Japan's Kirin, which is more accustomed to brewing beer, revealed earlier in August that it would spend over a billion dollars for a 30% stake in cosmetics and health food maker Fancl.
The announcement came a couple of weeks after the American multinational announced it would venture into the alcoholic drinks market later this year, for the first time in its history.
Japan’s domestic beer market has been shrinking for the last 15 years, leading its brewery majors to find other routes to maintain profits. Some like Kirin’s arch-competitor, Asahi, have been taking an international view on this, for instance by snapping up Australian leader Carlton & United Breweries in a A$16bn (US$10.8bn) takeover in July.
But given a growing preference among Japanese consumers for healthier and more premium products, it appears that Kirin is venturing into new territories on home ground.
Not only has the Japanese number two beer-maker been doubling down on craft beer brewing in its ambition to take the top spot off Asahi, it sees the substantial investment in Tokyo-listed cosmetics and kale-juice maker Fancl as a means to reduce its exposure to its shrinking domestic beer market.
At the same time, the company has been shedding underperforming overseas assets, in contrast to Asahi’s spending spree abroad.
Last year, it signalled its intention to recoup some of the A$2bn (US$1.4bn) it has sunk into Australian investments over the past 11 years, and in April announced it would sell Lion Dairy & Drinks' cheese business to Canada’s Saputo — though the deal is currently on the desk of Australia’s competition watchdog.
Kirin has been diversifying since the 1980s. Its pharmaceuticals and biochemical business, for instance, generates 18% of its revenue. The company’s president, Yoshinori Isozaki, hopes to work with Fancl to develop new products, including anti-aging skincare items.
Japanese demand is especially pronounced for food items claiming specific health benefits, such as increasing longevity and preventing diseases.
“In order to resolve these societal problems, we are facing the same direction as Fancl,” Isozaki said on announcing the deal.
Kirin’s investment in Fancl accelerates this shift and will, the two companies said, help expedite the development of new products.
Yet this latest deal, in which Kirin will pay a multiple of earnings more than twice its own for a minority stake, has received a lukewarm reaction from analysts, who have called it expensive for what it aims to achieve.
Fancl’s revenues have been growing at a pace of 12.4% over the last year, with China and Singapore providing fertile ground for sales. This growth has been substantially faster than Kirin’s. The brewer saw a 3.6% increase in sales in 2018, for which the lion’s share are still coming from beverages in Japan.
But the brewer’s business is still more profitable, and it is paying a great deal for Fancl based on its future projections. The health firm’s profit margin is lower than Kirin’s and the deal values its target at an expensive 40 times forward earnings—more than twice its own valuation, and even much higher than Fancl’s pre-deal multiple of 24 times.
Moody's called the deal "an unexpected new strategic direction to monitor," while still small enough not to make a huge difference to Kirin or its credit rating. The deal prompted a 5% dip in its share price.
Coca-Cola ventures into alcoholic drinks
At the same time, Coca-Cola, as it wades through a Japanese carbonated beverage market that has been stagnant for several years, will venture into alcoholic drinks for the first time anywhere, later this year.
To do so, it plans to sell a lemon-flavoured fizzy alcoholic drink nationwide, following what it says has been a successful test of the 133-year-old company’s first cocktail on the southern island of Kyushu since last year.
Though Coca-Cola is the market-leader for soft drinks in Japan, with a 22.4% share, according to data provided by Euromonitor, there has been a considerable shift in consumer attitude and consumption choices towards soft drinks.
The sluggish performance of carbonated soft drinks in Japan is due to an uptick in health trends, falling numbers of vending machines and competition from carbonated mineral waters.
In the face of this, Coca-Cola’s Lemon-Do enters a popular category of beverages known in Japan as chuhai, which are often made by mixing carbonated flavored water with a distilled grain-based alcohol called shochu.
During the trial, which began last May, 3%, 5% and 7% alcohol versions were introduced, followed by a 9% variant in February following a surge in popularity for mixed drinks with higher alcohol content. The beverage is expected to launch nationwide in four lines in October, according to reports.
Chuhai drinks, with their higher alcohol content, have been given a fillip of late as calorie- and cost-conscious consumers opt for stronger and healthier drinks. Canned cocktails are also taxed less than beer and cost less in Japan. They are also popular with women and younger drinkers.
Industry-watchers are already debating whether the pan-Japan launch will herald more launches of alcoholic drinks by Coca-Cola internationally, or if it will remain a Japanese exclusive.
While Japan sometimes serves as a testing ground for Coca-Cola’s global business, the company has no plans to sell alcoholic beverages outside Japan, it has revealed.
“This is still [an] experimental product specific for [the] unique Japanese market. We don’t have plans to sell this outside of Japan,” a Coca-Cola Japan spokeswoman said.
Coca-Cola Japan president Jorge Garduño is in agreement, saying “I don’t think people around the world should expect to see this kind of thing from Coca-Cola”.
“While many markets are becoming more like Japan, I think the culture here is still very unique and special, so many products that are born here will stay here,” Garduño added.
But given the state of demand for carbonated soft drinks in developed markets, it’s hard to shake the idea that Japan is serving as more than a test bed.