Looking at the Kirin Group’s consolidated results in fiscal 2016, our operating income and net income*1 both exceeded the initial planned levels. To achieve sustained increases in corporate value, we determined that we needed to improve profitability, which had declined, and to revitalize businesses. To that end, we implemented structural reforms quickly, and I believe that those initiatives have generated results.
The Kirin Group has included both comparatively high-profit businesses, such as Kirin Brewery, Kyowa Hakko Kirin, and Lion, as well as low-profit businesses, such as Kirin Beverage and Brasil Kirin. The damaging effect of the latter businesses on the Group’s overall corporate value became a major issue for the Group. Since I became president in March 2015, we have implemented policies of bolstering the domestic beer business and not accepting low profits at businesses with profitability issues.
Aiming to nurture a brand to follow Kirin Gogo-no-Kocha, which has earned a dominant share in the black tea category, we took steps to strengthen our positioning in the categories of sugar-free teas, coffee, and carbonated beverages, which account for a large share of the market. One success was the re-branding of Kirin Nama-cha through a complete renewal, which led to a substantially enhanced presence in the green tea market by addressing consumer needs in the areas of flavor and bottle design. As a result, we generated a favorable cycle of growing sales of small containers, which offer high profits; efficient control of sales promotion expenses thanks to Nama-cha becoming a staple item in stores; and improvement in the in-house manufacturing ratio. In this way, Kirin Beverage recorded substantial gains in profitability.
With the market contracting due to sluggish economic conditions, we rigorously implemented a detailed product strategy by region, and in 2016 we succeeded in restoring sales volume to positive growth. Furthermore, we successfully reduced costs by improving the management efficiency of our own distribution system and the use of our supply chain, as well as selling one plant to optimize production sites. In these ways, we advanced the revitalization initiatives at a pace that exceeded our plans. However, in consideration of the uncertain future of the political, economic, and social situation in Brazil, as well as the competitive environment, it will be difficult for Brasil Kirin to achieve sustained growth operating on its own. We compared a number of options, including independent restructuring, and as a result we decided that the transfer of the business at this time was the best solution for the stakeholders of both the Kirin Group and Brasil Kirin. In February 2017, we resolved to transfer all the shares in Brasil Kirin to Bavaria S.A., a subsidiary of Heineken International B.V.
As with low-profit businesses, we have also pursued cost efficiency in high-profit beer businesses. Targeting the Groupwide cost cut initiative of ¥30.0 billion in the 2016 MTBP, we are making progress at a pace that exceeds our plans. Supported by these initiatives, we have taken steps to advance new value creation, targeting growth in our beer businesses over the medium to long term, and we are already starting to see the results of these initiatives.
The domestic beer market continues to contract, but nonetheless 47 Todofuken no Ichiban Shibori has become a major hit, with annual shipments of 2.7 million cases, more than double the initial target. This success is attributable to innovative marketing that addresses the preferences of consumers in each region while leveraging the presence of Ichiban Shibori as a national brand. This project—which offers different tastes and characteristics for each prefecture in Japan—was made possible by our strengths in marketing, R&D, and supply chain management. Moreover, it has contributed to the revitalization of local regions while providing new value to consumers. These comprehensive activities have been highly evaluated, and 47 Todofuken no Ichiban Shibori received the 2016 Japan Marketing Award. We are making steady progress in realizing the Kirin Group’s vision and strategies—to leverage our fundamental strengths to target the creation of value and the achievement of sustained growth together with society.
In Japan, to drive further growth in the craft beer market, we are taking steps to nurture our in-house brands and are working in cooperation with YO-HO BREWING COMPANY. In addition, we have also commenced a capital and business partnership agreement with the Brooklyn Brewery Corporation. Targeting the revitalization of the beer market, we will strive to expand Japan’s original beer culture through craft beer. In Australia, our subsidiary Lion continues to record favorable sales of such products as James Squire and Little Creatures.
To meet consumer needs for true flavors and individual tastes, Lion has acquired craft beer companies in Australia and New Zealand, thereby strengthening its base for future business growth.
We have made favorable progress in integrating Myanmar Brewery into the Group, following its acquisition. One challenge we faced was efficiently establishing a system for increasing production to address the rise in demand accompanying economic growth. To that end, we are successfully transferring Kirin’s know-how in the area of efficient production. In addition, in response to rapid gains in the standard of living, another challenge was rapidly enhancing the lineup of products other than existing national brands. To address this, we quickly launched such brands as KIRIN ICHIBAN and Myanmar Premium, leveraging synergies with Kirin once again, thereby building a strong brand portfolio that covers each price range.
We are making favorable progress in the development of global strategic products. In particular, KRN23 was granted breakthrough therapy designation by the Food and Drug Administration (FDA) in the United States in June 2016, and the European Medicines Agency (EMA) accepted for review the Marketing Authorisation Application (MAA) for KRN23 at the end of 2016.