Japan’s Population Problem

Projected to lose 20 million people by 2050, Japan (DXJ, EWJ) is leading the way for a global first world demographic decline. Needless to say, the population problem is a major focal point for Japan – and other nations are watching Japan’s moves in hopes to learn a thing or two about dealing with a population decline. I’ve discussed this looming problem in a previous post here, but the solutions to these problems can broadly be divided into three categories:

  1. Improve fertility rates

  2. Open floodgates to foreign labor

  3. Improve productivity

Earlier this week, the Japanese Ministry of Economy, Trade, and Industry (METI) announced that major Japanese convenience store players – 7-Eleven (OTCPK:SVNDY, OTCPK:SVNDF), FamilyMart (OTCPK:FYRTY, OTC:FYRTF), Lawson (OTC:LWSOF), Mini Stop (TYO: 9946), and New Days (OTCPK:EJPRY, subsidiary) – have agreed to implement electronic tags on all products by 2025.

Assuming all goes well, relatively immediate implications of this movement would include: Unmanned convenience stores, productivity improvements decreasing labor demand in convenience industry, dynamic product pricing, etc.

E-Tags + Tanpin Kanri + IoT = Productivity Improvements

What does it mean to implement electronic tags on all products at convenience stores?

Benefit 1: Speedy Check-out

The short story is that customers will throw products in a basket, put the basket on the unmanned checkout table, and the table will scan all products (no need for human intervention), customer pays, and voila! Customer goes home.

Here’s an example of Lawson’s RFID self-checkout register:

Source: METI (Japanese Source)

As an aside, I thought it was fun to think about the possibility of my refrigerator tracking everything inside and maybe even creating my grocery list for me.

Benefit 2: Dynamic Pricing

I’ll take the largest convenience chain, 7-Eleven, as an example.

For those that are not familiar with 7-Eleven Japan’s inventory strategy, it has adopted a strategy called “Tanpin Kanri” (a direct translation would be “Individual Product Management”). Essentially, Tanpin Kanri tracks demand on a store-by-store and product-by-product basis. As with any physical retailer, shelf-space is the name of the game, and 7-Eleven Japan is known to be allergic to stockouts. This means 7-Eleven Japan proactively disposes slow-moving inventory and replaces it with newer, fast-moving inventory. On top of that, its whole convenience business is focused on fresh food, which increases the pressure to get inventory moving.

Instead of disposing inventory, especially for fresh foods, 7-Eleven can adjust pricing. That is, provide “older products” for lower prices. This is near impossible to implement when food products are tracked by SKUs and batch codes. With each product having an electronic tag, every single product will have a unique ID, which, for traceability purposes, must include key information like production date, best-by date, batch code, etc. This enables 7-Eleven to implement the truest version of its “Tanpin Kanri” strategy and adjust prices at the individual item level to entice shoppers to buy that 300 yen lunch for 200 yen instead of disposing it for the next batch of fresh food.

Broader Implications Of An Automated, Robotic Japan

Personally, I think 7-Eleven is best positioned to take advantage of e-tags. From logistics infrastructure to inventory strategy, all ducks are in a row (at least in Japan). What I’m really curious to see is how 7-Eleven leverages the IoT movement globally.

The keyword is “Globally”. There is a bigger story to follow for Japan-interested long-term investors. While Japan has its own set of problems – population decline, high government debt, comparatively low ROE, etc., there is a lot to be gained through overcoming these problems.

The focal point of this article has been productivity improvements. And so, we looked at the convenience industry (and more specifically, 7-Eleven Japan), but there are similar movements in other industries as well.

For example, Daicel Corporation (TYO: 4202) (OTC:DACHF), a major chemical company, has a unique approach to operations management: It wants employees to spend time on value-added work instead of maintenance/routine work. Just about everything routine is automated. As a result, Daicel is able to run its Aboshi plant (multiple buildings sitting on 10 million square feet of land) through one control room with 20 people. In Japan, this is raved as “Daicel Hoshiki” or “The Daicel Way”.

Another example is Yaskawa Electric (OTCPK:YASKY, OTC:YASKF), which has a stronghold in motion control and industrial robots. Fellow Seeking Alpha author Stephen Simpson recently wrote an insightful article here.

For The Long-Term Investor

Now, the population problem is not a uniquely Japanese problem. It is a first world global problem, and Japan is an extreme case. For long-term Japan-interested investors, it might be useful to frame this problem a little differently. Japan is clearly under pressure but taking steps to mitigate its population problem, primarily through productivity improvements. Investors ought to take a look at some of the advancements made by Japan’s highest quality companies and then see how the advancements can be applied outside of Japan. As Mr. Simpson points out in his article, Yaskawa Electric has been shifting its production outside of Japan, which has resulted in improved margins. You better bet other Japanese companies are looking beyond the border as well.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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