Case 12

The Japanese Beer Industry

INTRODUCTION

In 1980, after two decades of phenomenal growth during Japan’s “economic miracle” years, the Japanese beer industry appeared to have changed from a growth to a mature industry. Beer consumption had leveled off; after increasing fivefold from 1955 to 1965, and then doubling between 1965 and 1975, it grew by only 15 percent from 1975 to 1980. And with Japan’s population growing at a rate of only 0.4 percent a year, demand was not expected to increase significantly in the foreseeable future.

Virtually all the beer consumed by Japanese drinkers was produced by Japan’s four brewers: Kirin, Asahi, Sapporo, and Suntory. These companies formed a profitable oligopoly protected by high entry barriers in distribution, advertising costs, and government regulation. In 1980 Kirin dominated the industry with a 60 plus market share. The company also acred as price leader, setting prices at a level high enough to allow the weakest two competitors. Asahi and Suntory, to survive. This arrangement was tacitly supported by the Japanese government because of the huge tax revenues that profitable beer companies brought in.

The Japanese brewers competed with each other mainly through development and control of distribution channels and advertising. While there had been a certain amount of product innovation, Asahi, Sapporo, and Suntory had learned from experience that when one of them came out with a new product that threatened to take market share away from Kirin, the industry lender would imitate the innovation and use its advantage in reputation, distribution, and financial clout to overwhelm the originator. Thus was a certain balance maintained the three smaller brewers avoided directly attacking Kirin for fear of retaliation, while Kirin, for its part fearful that further share gains would put the company in violation of Japan’s anti-monopoly law, restrained itself from doing anything that would further weaken its rivals.

Ten years later, however, the industry presented quite a different picture. In the mid-1980s, beer consumption picked up again, jumping 37 percent from 1985 to 1990. Demand was expected to continue to grow at a rate of 5 percent a year during the first half of the 1990s. Sales growth had not translated into higher profits, though, as an expensive new product war had broken out in the mid interest and helped stimulate demand. It also had dramatically reversed Asahi’s fortunes and

produced the biggest market share shake-up an industry history. By 1991, however, the new product sweepstakes appeared to have become a negative-sum game, and the high costs of developing and advertising new beers had many in the industry longing for a return to the more stable and profitable competitive arrangements of the pre-1980s.

About the time Samuel Taylor Coleridge (1772-1834) was penning the line “Water, water everywhere, nor any drop to drink,” British and Dutch trading ships were oft-loading kegs of beer in Japan. In 1870 Japan’s first brewery, Spring Valley Brewery, was established by an American in Yokohama, and by the early twentieth century the popularity of beer had grown to the point where as many as 100 independent breweries were operating.

World War I proved to be a boon for Japanese brewers. Fueled by a consumer market in Southeast Asia that European producers were unable to supply because of the war, local breweries began exporting an expanding. The building of new plants was facilitated by the availability at bargain prices of brewing and battling equipment from America, where prohibition had shut down scores of companies. Brands such as Sakura, Kabuto, Fuji, Union, and Cascade Beer flourished, along with today’s familiar Kirin, Sapporo, and Asahi.

All was not a bed of hops, however. With the stock market crash and worldwide depression of the late 1920s and 1930s, demand plummeted, resulting in a period of brewery failures and consolidations. As Japan went to war in the late 1930s and 1940s, barley and hops became harder to obtain, there were shortages of needed electricity and coal, and beer taxes were raised continuously to provide war funds. By the end of the war only three brewers remained in Japan, and one of these went out of business in 1948. The two that remained were Kirin Beer, a descendant of Spring Valley, and Dai Nippon Breweries, which had evolved over a 40-year period through the merging of numerous independent brewers, among them the original Sapporo and Asahi.

In 1949 Dai Nippon Breweries, which controlled nearly three-quarters of the beer market, was declared to be in violation of Japan’s anti-monopoly law, which had been imposed by the United States in its postwar occupation of Japan for the purpose of dissolving Japan’s zaibatsu (financial cliques). Dai Nippon was split into two parts along geographical lines: its breweries and distribution network in western Japan became present-day Asahi Beer, while its breweries and distribution network in eastern Japan (including Tokyo) became Sapporo.

At the time of the breakup, Sapporo held 38.6 percent of the market, Asahi 36.1 percent, and Kirin 25.3 percent. The next 30 years were a Kirin success story, as Kirin steadily increased its share of the market at the expense of its rivals and came to dominate the industry (see Exhibit 1.), Kirin’s success is attributed to several factors.

1. The breakup of Dai Nippon into Sapporo and Asahi left Kirin with the only nationally recognized brand name and nationwide sales network, giving Kirin a scale advantage in advertising and, until the others could expand their distribution networks, a larger target market.

2. Kirin anticipated growing demand and, in order to meet it, built new production capacity aggressively, at the rate of one brewery every two years.

3. Kirin concentrated on the home consumption market, which was growing rapidly as refrigerator use became widespread during the 1950s and 1960s. Asahi and Sapporo, by contrast, focused on the shrinking commercial market, in which they traditionally had been strong.

4. The strong, bitter taste of Kirin’s larger beer was right for the times. The diet in postwar Japan was poor and bland, and people craved strong tastes.

Exhibit 1 Comparative Market Share by Year 1949-1990

Year Kirin Asahi Sapporo Suntory Takara1949 25.30% 36.10% 38.60%1950 29.5 33.5 371951 29.5 34.5 361952 33 32.5 34.51953 33.2 33.3 33.41954 37.1 31.5 31.41955 36.9 31.7 31.41956 41.7 31.1 27.21957 42.1 30.7 26.2 1.00%1958 39.9 30.9 27.5 1.71959 42.4 29.3 26.5 1.81960 44.7 27.2 26 2.11961 41.6 28 27.8 2.61962 45 26.4 26.4 2.21963 46.5 24.3 26.2 1.00% 21964 46.2 25.5 25.2 1.2 1.91965 47.7 23.2 25.3 1.9 1.91966 50.9 22.1 23.8 1.7 1.51967 49.4 22 25 3.2 0.41968 51.3 20.1 24.4 4.21969 53.3 18.9 23.3 4.51970 55.4 17.2 23 4.41971 58.9 14.9 22.1 4.11972 60.1 14.1 21.3 4.51973 61.3 13.6 20.3 4.81974 62.5 13.1 19.6 4.81975 60.8 13.5 20.2 5.51976 63.8 11.8 18.4 61977 61.9 12 19.6 6.51978 62.1 11.6 19.6 6.71979 63 11 19.2 6.81980 62.3 11 19.6 7.11981 62.8 10.3 20 6.91982 62.3 9.9 19.9 7.91983 61.3 10.2 19.9 8.61984 61.6 9.8 19.6 91985 61.4 9.5 19.8 9.31986 59.6 10.3 20.8 9.31987 56.9 12.3 20.7 9.51988 50.7 20.7 19.8 8.81989 48.4 24.8 15.4 8.41990 49.2 24 18 8.1

Through skillful advertising, Kirin succeeded in teaching the public that strong, bitter beer equals delicious beer.

Only two other firms have entered Japan’s postwar beer industry. One is Tasara, a distillery, which entered the beer market in 1957 and withdrew 11 years later after failing to achieve a viable position. The other is whiskey marker Suntory, which entered in 1963 and has survived, despite making a profit in beer in one year only, 1984: (There is also Orion, an Okinawa brewer whose beer was sold only in Okinawa until 1990, when it began appearing on “mainland” shelves in small quantities.)

DEMAND

For the first 10 years after the war, beer was a luxury product in Japan; in 1950 a single 633 milliliter bottle cost 132 yen, or about 2 percent of the average monthly salary for a university graduate. With economic recovery and rising incomes, however, beer gradually came to be a affordable by the average Japanese. By the 1960s beer was drunk regularly by a wide variety of people of all income levels in Japan.

Overall demand for beer in Japan grew steadily during the first 30 years of the postwar period. From the 1970s through the mid 1980s, demand leveled off and the industry was viewed by many as mature, with limited potential for further growth. However, a boom in new products combined with other environmental changes (see below) revived growth, and the outlook for the 1990s was for continued market growth. In 1990 Nikko Research Center expected beer consumption to increase by 5 percent annually over the next few years. Exhibit 2 shows Japanese beer shipments for the postwar period. Exhibit 3 shows per capita beer consumption in Japan and other countries.

Exhibit 2 Japanese Beer Shipments 1946-1990 (in Kiloliters)

Year Domestic Exports Total1947 91,270 91,2701948 91,372 91,3721949 140,495 731 141,2261950 165,434 4,298 169,7321951 261,007 9,699 270,7061952 275,479 16,705 292,1841953 372,054 15,757 387,8111954 390,280 10,278 400,5581955 403,413 7,371 410,7841956 452,163 6,120 458,2831957 551,536 6,815 558,3511958 615,552 6,970 622,5221959 744,947 6,843 751,7901960 919,313 6,104 925,4171961 1,232,663 7,064 1,239,7271962 1,478,102 7,069 1,485,1711963 1,685,916 6,596 1,692,5121964 1,991,648 5,630 1,997,2781965 1,989,147 6,013 1,995,1601966 2,116,910 6,368 2,123,2781967 2,410,602 11,547 2,422,1491968 2,525,975 13,809 2,539,7841969 2,730,637 12,569 2,743,2061970 2,972,253 15,481 2,987,7341971 3,052,746 15,380 3,068,1261972 3,433,426 13,674 3,447,1001973 3,811,156 13,930 3,825,0861974 3,612,043 14,056 3,625,0991975 3,955,519 13,978 3,969,4971976 3,665,370 14,182 3,679,5521977 4,131,678 15,728 4,147,4061978 4,431,141 18,592 4,449,7331979 4,449,156 18,048 4,517,5641980 4,539,799 18,084 4,557,8831981 4,638,889 18,796 4,657,6851982 4,763,444 18,507 4,781,9511983 4,492,317 23,670 4,965,9871984 4,680,770 26,251 4,707,0211985 4,785,328 27,435 4,812,7631986 4,970,028 27,972 4,998,0001987 5,340,047 29,330 5,369,3771988 5,749,828 30,267 5,780,0951989 6,054,120 n.a n.a1990 6,550,914 n.a n.a

Exhibit 3 Per Capita Beer Consumption for Selected Countries, 1987 (in Liters per year)

Country Per Capita ConsumptionWest Germany 144.3 litersCzechoslovakia 130Denmark 125.2New Zealand 120.8Austria 116.2Australia 111.3United States 90.1Netherlands 84.3Venezuela 72.4Spain 64.5Sweden 51.5Japan 43.8

Demand varied by season, with more beer drunk in summer than in winter (see Exhibit 4). In recent years the seasonality of demand has weakened, however. Beer increasingly is seen as a year-round beverage, thanks to promotional efforts by the brewers and the development of some beers “especially created for drinking in cold weather.”

TAXATION AND GOVERNMENT REGULATION

Beer was the richest source of liquor tax in Japan, in 1989 providing 2.5 percent of total Japanese government tax revenues. Tax by volume was 208.4 yen per liter, which amounted to 44 percent of the retail price. Including sales tax, a total

Exhibit 4Percent of Yearly Sales by Month, 1979-1986

Month Percent of SalesJanuary 3.7February 5.0March 7.5April 9.8May 8.6June 11.4July 13.4August 10.6September 8.1October 6.8November 5.8December 9.3

of 46.9 percent of the retail price of a bottle was taxes. This compared with 36.6 percent for Great Britain, 18.3 percent for West Germany, 16.9 percent for France, and 12.7% for the United States.

Beer taxes traditionally were raised about once every four years, but they had not increased since 1984. With Japan entering an economic slowdown in 1991 and government tax receipts falling accordingly, a tax increase was seen as likely within he next two or three years.

Because of the importance of beer taxes as a source of government revenue, the Japanese beer industry was strictly regulated by the government through licensing requirements. Licenses were issued to producers, wholesalers, and retailers with the aim of avoiding “excess competition”, which, it was feared, might drive weaker operations out of business.

Permits to produce beer were especially difficult to obtain; they were issued only for a specific piece of land, an in order to get one, a producer had to make at least 2,000 kiloliters of beer annually. The purpose of this regulation was to keep the number of beer companies to a handful, as it was easier to collect tax from a few large brewers than from many small ones scattered throughout the country. Because of the minimum production requirement, there were virtually no independent microbreweries or brew pubs in Japan. In the United States, by contrast;, there were over 200 microbreweries, many putting out just 90 kiloliters a year. A consultant specializing in Japan’s beer market calculated that reducing the minimum production requirement to 200 kiloliters would boost Japanese beer sales by around 2 percent, but there were no signs in 1990 that the government was considering changing its regulation.

The government also had traditionally limited the number of retail liquor licenses issued, again on the theory that this offered the best way to fully collect liquor tax at minimal expense. In June 1980, however, the National Tax Administration Agency announced that 6,000 new regular licenses and 250 new licenses to large retailers (such as supermarkets and convenience store chains) would be issued to new entrants between 1990 and 1994 in an effort to promote greater competition in the alcoholic beverage market. The priority given to large-scale retailers was in part a response to foreign pressure, as the larger stores generally carry a higher proportion of imported products.

These changes were seen by many as the beginning of a major restructuring of the retailing of alcoholic beverages in Japan. In 1988 Japan had 122,000 mom-and-pop retail liquor outlets, most of which were tiny stores with an average turnover of 30 million yen and gross profits of 6 million yen annually. An analyst for Morgan Stanley International estimated that by 1988 the number of liquor stores would drop to around 60,000 while the number of large retailers would rise from 6,000 (in 1991) to about 30,000.

PRODUCTION AND DISTRUBITION

Beer was defined under Japanese law as a beverage brewed by fermentation of malt, hops, and water. Other grains such as rice or corn could also be added to produce a smoother taste. The production process involved using yeast to ferment sugar present in the primary materials. Most of the raw materials were imported from Europe, North America, and Australia.

While all the Japanese brewers used the same basic ingredients and German production process, within these parameters lay a number of technical complexities and variations that produced tangible taste differences from beer to beer. The most important determinant of taste was said to be the particular yeast used, with different strains producing slightly different flavor and bouquet. The brewers all maintained yeast banks containing hundreds of strains and were constantly developing and testing new ones. Other brewing variations included the choice, quality, and combination of ingredients, the use of hulled versus unhulled malt, and temperature and degree of fermentation. It generally took from one to four years to develop and put on the market a new beers.

The number and geographic distribution of brewing plants was shaped by scale and transportation considerations. There were considerable economies of scale in beer production, thanks to large outdoor tanks which were invented in the late 1960s. Beer is heavy and transportation costs considerable, so the companies had located their breweries fairly evenly around the country near major population centers. In 1991 Kirin had 14 breweries; Sapporo, 10; Asahi 7: and Suntory, 3.

Beer was sold in bottles, cans, and kegs of various sizes (see Exhibit 5). The most common bottle was the returnable 633 milliliter bottle. Twenty 633 milliliter bottles made up one case, the standard measuring unit for beer sales. The most common cans were the 350 and 500 milliliter sizes. The smaller kegs were take-home containers sold directly to consumers, while the larger kegs went to commercial operations such as bars and restaurants.

In 1988, 67 percent of the beer sold in Japan came in bottles, 26 percent in cans, and 7 percent in kegs. A trend toward canned beer, and away from bottles had been under way for some time. In 1983 canned beer had accounted for only 13 percent of total sales.

There were two basic beer markets in Japan: the home-use market and the commercial market. The home use market included home delivery sales (typically, a consumer would have a retail shop deliver a case of beer to his home periodically); the gift market (smartly packaged gift sets of beer were to his home periodically); the gift market (smartly packaged gift sets of beer were sold through department stores during Japan’s two major gift giving seasons in July and December); and sales through liquor shops, food stores, and vending machines. The commercial market included sales through restaurants, bars, and hotels. In 1990 the home-use market accounted for around 75 percent of sales, the commercial market for 25 percent. The home-use market had grown steadily in size relative to the commercial market over the postwar period (see Exhibit 6).

Exhibit 5 Main Types and Sizes of Beer Containers

Bottles Cans Kegs

1,957 ml 1,000 ml 25,000 ml633 ml 700 ml 15,000 ml500 ml 500 ml 10,000 ml334 ml 350 ml 3,000 ml

250 ml 2,000 ml200 ml 1,200 ml135 ml

Exhibit 6 : Relative Size of Home-use and Commercial Markets (Percent of Total Consumption)

Year Home MarketCommercial Market

1950 25% 75%

1962 53% 47%1978 70% 30%1987 71.30% 28.70%

Japan’s beer distribution system consisted of two kinds of distributors - the exclusive distributor, which handled only one or a limited number of brands, and the general distributor, which handled all four brands: Exclusive distributors were more common. The distribution system worked as an important barrier to entry. The inability to establish strong distribution channels is often cited as a the main reason for the failure in beer of Takara, a distillery that entered the beer market in 1957 but withdrew 10 years later without ever gaining more than a 2 percent share. Suntory’s 1963 entry into the beer market was facilitated by an agreement reached with Asahi which allowed Suntory to share Asahi’s distribution network. There were approximately 173,000 retail outlets for beer in Japan in 1988, most of which were liquor stores that sold to both consumers and commercial establishments. Retailers independently chose which brands to sell.

COST STRUCTURE

Production costs were roughly the same for all the brewers accounting for about 58 percent of the producers’ share of the retail cost of a bottle of beer. Fixed costs made up a significant portion of the brewers’ spending, which meant that the smaller the firm, the lower profit margins rendered to be. In particular, the costs for sales force, advertising, and promotion were mostly fixed, varying little with volume. This gave market share leader Kirin a clear scale advantage. For example, because Kirin could spread its advertising costs over a larger volume, its advertising cost per bottle was only about 5.5 yen, compared to more than double that for its competitors. Exhibit 7 shows the cost makeup of the retail price of a bottle of beer.

Figure 2Beer Distribution System

General Commercial Distributor operations

Producer Executive RetailerDistributor

Consumer

Exhibit 7Cost Analysis per Average633 Milliliter Bottle of Beer for Kirin, Sapporo, and Asahi, 1991

Kirin Sapporo AsahiRetail Price V320 V320 V320Liquor tax 131.9 131.9 131/9Retailer and wholesaler margin

63.5 63.5 63.5

Cost of SalesMaterials cost 49.3 45.9 47.6Labor 8.7 7.7 5.7Other manufacturing

14.8 18.2 17.1

72.8 71.8 70.5Other costsSales Promotion 7.6 9.9 9.3Transportation 7.3 7.6 8.3Salaries and wages

5.7 8.1 7.1

Advertising expenses

5.5 13.4 11.9

Other administrative expenses

14.7 15.6 15.7

40.9 54.5 52.410.9 (1.8) 1.7

PRICING

The retail price of beer was set directly by the government (the National Tax Board) until 1964, after which “free pricing” was introduced. In practice, however, there was little price competition. The four producers strictly maintained a standard producer price, a standard wholesale price, and a standard retail price for beer, with Kirin, due to its dominant market share, acting as price leader. In milliliter cans for the stated reason of passing on to consumers gains from the appreciation of the yen (which reduced the cost of imported barley and hops), and the other three companies immediately followed suit. Similarly, in March 1990 all four companies raised prices in concern, citing increasing material and labor costs and distribution sector demands for higher profit margins. This provoked public disapproval and an investigation by Japan’s Fair Trade Commission. No evidence of a price cartel was

found, but the commission asked the brewers to take action to liberalize prices. The four companies responded by running a point newspaper advertisement in October 1990, stating that “the price of beer is supposed to be set independently by each store.” A Sapporo spokesman noted that producers were inclined to keep prices in line with each other because many consumers view cheaper goods as inferior.

The lack of price competition, besides favoring the brewers, reflected the interests of the Japanese government, which depended on a financially healthy brewing industry for important tax revenues. A Kirin spokesman stated, “The government has been giving preference to stability in the beer market, eliminating excess competition, to avoid a state of panic that might lead to a decrease in tax income.”

At the end of 1990, a small amount of discounting could be seen at the retail level. A Tokyo survey found that Japanese beer brands were being sold at uniform prices in 99 percent of 668 convenience stores, department stores, and liquor shops and in 91 percent of 111 supermarkets. Foreign brands, including those produced in Japan under license, were sold it varying prices at different stores (from 178 yen to 240 yen for a 350 milliliter can). Kirin and Suntory spokespersons stated that a gradual trend toward price differentiation was probably starting, due in part to the increasing number of large-scale retail outlets, which did more discounting.

IMPORTS, EXPORTS, AND LICENSED PRODUCTION

Foreign beers, including both imports and licensed production in Japan of foreign brands, accounting for just 2 percent of the beer consumed in Japan. The geographic distance separating Japan from foreign markets, the heavy weight of beer, and the fact that beer has a limited shelf life – the taste of canned or bottled beer begins to deteriorate three or four months after production – meant that beer was not a particularly suitable product for large-scale import to and export from Japan. Many pointed also to country differences in climate, diet, and tastes as factors that limited international trade in beer. Barriers that inhibited exports to Japan included a small customs duty charged on imported beer and, more important, the complex and multitiered distribution system which required relatively small and frequent shipments due to limited warehouse space.

In 1988 Japan’s brewers exported 30,000 kiloliters of beer, or 0.5 percent of total shipments. In the same year, around 20,000 kiloliters of foreign beer were imported, accounting for about 0.35 percent of domestic consumption.

Because of the limitations to trade in beer, licensing agreements increasingly had come to be used by Japanese and foreign brewers to make their products available in each other’s markets. In Japan, under licensing agreements, Kirin brewed Heineken, Asahi brewed Coors and Lowenbrau, Sapporo brewed Miller, and

Suntory brewed Budweiser and Carlsberg. Abroad, Molson produced Kirin in Canada and San Miguel brewed Asahi in Indonesia.’

NATURE OF COMPETITION

Through the Early 1980’s: Prior to the “New Product Boom”

In the absence of price competition, the brewers competed with each other in other ways. Prior to the mid-1980’s competition through advertising, quality (i.e., keeping fresh beer on the shelves), and development and control of distribution channels was the rule.

In addition, two types of product differentiation had been tried by Kirin’s competitors, but without much success in terms of market share gain. The first was the introduction of canned and bottled “draft” beer, which generally has a smoother taste than traditional larger. In order to bottle or can freshly brewed beer, either heat pasteurization or filtering is required to remove micro-organisms which shorten shelf life. In Japan, beer that is heat pasteurized is known as “lager,” while beer that is filtered is called “draft.” (Outside Japan, - lager” has a different meaning: it is the name for beer produced by “bottom fermenting,” in which the yeast sinks to the bottom of the brewing vat during fermentation; beer produced by “top fermenting” is called “ale.”)

Until 1964 all the canned and bottled beer produced in Japan was heat-pasteurized lager. Suntory introduced Japan’s first bottled draft beer in 1967, using a micro filter developed by NASA. Asahi brought out its own draft in 1968, followed by Sapporo in 1977, and, finally, Kirin in 1985. Although draft beer’s share of the market grew steadily during this period, reaching 41 percent in 1985 and 62 percent in 1989, no company was able to increase its market share significantly via draft beer.

More short-lived than the “draft war” was an outbreak of packaging based product differentiation in the late 1970s and early 1980s known as the “container war.” Led by Asahi and Suntory, the brewers began packaging beer in unique containers of various sizes, shapes, and designs; there were take-home mini-barrels for parties, rocker-shaped containers called space shuttles, and cans and beer ads featuring cartoon penguins and raccoons. As with the introduction of draft beer, however, this differentiation strategy had little effect on market share. By the mid 1980s it had been largely abandoned.

By the mid-1980s, a number of environmental trends had developed in Japan, that set the stage for an era of intensified competition dominated by a powerful new weapon, new product development.

One key trend was demographic. The generation of beer drinkers that provided the backbone of support for Kirin’s lager beer, the industry’s dominant brand, was the generation born before World War II. By 1983, however, only 35 percent of Japan’s population had been born before the war, and it was the post-war generation that was consuming the most beer. A new generation of “main users,” the 10 percent of beer drinkers that consume 50 percent of the beer in Japan, was in place, ripe for new beers that matched their modern tastes. The younger generation still drank Kirin lager but were not necessarily devoted to it; many chose it because they had been taught by their elders that Kirin was the real beer drinker’s beer.

Another change was that more women were drinking beer, particularly the young, working women who play a major role as trend setters. Women were widely believed in Japan to prefer a lighter, smoother-tasting beer.

One result of economic prosperity and rising incomes was that by the 1980s an “era of consumer choice” had arrived in Japan. “Keeping up with the Joneses” was being replaced by self-expression, and many products, including beer, were no longer commodities but ways to satisfy and express one’s individual taste. Skyrocketing land prices, which pushed the dream of building one’s own home beyond the reach of the average salaried worker, served to block one avenue of expressive consumption and funneled people’s purchasing toward non-housing consumer goods. For many beer drinkers, this translated into an eagerness to try new beers and to the feeling that drinking the old standard, Kirin lager, was passé.

This trend caused Kirin president Hideyo Moroyama to admit, “Unfortunately, the young in Tokyo have an impression that Kirin is not fashionable”.

Change was also under way in the way beer was bought and sold. Fast disappearing were the days when Grandpa would call the local liquor shop and simply say, “Send over a case of beer.” With more singles and young couples living in urban apartments and fewer traditional homes with three generations under one roof, there was often no space for a case of beer. Instead, more and more people were buying a few cans at a time from convenience stores. Super-markets, and vending machines. This led to more active choice making on the part of the consumer. Standing in front of a vending machine or reach-in display case in a store, the buyer had an array of labels spread before him or her, which encouraged experimenting with different brands.

There was also new variety in the marketplace.’ By 1985 foreign beers such as Budweiser and Heineken had worked their way into Japanese stores and vending machines and, although not capturing significant market share, were being widely advertised. More telling was he chu-hai boom of 1985. Chu-hai, a light cocktail made from shochu (a potato-based wine similar to vodka), soda, and fruit flavoring was invented that year and became an instant hit. It was easy to drink, which made it particularly popular among inexperienced drinkers such as students and women.

The success of the chu-hai and the accompanying rise in shochu sales’ came at the direct expense of the beer companies and drove home the point that demand existed for greater novelty and variety in alcoholic beverages.’

The four brewers responded similarly to these changes, interpreting them as a call for increased development and marketing of newer products to meet consumers’ growing desire for different beers and greater variety. The result was a new product boom which began in the early and mid-1980s and then took off in earnest in 1987 with the unprecedented success of Asahi’s “Super Dry.”

The new product boom falls into two distinct phases. The first was the pre-Super Dry period, roughly from 1983 to 1987, Because no single new product had ever had a dramatic effect on market share in the industry, the aim of most new product development at this time was to create and fill a new niche. “Many varieties, small volume” was the watchword, and the accepted industry definition of a “hit” new product was one that sold 1 million cases in a year. Kirin, Sapporo, and Suntory all developed and marketed “light” and all-malt beers, and Asahi reformulated its main product, Asahi draft. Among the success stories were Suntory’s “Mait’s” (an all-malt introduced in 1986, which sold 2 million cases its first year, and Asahi’s new draft in 1986, which helped the company gain market share for the first time in several years.

While the level of new product competition in the pre-Super Dry period was greater than that at any previous time, it was still relatively moderate in terms of new product introduction frequency, sales targets, and perceived stakes. This was in sharp contrast to the more ambitious goals and perceived higher stakes that were created in 1987 by the appearance and unprecedented success of Asahi Super Dry.

In March 1987 Asahi put on the market a new beer, Asahi Super Dry, characterized by a higher alcohol content (5 percent compared to the usual 4.5 percent less sugar, and a smooth but sharp taste. Although originally designed not to head the Asahi lineup but to complement the previous year’s new draft beer, the product surpassed all expectations and became the biggest hit in industry history. Asahi’s initial sales target of 1 million cases had to be revised upward five times within six months, and by the end of the year, 13.5 million cases of Super Dry had been sold. Super Dry created a new beer category, “dry” beer which was to be imitated by brewers all over the world.

The effect of Super Dry on Asahi’s position in the industry was far greater than anyone could have anticipated. The company more than doubled its market share from 10.3 percent in 1986 to 12.9 percent in 1987, 20.7 percent in 1988, and 24.8 percent in 1989. Super Dry allowed Asahi to establish important new distribution channels and sales outlets, and for the first time in 28 years, Asahi

passed Sapporo to reach second place in market share. By 1989 Super Dry accounted for more than 20 percent of all beer consumed in Japan.

As the popularity of Super Dry became evident, Kirin, Sapporo, and Suntory, all came out with their own versions of “dry” beer. None of these proved successful, however. Thanks to its first mover advantage, creative and continual promotion, and, in the opinion of many, simply better taste, Super Dry became firmly rooted in beer drinkers’ minds as the dry bee.

The scale of Super Dry’s success revolutionized thinking in the Japanese brewing industry. At the very least, it confirmed the belief that Japanese drinkers were open to new and “modern” beers with fresh images and tastes that matched the times. Equally important, Super Dry demonstrated that what was at stake was not just the loyalty of any particular niche, such as the fashion-conscious young, but a mass market, including Japan’s “main users”; Super Dry had succeeded at the expense of the standard beer drinker’s beer, Kirin lager. Super Dry was called a “home run.” And it further boosted the level of new product competition as each company sought to be the next to hit a home run. The aim of new product development changed from “many varieties, small volume” to “many varieties, medium or large volume,” and the accepted definition of a hit product jumped from 2 million to 10 million cases.

The success of Super Dry also changed consumer expectations about beer. The Super Dry story was widely told in the media, generating high public interest in the “beer wars” (as the competition was called) and further increasing consumers’ expectations for new products.

After Super Dry, the number of new beers introduced per year jumped against as it was considered impossible for a brewer to compete in the industry without participating aggressively in the new product race. Each year, one or two new products proved extremely popular among consumers, and a company that did not put new products on the market seemed assured of losing market share.

Kirin, which generally had taken a passive approach to marketing new beers for fear of cannibalizing sales of its top-selling lager, jumped into the new product game in earnest after suffering a 10 percent plus market share loss to Super Dry. The company announced a “full-line” strategy in 1989 and by 1990 had no less than 15 brands in its product lineup. Kirin’s biggest hit was Ichiban Shibori (literally “first extract”; the name sounds much better in Japanese), brought out in 1990. Starting with a first-year sales target of 10 million cases, Ichiban Shibori ended up selling 35 million cases in 1990, and by mid-year 1991 second year sales were expected to hit 70 million. Combined with still-strong Kirin lager, Ichiban Shibori gave Kirin two solid pillars around which to anchor its broad lineup and helped the company gain in 1990 for the first time in six years.

Sapporo brought out a large number of new beers, both before and after Super Dry, but not many of them sold well. One of those that did was Japan’s first “seasonal” beer, Fuyu Monogatari (“Winter Tale”), a 5.5. percent alcohol beer made to be drunk with the kinds of foods eaten in winter, sold only from October through February each year, and featuring a wintry quote from Shake speare on the label. (The seasonal concept would later be used by Suntory with its Summer Beer Nouveau and Kirin with Aki Aji, or Autumn Taste.) After a period of slipping market share and uncertainty with regard to its product lineup and positioning, Sapporo’s product strategy in 1991 had settled around four main and a few niche beers. The four main beers were: (1) Sapporo’s mainstay draft Black Label; (2) Ebisu (a rich-tasting, all malt with a strong following among beer “connoisscurs”); (3) Fuyu Monogatari (still a strong seller in its fourth year); and (4) the smooth-tasting Ginjikomi (made using hulled malt), 1991’s most successful new beer. In early 1991 Sapporo’s president stated, “Even if the economy turns bad, we will continue developing and marketing new products; that’s what the market wants.”

With the exception of Malt’s, which in 1991 was the top brand in the all-malt segment of the market, Suntory had not had much luck in the new product race. A number of new Suntory beers had enjoyed good first year sales but had then fallen off. IN 1991 draft Beer Ginjo, and the seasonal Beer Nouveau, which came in both a summer and an autumn version. A Suntory light beer – no light beer had yet sold well in Japan was due out in early 1992. In 1990 Suntory’s vice president said that Suntory considered the new product market not yet mature and that the company would continue to aggressively create and market new beers.

Exhibit 8 shows the number and names of new beers introduced per year. Figure 4 shows the changes in market share that occurred before and during the new product boom, including the dramatic shift that occurred when Asahi Super Dry was introduced.

By 1991 not everyone was happy with the continuing new product boom and the competitive dynamics it created. The head of R&D in Sapporo’s Production Division said:

Exhibit 8 : New Product Introductions, 1964 - 1991

Year No Asahi Kirin Sapporo Suntory

1964 1 Bin Nama1965 01966 01967 11968 2 Hon Nama Black Jun Nama1969 11970 0 Sapporo Light1971 11972 0 Ebisu1973 01974 01975 01976 1 Mainbure1977 21978 0 Bin Nama Merutsuen1979 01980 1 Kirin Light Beer1981 1 Kirin Nama1982 1 Kuro Nama

1983 3 (Lowenbrau) Kuro NamaNama Merutsuen

Ebisu Drat1984 1 Heineken Penguin's Bar

(Budweiser)1985 6 Rasuta Mild News Beer Next one

Kirin Beer Light ClassicWeizen

1986 5 Nama Koku-kire Export Quality Malt's Our's (Carlsberg)

1987 7 100% Malt Heartland Edelpils New Sun, NamaSuper Dry Kirin Classic (Miller)(Coors) Heartland Alt

1988 9 (Coors Light) Kirin Dry Extra dry Suntory DryFine Malt Malt 100 Dry 5.5Half & Half On the Rocks

Fuyu Monogatari

1989 12Super Yeast (Der Lowenbrau) Fine Draft Sapporo Draft Sae

Fine Pilsner Hardy Malt's PremMalt Dry Cool Drycool Black Label1497

1990 7 Ichiban Shibori Hokkaido Jun NamaMild Lager Byakuya Monoga The Earth

Beer Nouveau1991 8 Z Premium Ginjikomi Ginjo

Horoniga Aki Aji Beer Nouv, SumSum Sento

Note : The definition of a “new product” is as follows. A new product is one in which the beer itself is new or different – in ingredients and/or brewing method, and therefore in taste – from products previously offered by the producer. It must be announced and advertised to the consumer as a new or improved beer. Thus unpublicized adjustments in the taste of canning products are not considered new products.) A previously marketed beer offered in a new type or use of container is not considered a new product. Product names in are foreign brands produced under license in Japan these are not considered new product introductions.

The current level of new product development is quite expensive. It takes a lot of money to develop an original new beer, and on top of that many of the recent new brands require materials or production methods that are more costly than those used to brew the old standards. Plus, to give a new product a chance to become a hit, you need to advertise it heavily, and that costs money. We seem to be caught in this cycle where if one company tries to differentiate itself, say by developing a certain type of mini-keg spout, then the three others also have to do it. The originator gets a temporary advantage, but it’s copied quickly, and the industry as a whole ends up hurting itself by having to do all these extra things that cost more but give no advantage over the competition. The result is that consumers end up drinking expensive beer.