Three of Japans top four brewers have predicted an upswing in domestic beer demand for this year

Three of Japan's top four brewers have predicted an upswing in domestic beer demand for this year

The long-accepted truth for Japan's beer market is that domestic consumption is in long-term decline, forcing the country's brewers to look overseas for growth.

That is why last year Asahi Holdings paid EUR2.55bn (then-US$2.87bn) to add SABMiller's Grolsch, Meantime and Peroni Nastro Azzuro brands to its stable and EUR7.3bn (then-US$7.7bn) for SAB's Central and Eastern European assets. It is also why Japan's big brewers are on the list of companies keen to acquire a bigger slice of Vietnam's beer market in the Government's sale of Sabeco (Saigon Beer Alcohol & Beverages Corp).

But, new full-year results this month suggest Japan's brewers see brighter times ahead in their own backyard, as consumers show signs of returning to the real beer category.

The domestic beer market is split into three distinct tiers, with high-malt beer at the top followed by the lower-malt products known as happoshu, and the even-lower-malt offerings of the so-called 'new genre' category. The latter two categories were created to avoid taxes on high-malt beers but have recently stuttered, with happoshu in sharp decline. Now, forecasts from both Asahi and Sapporo suggest continued drops for lower-malt beverages, but in turn an uptick for real beer. If these forecasts are correct, then it could signal a reversal of trends that culminated last year in higher-malt 'real' beer - falling a reported 2% in Japan.

First up was Asahi. In the company's 2016 full-year results, released last week, sales volumes for its high-malt beers were down 3% as the company's core Super Dry brand lost close to 4%. Meanwhile, happoshu also dropped 3% in sales volumes while new genre jumped 10% through investment in the new Clear Asahi Zeitaku.

However, look at Asahi's full-year estimates for 2017, and a different picture emerges. Happoshu's troubles are expected to continue, with sales volumes predicted to fall by 8%. But, beer fortunes are expected to revive - instead of last year's 3% drop, Asahi predicts a 1% increase in both sales volumes and sales.

Asahi Beer Sales Volumes 2011-2017 (est)

Asahi Beer Sales Volumes 2011-2017

Source: Company results

The comparison is even more stark for Sapporo Holdings, which in its FY results ten days ago saw sales volumes for its happoshu and new genre brands tumble 8% against an overall 7% drop for the Japanese market.

Meanwhile, its beer brands upped sales volumes by 4% despite an overall 2% market decline. Clearly, Sapporo is ahead of the curve – last year its beer brands climbed by 1% in sales volumes, against a flat market.

Looking ahead, Sapporo continues to be optimistic for its high-malt beer brands, predicting a 3% sales volumes jump, including a 1% rise for its core Black Label and a 10% increase for the premium Yebisu brand.

Finally, Kirin Breweries, which released its FY results last week, has forecast a 5% jump in beer sales volumes for this year after a 2% drop in 2016.

It should be pointed out that Asahi still estimates Japan's overall high-malt beer category to decline by 1-2% over the course of this year. It should also be highlighted that a slight rise in sales volumes for the Super Dry owner's beer brands predicted at the start of last year failed to materialise partly, the company said, because of weather issues.

However, that three of Japan's big four breweries (the fourth, Suntory, didn't offer 2017 estimates) are forecasting increases in the top tier of the beer market should come as good news to everybody.

Why is it happening now after years of declines? Part of the answer could lie in Sapporo's realignment of its beer focus, which last year saw it pivot away from lower-malt labels and concentrate on its core high-malt brands. As a result, Sapporo's high-malt brands increased their share of the company's overall beer and beer-like sales volumes by three percentage points to 62%. Sapporo sees value in its real beer heritage brands and is now investing accordingly.

Meanwhile, the emergence of a few successful craft breweries such as Baird Breweries and Yo-Ho Brewing - a 30% slice of which was snapped up by Kirin in 2014 - shows that Japanese consumers, especially in the big cities of Tokyo and Osaka, are rediscovering the taste of full-flavoured beer, and are willing to pay for it. Sapporo's high-end restaurant and beer hall business, where a single drink can cost upwards of US$10, has been newly overhauled, with thirsty young urbanites expected to add to the brewer's bottom line in 2017.

Also, the big brewers are trying to emulate craft. Disregarding Kirin, which has a craft beer portfolio through its Australian subsidiary Lionco and a recent tie-up with New York City's Brooklyn Brewery, Japan's mainstream brewers have so far stayed away from craft brewery acquisitions. Instead, they have taken matters in to their own hands with the release of craft-style labels. Last month, for example, Suntory launched a pale ale under the new Tokyo Craft brand, part of its Craft Select series. Last year, Asahi released The Dream, reportedly its first new beer in seven years.

And these trends are only set to continue, helped by the Japanese government's long-awaited overhaul of its three-tier tax code. Whereas happoshu and new genre currently benefit from a lower tax bracket, new proposals to be gradually implemented up to 2026 are expected to align all categories into one tax code (a flat JPY54.25 per 35cl), giving a further boost to high-malt beer.

Of course, other headwinds such as Japan's shrinking population and relative economic stagnation continue to conspire against the country's long-term beer market future. But these signs of life from Asahi, Sapporo and Kirin show that the big brewers have far from given up on their domestic market. In the future, this may mean less focus on what assets can be picked off overseas, and more on how to continue bringing Japanese consumers back into the beer fold.