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Japan Food and Drink Report Q3 2008

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Report Summary

In BMI’s Food and Drink Business Environment Ratings, which ranks 14 key markets in the Asia Pacific region, Japan is placed joint fourth (alongside Thailand). While the high disposable income continues to ensure strong food and beverage consumption, the longer-term growth potential is stifled by the market’s maturity as well as a generally difficult operating environment for foreign players. More recently, rising commodity prices have been passed onto consumers, with the overall effect being higher value, but lower volume sales.

Nevertheless, companies investing in innovation and marketing will have room for growth. In the light of the difficult business condition in the home market, many companies are looking elsewhere for expansion opportunities. In April 2008, Japanese dairy giant Yakult Honsha Co confirmed that international expansion will remain its primary focus in FY09, with global interest in Yakult's health and well-being portfolio soaring. Similarly, Japanese food flavourings specialist Ajinomoto Co confirmed the construction of two new manufacturing facilities in Thailand, while Meiji Dairies Corp – Japan's leading dairy company – revealed its intention to expand its market share in Taiwan.

This situation is also reflected in the beverages industry, with major brewers attempting to boost their involvement in other segments, as well as regions. Japanese beer major Asahi Breweries Ltd recently signed a deal with Russian Baltika Breweries, which will pave the way for the manufacture of its Super Dry beer brand in Russia. Similarly, leading local brewer Kirin Holdings is seeking partnerships in India, Thailand and Vietnam, in a bid to increase its brewing operations in the region and capitalise on rising beer consumption in those countries.

In late 2007, Kirin Holdings announced a partnership with Australian Lion Nathan – in which it holds a 46% stake – to purchase raw materials, having successfully trialled the scheme in the course of 2007. In the meantime, domestic shipments of beer and beer-like products dropped by 2.6% year-on-year (y-o-y), in the first three months of 2008, disadvantaged by rising prices and despite new launches of carbohydrate-free beverage and similar beverages. In the wider retail environment, organic growth is becoming less and less viable, with retail operators seeking new avenues of expansion.

To this end, Japan's second-largest convenience store chain Lawson reported is considering domestic acquisitions, in tandem with amending the product mix and layout of many of its existing stores in order to cater to Japan's changing population demographics. Those issues are also relevant to food and drinks manufacturers, which are forced to innovate or relinquish their market shares.

Table of Contents

Executive Summary 7

Business Environment ....8

Regional Food and Drink Business Environment Ratings .. 8

Table: Asia Pacific Food & Drink Business Environment Ratings – Q308 ...... 11

Japan’s Food and Drink Business Environment Rating 11

Table: Global Food & Drink Business Environment Ratings – Japan’s Peer Group 12

SWOT Analysis . 13

Food And Drink 13

Japan Food And Drink SWOT 13

Mass Grocery Retail ...... 14

Japan Mass Grocery Retail SWOT .. 14

Macroeconomic Outlook ..... 15

Table: Japan – Macroeconomic Forecasts . 18

Food ......19

Industry Forecast Scenario . 19

Food Consumption 19

Table: Food Consumption Indicators – Historical Data & Forecasts 19

Confectionery . 20

Table: Confectionery Indicators – Historical Data & Forecasts 20

Canned Food . 21

Table: Canned Food Sales Indicators – Historical Data & Forecasts 21

Trade .. 22

Table: Food & Drink Trade Indicators (US$mn) – Historical Data & Forecasts ..... 22

Industry Developments . 22

Market Overview 24

Food Consumption 24

Table: Japan Consumption Of Dairy Products .. 26

Confectionery . 26

Canned Food . 27

Trade .. 27

Agriculture. 28

Drink .....29

Industry Forecast Scenario . 29

Alcoholic Drinks ... 29

Table: Alcoholic Drinks Indicators – Historical Data & Forecasts 30

Hot Drinks . 30

Table: Hot Drinks Indicators – Historical Data & Forecas 30

Soft Drinks . 31

Table: Soft Drinks Indicators – Historical Data & Forecas 31

Industry Developments .. 31

Market Overview 34

Alcoholic Drinks ... 34

Hot Drinks . 35

Soft Drinks . 35

Agriculture At A Glance 37

Table: Japan Agricultural Production By Sub-Sector ('000 Tonnes) 37

Table: Japan Organic Agricultural Data .. 37
Table: Japan Processed Dairy Production ('000 Tonnes, Unless Stated) 37
Agricultural Commodity Price 38
Table: Japan Rural/Urban Breakdown ..... 39
Mass Grocery Retail 40
Industry Forecast Scenario . 40
Table: Japan Mass Grocery Retail Indicators – Sales Value By Format (US$bn) – Historical Data & Forecasts . 41
Table: Grocery Retail Sales By Format – Historical Data & Forecasts .. 42
Industry Developments . 42
Market Overview 43
Table: Structure Of Japan’s Mass Grocery Retail Market By Estimated Number Of Outlets 46
Table: Structure Of Japan’s Mass Grocery Retail Market, Sales By Format (US$bn) 46
Table: Average Annual Sales Per Outlet By Format (US$mn) .. 46
Competitive Landscape 47
Key Players. 47
Food And Drink 47
Key Players In Japan's Food & Drink Sector – 2007 . 47
Mass Grocery Retail ...... 48
Key Players In Japan's Mass Grocery Retail Sector – 2007 48
Company Analysis ...... 49
Food ... 49
Ajinomoto .. 49
Drink ... 50
Kirin ... 50
Asahi Breweries Ltd 51
Mass Grocery Retail ...... 52
Seven & I Holdings . 52
Lawson Inc. 53
AEON .. 54
Seiyu ... 55
Deep US Recession Scenario .....56
Global Scenario 56
Table: World GDP Growth ..... 56
Table: US GDP Growth, Investment Growth And Private Consumption Growth ...... 57
Table: Eurozone GDP Growth 58
Table: Asia, Excluding Japan, GDP Growth ..... 59
Table: China GDP Growth ..... 60
Table: Mexico GDP Growth ... 60
Table: Africa GDP Growth ..... 61
Asia Pacific Food & Drink Scenario .... 62
Table: Impact of Deep US Recession On Total Food Consumption (US$bn) In Selected Asia Pacific Markets – Cumulative US$ Impact Over 5-
yr Forecast Period 64
Appendix 65
Food & Drink Business Environment Ratings ..65
Ratings Methodology . 65
Ratings Overview 65
Ratings System ...... 65
Indicators... 65
Limits Of Potential Returns ..... 66
Risks To Realisation Of Potential Returns 67
Weighting... 68 Weighting... 68 BMI Food & Drink Industry Glossary .69 Food & Drink . 69 Mass Grocery Retail .. 69 BMI Food & Drink Forecasting & Sourcing 71 How We Generate Our Industry Forecasts .... 71 Sourcing ... 72