Byravee Iyer
Apr 4, 2014

Japan’s consumption tax hike to impact ad budgets

TOKYO - Japan’s decision to increase the country’s consumption tax from 5 to 8 per cent on 1 April may prompt consumer firms to lift near-term advertising and promotional spend to woo shoppers and boost volume even as rising costs crimp margins.

Japan’s consumption tax hike to impact ad budgets

“Ad spend by manufacturers and retailers is expected to increase in the short term, “said Mariko Takemura, senior research analyst, Euromonitor “as companies are seeking to capture consumers that are scaling back spending following the tax increase”.

Homegrown retailer Aeon already revamped its private label brand TopValu, giving it a more stylish and modern packaging design. At the same time, the company ran a big ad campaign and assured consumers that it will not increase prices. “It’s difficult to say what the long term affects on ad spend will be, but manufacturers and retailers will be keeping a close eye on their return on advertising spend during this phase,” Takemura added.

Several companies have passed on the tax burden to consumers. Coca Cola, for instance, raised its price for a 350 ml can of soda from $1.15 (120 Yen) to $1.25 (130 Yen). The soft-drinks giant also tweaked the price of 500 ml PETbottles from $1.44 (150 Yen) to $1.53 (160 Yen). Fast food company Yoshinoya also bumped up the charge for its beef bowl from$2.60 (280 Yen) to $2.80 (300 Yen). 

Reducing pack sizes is another way brands are tackling the tax. MegamilkSnowbrand’s J-Oil Mills and Meiji have trimmed volumes but left prices unchanged. Tokyo-based Morinaga Milk industry, which distributes Kraft products, has cut back on the number of cheese slices in one pack from eight to seven. Kewpie Mayonnaise scaled back the amount of mayonnaise in its bottles from 500 grams to 450 grams, while reducing the unit price. And while keeping prices intact, Häagen-Dazs announced it would reduce the amount of ice cream in120 ml packages to 110 ml starting in July.

Sectors most affected

  • Tobacco
  • Automobile
  • Luxury goods
  • Purchases related to hobbies
  • Drinking and dining

Conversely, McDonald’s decided to decrease the price of its Hamburger and Cheese Burger while raising fees for other products. The company has used this tactic before in the US during recessionary periods with some success. Perhaps it is looking to rebuild its brand in Japan, its largest market after the US, by standing up for people. The fast food giant has seen its market share and profits steadily fall in Japan, casting doubt on its strategy in the country.

“Although we can expect an increase in advertising, if the reactionary drop is larger than initially expected,” Yoshiyuku Sodekawa, research director of consumer insights at Dentsu Innovation Institute pointed out while speaking about likely consumer tax backlash, “there is a likelihood that a larger share of marketing budgets will be used for discounts and in-store promotions rather than on advertising,”

The current situation is uncertain, he warned, noting that advertising charges are also subject to consumption taxes. “We will hold consultations with each advertiser with regard to either keeping the total [media] cost the same by reducing the amount of taxable placements or keeping the amount of placements the same, thereby increasing the amount of tax levied.”

Kaz Maezawa, founder and CEO of Naked Communications predicts brands will take a more cautious approach. “Brands will see how business gets impacted. If it goes down, marketing budgets could be tightened.”

Hobbies, automobiles, luxury products, dining out, drinking are all likely to see a significant drop in demand, say experts. The Japan Automobile Manufacturers Association estimates car sales could drop 15 per cent to 4.75 million vehicles in 2014. Hakuhodo’sToshihiro Tsujita even expects instant food, deli foods, prepared lunches and other home-meal replacements to suffer.

To offset the tax hike, consumers stockpiled purchases in March. Last minute shopping ramped up across the country, particularly for high-ticket items such as automobiles, consumer electronics, consumer appliances, jewelry and other luxury products.  Consumers also rushed to purchase necessities including tissue products, beauty and personal care brands and seasonings.

Retailers have been quick to swoop in. Aeon offered extra points to consumers who used electronic payments for bulk purchases. Walmart’s Seiyuran launched discounts on key items. Some companies even started to sell summer goods like air conditioners in March. Apart from bargains and special sales, Takashimaya offered coupons for use in April to consumers who spend more than $96 or 10,000 yen in March and Seven-Eleven Japan doubled the percentage points allotted on its prepaid card.

In the coming quarters Japanese companies will be twiddling thumbs debating between an increase in ad spends or plouging back marketing budgets to offset contracting margins. 

 


COMMENT Brands have little choice but to pass on costs

Nick Foley, president, Southeast Asia and Pacific, Landor Associates

Coke’s response to the increased consumption tax is in line with how most companies respond to any external cost being imposed upon them. Many companies work on the “Cost Plus” pricing model (Particularly FMCG companies).

Taxes need to be paid by companies, to governments, in the respective countries their brands are sold in. Companies also have a duty to their shareholders to responsibly increase profit. Put simply, when taxes are imposed upon a brand, the company has little option but to recover the imposed cost via higher pricing.  

In Singapore, where the government substantially increased the cost of excise tax on alcohol, companies are doing the same as Coke in regards to increased pricing. There are few other options available and it is standard practice for companies to respond in this manner. 

The Japanese government has little choice but to increase its consumption tax. The population is ageing and the proportion of consumers earning an income is declining. The Japanese government needs to provide for ageing consumers. It therefore has little choice but to increase non-income related taxes via the adoption of a tighter fiscal policy. Most developed economies are also starting to experience this pressure as the percentage of the population no longer drawing an income increases.

Savvy brand custodians will respond to an ageing demographic in Japan by tailoring, or expanding, their brand offer to suit older consumers. This will require a radical departure from traditional marketing techniques and a focus on a consumer segment that has received little attention in the past. One thing we do know about older consumers is that they are less promiscuous than those under 30. This offers marketers the opportunity to build brand loyalty if managed in the appropriate way. If companies opt to respond to the changing consumer landscape in Japan via heavier discounting, then it will only result in lower margins, higher levels of switching and lower levels of brand loyalty. 

 

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