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MITSURU MISAWA

INA FOOD INDUSTRY (2): MARKETING

STRATEGIES IN A DEFLATIONARY
ENVIRONMENT

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Synopsis
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Ina Food Industry Co. Ltd. (“Ina Food”)1 is situated in the city of Ina, Nagano Prefecture, and
surrounded by the soaring mountains of the Japanese Alps. Hiroshi Tsukakoshi, Ina Food’s
75-year-old chairman, has led the company through an incredible 55 years of continuous
revenue and profit growth. The company is a leading manufacturer of powdered agar, 2 a
traditional gelatin product derived from seaweed.
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In the summer of 2012, Tsukakoshi is looking through the windows of his office in Ina City.
He is thinking about how he aims for his company to be a corporation that is conscious of the
global environment. He feels he has done a good job so far. The business has prospered and
does not present any urgent problems. However, he also feels that he should not simply sit
back and savor his success. He is facing his retirement and has concerns about the long-term
growth of the company. He is thinking it might be the right time to introduce some new
marketing strategies for the company. There is also another reason for concern: Japan’s
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deflationary environment, persistent for 20 years now. He is interested in increasing sales

volume and profit by raising prices when most other companies are lowering theirs under

1
“See Exhibit 1 in the case for information about Ina Food.”
2
“See Exhibit 1 in the case for information about Ina Food.”

Professor Mitsuru Misawa prepared this teaching note as a guideline to teaching “Ina Food Industry (2): Marketing Strategies
in a Deflationary Environment” Dr. Misawa is a Professor of Finance and Director of the Centre for Japanese Global
Investment and Finance at the University of Hawaii at Manoa.
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During his time as an executive officer at the Industrial Bank of Japan (now Mizuho Corporate Bank), Dr. Misawa acted as an
international investment banker in charge of various industries in Japan.
This case is Part 2 of a two-part case series about Ina Food Industry in Japan. It may be taught on a stand-alone basis or
combined with the other case to create a joint-negotiation exercise
© 2013 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or
transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise (including the
internet)—without the permission of The University of Hong Kong.
Ref. 13/531TN

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 13/531C Ina Food Industry (2): Marketing Strategies in a Deflationary Environment

deflation. In this environment, even keeping prices constant means a relative increase of price.
Tsukakoshi believes that, in essence, as long as a company is confident in the competitiveness

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of its products, there are always methods to raise prices and increase profits. The key is

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raising the prices of merchandise and services in a way that the customers can accept.

Raising prices in a difficult economic climate is a risky decision. Nevertheless, the company
is successful in raising the price under deflation. While the Japanese economy faces serious
difficulties, the company has obtained successful results thanks to marketing, producing,
financing, and allocating resources.

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Conceptual Foundation and Teaching Objectives
Understanding the company’s price strategies provides valuable insights not only for students
but also for decision makers and marketing planners in times of economic crisis, and will add
a specific focus on marketing and pricing strategies to existing studies of general measures
taken by companies during deflation. This Japanese company’s strategy under deflation will

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be of particular relevance to students and companies in other countries, since the world
economy tends to be following Japan’s path into deflation.

The case allows students to:

1. Identify what deflation means.

2. Identify the factors that managers should consider in a pricing strategy.
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3. Identify what the price elasticity of demand means and how it is calculated.
4. Identify an interesting and noteworthy principle as a basis of success—“contrarianism.”
5. Rethink what a good company is.
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Students will also learn about the critical thinking skills that top management must possess to
make important business decisions. This case can be used in both undergraduate and
graduate-level courses of international business and finance and has already been used in the
author’s international finance courses. This case is particularly appropriate for courses that
focus on international marketing and business strategy.

The amount of time necessary to effectively examine the issues of this case in a class setting
is estimated at approximately two to three hours. The teaching objectives of the case are:
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1. To teach the concept of pricing strategy under deflation.

2. To provide students with a background on contemporary Japanese corporate behavior and
practice.
3. To allow students to examine the cultivation of American and Japanese corporate
business, and the impact of contrasting cultures, customs, and values in the decision-
making process.
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Suggested Student Assignments

1. It is widely said that global economies are now facing an age of deflation. Comment on
this.

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 13/531C Ina Food Industry (2): Marketing Strategies in a Deflationary Environment

2. Ina Food has enjoyed an incredible 55 years of continuous revenue and profit growth.
However, the Japanese economy has been stagnant due to deflation for 20 years. If Japan

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can overcome deflation, Ina Food can do even better. How can Japan overcome deflation?

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3. In the case, it is claimed, “If the gross margin of a product was 30%, it could be increased
by as much as 17% through simply raising the price 5% if the cost was not changed.”
Explain this mathematically.
4. Tsukakoshi believes that as long as a company is confident in its products’
competitiveness, there are always methods to raise prices and increase profits smoothly.

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Is this a viable general business model in a deflationary environment?
5. In our example, raising prices has appeared rational when viewed on an ex post basis.
However, company management did not have the benefit of clairvoyance during the
process. The case of this company suggests that a company that modifies its price strategy
appropriately can maintain or improve its performance in times of deflation. It is said that
Ina Food reveals an interesting and noteworthy principle as the basis of its success—it
plays the role of a “contrarian.” Comment on the “contrarian” concept, using this case as

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an example.
6. Are larger companies better equipped to handle deflationary periods? Or do smaller
companies do better?
7. Given the following data, calculate the price elasticity of demand. Is this price elastic or
inelastic? Suppose, Price (OLD) = 10, Price (NEW) = 12, Quantity of Demand (OLD) =
200, and Quantity of Demand (NEW) = 150.
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8. Tsukakoshi decided to raise prices. If he had decided to lower prices, as other companies
were doing in a deflationary environment, what would the consequences for the company
have been?

Analysis
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1. It is widely said that global economies are now facing an age of deflation.
Comment on this.
Deflation is now the greatest concern for the world economy. The last period of prolonged
deflation was in the 1930s. So far, none of these price declines look anything like the massive
deflation that accompanied the Great Depression. It is widely said that global economies are
now facing an age of deflation.3 In our traditional Keynesian economic model, the appearance
of deflation is a widespread problem and is disturbing because of its economic implications.
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Declining real household income depresses consumer- spending power. The continuing
decline in purchasing power produced by shrinking real wages and real incomes is also
putting downward pressure on prices. Deflation’s spiral is shown in the following figure.
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3
There are many articles on deflation. For example, see Shilling A. G. (2013 March 26) “The Five Ways Deflation
Has Already Taken Hold,” Bloomberg, http://www.bloomberg.com/news/2013-03-26/the-five-ways-deflation-
has-already-taken-hold.html (accessedJuly 21,2013]).

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or 617.783.7860.
 13/531C Ina Food Industry (2): Marketing Strategies in a Deflationary Environment

Figure 1: Deflation’s Spiral

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Deflation
(Lower prices for
goods and services)
Smaller cash flow
and profits for
Oversupply of company

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goods and
services by
companies Reduction in
production by
companies

Less spending Increased

by consumers unemployment

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Our global economy is dominated by deleveraging in the private sector and financial
institutions, and is highly deflationary. Over the past year of 2007-2012, producer prices have
fallen throughout the world. In Japan wages have actually fallen 4% over the past year of
2007-2012. The United States reported a mere 0.1% annual increase in real GDP for the
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fourth quarter of 2012. Consumer prices have been falling for the last six months in 2012 in
the United Kingdom, France, and Germany. They were falling in Brazil, China, and Hong
Kong as well. They will probably soon be falling in a number of other developing countries.
The following are common deflationary forces in global economies:
(1) Declining real household income is depressing consumer-spending power;
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consequently, the consumer-price index falls.

(2) Income polarization contributes to deflation because high earners are less likely to
spend their money than people with lower incomes.
(3) The household-savings rate increases.
(4) Banks are eliminating or writing down off-balance-sheet vehicles substantially to
lower the amount of risky assets.
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(5) Populations are aging. As a result, the ratio of working-age people to total population
will shrink, retarding economic growth.
(6) Substandard education systems restrain productivity growth and economic advances.
(7) Deflation is a result of the huge gap between annual real GDP and its potential long-
term trend growth.
(8) Excess supply is an important cause of deflation.
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(9) Governments are under pressure to cut spending and jobs.

(10) Businesses are using cost cutting rather than pricing power and sales-volume growth
to improve profit margins.

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 13/531C Ina Food Industry (2): Marketing Strategies in a Deflationary Environment

(11) Competitive currency devaluations are a serious threat to global growth and
cooperation. Many countries are pursuing competitive devaluations to spur exports

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via a cheaper currency and to impede imports. When all nations competitively

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devalue, they all lose because foreign trade is disrupted and economic growth is
depressed.

2. Ina Food has enjoyed an incredible 55 years of continuous revenue and

profit growth. However, the Japanese economy has been stagnant due to
deflation for 20 years. If Japan can overcome deflation, Ina Food can do even

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better. How can Japan overcome deflation?
Theoretically deflation can be overcome by the following measures:
(1) Increasing the money supply can offset deflationary pressures.
(2) Structural reforms should be pursued to eliminate the savings-investment gap.
(3) The savings-investment gap can be closed with government dissaving. However,
Japan has already pretty much reached the limits of this approach.

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(4) Monetary policy could be effective if the central bank were to undertake open-
market operations in assets other than short-term government debt. By increasing the
demand for long-term Japanese government bonds, the Bank of Japan could surely
have a positive impact on the economy.
(5) The Bank of Japan must provide the expected inflation by credibly promising that
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future price levels will be sufficiently high compared with the present. This is the
proposal for “managed inflation.”
Actually, on April 4, 2013, the Japanese parliament approved Haruhiko Kuroda for a full,
five-year term as the Bank of Japan’s governor. He officially replaced his predecessor,
Masaaski Shirakawa, who stepped down on March 19 before his official term was expected to
end on April 8. 4 The new Bank of Japan under Kuroda decided on the same day that it
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planned to double the monetary base over two years, primarily through a massive increase in
Japanese government bond buying.5 The effectiveness of this measure against deflation will
be studied on an ex post basis in the future.

3. In the main text, it is claimed, “If the gross margin of a product was 30%, it
could be increased by as much as 17% through simply raising the price 5% if
the cost was not changed.” Explain this mathematically.
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For example, there is a bag of raw agar from seaweed. The price of this bag is ¥100 and the
cost is ¥70. The gross margin is ¥30. Suppose the price is increased by 5%. The new price is
¥105 and the gross margin is ¥35, if the cost is the same. With this price increase, the gross
margin increased from ¥30 to ¥35, which is the 17% increase (35/30). With this in mind, the
company was successful in increasing sales and profits even while the economy at large faced
deflation.
Do

4
Nikkei (2013, April 2) http://e.nikkei.com/e/fr/tnks/Nni20130405D05JF455.htm (accessed April 1, 2013).
5
Nikkei (2013, April 5) http://e.nikkei.com/e/ac/TNKS/Nni20130405D0404A12.htm?NS-query=BOJ (accessed
April 1, 2013).

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or 617.783.7860.
 13/531C Ina Food Industry (2): Marketing Strategies in a Deflationary Environment

4. Tsukakoshi believes that as long as a company is confident in its products’

competitiveness, there are always methods to raise prices and increase

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profits smoothly. Is this a viable general business model in a deflationary

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environment?
The key is raising the prices of merchandise and services without alerting the customers.
However, this does not offer a general model of pricing behavior. Consumers may not notice
the price increase in short periods of time, but over a year or more the increases will become
obvious as they begin to constrain consumer budgets. Consumers may then switch to a
different product.

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What distinguishes Ina Food in its success? Consumers have not abandoned its products even
after they notice the price increases, because they are satisfied that they are getting better
value than elsewhere.

5. In our example, raising prices has appeared rational when viewed on an ex

post basis. However, company management did not have the benefit of

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clairvoyance during the process. The case of this company suggests that a
company that modifies its price strategy appropriately can maintain or
improve its performance in times of deflation. It is said that Ina Food reveals
an interesting and noteworthy principle as the basis of its success—it plays
the role of a “contrarian.” Comment on the “contrarian” concept, using this
case as an example.
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The company in our study has been raising prices constantly in a deflationary environment,
and the result has been success. Theory suggests that for a company operating in an economy
in recession, simply decreasing supply might not be enough to offset the decrease in
consumer demand, and prices may need to be adjusted downward. What this company did is
contrary to this theory. The position of Ina Food as a contrarian is supported by the following
reasons:
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(1) The consumers of Ina Food products perceive that the products are harmonious with
certain of their key needs and values and they continue to purchase these products
despite price increases.

(2) Price itself can be used as a tool to control consumer behavior. A desired hedonic
value ascribed to merchandise can increase loyalty to the brand, enabling the
company to be more fluid with price changes.
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(3) Price may actually have played a subordinate role to product worthiness in the
consumer’s decision-making process. The demand for the goods produced by Ina
Food is inelastic, and the price change has a relatively small effect on the quantity of
goods demanded.

6. Are larger companies better equipped to handle deflationary periods? Or do

smaller companies do better?
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Though it might seem that larger and more established companies, with more abundant
resources and experience, would be better equipped to handle recessionary periods, this is not
always the case. In fact, it is found that small companies sometimes have better survival rates
than large companies.6 It is much easier for small companies to shift to a new or niche market,

6
Duncan, J. W. and Handler, D. P. (1994) “The Misunderstood Role of Small Business,” Business Economics,
29(3), pp. 7-12.

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 13/531C Ina Food Industry (2): Marketing Strategies in a Deflationary Environment

as well as imitate their larger competitors’ actions and take new pricing and promotional
actions more quickly; they are strategically nimble. 7 A small company can use price to

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influence consumer behavior as long as consumers use price as an index for shopping.8 The

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company educates the consumer constantly and its price increases encounter
less resistance from consumers.

7. Given the following data, calculate the price elasticity of demand (PED). Is
this price elastic or inelastic?
Suppose, Price (OLD) = 10, Price (NEW) = 12, Quantity of Demand (OLD) = 200, Quantity

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of Demand (NEW) = 150

Then, Percentage Change in Quantity Demanded = -0.25 [150 - 200] / 200 = -0.25

Percentage Change in Price = 0.2 [12 - 10] / 10 = 0.2

Then,
PED = (% Change in Quantity Demanded) / (% Change in Price). We can now obtain the two

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percentages values in this equation using the figures we calculated earlier.

PED = (-0.25)/ (0.2) = -1.25

When we analyze price elasticity we are concerned with absolute value, so we ignore the
negative value. PED is, by definition, always positive. We conclude that the price elasticity of
demand when the price increases from $10 to $12 is 1.25.
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If PED > 1 then Demand is Price Elastic (demand is sensitive to price changes)

In the case of the good above, we calculate the price elasticity of demand to be 1.25; therefore,
this particular good is price elastic and thus demand is sensitive to price changes.

8. Tsukakoshi decided to raise prices. If he had decided to lower prices, as

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other companies were doing in a deflationary environment, what would the

consequences for the company have been?
Consumers view prices as an indicator of quality.9 The connection has been explored more
deeply, with the finding of a positive correlation between the reference price and consumers’
opinions of quality.10 Even though a high-priced product requires financial sacrifice on the
part of the consumer, so too does the higher-priced product garner more esteem. Therefore,
perceived value is a trade-off between perceived sacrifice and perceived prestige. Given this,
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the implication is that companies can use pricing as a tool to influence consumer behavior. If
Ina Food had lowered its prices, it might have lost the high esteem and prestige given to its
products by consumers. It might have had an adverse effect on demand, and more price cuts
might have been needed.

7
Grinyer, P. H. and Yasai-Ardekani, M. (1981) “Strategy, Structure, Size and Bureaucracy,” Academy of
Management Journal, 24(3), pp. 471-486; Stasch, S. F., Lonsdale, R. T., Ward, J. L. and Harris, D. A. (1999)
“Characteristics of Share-Gaining Marketing Strategies for Smaller-Share Firms: Literature Review and
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Synthesis,” Journal of Marketing Theory and Practice, 7(2), pp. 54-67.

8
Teas, K. R. and Agarwal, S. (2000) “The Effects of Extrinsic Product Cues on Consumers’ Perceptions of
Quality, Sacrifice, and Value,” Journal of the Academy of Marketing Science, 28(2), pp. 278-290; Yoo, B.,
Donthu, N. and Lee, S. (2000) “An Examination of Selected Marketing Mix Elements and Brand Equity,”
Journal of the Academy of Marketing Science, 28(2), pp. 195-211.
9
Ibid.
10
Chapman, J. and Wahlers, R. (1999) “A Revision and Empirical Test of the Extended Price-Perceived Quality
Model,” Journal of Marketing Theory and Practice, 7(3), pp. 53-64.

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 13/531C Ina Food Industry (2): Marketing Strategies in a Deflationary Environment

References

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Chapman, J. and Wahlers, R. (1999) “A Revision and Empirical Test of the Extended

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Price-Perceived Quality Model,” Journal of Marketing Theory and Practice, 7(3), pp.
53-64.

Chaudhuri, A. (1999) “Does Brand Loyalty Mediate Brand Equity Outcomes?”

Journal of Marketing Theory and Practice, 7(2), pp. 136-146.

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Chaudhuri, A. and Holbrook, M. B. (2001) “The Chain of Effects from Brand Trust
and Brand Affect to Brand Performance: The Role of Brand Loyalty,” Journal of
Marketing, 65(2), pp. 81-93.

Chou, T. and Chen, F. (2004) “Retail Pricing Strategies in Recession Economies: The
Case of Taiwan,” Journal of International Marketing, 12(1), pp. 82-102.

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Duncan, J. W. and Handler, D. P. (1994) “The Misunderstood Role of Small
Business,” Business Economics, 29(3), pp. 7-12.

Grinyer, P. H. and Yasai-Ardekani, M. (1981) “Strategy, Structure, Size and

Bureaucracy,” Academy of Management Journal, 24(3), pp. 471-486.
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Guadagni, P. M. and Little, J. D. C. (1983) “A Logit Model of Brand Choice
Calibrated on Scanner Data,” Marketing Science, 2(3), pp. 203-238.

Kodansha (1983) Kodansha Encyclopaedia of Japan, Tokyo, vol. 6, p. 7.

Mazumdar, T. and Papatla, P. (2000) “An Investigation of Reference Price
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Segments,” Journal of Marketing Research, 37(2), pp. 246-258.

Nikkei (2013, April 1 http://e.nikkei.com/e/fr/tnks/Nni20130405D05JF455.htm (accessed

April 5, 2013).

Nikkei (2013, April 5) http://e.nikkei.com/e/ac/TNKS/Nni20130405D0404A12.htm?NS-

query=BOJ (accessed April 5, 2013).
No

Pindyck, R. S. and Rubinfeld, D. L. (2012) Microeconomics, 7th Edition, New Jersey:

Prentice Hall.

Samuelson, P. A. (2010) Economics, 19th Edition, New York: McGraw-Hill.

Scott, C. A. and Yalch, R. F. (1980) “Consumer Response to Initial Product Trial: A

Bayesian Analysis,” Journal of Consumer Research, 7(1), pp. 32-41.
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Shilling, A. G. (2013, March 26) “The Five Ways Deflation Has Already Taken Hold,”
Bloomberg, http://www.bloomberg.com/news/2013-03-26/the-five-ways-deflation-
has- already-taken (accessed July 21,2013).

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or 617.783.7860.
 13/531C Ina Food Industry (2): Marketing Strategies in a Deflationary Environment

Stasch, S. F., Lonsdale, R. T., Ward, J. L. and Harris, D. A. (1999) “Characteristics of

Share-Gaining Marketing Strategies for Smaller-Share Firms: Literature Review and

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Synthesis,” Journal of Marketing Theory and Practice, 7(2), pp. 54-67.

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Tsukakoshi, H. (2005) “Iikaisha wo Tsukurimashou” (Let us build a good company),
Bunya Publishing Company, 7th Edition, pp. 11-213.

Teas, K. R. and Agarwal, S. (2000) “The Effects of Extrinsic Product Cues on

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Consumers’ Perceptions of Quality, Sacrifice, and Value,” Journal of the Academy of
Marketing Science, 28(2), pp. 278-290.

Yoo, B., Donthu, N. and Lee, S. (2000) “An Examination of Selected Marketing Mix
Elements and Brand Equity,” Journal of the Academy of Marketing Science, 28(2), pp.
195-211.

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No
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or 617.783.7860.