Over the past 30 years, the development of Japan’s F&B industry has been closely linked to changes in per capita annual income.

Since the 1980s, the scale of the F&B industry has shown high sensitivity to fluctuations in overall income levels. However, starting from the late 1990s, especially after the COVID-19 pandemic, the industry has shown a clear trend of overall decline.

From chain expansion to industry consolidation, Japan's F&B sector has undergone a series of transformations. The CR100 (concentration ratio of the top 100 companies) rose from 10.5% in 1981 to 23.2% in 2011. Within that, the CR10 (top 10 companies) grew from 4% in 2000 to 13% in 2020, indicating a trend toward concentration around leading enterprises.

The challenges companies face vary with changes in the external environment. During growth phases, businesses focus on expansion and opening new locations (similar to the current situation in China). During maturity phases, rising costs and declining consumer purchasing power become main issues.

Moreover, Japan’s consumption tax policy has also impacted the F&B industry, causing a general price increase of around 10% for goods and services. Due to high sensitivity to price changes, companies have been forced to adopt cost-reduction and efficiency-improvement strategies in response to tax hikes.

Since 2000, improving operational efficiency and reducing costs has become a critical strategy for F&B businesses. At the same time, the industry has been undergoing intense changes.

On one hand, there have been frequent mergers and acquisitions—"big fish eating small fish" and alliances between strong players. New business models have also emerged, such as Japan’s version of “Drip Capital,” called Venture Link, which has promoted more specialized development within the chain restaurant industry, successfully creating over 20 chain brands, 10 of which have gone public.

On the other hand, consumer habits have changed significantly. The proportion of people dining out over the course of a year has steadily declined and may have fallen below 30% in recent years. Fresh food sold through retail channels has partially replaced the demand for dining out.

In addition, Japan’s F&B sector faces a major issue—despite its large scale, profit margins are extremely low. During periods of economic deflation, businesses dare not raise prices and often have to lower them, even as costs for utilities, labor, rent, and raw ingredients continue to rise. The depreciation of the yen has posed a particularly tough challenge for Japanese companies. Under the dual pressure of being unable to raise prices and facing rising costs, profit margins in the industry remain very slim.

For example, while Saizeriya may appear successful, its profits have mainly come from the Chinese market in recent years, nearly all its profits were generated from China in 2023.

Furthermore, some Japanese F&B companies, despite their razor-thin margins, are still able to stay afloat largely due to extremely low capital costs. When capital costs are low enough, even unprofitable businesses can continue operating through low-interest loans, as capital becomes virtually free and banks also face pressure on lending.

In this market environment, F&B companies are being forced to reconsider several key questions:

• How can a business survive when consumer spending is shrinking and costs are rising?
• What kinds of “unexpected” competition does the Japanese F&B industry face?
• How can companies achieve differentiated innovation?
• What forces could reshape the industry? And which pitfalls should be avoided?

Beyond the intense price competition within the foodservice industry itself, the growing trend of fresh food retail is further encroaching on traditional restaurants. Convenience stores that sell ready-to-eat fresh food have become one of the biggest competitors to the dining-out sector.

In Japan, the taste and quality of food offerings at convenience stores vary by region, and their product update cycles are sometimes even faster than those of restaurant chains, marking a phase of intense competition. For example, at 7-Eleven, approximately 70% of SKUs are region-specific, while 30% are offered nationwide—demonstrating a high level of regional customization.

In terms of overall scale, the prepared meal market in Japan exceeds 700 billion RMB, with the majority of it being channel-driven: convenience stores, supermarkets, and other retail outlets contribute over 300 billion in prepared foods alone.

As fresh food offerings in retail channels like convenience stores and supermarkets become increasingly abundant, “middle meals” (ready-to-eat food not consumed on-site) are rapidly gaining popularity in Japan.

Japan’s offline dining consumption scenarios are typically divided into three main categories:

• Soto-shoku (eating out)
• Nai-shoku (cooking at home)
• Naka-shoku (purchasing food to eat at home or at the office—between eating out and cooking)

Among single-person households, naka-shoku accounts for about 20% of total food expenditure, and about 15% for households with two or more members, indicating its substantial share in Japan’s overall food consumption.

The rise of naka-shoku is driven by structural factors on both the demand and supply sides.

On the demand side, Japan’s average household size has been shrinking—from 3.8 people in earlier years to just 2.39 today. This trend toward smaller households has boosted the growth of the prepared meal market, essentially outsourcing cooking tasks to professional services. Notably, 35% of Japanese households are single-person households, which form the core consumer base for prepared meals.

This is especially evident among white-collar workers, whose lifestyles have changed significantly during periods of economic stagnation. Data shows that the average lunch spending by white-collar workers has dropped from 700 yen to 500 yen, and lunch duration has also shortened significantly—from 33 minutes to 21 minutes. As a result, many consumers have stopped dining in restaurants and are instead seeking faster, more cost-effective lunch options, forcing the industry to adapt.

On the supply side, prepared meals have become a high-margin segment within Japan’s retail sector. Many companies are actively developing their prepared meal businesses. For supermarkets and convenience stores, prepared meals represent a key source of revenue and profit. In Japan, prepared meals may account for 10% of a convenience store’s revenue but contribute up to 15% of its profit. Furthermore, “daily delivered” fresh foods account for a large portion of sales, reaching as much as 33.5%.

In their relentless pursuit of cost efficiency, Japan's F&B giants have left behind cautionary tales. Here are two typical cases:

The first case is the story of how Izusen overtook Yoshinoya. The founder of Izusen was a former Yoshinoya employee. Dissatisfied with the company, he decided to start his own business, establishing Izusen Co. and the Sukiya brand.

The turning point that allowed Izusen to surpass Yoshinoya occurred between 2003 and 2006, when the outbreak of mad cow disease in the United States led Japan to ban the import of American beef. This had a major impact on Japanese beef bowl chains that relied on U.S. beef. Against this backdrop, the two companies made very different decisions.

Yoshinoya primarily used U.S. beef, specifically the short plate cut. However, Australian beef was sold by the whole cow, which meant many cattle were needed to gather enough short plate, limiting supply. Additionally, Australian beef was more expensive at the time. Yoshinoya already operated on a low gross margin (59.8%) and couldn’t absorb the rising costs. Furthermore, Australian beef was grass-fed, resulting in a different flavor from the grain-fed American beef, which Yoshinoya feared would harm its brand image.

Taking all this into account, Yoshinoya decided to remove beef bowls from its menu, leading to a 10% drop in revenue and severe losses. To cope with the crisis, Yoshinoya shifted focus to other products, such as acquiring the Hanamaru udon brand and launching new items like pork bowls and curry rice.

Sukiya, under Izusen, took a different path. They used Australian beef as a substitute and adopted a multi-brand sourcing strategy to make use of the entire cow, catering to a broader range of customers and dining scenarios. Sukiya also had a higher gross margin (66.9%), allowing it to raise prices and expand the product lineup (e.g., offering more toppings) to attract consumers despite increased costs. In response to the flavor difference of Australian beef, Sukiya adjusted its recipe, using toppings to mask the flavor change.

As a result, Sukiya managed to reintroduce its beef bowls within six months. During that time, as no other beef bowls were available in the market, Sukiya raised its price from 280 yen to 380 yen. While Yoshinoya was still scrambling for solutions, Sukiya had already taken off. This was a critical moment in Izusen's rise over Yoshinoya.

After this event, Izusen further strengthened its upstream supply chain management. For example, they established a food research lab to study how to improve the taste and preparation of ingredients. They also decentralized procurement authority and enhanced safety mechanisms, facilitating the company’s transformation and upgrade.

The second story is about McDonald's.

McDonald’s became the biggest loss-maker in the history of Japan’s food service industry. Its revenue in Japan plummeted from 400 billion yen in 2008 to 180 billion yen in 2015, with losses reaching 21.8 billion yen (about 1 billion RMB).

Initially, Fujita brought McDonald’s to Japan with a focus on direct ownership and customer service. But in 2005, McDonald’s Japan underwent a leadership change. Eikoh Harada, then CEO of Apple Japan, joined McDonald’s and brought an American-style management approach. He implemented a 24-hour operation strategy, which increased revenue but didn’t improve profits.

Under pressure to boost profits, the Japanese CEO introduced several reforms:

• First, he shifted the business model from 70% company-owned and 30% franchised to a franchise-dominant model, transferring costs to franchisees.
• Second, he cut staff to improve efficiency, transferring McDonald’s Japan head office employees to franchise stores to reduce head office expenses.
• Third, he focused on aggressive price-cutting promotions, like discount coupons—dropping the Big Mac price from 20 to 12 yen, and cheeseburgers from 12 to 6 yen—while also launching high-margin new products to increase table turnover.

These reforms temporarily improved McDonald’s performance in Japan. However, in 2014, a food safety scandal caused a sharp loss of customer trust, staff resignations, and damage to the brand’s image.

In fact, the growth masked underlying contradictions. To increase franchise fees, McDonald’s Japan adopted a hardline approach to communication, pressuring company-owned stores to switch to franchising. This led to management and communication issues. Many veteran employees were unhappy with the new strategies, causing staff turnover in stores and across the supply chain.

The 24-hour operation and ultra-low price strategy attracted many customers outside McDonald’s target demographic, resulting in messy, poorly maintained stores. This drove away the core family customers willing to pay and generate profit. The food safety incident further intensified these business contradictions.

As a result, McDonald’s profit margins dropped significantly. To regain consumer trust, a new CEO was appointed. She spent over five years implementing reforms, including improving communication with customers, building a transparent and traceable supply chain, setting up a store feedback system, and revamping management practices to restore the brand’s performance.

These two cases demonstrate that hasty price cuts and supply chain risks must not be ignored. Even in an environment where everyone is chasing low costs, cost-effectiveness is not the only thing that matters.