NEW YORK (Reuters Breakingviews) - At a local Connecticut package store, a six-pack of Sapporo goes for $10.49. For a dollar more, tipplers can take home a half-dozen bottles of Anchor Steam. There’s no easy way to explain why one brand deserves a 10 percent premium. Both are brewed domestically, and from venerable producers founded within years of each other, in Hokkaido and San Francisco, respectively. Anchor Steam’s ability to charge more, however, may explain why Sapporo plunked down $85 million to buy the smaller enterprise last week.
Marketing is what gives Anchor Steam the extra cost kick. American consumers see value in so-called craft beers, a designation that may be a misnomer in this case. Its origins trace back to an 1871 beer-and-billiards saloon near Russian Hill run by Gottlieb Brekle, who had left Germany for the Gold Rush. Around the same time, Seibei Nakagawa returned from Germany, where he studied the beer-making process. He was anointed brew-master by the Meiji government, and oversaw construction of a beer factory in Japan’s northernmost island.
While Sapporo kept its focus, becoming one of Japan’s four major brewers, Anchor Steam led an undistinguished century until an aficionado with pockets bulging from his great-grandfather’s appliances business, turned things around. Under Fritz Maytag, Anchor Steam effectively led a renaissance in independent brewing that, by the time he sold out in 2010, had become something of a bubble. Today, two U.S. breweries open every day.
It’s puzzling why anyone concerned with making adequate shareholder returns would want to enter America’s rapidly-saturating suds business. Sapporo and its Japanese rivals Kirin, Asahi and Suntory have been voracious buyers of brands – newfangled and august alike – of late. Although their stocks have outperformed the broader market since the start of 2013, just after Prime Minister Shinzo Abe took office, much of that probably can be attributed to cheap money and a weak yen. When it comes to profitability, the brewers notably lag their global peers, including Anheuser-Busch InBev and Heineken.
Their overseas shopping excursions mainly seem to accomplish one goal: they delay seriously contemplating any form of domestic consolidation. For purist consumers, that may be a good thing. For the prospect of creating a more efficient Japanese economy – one of Abe’s central economic ambitions, or “arrows” as he calls them – it is something of a disappointment.
There is a bit of logic to investing abroad. Japan’s beer businesses produce lots of cash, and their local markets are shrinking. The simple fact that fewer people will populate Japan every year for generations to come is only part of the problem. Consumer tastes are also changing, with beer consumption now at an all-time low. Beer sales fell 1.4 percent in the first half of 2017 from a year earlier.
This long-term, secular trend should be forcing a strategic rethink. The prospect of a smaller market means Sapporo, Asahi, Kirin and Suntory need to find ways to crunch out costs and preserve their competitive positions. That ought to lead them toward mergers at home, as it did in other markets that saw similar mainstream trends, such as the United States and Europe, where AB InBev and Heineken now dominate.
The most recent crop of earnings from Japan’s big beer underscores the conundrum. Sapporo, which is led by Masaki Oga, posted a 3.2 percent rise in second-quarter sales and an operating margin of 3.1 percent. Kirin did better, squeezing out 80 billion yen of operating income from 962 billion of sales for a margin of 8.3 percent. That’s principally because Kirin’s pharmaceuticals division – yes, it has one – converted 15 percent of its revenue into operating profit.
Kirin’s domestic drinks arm eked out less than a 6 percent operating margin. Overall profitability grew thanks to Kirin’s exit earlier in the year from Brazil. It had spent $3.9 billion in 2011 for family-owned Schincariol, a business it offloaded to Heineken for $700 million.
Asahi, with more than a third of the domestic market, reported a 10.7 percent operating profit margin on sales that rose 29 percent following its 1.2 trillion yen, or $10.9 billion, purchase of a slew of European brands, including Peroni, Grolsch and Pilsner Urquell. AB InBev sold them to secure regulatory approval for its takeover of SABMiller.
By contrast, that company, which produces Budweiser and Stella Artois, reported second-quarter earnings before interest and tax of $4.4 billion on $14.2 billion of sales, for an operating margin nearly three times higher than Asahi‘s. If AB InBev’s size, as the biggest brewer in the world, makes that an unfair comparison, consider that Heineken, which is family controlled, turned 17.2 percent of its top line into operating profit in the first half.
All of Japan’s brewers can and should do better, either on their own or by joining forces. Imagine if Asahi acquired Sapporo and brought their combined operating margin to 15 percent, still below Heineken‘s. In such a scenario, using JPMorgan’s estimates for 2018 sales, the two could then churn out an additional $1.5 billion of operating income. That would no doubt prod Kirin and Suntory to resume discussions they aborted seven years ago.
Japan is, of course, different. It’s an island nation whose people have a different view of corporate efficiency, job security and getting rich. But they, too, are drinking less beer, no matter how many government initiatives Tokyo proposes. Buying dinky Anchor Steam, or a stake in Brooklyn Brewery as Kirin did, won’t change that. Big Beer’s next wave will soon hit Japan.
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