Japan: Sapporo Group reports growth for 2011, though net income drops 71%
Sapporo Group, Japan’s fourth-largest beer maker, reported on February, 10 sharp year-over-year growth in consolidated sales, plus 16.7% to 454.1 bln yen and large gains in consolidated operating income and ordinary income in the financial year to December 31, 2011.
Consolidated operating income was up 23% year over year, while growth in consolidated ordinary income (+17.3%) was achieved for the fifth straight year.
The company’s net income, however, declined by 70.6% to 3.16 bln yen from 10.77 bln in 2010. Despite the gains in consolidated operating income, net income declined due to the posting of extraordinary losses related to changes in accounting standards for asset retirement obligations and to disaster-related losses stemming from the earthquake and tsunami. Net income was also impacted by the absence of gains on the sale of property, plant and equipment that were posted in 2010, Sapporo said.
Domestic demand for beer and beer-type beverages in 2011 fell about 4% year over year, reflecting the earthquake/tsunami disaster’s negative impact on all beer makers’ product supply chains and marketing activities. Sales volume of beer-flavored beverages was down slightly while sales of happoshu showed substantial decline. New-genre beer sales volume growth slowed but surpassed the previous year.
In this market environment, Sapporo’s Japanese Alcoholic Beverages business suffered a major hit to its product supply capability and had to curtail marketing activities for a lengthy period owing to earthquake damage to two of its five main breweries, the Sendai and Chiba breweries, which supply markets that account for a large share of total company sales. As a result, total unit sales of Sapporo’s beer products in 2011 were down 6.7% year over year. The damage to these plants prompted the company to concentrate production and supply on its three core brands—Yebisu, Sapporo Draft Beer Black Label, and Mugi to Hop. While sales of other products consequently declined sharply, sales of canned versions of the three core products exceeded previous-year levels.
In the nonalcoholic beer category, the company introduced Sapporo Premium Alcohol Free on March 16. The new product was received enthusiastically and sales far exceeded original targets.
In the low-alcohol category, in April Sapporo launched a new and improved version of Sapporo Nectar Sour Sparkling Peach. It also introduced several limited volume, seasonal flavours of cocktails, all of which were favorably received by customers.
Overall, the Japanese Alcoholic Beverages business posted sales of 268.1 billion yen (down 11.1 billion, or 4%, year over year) in 2011. Despite the drop in sales, the business managed to keep operating income level with the previous year, at 9.3 billion yen.
North American beer demand has remained sluggish despite signs of a recovery in consumer spending. General demand appears to have contracted 1–2% from the 2010 level. The Asian beer market, meanwhile, has continued to grow steadily, supported by fast-growing economies in the region. In this environment, Sapporo’s International Alcoholic Beverages business continued marketing activities targeting the premium beer segment.
Canadian subsidiary SLEEMAN BREWERIES achieved a 9% year-over-year increase in unit sales (excluding outsourced production of Sapporo brand products), sustaining its five-year growth streak. SAPPORO USA, meanwhile, boosted its sales of Sapporo brand beers by 10% over the volume achieved in 2010.
Sales outside of North America, which are concentrated mainly in Asia, expanded by 40% year over year.
In Vietnam, the company’s local subsidiary SAPPORO VIETNAM completed construction of its Long An Brewery on November 24 and started production of locally produced beer.
In other overseas markets, Sapporo pursued various growth strategies. In Singapore the company teamed up with the POKKA Group to expanding sales channels in the local household market, while in South Korea it began selling Sapporo brand beers to the household and commercial markets via an alliance with Maeil Dairies Co., Ltd. In Oceania, Coopers Brewery of Australia started brewing and selling Sapporo brand beer from October under a licensing agreement.
As a result of the above activities, the company’s International Alcoholic Beverages business achieved solid sales gains on local-currency bases. Yen appreciation, however, diluted much of these gains in yen terms, resulting in reportable sales of 25.8 billion yen (up 0.5 billion, or 2%, year over year). Operating income, however, was 0.3 billion yen (down 0.1 billion, or 24%), reflecting startup investments totaling 1.0 billion yen in Vietnam.
In 2012, Sapporo’s Japanese Alcoholic Beverage business will continue to focus on expanding its existing brands while aggressively pursuing growth opportunities in non-beer product areas. In particular, Sapporo is targeting a tripling of sales in the low-alcohol category, a growth area where it is enhancing its product offerings through tie-ups with Bacardi and CJ CheilJedang.
The renamed International Business segment is targeting further growth in all core overseas markets. In North America, SLEEMAN will continue its efforts to help Sapporo brand beers better penetrate the local market, while expansion in Southeast Asia will center on Vietnam. Sapporo also targets accelerated growth of beer sales in the South Korea market, where it formed a new joint venture at the end of January by taking a 15% stake in a subsidiary of our local partner Maeil Dairies Co., Ltd. Sapporo also signed a licensing agreement with Coopers Brewery in Australia to propel sales growth of Sapporo brand beers in the Oceania market.
In addition, the company said it will pursue M&A and alliance opportunities in new businesses where it can demonstrate Group synergies in soft drinks and foods.
Sapporo forecasts consolidated sales will expand to 510.0 billion yen (a year-over-year increase of 55.9 billion yen or 12%) in 2012.
The Japanese Alcoholic Beverages business plans to increase profits by boosting sales and continuing cost control measures. The International Business segment, however, expects another decrease in profits as continued forward investments to build brand recognition in Vietnam are expected to offset profit gains by the company’s other existing overseas operations.
Overall, Sapporo forecasts consolidated operating income of 20.0 billion yen (up 1.1 billion or 6% year over year) in 2012, when we target a third consecutive year of growth at the operating level.
Sapporo also projects a 6th consecutive year of growth with consolidated ordinary income of 17.0 billion yen, up just 0.1 billion yen or 1% from 2011, because the company expects higher interest payments to offset most of the gains at the operating level.
Sapporo projects consolidated net income of 6.3 billion yen in 2012, a 3.1 billion yen or 99% increase over 2011. The main differences with 2011 are expected to be the absence of losses stemming from the application of revised accounting standards relating to asset retirement obligations, lower extraordinary losses related to earthquake damages, and an increase in corporate taxes owing to a rise in income before income taxes and minority interests.
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