Convenience-store squeeze shows deflationary dilemma facing Bank of Japan

Takanori Sakai works the graveyard shift four nights a week at the FamilyMart store he owns in Himeji, Hyogo Prefecture, because he can’t afford the higher pay employees demand these days.

“More and more stores can’t secure a profit,” the 57-year-old said. Problem is, with competition just down the street, raising prices to cover higher wages risks turning off customers who have become accustomed to steady prices for a generation.

Sakai and his fellow convenience-store owners are on the front lines of the battle with a “deflationary mindset,” one compounded by a declining population. As the Bank of Japan repeatedly urges businesses to fatten paychecks to help stoke inflation, convenience-store chains are turning to automation and other means to absorb higher labor costs.

The reluctance to pass on those costs to customers, the BOJ says, is a key reason inflation remains well below its 2 percent target despite years of extraordinary monetary stimulus.

“It’s very hard to predict when companies will stop absorbing these costs,” according to Izumi Devalier, head of Japan economics at Bank of America Merrill Lynch. “The short answer is, when the deflation mindset changes.”

Yet with the unemployment rate at 2.4 percent, the labor market is getting so tight that wages and prices are beginning to budge. Workers are moving into better-paying jobs and permanent, full-time employment, Bank of America Merrill Lynch said in a recent report. Meanwhile, the minimum wage that serves as something of a benchmark among retailers rose by around 11 percent between 2013 and 2017, part of the government’s efforts to improve paychecks overall.

And that’s where productivity comes in. If workers are more productive, companies can absorb higher wages without denting profits, salary-earners spend more and the BOJ’s 2 percent inflation target becomes a reality. But if the deflationary mindset never changes, the risk is those productivity increases fail to trigger broad wage gains or stronger inflation.

Convenience-store franchisees in cities such as Tokyo and Osaka have already turned to foreign workers, housewives and the elderly to staff their stores, which are ubiquitous in metropolitan areas and suburbs, providing services such as package drop-off and bill payment, and selling everything from underwear to fresh foods.

Now, big chains FamilyMart UNY Holdings Co., Seven and I Holdings Co. and Lawson Inc. are investing in automation and other labor-saving measures to help their franchisees keep stores running and offset rising wages.

Five major operators are working with the economy ministry to place electronic tags on all 100 billion products in their stores by 2025. The tags, called radio frequency identification devices, enable automated price tabulation and inventory processes.

In February, a FamilyMart store in the ministry’s basement introduced the RFID tags and an unmanned cash register for a limited test run. Ministry officials browsed rows of drinks, rice balls and sandwiches — all plastered with small stickers holding the tags.

“With demographic decline becoming a major problem, this is something we have to address with speed,” said Yotetsu Hayashi, a senior ministry official overseeing the initiative, which is meant to improve the nation’s logistics system and productivity.

Lawson, which opened an innovation center in Tokyo in October, is working with Panasonic Corp. on a range of initiatives, including automated payment and bagging of goods. The company also began supplying tablets and new, more efficient cash registers to its stores in the fiscal year that ended in February.

Seven & I invested an estimated ¥27 billion ($253 million) in the just-ended fiscal year to reorganize franchisees’ stores for greater efficiency, and another ¥15 billion to install dishwashers in those that sell prepared food. Last year it lowered the cut of profits it collects from franchisees by 1 percent to help offset the labor costs.

FamilyMart last month finished installing a new point-of-sale system to simplify cash register operations, at a cost of around ¥11 billion. Over the longer term, it says, it will focus on comprehensive operational reforms and utilize advanced technology, including artificial intelligence, with the goal of cutting workloads by half.

The short-term benefit for store owners is likely to be limited, analysts say. “The problem with technology is that if you install something that doesn’t demand labor like a cash register, you still have to teach the customer how to use it,” Jefferies LLC analyst Michael Allen said. “It takes years for the impact to be seen.”

For Japan’s economy, though, such investment could help solve its demographic riddle and deflationary drag over the longer term. While rapid automation could cost millions of jobs, Japan’s shrinking population means it won’t suffer as much as a growing country, while investment in greater productivity could help fuel higher pay and economic expansion.

Signs already point to Japan’s deflationary mindset slowly changing, and to a positive cycle of increasing productivity, wage growth and inflation, according to Bloomberg Economics’ Yuki Masujima. In the long term, productivity growth in the service sector will remain vital, as the sector’s share of Japan’s economy grows, he said.

“It’s important, and when productivity is being improved, we need to properly train employees, and make sure they’re able to switch to different industries or move to different departments within their company,” Masujima said.

Meanwhile, franchisee Sakai has formed an association of store owners that’s lobbying lawmakers for a franchise law that, among other things, would allow them to pay a lower share of profits to their corporate partners. Until then, he says, he has gotten used to working nights.

“I haven’t had a real day off from the store in 13 years — not one day,” he said. “That’s something I can say for sure.”