Kirin has struggled in the Brazilian market

Kirin has struggled in the Brazilian market

The general intention of Japan's drinks companies to break out of their domestic market has been a headline of the last six years, at least. Today's confirmation that Kirin Holdings is looking to pull out of Brazil, however, shows the pitfalls of this strategy. Indeed, the fact that this is playing out in one of the fabled BRIC markets serves to bring the strategy into worrying relief.

Earlier today, Kirin said it is "reviewing all options regarding a potential transaction" related to the Schincariol beer business it bought in 2011. Heineken has revealed itself as the interested party, with the pair "currently in discussions" over a reported divestment by the Japanese group.

The story was broken by Nikkei Asian Review early this morning. The numbers cited in the (albeit unsourced) report are frankly terrifying: Kirin will offload the Brazilian unit, the news outlet said, for US$870m. In a tranche of two transactions six years ago, Kirin completed the takeover of Schincariol for a total of $3.9bn.

The disparity between these two figures clearly highlights the depth of Kirin's crisis in Brazil. Other numbers doing the rounds serve only to confirm: At the time of the Kirin acquisition, Schincariol was the second-largest brewer in Brazil – way behind Anheuser-Busch InBev's cash engine, AmBev, which boasts the better part of 70% the country's beer market. Today, however, Brasil Kirin has slipped back to number three, overtaken by Grupo Petrópolis.

Throw in a state of nation-wide economic stagnation, a currency that has also had its struggles and a consumer with less willingness and ability to spend, and Brazil has turned into a nightmare for Kirin.

Rewind to late-2015, and the problems had already mounted up to such an extent that Kirin posted its first ever full-year loss thanks to a $1.2bn impairment charge on its Brazilian operations.

What lessons, then, can be learnt from Kirin's troubles in Brazil?

THe omens weren't good: When the company made its initial move for Schincariol, Kirin got into a sticky situation involving legal action from some of the owning family's shareholders. The presence of a market leader that casts such a long shadow over the competition, along with Schincariol's clear reliance on volumes rather than value, instantly painted Brazil's beer market in a far less enticing light than it would appear at first glance.

And yet, Kirin's eagerness to break out beyond Japan prompted the group to stump up cash (that's, cash) of an amount equating to 20 times Schincariol's 2010 EBITDA. This, at a time when the average valuation in brewing industry deals was around 12 times EBITDA.

Had the group chosen the wrong company in the wrong category in the wrong market? Was it blinded by the then-perceived glowing future of the BRIC markets? 

The answer to both is, unfortunately, yes.

A willing buyer and a willing seller, then, is not enough to secure a win-win situation. The checklist for success is clearly far longer than the list Kirin drew up six years ago (and you can add to that list "distance and communication", if the Nikkei report is to be believed).

Japan's drinks companies would do well to ensure far more boxes than just the obvious ones are ticked next time they head to the airport.