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COVID-19 and social-distancing measures are forcing some owners of tiny noodle diners to choose between pushing up prices or pulling down their shutters.

The pandemic is upending a finely balanced business model that depends on serving quick, cheap fare to customers eating elbow-to-elbow.

While some proprietors are finally embracing the need to get creative with pricing, there are others who would rather close up shop than force their regulars to swallow a more expensive bowl of ramen.

The continued reluctance to raise prices suggests the nation remains far from dispelling its deflationary mindset, even after more than seven years of massive central bank stimulus.

That spells trouble amid renewed concern of a return to deflation as key consumer prices continue to fall.

Small ramen chain Kouraku Honpo is one of the many noodle restaurant operators looking for light at the end of the COVID-19 tunnel.

For more than two decades, it has been serving wiry noodles with a pungent pork-bone broth at its branch in the Shimbashi district of Tokyo.

Business was roaring at the end of last year, with daily servings at the 26-seat joint sometimes nearing the 500 mark, according to store employee Yoshihisa Saito, 61.

The pandemic changed these dynamics. The store stayed open with shorter hours during a national state of emergency that continued in the capital until late May. Saito’s pay fell as much as 40% to keep the restaurant in business, but at no point did the store consider raising prices to cope with the new normal.

“A price increase was never an option because passing our burden onto customers would be totally unfair. Their finances could be under severe pressure too because of the virus, yet they are still coming to us,” Saito said.

On Aug. 28, Kouraku Honpo closed its Shinbashi store for good.

A customer eats a bowl of ramen at an Ippudo outlet in Tokyo. | BLOOMBERG
A customer eats a bowl of ramen at an Ippudo outlet in Tokyo. | BLOOMBERG

Small restaurant operators like Kouraku Honpo and hole-in-the-wall bars are among the businesses hardest hit by the pandemic, as they struggle to price in social-distancing limitations on capacity and rising costs for virus-response measures. Outlets that are also facing a sharp drop in demand are at most risk of going bust.

Bank of Japan loan programs worth around ¥110 trillion and large-scale government aid have helped reduce the overall number of bankruptcy filings in the economy between April and September compared to a year earlier.

But the number of eateries going out of business has continued to rise, accounting for about 10% of bankruptcies — the highest among all types of business — according to Teikoku Databank.

A chef prepares a bowl of ramen at an Ippudo ramen store in Tokyo. | BLOOMBERG
A chef prepares a bowl of ramen at an Ippudo ramen store in Tokyo. | BLOOMBERG

From the beginning of the year through August, 1,221 restaurant operators closed down, according to Tokyo Shoko Research data.

“Most Japanese businesses act on the premise that if the price of beer is ¥100 today, then it’s going to be ¥100 tomorrow too,” said Tsutomu Watanabe, head of the economics department at the University of Tokyo. “To keep making that a reality, companies keep cutting costs. They’ll turn out some of the lights and they’ll keep a tight lid on wages. Their thinking becomes progressively inward-looking.”

Having run out of costs to cut, some restaurant owners have concluded that survival depends on taking a fresh approach.

Kazuhisa Tanaka says a light bulb lit up in his head one gloomy night in May as he tried to figure out how to stay open while reducing the number of spaces in use at his 12-seat eatery.

He decided to raise the price of a lunch set to ¥1,500 from around ¥1,000 during peak hours and lower the price to ¥800 — little more than half — after 2:30 p.m. His staff objected to his dynamic pricing proposal, labeling it disloyal, but he pressed on anyway.

“Simply cutting the number of customers without knowing when this pandemic will end is a loser’s game,” Tanaka said. “Adjusting prices has become my tool to deal with this crisis, and this would never have happened without COVID-19.”

Tanaka isn’t alone in opting for dynamic pricing, a budding tendency that offers a glimmer of hope for policymakers seeking greater price movement in a country where inflation has been at or below zero since March.

Chikaranomoto Holdings, owner of Ippudo — one of the nation’s most popular noodle chains, with branches around the world from New York to London — has limited seating capacity to about 60% as a virus-prevention measure.

Seeing revenue was still only around half its level the previous year after re-opening, the chain decided to raise the price of some of its set menus in late July, while offering new and cheaper ramen dishes for ultra price-sensitive customers the following month, according to Midori Nakamura, who works at the company’s public relations section.

“It’s becoming so hard to keep prices unchanged with the increasing costs and impact of COVID-19,” Nakamura said. “So what we do is give our customers a choice.”

Diners are spaced apart due to social distancing measures at a Ramen King Kouraku Honpo noodle store in Tokyo. | BLOOMBERG
Diners are spaced apart due to social distancing measures at a Ramen King Kouraku Honpo noodle store in Tokyo. | BLOOMBERG

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