On February 22, 2024, the Nikkei 225 index reached an impressive closing of 39,098.68 points, a significant milestone that marks a departure from the harrowing economic landscape of the 1990s in JapanThis index surpasses the previous highs just before the financial bubble burst, signifying the end of what many refer to as Japan's “Lost 30 Years.” Despite this triumphant rally in the stock market, it is impossible to overlook the dark shadows cast by the pastThe events leading to the crisis in the early 90s unfolded almost like a meticulously arranged macroeconomic textbook, where issues in the stock market spilled over into the real estate sector, culminating in a full-blown recession that saw Japan enter a prolonged period of stagnation.

During these “lost decades,” both macroeconomic indicators like GDP growth and microeconomic factors such as consumer prices ground to a halt, giving rise to societal issues like ‘responsibility-avoidant personality’ and the phenomenon of ‘Heisei waste’—a term describing a generation of disengaged young adults

These issues became even more pronounced amid Japan’s rapidly aging populationBy 1994, the proportion of the population aged 65 and over reached 14%, and by 2005, this figure exceeded 20%, officially marking Japan as a super-aged societyThis demographic trend further exacerbated the mounting problems, with the manufacturing sector facing significant challenges: excessive production capacity, labor shortages, and an overwhelming debt crisis.

By 1999, inventory levels only began to show structural reduction, while the capacity utilization rate plummeted by 33% before stabilizing in 2001. It took a painful decade for Japan's manufacturing industry to emerge from this quagmireHowever, reframing history with a more positive lens reveals that, through various economic cycles, Japan's food and beverage sector has birthed many resilient enterprises that not only survived the “lost decades” but also thrived post-crisis, delivering exceptional performance in terms of both revenue and stock prices

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The intrinsic resilience of the food and beverage industry is undoubtedly linked to its close ties to everyday lifeThis sector has often been at the forefront of adapting to changing times, ceaselessly innovating and finding pathways to overcome challenges even in the direst of economic conditions.

Two exemplary companies in this regard are Ajinomoto and Nichirei, giants in the food industryThroughout Japan’s “lost three decades,” Ajinomoto pivoted from being primarily a seasoning company to a holistic food and health conglomerate, while Nichirei solidified its position as a leader in the prepared foods category, often being coined as the “national enterprise.” This article will delve into how these food and beverage companies have honed their ‘internal skills’ to navigate through economic cycles.

Ajinomoto: A Hidden Champion and Innovation Powerhouse

Founded in 1909 by chemist Kikunae Ikeda, Ajinomoto revolutionized the flavoring industry by extracting umami from kombu (a type of seaweed) in the form of monosodium glutamate (MSG). This innovation laid the foundation for the modern seasoning industry

However, Ajinomoto's journey didn't halt there; the company evolved its portfolio to include prepared foods and electronic insulating materials like ABF (Ajinomoto Build-up Film). These seemingly disparate products harmonize under a unifying mission: to enrich the quality of life for people around the world through amino acidsToday, this adaptation has facilitated annual revenue of approximately 60 billion RMB and a market valuation of about 135 billion RMB.

Even this treasured enterprise was not immune to the repercussions of Japan’s economic decline in the 1990sPost-bubble, Ajinomoto faced stagnated revenue growth and saw its operating profit margins decline for five consecutive years, with capacity utilization dropping below 50%. The causes of this downturn were twofold: first, the economic recession; second, a profound shift in consumer structures fueled by demographic changes

The aging population demanded healthier options, while economic stagnation drove a preference for cost-effective solutions, compounded by an inclination toward convenient products due to the trend of smaller household units.

To navigate these tumultuous waters from 1994 to 2004, Ajinomoto embraced three pivotal strategies that turned its fortunes around:

1. Reconstruction: The company shifted excess production capacity to overseas facilities, allowing for lower-cost supplies back to Japan while upgrading local manufacturing capabilities.

2. Innovation: Ajinomoto committed significant resources to foundational research and development, focusing on ‘internal strength’ while creating new businesses that formed a second growth curve.

3. Global Expansion: The corporation increased its investments in mature markets like Europe and the USA while deeply customizing products and services for Southeast Asia.

Transforming an enterprise is a complex systemic endeavor requiring continuous financial investment, making capacity reconstruction the essential precursor to any transformational strategy

During the financially turbulent 1990s, Ajinomoto was operating 32 regional small-scale factories in Japan, leading to overcapacity and escalating costsIn response, the company quickly turned its attention to the rapidly growing Chinese market and established production facilities starting in 1995, transferring the manufacturing of MSG and chicken essence to capitalize on the untapped potential in China, where these products were still novel.

Instead of outright closing Japanese factories, Ajinomoto gradually consolidated them into three major site clusters, pivoting towards higher-value innovative products like meal kits and instant miso soupThis strategy not only allowed them to weather economic downturns successfully, but also significantly improved their financial performance: capacity utilization surged from below 50% in the 1990s to over 90% in the first decade of the 21st century

Their operating profit margin rose from 4.4% in 1990 to 6.6% by 2005, while net profit margin climbed from 2.6% to 4.2% during the same period.

Ajinomoto’s decisive adjustments are not isolated examples; capacity reconstruction is a commonplace strategy among Japanese food and beverage companies during periods of transformationFor instance, Asahi Beer closed more than ten plants in regions including Tokyo over a span of 20 years starting in 1990. Similarly, Meiji Dairy underwent capacity consolidation after four consecutive years of profit declines, while giants like Morinaga, Snow Brand, and Toyo Suisan also significantly downsized their operations in response to inadequate demand.

It is critical to note that such decisive capacity restructuring is not an easy feat within the context of Japan’s culture, which tends to favor lifetime employment

Whether a company can decisively consolidate becomes a pivotal factor in its survival during economic downturns.

The optimization of costs provided Ajinomoto with the necessary profit margins to implement these transformative strategiesWith ample cash flow, Ajinomoto accelerated its extensive innovation initiativesThis was essential, as mere shifts in production capacity would not suffice for the intricate challenges posed by economic stagnation in the 1990sThe structural changes in consumer behavior necessitated greater product appeal and versatility.

The rising demographic of older consumers and the increasing number of working women are notable characteristics of this eraWith aging comes heightened awareness of health, leading to an increase in demand for functional foods and ‘medicated cosmetics.’ Concurrently, as more women joined the workforce, traditional domestic roles evolved dramatically

With less time available for meal preparation, and supported by the proliferation of refrigerators and microwaves, the era of frozen and convenience foods began.

In response to these market dynamics, in 1972, Ajinomoto launched its first frozen dumplingsResponding to the popular Japanese nabemono (hot pot) and chashu dishes, they introduced “Nabe Cube,” a cooking product that featured ease of use, as well as the “SteamMe” line for convenient chashuEach of these products has maintained a leading position in their respective categories, all thanks to the foundational research accumulated during Japan's economic boomFurthermore, Ajinomoto’s robust R&D team has allowed the company to not just transition from basic food production to high-value health products, but also propel into cosmetics and medical beautification realms while securing a 40% share of the global market for amino acids used in food and pharmaceuticals

Entering the new century, Ajinomoto expanded further into the CDMO sector via self-development and acquisition strategies, reinforcing its position in the healthcare market.

In addition to capacity restructuring and product innovation, Ajinomoto has made international expansion a central strategyUnlike the home appliance and automotive sectors, which often bear the ‘Made in Japan’ and ‘high-tech’ labels, their approach to global markets is condition-specific, emphasizing deep customization in Asia while pursuing acquisitions in Europe and the AmericasTheir strategy concentrates on reinforcing strong resource allocation, aiming to maintain a leading position in every category: MSG dominates markets in Indonesia, the Philippines, and Vietnam, while flavored seasonings lead in Thailand and Indonesia, and ready-to-drink coffee has captured the top spot in Thailand.

For distribution, Ajinomoto has employed a sales strategy adapted to the Southeast Asian context, deploying sales staff to roam various informal markets and small retail outlets to promote new products and optimize display of existing stock

This contrasts sharply with Western brands like Unilever that invest heavily in marketing but often neglect the grassroots retail channelThis two-pronged approach effectively entrenches Ajinomoto deeper into the consumer baseAn analogous success story is reflected in Genki Forest’s rapid expansion across 30,000 retail points in Indonesia, which also started through small convenience storesIn Western markets, Ajinomoto strategically acquired Windsor, the largest Asian frozen food manufacturer in America in 2014, capitalizing on its existing distribution networkOver the next decade, this resulted in North American revenue growth accelerating from 5.3% to 9.7%.

Through adept capacity reconstruction, renewed commitment to innovation, and strategic overseas expansion, Ajinomoto has successfully weathered multiple financial crises, including the Japanese stock crisis, the Asian financial crisis, and the subprime mortgage crisis