Japan Food and Drink Report Q4 2009

As Japan appears to be slowly emerging from the 'Great Recession', there is little doubt that the country is substantially weaker than before. While the economy does seem to be improving, it is from a very deep trough, and as discussed in BMI's recently published Japan Food & Drink Report for Q409, this has had a major impact on consumer confidence and the country's food and drink industry. Japan benefits from a large and highly dynamic alcoholic drinks industry, which accounts for around 19% of the combined food and beverage industries. However, the outlook for the alcoholic drinks industry is poor. It is suffering from the effects of market saturation and from the country's recent economic downturn, which negatively impacted on alcoholic drinks sales, stymieing consumer purchasing patterns and preventing the emergence of premiumisation, which has driven alcohol sales growth in other highly mature markets.

The tough times for the industry are clear from the recent financial results of a number of the country's main brewers, released in August. Local brewing giant Kirin announced that during H109 (ended June 30 2009) its net profit plummeted by 82% year-on-year (y-o-y) to JPY14.96bn (US$157.5mn) while its sales registered a 1.2% y-o-y growth to JPY1.06trn (US$11.16bn). The company has reported that its operating profit declined by 16% y-o-y to JPY40.18bn (US$423.0mn) as a result of Australian dollar weakness and poor performance of its soft-drink business. Brewing and distilling company Suntory announced that during H109 its net income declined by 28.4% y-o-y to JPY8.16bn (US$85.5mn) while its sales registered 1% y-o-y growth to JPY731bn (US$7.66bn). Suntory attributed the drop in net income to a rise in raw material costs and appreciation of the yen against other operating currencies. Meanwhile, beer and soft drink company Sapporo Holdings announced that during H109 it registered a net loss of JPY738mn (US$7.8mn) as compared to a net profit of JPY9.59bn (US$100.9mn) during H108. During the same period, sales declined by 6% y-o-y to JPY182.41bn (US$1.92bn), with the ongoing economic slowdown blamed for the poor results.

The sector's advanced stage of maturity, exacerbated by stagnant wage growth and an ageing population, has seen the market become sluggish and all leading brewers are now seeking diversification, either geographic, in product terms, or both. These difficult times will also likely lead to industry consolidation.

In fact, in July it was revealed that Kirin and Suntory, both industry giants, are considering a merger.

Already working together in the fields of procurement and distribution, such a merger would lift both companies' domestic pricing and earnings power, as well as improving their ability to accelerate international expansion. Combined, the two parties would hope to have more weight to compete in high profile international M&A activity and more resources to support organic expansion. They would also have an improved footprint in the ultra-competitive local soft drinks industry, a segment both have struggled to penetrate in the way they have the beer industry. Clearly, the impact of the recession on the drinks industry will be felt for some time to come.