The Kirin Group sincerely faces its challenges and is addressing those challenges in accordance with new strategies for achieving sustained enhancement of corporate value. In this section, Kirin Holdings President & CEO Yoshinori Isozaki provides frank replies to tough questions and clarifies the steps that the Group is taking to return to a growth track.
The Kirin Group leverages its advanced technological capabilities and manufacturing capabilities to produce high-value products, and it has superior capabilities in the creation of value. One example is Kirin Hyoketsu®. With this product, we have created an invigorating drinking sensation by mixing refreshing vodka with juice, selling it in an original diamond-cut can. These features have been well received by consumers. Kirin Hyoketsu® has substantially expanded the RTD*1 market in Japan, and it has become a hit product that continues to drive market growth. Tanrei Green Label is another highvalue product that draws on the distinctive strengths of the Kirin Group. In addition to a delicious taste, Tanrei Green Label offers functional benefits with a 70% reduction in sugar, and it has earned the support of consumers in Japan. Since its launch in 2002, unit sales have reached approximately 7.3 billion units, and it has driven growth in the functional products category as a longselling brand.
There are two key reasons why we were not able to link our strong value creation capabilities to bottomline growth.
The first reason is that we did not efficiently allocate our management resources. For example, in the Japanese beer business, despite a basic strategy of focusing investment on our core brands, we pursued sales volume through product launches. We did not implement a consistent strategy. As a result, I believe that our investment was dispersed over multiple products and we did not adequately nurture superior brands.
The second reason relates to our ability to respond to downturns in the business environment. One example is our subsidiary Brasil Kirin. From the second half of 2013, competition among companies intensified in Brasil Kirin’s market. In this setting, we implemented price increases to secure profits, and those increases were excessive. Also, the renewal of a core brand ended up backfiring and losing the support of consumers. In these ways, we had a series of marketing failures. Kirin Holdings needed to move quickly in response to this situation, and we did not have a governance system that was suitable for that task.
On being appointed, the first thing that I did was take steps to rebuild our Japanese beer business. This business is the pillar of the Kirin Group’s operations, and successfully rebuilding it depends on the motivation and morale of all of the Group’s employees. Specifically, we focused investment on our flagship brand, Kirin Ichiban Shibori. Kirin Brewery planned for a year-on-year decline in profits and stepped up investment in marketing. As a result, for the first time in six years, the business’s declining share among Japanese beers*2 turned around and began to increase, which led to gains in the motivation of Group employees.
We have established a competitive edge in the functional products category. In fiscal 2015, Kirin Brewery’s share*2 in this category recorded further gains, and that was another significant success. Consumers are becoming increasingly health conscious. The functional products category is expected to record strong growth, and it is also an area in which we can leverage our technological capabilities. The Kirin Group is aiming to create value through initiatives that address social issues over the medium to long term, and I believe that the functional products category will play an important role in helping us achieve that goal.
On the other hand, at Brasil Kirin, where results have worsened considerably, we have begun to implement rigorous structural reforms. We strengthened governance with the appointment of an executive officer at Kirin Holdings with responsibility for Brazil operations. With the holding company and the operating company working together, we have established a system that can accelerate the implementation of structural reforms. In addition, we reached outside the Group to appoint a new Brasil Kirin CEO with expertise in sales. We also shifted to undertake marketing initiatives rapidly and implemented major cost reductions. It will still require some time before the effects of this series of initiatives show up in Brasil Kirin’s results, but we will definitely rebuild the company within three years.
As suggested by your question, the overall scale of the Japanese beer market is not expanding. In this environment, if we simply continue the previous approach of pursuing sales volume, competition among companies will intensify and profitability will decline.
Accordingly, we will steadily shift our competitive axis from volume to value by leveraging the distinctive technical expertise of the Kirin Group. That is the growth strategy of the Group.
In the background of our shift from volume to value is a change in consumer needs. In the era of mass consumption, when markets continued to expand, manufacturers were able to achieve growth simply by focusing on expanding sales of national brands.
Today, however, the needs of consumers are diversifying at an accelerating pace, and we have to respond appropriately to these changing needs at the same time as we work to expand sales volume of our national brands.
In Japan, our strategy is to strengthen our core brands while simultaneously addressing the growing health consciousness of consumers by reinforcing our presence in the functional products category. At the same time, to meet consumer needs for beer with a variety of tastes and the personality of the brewer, we are devoting resources to the development and sale of craft beers.
In recognition of how consumers feel strongly attached to their local regions and how Japanese consumers are highly sensitive to materials and seasonal offerings at their peak, we are also developing and selling products aligned with local characteristics and a sense of the seasons. Through the implementation of these types of initiatives, we have begun taking steps to activate the beer market and create demand by proposing new ways to enjoy beer.
Implementing an accurate response to the transformation of needs is certainly not something that can be achieved by all manufacturers. The Kirin Group has strong R&D capabilities. Also, we have past experience in using our technical expertise to implement timely responses to the transformation of needs and to create entirely new value and markets. That is why I believe that the Kirin Group can successfully address the current transformation in consumer needs.
At the beginning of 1980, the Kirin Group decided to enter the pharmaceuticals business, which it positioned as a new field in which it could leverage the biotechnologies cultivated in beer production. To develop ESPO®, a biopharmaceutical that was launched in 1990 as a treatment agent for renal anemia, we applied beer production technologies and succeeded in mass production. Subsequently, Kirin Pharma, which had recorded steady growth, merged with Kyowa Hakko in 2008.
Both companies had strengths in therapeutic antibodies. These antibodies are considered to offer high levels of efficacy with few side effects in treating diseases for which effective treatment methods have not been found. The merger of these two companies further reinforced these technological capabilities. The Pharmaceuticals and Bio-chemicals Business can contribute to society through the use of these types of original biotechnologies, and in that sense the business embodies the Kirin Group’s unique CSV. Along with alcoholic beverages and non-alcoholic beverages, the Pharmaceuticals and Bio-chemicals Business is one of the Group’s core businesses.
Kyowa Hakko Kirin, which is in charge of the Pharmaceuticals and Bio-chemicals Business, has a promising pipeline in the fields of nephrology, oncology, immunology/allergy, and the central nervous system. Kyowa Hakko Kirin has substantial growth potential. In particular, KRN23, which is under development for such diseases as X-linked Hypophosphatemia, has been in global development for the past five years. In the cancer field, KW-0761 (Japan brand name: POTELIGEO®) is highly anticipated around the world in the field of cancer immunotherapy, which is currently drawing attention.
In fiscal 2015, the Pharmaceuticals and Biochemicals Business recorded a substantial increase in profits and made a major contribution to the Kirin Group’s consolidated results. Over the medium to long term, however, I believe that the true strength of the Pharmaceuticals and Bio-chemicals Business is even greater. Accordingly, we will continue to invest in R&D, even if this places a burden on results in the short term. We will take steps to ensure sound launches of compounds in the development pipeline, build an organization that can accommodate globalization, and establish sales infrastructure. In this way, I would like to see the Pharmaceuticals and Bio-chemicals Business make strong progress in the European and U.S. markets over the medium to long term.
If we allow the issue of low-profit businesses to remain unresolved over the long term, corporate value will be damaged. We will not let this happen. As the Group’s CEO, I will do my utmost to improve low-profit businesses within the period covered by the medium-term business plan.
For Brasil Kirin, we have established an organizational structure that will function in a highly effective manner under the governance system of Kirin Holdings. We have taken steps to reinforce marketing at Brasil Kirin, such as changing the local CEO, rebuilding the distributor network, and revising the pricing policy. Now, Brasil Kirin is in the process of breaking out of the slump in which it recorded continued, substantial declines in market share. Moving forward, we will ensure the recovery of top-line growth potential and accelerate cost structure reforms. Our strategy for restoring top-line growth potential will entail focused investment in the core brand Schin in the northern and northeastern regions of Brazil, where Brasil Kirin has traditionally had a strong presence. In the southern and southeastern regions, where Brasil Kirin has historically been less competitive, we will implement region-specific strategies to increase sales, centered on craft beers and other premium beers.
At the same time, a full-scale recovery in the economy of Brazil is not anticipated, and accordingly we will immediately accelerate cost structure reforms. Our cost-reduction initiatives will include taking steps to increase the management efficiency of in-house wholesaling, optimize production sites, and reduce indirect expenses. In this way, we anticipate cost reductions of 200 million reals (approximately $53 million) in fiscal 2016.
Kirin Beverage has steadily recorded top-line growth. In fiscal 2015, for example, core brand Kirin Gogo -no- Kocha recorded favorable results, and in the carbonated non-alcoholic beverages category the Mets brand substantially enhanced its presence.
Moving forward, we will shift the management focus to profit growth by improving sales methods and product mixes and reevaluating the cost structure.
In the shift to profit growth, we will focus investment on core brands. We will use as a management objective the sales ratio of products in cans and small PET bottles, which are highly profitable. In addition, to increase the sales ratio of vending machines, which are profitable channels, we will strengthen joint sales with other companies.
In reevaluating the cost structure, we will rigorously reevaluate the supply chain overall and reduce the cost of goods sold and other costs by increasing the ratio of products manufactured in-house.
It is important to steadily address social issues related to well-being and to accelerate growth led by the creation of value that delights customers. In this way, it will be possible to increase both social value and economic value and to achieve sustained enhancement of corporate value.
To that end, it will be important to continually strengthen our business platforms, especially our technology platform, for the generation of the Kirin Group’s unique added value. Moreover, our business platforms are supported by our people, and accordingly we will continue to actively invest in human resources development from a medium to long term perspective. Also, in regard to human resources and technologies, we will not be overly committed to handling everything in-house. Our primary consideration will be the creation of value, and we will draw on external resources as needed.
It is also important for the Group’s operating companies to leverage each other’s assets to generate synergies. For example, in Japan we are implementing aggressive initiatives in the craft beer field. Craft beer is also a growth market in Australia, where Lion has been earning the top share and leading growth in the Australian craft beer market. Our craft beer initiatives in Japan are the result of Kirin Brewery successfully drawing on Lion’s know-how.
In addition, with Myanmar Brewery, which we acquired in August 2015, we are in the stage of expanding manufacturing capacity to meet beer demand in Myanmar, which is expected to grow rapidly. Kirin Brewery is successfully providing technical support, and we are cooperating in the addition of the first premium beer products to Myanmar Brewery’s brand portfolio.
The Kirin Group is a distinctive business group with operations in the fields of alcoholic beverages, non-alcoholic beverages, and pharmaceuticals and bio-chemicals. In the future, we will continue to take on the challenges of leveraging synergies among these business domains and, in line with the theme of "well-being," searching for fields in which we can create new value that helps to resolve social issues.
We have implemented aggressive measures for shareholders’ returns, such as through continued increases in dividends and own stock repurchases. Moving forward, we will continue to steadily implement a dividend payout ratio on normalized EPS of at least 30%.
Of course, shareholder value is not something that can be enhanced simply through dividends. In addition to dividends, the stock price is also important to shareholders, and to further advance management that reflects consideration for the stock price we will do our utmost to steadily achieve the quantitative targets set out in 2016 MTBP.
President & CEO of Kirin Holdings
I joined Kirin Brewery in 1977. Working principally in the Corporate Planning Department, I gained experience in Japanese beer business branches and in business development units, both in Japan and in Los Angeles. I studied at the Cornell University School of Hotel Administration and worked in the Kirin Group’s hotel business. I also worked in PR at Kirin and served as vice president of San Miguel Corporation, in the Philippines. I became a managing director of Kirin Holdings in 2010, and in 2012, I was appointed as president & CEO of Kirin Brewery. In 2013, I became president & CEO of Kirin Company, and I was subsequently appointed as president & CEO of Kirin Holdings in March 2015.