Sapporo Breweries Limited Business Information, Profile, and History

Company Perspectives:

'`Be Exciting.' This was the first goal I set for Sapporo when I became president in November. It means that while we will not abandon our heritage--the very fabric of Sapporo--we are firmly focused on the future. For that future to be bright, all employees must embrace change. Our aim is to construct a corporate culture that fosters initiative and lateral thinking. This will create a rejuvenated Sapporo--and value for our shareholders. I intend to make this vision a reality by, in essence, undertaking to remold Sapporo just as if we were establishing an entirely new company' (March 2000). --Tatsushi Iwama, president

History of Sapporo Breweries Limited

Over the course of its more than 120-year history, Sapporo Breweries Limited has evolved from a government-owned beer maker into a multifaceted consumer products concern. In the early 21st century, its interests included the namesake Sapporo beers and a full line of soft drinks, wine, teas, and coffees, as well as real estate, restaurants, and hotels. Sapporo Breweries also imports Guinness Irish stout into Japan. Along with Kirin Brewery Company, Limited, Asahi Breweries, Ltd., and Suntory Ltd., Sapporo ranks among Japan's 'Big Four' breweries; it holds about 16 percent of the country's beer market, placing it number three behind Kirin and Asahi. Overseas, the Sapporo brand is the best-selling Japanese beer in the United States and is also exported to Taiwan; Sapporo Premium Lager is produced in Ireland on a contract basis by Diageo plc and sold throughout Europe; and a joint venture in China brews Sapporo Premium Lager for the local market.

Late 19th-Century Founding

Beer was introduced to Japan in the mid-1800s. The American primarily responsible for renewing trade relations with Japan, Commodore Matthew Perry, brought several cases of beer to Japan as a gift for the Tokugawa Shogunate. The beverage was so well liked that the Japanese government soon decided to establish a brewing industry. After an extensive search for a suitable area, wild hops were found growing on the island of Hokkaido, the northernmost island in the Japanese archipelago. As a result, in 1876 the Commissioner-General for the development of Hokkaido founded Japan's first brewery in the town of Sapporo. (Coincidentally, the global beer capitols of Munich, Milwaukee, and Sapporo are all located along the 45 degrees north latitude.)

The original government facility was designed by the brewmaster Seibei Nakagawa, who had returned to Japan after studying beer-making techniques in Germany. The first product brewed in the factory was called Sapporo cold beer or German beer, and even some of the early labels were printed in German as well as in Japanese.

In 1886 the brewery was sold by the government to Okura-Gumi, a private trading company. One year later, Okura-Gumi itself was purchased by a group of Japanese businessmen, who then reorganized the brewing operations under the name Sapporo Brewery Ltd. A number of other breweries, which would soon figure prominently in Sapporo's development, also were started during this time, including Nippon Brewing Company Ltd., Osaka Brewery, Kirin Brewery Company, and the Nippon Beer Kosen Brewery.

1906--49: The Dai Nippon Era

In 1906 the Sapporo Brewery, the Nippon Brewing Company, and the Osaka Brewery were amalgamated as the Dai Nippon Brewery Co., Ltd. This process of amalgamation and consolidation continued for 20 years until, in 1933, the Nippon Beer Kosen Brewery also was absorbed by Dai Nippon.

During the 1920s and 1930s Japanese militarists, implementing their plan to make Japan the dominant economic power in Asia, began to centralize the brewing industry. By 1943, the merger of all Japanese breweries was virtually complete: Dai Nippon and Kirin were the only two brewing companies left in Japan. In fact, the militarists were powerful enough to force the Sapporo division of Dai Nippon to establish joint ventures in the occupied territories of Korea and Manchuria.

At this stage, local markets were dominated by particular brands. Dai Nippon sold Sapporo beer in the region north of the Kanto district, primarily in Hokkaido. The company also manufactured Yebisu and Asahi brand beers; the former was popular in the Tokyo area and the latter in the Kansai area. Not surprisingly, because of the increased demand for beer (it was rapidly superseding sake, the traditional drink), its production continued throughout the war.

Postwar Revival of Sapporo

The current structure of Japan's brewing industry originated after World War II during the U.S. occupation. In 1949 the Dai Nippon Brewery, which had cornered nearly 70 percent of the beer market in Japan, was divided into Nippon Breweries, Ltd. and Asahi Breweries, Ltd. Initially, Nippon Breweries marketed beer exclusively under its own brand name; it was not until 1956 that beer displaying the Sapporo label was reintroduced.

Nippon's growth during the postwar period, primarily because of an expanding product line, was impressive; from 1951 to 1981 production at the company's facilities increased by a factor of 15. During that same period, the brewery's sales increased from ¥20 billion to ¥330 billion, and its capitalization from ¥100 million to more than ¥14.1 billion. Supporting this growth was the construction of new breweries, in Osaka, in 1961; in Sendai, in 1971; and in Shizuoka, in 1980.

It was not until 1964 that the Nippon Breweries changed its name to Sapporo Breweries Limited. Shortly thereafter, arrangements were made to merge the Sapporo and Asahi breweries. By this time they had become the second and third largest breweries, respectively, in Japan. (Kirin had captured the largest share of the domestic beer market.) But the merger never materialized.

The formation of a joint venture with Guinness plc, called Sapporo-Guinness, also took place in 1964. This agreement led to the sale of Irish stout in Japan. By 1976 the consumption of stout beer had risen dramatically and a sales war ensued with the Kirin brewery, which had its own version of the beverage. Even though the cost of Guinness's product was twice that of Kirin's, Sapporo managed to maintain about 45 percent of the domestic stout market by relying heavily on Guinness's quality image.

In 1971 Sapporo reintroduced Yebisu Beer to the market as a premium 100 percent barley beer. That same year Sapporo entered the wine market when it formed a joint venture with Mitsui and Company Ltd. to import both wine and liquor. Sapporo Liquor Company Ltd. first began to import Nicolas, Hoch, and Melini wines. The company then started to produce its own wines at the Katsunuma Winery west of Tokyo in 1976; its Polaire brand of wine eventually would include the top five best-sellers in Japan. After the Okayama Winery was established in 1984, a wine cooler, a sparkling wine, and Hyosai, a white brandy, also were added to the growing domestically produced beverage line. In addition, the Sapporo Liquor Company imported Bailey's Irish Cream, Bombay Gin, Green Island Rum, and several scotches, including J & B Rare, Dunhill, Knockando, and Spay Royal.

First established in 1908, Sapporo's research and development division was created to breed varieties of barley and hops especially suited to Japan's climate. In the mid-1970s the Sapporo laboratory developed a technique for the ceramic filtration of beer. Since the introduction of pasteurization in the early part of the 20th century, beer had been sterilized by means of a heating process. This was necessary because the yeast residue in beer rendered it unsuitable for extended storage or long-distance transportation. Yet the problem with heating beer was that the high temperature affected its flavor. Sapporo's unique ceramic filtration method removed the yeast residue from beer without having to heat it. The beer was filtered at a constant temperature of zero to one degree centigrade through a long ceramic cylinder; a thin coating of diatomaceous earth in the tube trapped the yeast residue. The first draft beer made with this new process went on the market in 1977 ('Sapporo Black Label'), and in 1985 the filtration technology was exported to South Korea and to the Miller Brewing Company in the United States. Even so, Sapporo continued to pasteurize many of its products.

Throughout its history, rising prices for raw materials cut into company profits. Sapporo's supply of yeast came from a strain originally developed at the Sapporo laboratory. Although Sapporo brand name beer was brewed exclusively in Japan, much of the barley and hops used in its manufacture was, historically, imported from Canada, Australia, West Germany, and Czechoslovakia. During the 1970s the Japanese government raised the brewery's already high costs by requiring them to purchase domestically grown barley; this accounted for 20 to 25 percent of the barley used in the entire industry. Originally intended to protect farmers who had switched from the cultivation of rice (which was in surplus) to barley, the domestic strain cost brewers 3.7 times as much as imported ones.

In spite of such roadblocks, Sapporo grew consistently. In fact, from 1985 to 1987 the company enjoyed record sales and earnings. Sapporo attributed its success to reduced materials costs, a decreasing interest payment burden, and effective management of surplus funds. Furthermore, the appreciation of the yen and the consequent lower price of foreign malt also helped boost results.

But as the Japanese beer market fast approached saturation in the mid-1980s, Sapporo sought new markets through geographic and product diversification. Having established distributorships in more than 30 countries around the world, the company founded its first full-fledged foreign subsidiary in the United States in 1984. The Sapporo brand quickly became the number one Japanese beer in the very large U.S. beer market.

Late 1980s and Early 1990s: New Products and Diversification

While striving to maintain a premium image for its flagship beers, Sapporo catered to both ends of the Japanese beer market in the late 1980s and early 1990s. The company introduced the gold-labeled Yebisu Beer and the ultra-dry Kissui ale for the upscale market. Around the same time, it inked a contract with the U.S.-based Stroh Brewing Company to import a bargain-priced beer into the country. After five years of research and development, the company also launched 'Drafty,' a sparkling alcoholic drink that the company was able to offer at a low price, because of the product's low malt content, which incurred less tax.

In 1988, Sapporo's research and development department expanded into the propagation of rare orchids for sale in the United States, Europe, and domestically. In addition, the Sapporo laboratory conducted research in fields such as soft drinks as well as the application of beer yeast to the development of food seasonings and health food products. Sapporo scientists also investigated the utilization of recent discoveries in biotechnology to develop agricultural chemicals and pharmaceuticals.

The seeds of Sapporo's burgeoning restaurant empire were planted with the establishment of the brewery's first beer hall back in 1899. By 1994, a beer hall division had grown to become Sapporo Lion Limited, a 180-location chain that contributed about five percent of the company's annual revenues and an incalculable amount to Sapporo's brand cachet. Echoing an American trend, the company began to develop several 'brew-pubs' featuring boutique beers brewed on site.

Having put its first soft drink, Ribbon Citron, on the market as early as 1909, Sapporo placed ever-increasing emphasis on its nonalcoholic beverage line. By the late 1980s, this product segment included traditional and medicinal teas, Beans brand canned coffees, and a variety of carbonated sodas and mineral waters. The company concentrated on introducing all-natural, wholesome drinks with fruit flavors and light carbonation in the early 1990s.

Although real estate still only contributed 6.5 percent of Sapporo's total annual revenues in the early 1990s, this segment was considered the cornerstone of the company's diversification strategy. Development activities took center stage with the 1994 opening of the Yebisu Garden Place, a downtown Tokyo office complex that featured retail outlets and upscale condominiums that cost the company ¥295 billion and took ten years to complete. The brewer proudly moved its headquarters to the new facility that same year. But far from abandoning its historical birthplace, the company redeveloped its first brewery into what it referred to as a 'cultural mall,' incorporating public services, retail, and leisure centers.

Late 1990s and Beyond: Seeking Overseas Growth

The second half of the 1990s were marked by expansionary moves overseas. In 1995 the company began exporting the Black Label draft beer to Taiwan. By 1997 sales had exceeded one million cases. In October 1995 the alliance between Sapporo and Guinness expanded. That month, Guinness began contract production in Ireland of a beer called Sapporo Premium Lager. Sapporo contracted with Marubeni Corporation, a Japanese trading firm, to distribute Sapporo Premium in several countries in western Europe. In 1997 distribution was expanded to Russia, Poland, and Sweden. In the U.S. market, the long-successful Sapporo Draft brand was joined by Yebisu and Sapporo Black beer in 1996. The other key country targeted for growth was China. In December 1996 Sapporo established a joint venture with two of the leading breweries in Jiangsu Province, Jiangsu Brewery and Nangton Five Stars Brewery. The joint venture began producing Sapporo Premium Lager for local consumption in May 1998.

Back in Japan, the company's beer lineup underwent some changes. Black Label and Yebisu were steady performers, but Drafty was replaced first in January 1998 by Drafty Special and then in October 1998 by Bräu. The latter, like its predecessors, was part of a rapidly growing category called Happo-shu, or sparkling low-malt beverage. Bräu, which sported a low price and was touted for its hops that were grown without the use of chemicals, found more success than either version of Drafty. A fourth brand was added to the product line in 2000: Grand Beer. This beer was targeted at 20- and 30-somethings and according to the company was 'characterized by crispness and a refreshing aftertaste.'

Sapporo's more aggressive approach to developing new brands could be traced to the heightened competition that characterized the Japanese brewing industry in the late 1990s. The beer market in Japan was maturing, Japanese consumers were developing more diverse beverage tastes, and the appreciation of the yen provided a pricing advantage to what quickly became an onslaught of imported beers from the United States and Europe. Sapporo's revenues declined in both 1996 and 1997; worse yet, in 1997 the company posted its first net loss since its emergence out of Dai Nippon. This development was not tied to the company's struggling beer operations, but rather to an extraordinary loss of ¥29.4 billion from its securities holdings. In September 1998 Sapporo announced that it would reduce its workforce by about 1,000 by the end of 2001, in a cost-cutting and profit-enhancing move. The cuts were slated to be made through attrition, accelerated retirement, and a hiring freeze. Sapporo also planned to close two of its breweries in 2000 and a third in 2002. A further extraordinary loss tied to the slumping Japanese stock market led to a second straight net loss in 1998. Sapporo suffered another decline in sales in 1999, a 5.4 percent drop, but returned to the black, posting net income of ¥4.43 billion (US$43.3 million).

Principal Subsidiaries: Sapporo Lion Limited; Sapporo Wines Limited; Sapporo Beer's Beverage Co., Ltd.; Sapporo Development Co., Ltd.; Yebisu Garden Place Co., Ltd.; Sapporo Hotel Enterprises Limited; Chateau Restaurants Co., Ltd.; Sapporo Logistics System Co., Ltd.; Yebisu Winemart Company Limited; Sapporo Florist Company Limited; Tokyo Energy Service Co., Ltd.; Sapporo Agency Limited; Sapporo U.S.A., Inc.; Sapporo International Europe, B.V. (Netherlands).

Principal Competitors: Adolph Coors Company; Anheuser-Busch Companies, Inc.; Asahi Breweries, Ltd.; Kirin Brewery Company, Limited; Miller Brewing Company; Suntory Ltd.

Chronology

• Key Dates:

• 1876: Japan's first brewery is built in Sapporo by the government.
• 1886: Government sells the brewery to a private trading company.
• 1887: Group of Japanese businessmen buy the brewery and reorganize it as Sapporo Brewery Ltd.
• 1906: The Sapporo Brewery, the Nippon Brewing Company, and the Osaka Brewery are amalgamated as Dai Nippon Brewery Co., Ltd.
• 1949: Dai Nippon is divided into Nippon Breweries, Ltd. and Asahi Breweries, Ltd.; Nippon Breweries is the successor to Sapporo Brewery but initially markets only Nippon Beer.
• 1956: Sapporo Beer is reintroduced into the Japanese market.
• 1964: Nippon Breweries changes its name to Sapporo Breweries Limited; through a joint venture with Guinness plc, the company begins selling Guinness Irish stout in Japan.
• 1971: Yebisu Beer is reintroduced as a premium, all-barley beer; company enters the wine market as an importer.
• 1976: Production of wine begins at the Katsunuma Winery, west of Tokyo.
• 1977: Company introduces the first draft beer, Sapporo Black Label.
• 1984: The company's first foreign subsidiary is established in the United States.
• 1994: Sapporo-developed Yebisu Garden Place, a downtown Tokyo office complex featuring retail outlets and condominiums, opens and becomes the company's new headquarters.
• 1995: Guinness begins contract production of Sapporo Premium Lager for European distribution.
• 1998: Production of Sapporo Premium Lager begins in China.