Disclaimer: The content on this website is for informational and educational purposes only and is not created to meet your personal financial situation. Nothing should be considered as investment advice or as a guarantee of profit. You are advised to consult with your financial advisors to discuss your investment options and whether it would be a suitable investment for your personal needs. The information used in this publication is from sources that are believed to be reliable but the accuracy cannot be guaranteed. It may include some errors, please make sure to do your due diligence. The opinions expressed are those of the author and the author only. These opinions are subject to change without prior notice. Welcome back to Part 2 of my write-up on Kotobuki Spirits. We’ll pick it up where we left off. Today, I’ll be discussing the mechanics behind their pricing strategy and why product quality is so crucial for them. In fact, this made me rethink how price increases should be thought about. It also shows this is ultimately driven by their culture. Furthermore, I’ll talk about some of their hidden advantages coming from ‘recurring’ revenues through loyal fans - a unique feature in an industry that’s highly competitive. They do a lot of things that are so inefficient, the things they would never teach you at business school, but counterintuitively, that’s what makes them special - and it works. I found out recently that at Gransta Tokyo Station, 5 of the top 10 brands by sales is part of Kotobuki Spirits. Near the end, I’ll also be discussing some of my thoughts on valuation, their surprising success in M&A as astute buyers of distressed assets (Which is rare in Japan!). I also discuss the downsides/negatives I’ve felt about the business! On Pricing
The most crucial component in the business of ‘gifts’, as Buffett so kindly highlighted in the beginning of part 1, is the ability to raise prices consistently. I have to remind you that in Japan, price increases have been frowned upon until recently. Not too long ago we had several companies publicly apologizing for raising prices. So this is where See’s might have an advantage when it comes to pricing - that it’s culturally more accepted in the US. “you could increase prices by 10% and no one cared”. In a once deflationary economy like Japan, where competition is already high in general, price increases still need to be done strategically. As one food producer once told me “in Japan, we’ve had plan our price increases 3-4 months in advance, in the US we could just do it in a week”.
It’s all the more reason why Kotobuki is so impressive; they’ve managed to increase their prices again and again in a country like Japan. Their cookies from their Tokyo Milk Cheese cost ¥80 per unit pre-COVID. Today it costs ~¥140. Here, I got to learn an interesting lesson in raising prices. It’s not in the what, but the why. I loved how the company frames this. The company rejects the notion that prices should be increased to offset costs. “input costs are higher because of inflation” is a reason all too common among Japanese companies today. Rather, the nuance for Kotobuki is that they believe they can only raise prices when they improve the quality of what they make, and provide more value. Once again, their positive sum mentality shines. They don’t raise prices unless the customer also benefits in some way. They need to deserve it. Ultimately, Kotobuki’s brand equity isn’t built through simple storytelling but also it’s ever improving quality. The CEO reiterates this in a Q&A from Investors, mentioning that they won’t raise prices just because costs have gone up. It’s a highly competitive market in the end, and raising prices without much to justify may lead to customers walking away. The reasons for the prices are intrinsic rather than extrinsic. I suspect being an owner-operator here also provides an advantage. A hurdle for other players who tend to be part of much larger companies may be that they might not have the imperative to focus on the long term for a brand. These tend to be typically CEOs of a subsidiary under much larger businesses that tend to switch roles every few years. Such CEOs are already stuck in a web of bureaucracy and aren’t structured to focus on long-term goals. They’re usually incentivized on short-term KPIs like the annual P&L. Furthermore, they aren’t going to take risks and would rather run the business ‘as is’. It’s probably a factor as to why they end up ‘discounting’ their products through supermarkets and effectively killing their brand equity. Kotobuki is different. Their aim is to improve customer satisfaction so much more that they can increase price further, unapologetically. Customers win, the company wins, the employees win. Win, win win. Ultimately: Focus on Quality and price will follow Value in this sense is that they want to make something that tastes good. But rather than something that’s orthodox, they want to make unique tasting products that have a distinct taste and can’t be found elsewhere. There is scarcity to that. This part is not hard to verify; if you buy their cookies from Tokyo Milk Cheese factory, it has a cheesy taste that is much more distinct than the typical cookie of a competitor. The company would argue it’s not just the quality of the product but the quality of everything they do. Of course, customer service is another focal point for them, but so is logistics, sales, operations and etc. Everyone behind the scenes are motivated for an endless pursuit of quality. Even the way a product is photographed for an ad campaign. One picture doubled the sales of a product. So what does quality actually mean in this context? On QualityTo Kotobuki, they emphasize that quality permeates literally everything they do and that the quality of the product that ends up in customers’ mouths is a culmination of that. So much so that their priorities are straight. Product quality first, efficiency second. This doesn’t mean they don’t care about efficiency, just that when push comes to shove, it’s the product quality that drives their bottom line. It’s actually somewhat of a ‘quality flywheel’, as they mention in the book. Higher quality → more products sold → more production → higher efficiency → [More profit to reinvest!*] *Addition my own!! They try to sustain the quality of their product meticulously, like the intensity of a Japanese craftsman. Even when it may obviously be inefficient. For example, the oven may be able to sustain the same temperature for baking, but depending on the weather that day, or when the flour is added or when it’s mixed, the outcome can be different and needs to be adjusted. It makes it impossible to fully automate. They account for this day in and day out, relying on people. Quite a few processes are done by hand. Whilst the CEO argues ‘no differentiation’ versus competitors. I don’t think this is true. Competitors can’t copy Kotobuki precisely because they have a degree of ‘manual input’. Moreover, Kotobuki also uses original machinery in the production line, providing another proprietary element and making it even tougher to replicate. Customer Service: Another important component of what defines quality for the company was customer service. Beyond the great taste of the product, it’s this customer obsession that ultimately leads to customers becoming loyal fans. It’s not even really about whether making sure the store staff are nice to the customer at all - those are table stakes. It’s this customer experience, which in Japanese is called omotenashi. The culture of the business is such that, each day, employees are striving to improve even the most minute, and I mean minute things. This includes the time when everyone had to wear masks during the pandemic. How do you express appreciation and enthusiasm without being able to show your smile? These were the questions Kotobuki had to answer. Is it your mannerism? your posture?. Constant evolution includes even things like how you say ‘thank you’ to a customer each day, perhaps by changing your tone. Maybe even how you hand back the customer’s change. One story I loved reading about came during Covid. When the whole world (and travel) stopped and Kotobuki’s sales plummeted. Turning challenge into opportunity as they usually do, they quickly and successfully pivoted to expanding their online sales channel. This went so well that their main issue became the logistics side, specifically with constraints on delivery. A manager found out 560 orders were being delayed! This has never happened before. The company and their call center partner attempted to make a call and at the very least send a personal email to every single customer affected. Contacting the customer directly to figure out the best solution for each. Not only did the customers appreciate it but showed their love and support to the company during a tough period. There were zero claims. The result was that what could have been lost customers became fans and the employees, who worked hard through it all had something to be proud of. As my personal reflection, I think Kotobuki Spirits is the antithesis of the AI trade in some ways and a living example of why AI can bring consistent customer service but not exceptional customer service. I personally believe you can’t really do this with chatbots or automated emails or AI call centers alone, so there’s an inherent trade-off with efficiency. I’m sure you’ve experienced it yourself. In services where customer service isn’t a priority, AI definitely improves service but only to an acceptable level. That’s where it plateaus. It’s never ‘exceptional‘. For that, as Kotobuki demonstrated, you need a deeply personal touch. These are real human connections. This is an ‘inefficient’ process once again, but counterintuitively, part of the reason why they can keep raising prices to more than offset them... Subscribe to Made In Japan to unlock the rest.Become a paying subscriber of Made In Japan to get access to this post and other subscriber-only content. 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Sunday, December 21, 2025
Kotobuki Spirits: The See's Candies of Japan
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