With cigarette sales in decline, Japan Tobacco launched Roots, a canned coffee, last year to capture the caffeine-addicts. David Robertson reports

While tobacco manufacturers in the West are fretting over billion dollar lawsuits, Japan Tobacco is scoring hits with consumers thanks to its drinks division.

Japan Tobacco, a massive conglomerate that privatised in 1985, launched a canned coffee drink called Roots in October and it has already taken a large chunk of the market.

Source: Japan Tobacco Inc

JT decided when its cosy role as state nicotine supplier disappeared in the mid-1980s that it needed to diversify. The company predicts that its stable tobacco sales will go into gradual decline from around 2010 and it wants to be prepared.

As a result JT has decided to expand its operations globally spending $7.8bn to take over RJR Nabisco Holdings two years ago. But giving itself an international tobacco arm is only part of the story.

In 1986 it moved into a wide range of industries looking to see where it could find success. JT had a real estate arm and a machinery business, both of which were ditched.

The company has kept faith with two divisions: pharmaceuticals and food and drinks - both of which are losing money.

But the drinks division is making waves with big successes in the soft drinks sector.

Source: Japan Tobacco Inc

Its peach-flavoured water drink sold 380m bottles in 1998 and 220m in 1999 providing JT with a real winner. Since then the company has moved into tea and coffee, the two largest soft drink categories.

Roots, its canned coffee drink, has rocketed to second place in terms of sales - another startling success.

Canned coffee is the biggest soft-drinks sector worth around Y800bn a year, or 25% of the Y3trillion soft drink market.

Analysts believe that survival in the soft drink market depends on having a hit coffee drink and Coca-Cola Japan and its Georgia product have so far dominated the market.

Rivals Suntory, Asahi Soft Drinks and Kirin are all fighting back and Coke is giving away 50,000 jackets with its coffee logo on.

Based on these successes and the on-going commitment to marketing and research, JT is hoping to move its food and beverage division to profitability by March 2002. It is looking at sales of Y150bn in drinks and Y75bn in ready-made foods by March 2005 (both are currently generating about Y50bn).

"Its canned coffee drink, has rocketed to second place in terms of sales"

"In February 2000 the company's management laid out their mid-term plan," spokesman Roy Tsuji told just-drinks.com from Tokyo.

"We said pharmaceuticals and food and beverages would be core businesses after tobacco. We want to grow them to be the three pillars of the company.

"The JT management want to diversify utilising technical knowledge from tobacco, for example in pharmaceuticals. The tobacco division is low risk and low return and pharmaceutical high risk but high return so we wanted a business mix which we found with food and beverage."

In Europe and North America a company with three such diverse divisions would be split up within seconds by greedy shareholders but in Japan they create new divisions on the back of another's success maintaining a single corporate entity.

Although the food part of the company has grown from 200 to over 600 employees in the past couple of years the big question Japan Tobacco has to face is whether it has the expertise to compete with the likes of Coca-Cola and Suntory on a regular basis.