, an approval process for nutraceuticals implemented in 1991 by the Japanese Ministry of Health, Labor and Welfare (MHLW), has approved close to 300 functional foods for specific health claims. It is the fastest growing segment in the food and nutraceutical industry with a market size of $2.6 billion. Products positioned for gastrointestinal (GI) health dominate the majority of this business. Other health claim categories include cardiovascular disease, hypertension, diabetes, mineral deficiency, dental health and obesity. Some examples of FOSHU products include coffees fortified with a prebiotic; lacto sucrose for GI health; soft drinks fortified with dietary fiber to maintain healthy blood sugar levels; yogurts fortified with lactoferrin for immune support for children and healthy cooking oils that contain diacylglycerol and plant sterols to improve cholesterol levels.
Although a portion of nutraceutical products have FOSHU approval, 85% of nutraceutical products are sold without it. This fact, combined with the many channels of distribution and smart sales strategies, can open the door to significant market opportunity. Unique and novel branded ingredients, linked with exclusive knowledgeable Japanese marketers, can create markets and market categories.
The right partner and the ability to commit to long term objectives is paramount in developing successful relationships and forging alliances that are effective, synergistic, creative and sure-footed when the terrain gets rocky. The "due diligence" required to educate, introduce and launch new ingredients in Japan is time consuming; it requires full disclosure, consistency in communication and the ability to translate complex biochemistry into understandable consumer benefits.
With branded ingredients the process is even more involved. Trademarks, patents, validated clinical trials and well-crafted marketing campaigns have to be developed in concert with the Japanese partner to make markets and develop critical mass to dominate product categories.
Success in Japan is important to the global picture. Global product launches by major multi-national conglomerates look at three major economic axes: Europe, North America and Asia. If a company can penetrate Japan and create a market category there, its product will have more appeal for those in North America and Europe who want third party validation, especially from a country like Japan.
Conclusion
In summary, the difficult economic times Japan is enduring have not severely impacted the nutraceutical business at this time. However, if major banking reforms don't occur, the economic struggle will undoubtedly broaden and affect all industries in Japan. That's why it is important for the Japanese government to take the bold steps necessary to break the cycle of short term fixes and do what's best for Japan in the long term.
Devaluing the Japanese yen, bailing out banks and focusing on export-generated strengths are not long term solutions. It will take an inward focus and true reform of the banking system where weak links are allowed to perish and the strong survive. Prime Minister Koizumi will have to make the tough decision to break the political encumbrances that have kept the Japanese economy in shackles for over a decade.
If change doesn't happen soon the other economic engine in Asia, China, will dominate as multi-nationals start to emerge from this giant. China has strong ambitions to break into the economic club of export domination via its low wage work force and this competitive environment will make things more difficult for those countries like Japan and the United States, which have traditionally dominated the art and science of global trade.NW
About the author:
Gary Troxel is executive vice president of InterHealth Nutraceuticals, Benicia, CA. An expert in international sales and marketing for the nutrition industry, Mr. Troxel has a bachelor of science degree in international business from Sophia University, Tokyo, Japan. He can be reached at (707) 751-2800; E-mail: gtroxel@interhealthusa.com.
