Price wars loom as tax hike takes effect

The much anticipated Consumption Tax increase came into force at midnight on 1 April, with consumers stripping shelves of some product and others buying gold bullion just in case. Unlike 1997 when the tax was last raised, retailers are much more savvy today and a range of price cuts and campaigns have already been announced. Price has suddenly become the key criteria for a lot of consumption choices.

In the dying hours of 31 March, drivers across the country queued up at petrol stations to top up their fuel tanks in advance of the 3% increase in Consumption Tax that came into force at midnight. The last few days of March saw some items stripped from retail shelves as consumers hoarded products to avoid the price increase. The actual evening of the changeover was relatively quiet as supermarkets closed their doors in order to manually change price tags. Aeon and Ito-Yokado have chosen to display both pre-tax and tax-inclusive figures – although tax inclusive prices are in small print. In contrast, Uniqlo prefers to only display pre-tax prices, trusting customers to understand the till price will be 8% higher, while H&M has made no change to prices on labels.

In the run up to the change high ticket items were in most demand. Sales were up five times compared to March 2013 at Tanaka Kikinzoku, a commodity gold trader and jeweller. The chain did a brisk trade in 500g gold bars at ¥2.3 million each. Demand for cars and houses has also been strong in the past few months.

Most retailers remain reasonably confident that the downturn will be short-lived. Without further increases to utility and food prices caused by the increased cost of imports, prices are expected to remain stable. Tax hikes aside, the government’s original target of 2% inflation looks like it will undershoot by at least half.

As expected, some firms have taken advantage of the tax hike to increase prices – many of the country’s largest private universities increased fees by between 5-10% over and above the tax increase for example, and many restaurants have done the same. Consumers will likely remain highly sensitive to price changes for the rest of the year. Lower priced retailers are expected to gain from this change in perception, but most of the industry will need to adjust the marketing message to offset consumer fears. Apparel chains like Shimamura and Honeys, where most product is own brand or exclusively sourced, will hold down prices at pre-increase levels (see JC1403). Other chains will begin a series of price-based promotions to keep up consumer awareness and to belay the perception of price increases. In some categories, consumers could even look forward to isolated price wars.

The two largest retailers, Aeon and Seven & I, have announced price reductions to begin in early April. Ito-Yokado, a company not known for price cutting, will reduce prices on 775 SKUs across its 180 store chain by between 5% and 30%. It will also hold prices at pre-increase levels for all its own brand apparel and household lines, some 1,797 SKUs in total. Another 8,607 SKUs will be ‘renewed’, meaning that as ‘different’ products, Ito-Yokado can adjust prices but without calling it a discount. Aeon is following a similar path, holding prices static on many of its own brand lines, but mixing pricing changes between categories and departments in order to increase perception of lower prices throughout its stores – but maintaining profit margins at the same time.

The price change will affect every single retailer in Japan. High end retailers will suffer more in the short-term, but even stores selling daily essentials will find themselves at the centre of renewed price competition.