How Japan's service industry is trying to adapt to the worst labor crunch in 25 years

Before Hisashi Kanbe in 2013 introduced BakeryScan, the world’s first image recognition checkout system designed specifically for bread, it was the job of every bakery worker in Japan to memorize the assorted prices of each baked good — from baguettes back to bagels.

Unlike shrink-wrapped food, whose prices are easy to calculate by scanning barcodes, bread is usually displayed sans packaging because “it sells better that way,” said Kanbe, CEO of a Hyogo-based company Brain Co. “But in a store with as many as 100 kinds of bread, it’s virtually impossible for inexperienced workers to remember all of their prices.”

But with BakeryScan, even novices can handle purchases by placing a tray of bread under a scanner, which identifies every item based on shape and color, calculates the prices and displays the total on a screen — all in just one second, eliminating the need for workers to manually enter prices piece by piece at the cash register.

“Many bakery owners say our product has made their job much easier and much more efficient,” he said, adding that the system is already used by about 250 bakeries nationwide.

BakeryScan could be a game-changer for the nation’s service industries, which are struggling with the worst labor shortage in a quarter of a century.

The Bank of Japan’s tankan quarterly economic survey, one of the key indicators of the nation’s current economy, released this month showed the country is facing the tightest labor market since 1992. In the survey of 10,687 companies, the index for firms complaining of the labor shortage as of September showed a reading of minus 28, down 3 points from minus 25 in the previous survey published in June. The reading was the worst in 25½ years.

The labor crisis is taking its toll on companies. In the first half of 2017, 49 firms shut down their businesses due to manpower shortages — 2.9 times more than the figure during the same six-month period in 2013, a July survey by Teikoku Databank Ltd. showed.

The situation has prompted some companies to tap IT and robots, while others have simply cut services to reduce overall workloads.

Convenience store chains have been among the first to turn to new technologies for solutions.

In April, the economy ministry and five major convenience store chains announced a plan to introduce electronic price tags for all products sold at their stores by 2025 and let customers settle their purchases at unmanned cashiers.

Lawson Inc. and electronics maker Panasonic Corp. have already tested robot registers that automatically scan shopping baskets full of goods and pack purchased items in plastic bags.

It might not be long before Japan’s retailers will look like the “Amazon Go” store, where sensors track the products customers grab, charging when they leave the store. The U.S.-based Amazon.com unveiled the concept for the unmanned store in December, though it has yet to fully launch such outlets.

In the not-so-distant future, services provided by humans may become a luxury, available at a premium for customers in need of meticulous work, while mass-market consumers will be serviced by machines, said Hirotoshi Kishi, a consultant at Nomura Research Institute.

The persistent labor crunch means “it is virtually impossible to maintain the current level of service given universally to all people,” he said. “The service sectors in Japan are at a crossroads now. They are trying to figure out what works best for them to survive the labor shortage.”

Some firms have already been hit by downsizing.

Restaurant chains, where around-the-clock operations used to be the norm, have cut back on hours.

In December 2016, in an effort to “improve the work-life balance of employees,” major family restaurant chain operator Skylark Co. announced it would halt operations from 2 a.m. to 7 a.m. at 80 percent of its 987 outlets across Japan. Royal Holdings Co. also abandoned 24-hour operations at all Royal Host family restaurants in January.

Meanwhile, inundated with orders due to the e-commerce boom, Yamato Transport Co. in June stopped giving customers the option of having their parcels delivered between noon and 2 p.m. The nation’s largest courier also raised its shipping fee for the first time in 27 years this month.

But labor shortages in the service sector has become so severe that one measure is not enough to make the business sustainable, according to Motoshige Ito, a professor of economics at Gakushuin University.

Ito said that there is room for the sector to improve its efficiency, however, noting a high level of redundancies.

A report released last year by the Japan Productivity Center showed that labor productivity between 2010 and 2012 in the service industry — defined by dividing the total output by productive hours — is only the half that in the United States. The gap was particularly large in the transportation, retail, and hotel and restaurant industries.

“Insignificant, redundant services are everywhere in Japan,” Ito said. “Maybe it’s time for firms to review such frills as free re-delivery of parcels and wiping of windows for customers’ cars at gas stations.”

Ito said some of Japan’s excessive services are the byproduct of the overheated price wars in the years of recession that followed the burst of the asset-inflated bubble economy of the early 1990s. Firms tried to win over customers by adding on extra services while taking advantage of stagnant wages.

Many people in Japan take these extra services for granted, and they are often cited as good examples of omotenashi, the Japanese spirit of hospitality. But the problem is that such hospitality doesn’t pay.

According to the July Japan Productivity Center survey, 500 Japanese and 500 Americans who have lived in both countries were asked to rate and compare the quality of services. The Japanese replied that the quality of services in Japan was on average better and thus they were willing to pay about 10-20 percent more for the same services offered in the U.S. The American respondents also rated Japanese services higher, but said they were willing to pay just 1 to 7 percent more for the same services in the U.S.

The result suggests that consumers are happy with the quality of services in Japan, but are used to getting them cheaply, said Yasuhiro Kiuchi, a senior researcher at Japan Productivity Center in charge of the research.

“I think many companies want to raise the prices of their services, but are hesitant to do so because of the prolonged deflation and price wars with rivals in the same industry,” he said.

The key, he added, is how to change the mindset of consumers so they will happily pay more for quality services.

“Service sectors are notorious for underpaid workers,” he said. “But such circumstances may change if they can raise prices and become more profitable,” which will help attract more workers to the industries.

Meanwhile, the shortage of workers has prompted some companies to hire more foreign part-timers.

In October 2016, the number of foreign workers in Japan topped 1 million for the first time, up about 20 percent from the previous year’s figure, the labor ministry said.

The number of non-Japanese workers at convenience chains has also surged. Around 44,000 foreign nationals, including many students, were working at three major convenience store chains — Seven Eleven Japan Co. Ltd., FamilyMart Co. and Lawson Inc. — as of August, accounting for about 6 percent of all part-timers at their outlets.

It shows that “service sectors are no longer sustainable without help from foreign workers,” said Hisashi Yamada, chief senior economist at Japan Research Institute.

“The problem is that many companies see foreign workers merely as a source of cheap labor,” he added.

Japan is reluctant to accept such people officially as “immigrants.” Unskilled foreign workers in Japan often join the labor force through the back door — for example, as technical intern trainees or foreign students. And some trainees have been forced to work under harsh conditions at extremely low wages.

“Japan’s service sectors tend to think it’s always good to provide their services as cheaply as possible, and they have done so by cutting labor costs,” Yamada said. “But it’s more important to increase prices if they are confident in their services, and give the profits back to their employees.”