Kirin Holdings Co. Ltd in Beer - World

June 2010 Scope of the Report Kirin Holdings - Beer © Euromonitor International Scope

• 2009 figures are based on part-year estimates. • All forecast data are expressed in constant terms; inflationary effects are discounted. Conversely, all historical data are expressed in current terms; inflationary effects are taken into account. • Alcoholic Drinks coverage:

Alcoholic Drinks 235 billion litres

RTDs/ Wine Beer Spirits High-strength Cider/perry 27 bn litres 184 bn litres 19 bn litres Premixes 1.5 bn litres 4 bn litres

Note: Figures may not add up due to rounding

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Strategic Evaluation

Competitive Positioning

Market Assessment

Category and Geographic Opportunities

Operations

Brand Strategy

Recommendations

3 Strategic Evaluation Kirin Holdings - Beer © Euromonitor International Kirin Company Facts

Kirin Kirin has looked for overseas expansion Headquarters Tokyo, Japan • Kirin has expanded its presence internationally, particularly in Asia Pacific and Australasia. Major Regional Asia Pacific, Australasia • It has acquired total control of the Australasian brewer Involvement Lion Nathan and has expanded its equity holding in the Category Pilipino brewer San Miguel. It also owns the Four Roses Beer, Wine, Spirits, Soft Drinks, Involvement distillery in the US. World Beer Volume • The company has acquired operations in Australia and 1.9% Share 2009 China in soft drinks and food. Beer Volume Growth • Kirin has stated it intentions to increase its revenues from 47.0% 2009 sources outside Japan, to counteract a declining and highly competitive domestic market. Kirin Beer Volumes 2000-2009 • Kirin also owns Coca-Cola bottler Coca-Cola Bottling 4,000 Company of Northern New England, USA. 3,500 Complete beverage portfolio in Japan • Kirin has operations in beer, soft drinks, wine and spirits 3,000 in Japan. 2,500 • It is also one of several Coca-Cola bottlers in the country. 2,000 • In 2009, Kirin announced that it was forming a joint 1,500 venture with the global spirits producer Diageo in Japan.

1,000 Volume (litres (litres mn) Volume 500 0

4 Strategic Evaluation Kirin Holdings - Beer © Euromonitor International Financial Assessment

Kirin Group FY 2009 Financials • Kirin has been hit by the strength of the yen, particularly against the Australian dollar in 2009. The ¥ (bn) (% growth y-on-y) company has substantially increased its exposure in alcoholic drinks, food and beverages since the Sales 2,278.4 (-1.1) acquisition of National Foods and gaining control of the brewer Lion Nathan. Operating Income (after 128.4 (-12.0) • Alcoholic Beverages made up the largest proportion goodwill amortisation) of sales and income in 2009 and should continue to Net Income 49.1 (-38.7) do so.

EBITDA 212.8 (-19.6)

Sales Breakdown by Segment, ¥ bn, Operating Income (after goodwill 2009 amortization) by Segment, 2009 Yen Other Other bn 11% Alcoholic 3% Pharmace Beverages Pharmace uticals 48% uticals 9% 23%

Soft Alcoholic Drinks and Beverages Foods 69% Soft Drinks 5% and Foods 32% Note: This excludes Corporate and Eliminations deductions that in 2009 totalled ¥19.6 bn. 5 Strategic Evaluation Kirin Holdings - Beer © Euromonitor International SWOT - Kirin

Operations in Asia Wide Beverage & Food Exposure to the Small Presence in China Pacific Portfolio Japanese Market • Asia Pacific is the fastest • A wide beverage and food • The Japanese market is in • Kirin has operations and growing region for beer. portfolio in Japan and decline with an ageing equity holdings in China Kirin is well placed to Australia could limit the and declining population but these are small. The benefit from this increase impact of a poor being the major factors of dynamic Chinese market with operations and equity performance in its this decline. is set to drive the majority stakes in China and the alcoholic drinks business. of global beer growth. Philippines.

Strengths Weaknesses Opportunities Threats

Strength of Growth in Consolidation of the Strength of the Yen Competitive Threat Asia Pacific Beer Market • The current strength of • Asia Pacific is expected to • The increasingly • Japan‟s fiercely the Japanese yen against be the largest growing consolidated nature of the competitive market could other currencies in Asia region in absolute volume global beer market could prove an issue if Kirin Pacific and Australasia terms for beer over the limit the number and/or does not keep on gives it greater buying 2009-2014 period. Kirin push up the costs of innovating as well as its power for acquisitions. and its equity holdings are acquisitions. rivals. With other large in a good position to brewers looking for growth expand in the region in in Asia Pacific, it may also their existing and come under threat from potentially new markets. new entrants. 6 Strategic Evaluation Kirin Holdings - Beer © Euromonitor International Kirin Vision 2015 Strategy Plan

Overview • Kirin has developed a strategy – Vision 2015 - for the company as a whole, based around three core strategies against three group consolidated targets. • This strategy has been implemented to increase Kirin‟s revenues and profits and to protect it from declining markets and intense competition in its domestic Japanese market. Core Strategies Consolidated Targets:

Three targets for entire Implement Kirin group to achieve by 2015 strategies to become an integrated beverage group.

Build the health and Overseas functional food sales ratio of business as Achieve ¥3 approximately a new trillion in 30% (sales business sales pillar. excluding Operating (including alcohol tax Internationalise income alcohol tax). and operating the group ratio of ¥2.5 trillion income) over 10% in sales (excluding alcohol tax)

7 Strategic Evaluation Kirin Holdings - Beer © Euromonitor International Driving Growth Through Acquisition

Recent Acquisitions • Kirin has acquired several assets and equity stakes since 2006 in several sectors including alcoholic drinks, packaged food and soft drinks in several markets in Asia Pacific and Australasia. These acquisition are to mitigate the declines in its domestic Japanese market and lay foundations for future growth. Non-Alcoholic Drinks Acquisitions • Kyowa Hakko Group – Kirin has acquired a 50.1% stake in Japanese pharmaceutical group in a strategic alliance. Kirin and Kyowa Hakko then merge both companies‟ pharmaceutical companies under the Kyowa Hakko Kirin Group. • Kirin has acquired National Foods from San Miguel Corporation for US$2.52 billion in December 2007. National Foods is a large Australian producer of diary foods and beverages. • Kirin has increased its stake in Shanghai Jinjiang Kirin Beverage & Food, a soft drinks company based in China, from 57.6% to 93%. Alcoholic Drinks Acquisitions • In 2006, Kirin acquired a 50.12% stake in Japanese wine company Mercian Corporation. Mercian is a leading wine and RTDs company and will look after Kirin‟s Japanese wine portfolio, while Kirin will manage Mercian‟s RTDs and shochu operations. • Kirin acquired the Two Dogs RTD brand in Japan from Pernod Ricard Australia in 2006. Kirin had been importing the Two Dogs brand since 1996. • Kirin acquired a 25% stake in brewer Hangzhou Qiandaohu, for US$38.1 million. • Kirin acquired a 49% stake in San Miguel Brewery from parent company San Miguel Corporation for US$1.19 in January 2009. San Miguel is the leading brewer in the Philippines, with a near 90% market share. San Miguel Brewery then acquired its international brewing arm from parent company San Miguel Corporation in December 2009, for US$300 million. The operation has six breweries in China, Hong Kong, Indonesia, Vietnam and Thailand. Kirin swapped a stake in San Miguel's parent company, San Miguel Corporation, for an increased stake in the brewing operation. It is also in the process of acquiring San Miguel‟s spirits business. The parent company San Miguel Corporation still has control of San Miguel Brewery and is currently in the process of divesting several operating units to fund the acquisition and development of new business in power generation, mining and heavy industry, Kirin has deepened its exposure to San Miguel Brewery in the last tranche of divestments. 8 Strategic Evaluation Kirin Holdings - Beer © Euromonitor International Lion Nathan Acquisition

• In October 2009, Kirin acquired total control of Lion Nathan, the number two Australasian brewer, for US$2.6 billion. Kirin already held a substantial 46% equity stake in the brewer, which was acquired in 1998. Lion Nathan had operations in Australia, where it was the second ranked brewer with a 41% market share in 2008, and was New Zealand‟s leading brewer, with 52%. Lion Nathan also has a small fine wines, spirits and RTDs business operating in Australasia, including a joint venture with Bacardi for the distribution of its spirits portfolio in Australia. • The acquisition added nearly 940 million litres, equal to a 50 basis points increase in Kirin‟s global market share in beer. At Australasian level this give Kirin a 41.1% market share in 2009 in beer. • In addition, in January 2008, Lion Nathan (then 46% owned by Kirin) purchased J. Boag & Son, a Tasmanian brewer, for US$302.8 million, from San Miguel Corporation, further extending it presence in Australia. Increasing its Australian volumes by 24 million litres or 110 basis point market share increase in the Australasian region. • Beer volumes in Australasia are expected to grow at a CAGR of just 2% over the 2009-2014 period, equal to an additional 201 million litres, with a general trading up trend to premium beers. However, this compares favourably with the Japanese beer market, which is forecast to decline at a CAGR of nearly 1%, equal to a decline of 160 million litres, with a trading down trend to trend to economy lager. Major Brewers in Australasia by Volume 2000-2009 2,500

2,000

1,500

1,000

Volume (litres (litres mn) Volume 500

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Foster's Group Ltd Kirin Holdings Co Ltd Lion Nathan Ltd Others 9 Strategic Evaluation Kirin Holdings - Beer © Euromonitor International Enters Into Joint Venture, Makes Small Disposals

Enters into a joint venture with Diageo in Japan • Kirin has ended its agreement with Pernod Ricard, the world‟s number two spirits producer. • Kirin enters into a joint venture with Diageo after Diageo dropped its previous Japanese distributor Sapporo for the Guinness, Kilkenny and Smirnoff Ice beer and RTD brands. Diageo will hold a 51% stake in the venture, with Kirin holding the remainder. The deal also includes Diageo‟s Captain Morgan, Crown Royal, Godiva, Myner‟s Rum, Seagram‟s Seven Crown, Seagram‟s VO and Gilbey's Gin and Vodka, which Kirin already distributed. In addition, 13 more brands were added, including Tanqueray Gin, Bailey‟s, I W Harper and Johnnie Walker Black and Red Labels. • Diageo‟s luxury and super luxury malt and blended Scotch whisky brands stay with its 50/50 joint venture in Japan with MHD Diageo Moet Hennessy. Diageo also owns a 34% stake in Moet Hennessy. Disposes of several small operations • In addition to Kirin‟s acquisitions in alcoholic drinks, the company has made some disposals: • Raymond Vineyards and Cellars: US Napa Valley-based winery to Boisset Family Estates, the US division of French wine producer Boisset. • Stake in Pernod Ricard: Kirin divested its 3.7% voting right stake in Pernod Ricard after entering the joint venture with Diageo. • Kirin Agriibo Businesses: In 2010, Kirin agreed to sell its Agriibo business units to H2 Equity Partners, a Dutch- based private equity company. The deal is due to complete in March 2010.

10 Strategic Evaluation Kirin Holdings - Beer © Euromonitor International Kirin Holds Several Equity Stakes in Other Brewers

Increased stake in San Miguel Breweries Philippine Beer Market by Volume 2004- • Kirin acquired a 49% stake in the Philippine company 2014 San Miguel Breweries, which in turn has acquired 2,000 control of San Miguel Breweries International. This has extended Kirin‟s Asia-Pacific presence with 1,500 increased access notably to Hong Kong, China and Vietnam. 1,000 • In total San Miguel Breweries and International generate 1.6 bn litres of beer sales in 2009. 500

• San Miguel Brewery is also currently in the process (litres mn) Volume of acquiring Ginbera San Miguel, San Miguel 0 Corporation‟s gin business, which is the leading spirits company in the Philippines. Stakes in Chinese brewers • As well as it own operations in China, Kirin owns two Chinese Beer Market by Volume 2004- equity stakes in Chinese brewers: 2014 • A 25% stake in Dalian Daxue Brewery, acquired in 70,000 November 2004 for ¥3.87 billion. It is based in North 60,000 East China and operates in three provinces. 50,000 • A 25% stake in Hangzhou Qiandaohu Brewery, which 40,000 is based in Zhejiang Province in China. 30,000 20,000

Volume (litres (litres mn) Volume 10,000 0

11 Strategic Evaluation Kirin Holdings - Beer © Euromonitor International Deals Strengthen Presence Domestically and Internationally

Broadens Japanese brand portfolio • Volume sales of vodka, rum, stout, RTDs and cream- based liqueurs all grew over the 2004-2009 period in the Diageo Kirin JV Japanese market against the general decline in spirits Broadens RTDs, Spirits, Beer volumes led by the decline in whisk(e)y, with large Japanese Mercian declines in Japanese whisky, bourbon/other US whiskey and blended Scotch whisky. Brand Wine, RTDs, Shochu Two Dogs • Mercian‟s position in wine combined with Kirin‟s existing Portfolio RTDs distribution of international wine brands has strengthened the latter‟s presence in the wine market.

Increases international presence • The acquisition of Lion Nathan and increasing its equity stake in San Miguel widens Kirin‟s revenue generation Gains Control of Lion Nathan base outside of the declining Japanese market. Australasian alcoholic drinks • The proposed acquisition by San Miguel Breweries of market Ginbera San Miguel, the spirits arm of parent company Increases Increases equity stake in San San Miguel Corporation, is also beneficial to Kirin, as International Miguel Ginbera is the leading spirits company in the Philippines. Presence Increases exposure to Asia Volume sales of spirits in the Philippines grew by a Pacific markets, spirits and beer healthy 32% over the 2004-2009 period and are expected to grow at a CAGR of more than 3% over the Australasia in the Philippines 2009-2014 period. Gains equity stakes in Chinese Asia Pacific • Kirin has increased its exposure to Asia Pacific beer brewers markets including China, Hong Kong, Indonesia, Increases presence in growing Vietnam and Thailand, which are generally performing Chinese beer market better than Japan. 12 Strategic Evaluation Kirin Holdings - Beer © Euromonitor International Proposed Merger with Suntory Fails

• In 2009, Kirin and Suntory had discussions regarding combining their operations, but revealed in early 2010 that they had failed to reach terms, which both parties were happy with. • Both companies have similar operations - alcoholic drinks, non-alcoholic drinks and food, with some overlap in geographic reach. A combined entity would have had greater buying power. • With Kirin being the number one brewer and Suntory the number three brewer in Japan, the combined entity would have a combined market share of nearly 46% (based on 2009 data), and thus dominate the Japanese market. In China also, the combined entity would hold a volume share in beer of almost 2%; closer to 2.5% when including Kirin‟s equity holdings in that market and thus enhancing its prospects in the world‟s largest and fastest growing volume beer market. • The deal is thought to have failed, because both companies could not agree on their stakes in the combined entity. • The deal did make strategic sense, as increased volumes in Japan would allow for synergies to be developed from overlapping operations, which would increase economies of scales in the different business segments. Outside Japan, this would have strengthened both companies‟ operations in several markets including the Chinese beer market, where both are relatively small players.

13 Kirin Holdings - Beer © Euromonitor International

Strategic Evaluation

Competitive Positioning

Market Assessment

Category and Geographic Opportunities

Operations

Brand Strategy

Recommendations

14 Competitive Positioning Kirin Holdings - Beer © Euromonitor International Kirin Under-Performs the Global Beer Market

• Over the 2003-2008 period, Kirin under-performed the global beer market, due to its major presence being in the mature, declining and competitive Japanese market. • Increasing its equity holding and thus gaining control of Lion Nathan in 2009 was the major reason for Kirin outperforming the global market in 2009 and the only reason for its growth in the year. • Gaining control of Lion Nathan should help partially mitigate the volume decline in the Japanese market. Global, Japanese and Kirin Volume Beer Volume Y-on-Y 2003-2009

40 Y%

- 30

on -

10 Volume Growth Y Growth Volume

0 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

-10 Global Beer Average Kirin Japanese Market Average 15 Competitive Positioning Kirin Holdings - Beer © Euromonitor International Rise in Global Rankings Through High-Growth Markets

Beer - Top 12 Global Companies, 2009 Rise of emerging brewers and consolidation • Carlsberg has strengthened its global position with its 5-Year part in the Scottish & Newcastle acquisition, with the Rank Brewer % volume share Ranking company becoming the fourth largest brewer in 2008. Trend • Heineken‟s part in the Scottish & Newcastle acquisition 1 A-B InBev 19.0 and InBev‟s acquisition of Anheuser-Busch improved its ranking by one place, to third, in 2008. 2 SABMiller 9.6 - • InBev‟s acquisition of Anheuser-Busch strengthened its position as the global leader by volume. This has been 3 Heineken 6.7 reduced to some extent by divestments to pay off the debt accrued by the deal. 4 Carlsberg 5.9 • Brewers with exposure to Latin American, Eastern European , Middle East and African and certain Asia 5 China Resources 4.5 Pacific markets grew faster than companies absent from these markets over the 2005-2009 period. This is due to 6 Tsingtao 3.2 the faster growth in these markets compared to the mature markets in Western Europe, North America and 7 Modelo 3.0 Australasia. 8 Molson Coors 2.8 • The leading Chinese brewers in particular have seen their volumes boom with the growth of the Chinese 9 Beijing Yanjing 2.5 market, and several have entered the global top 10 rankings. 10 FEMSA 2.3 • Kirin has strengthened its position, particularly through gaining control of Lion Nathan in 2009, but also through 11 Kirin 1.9 extending its equity holdings in China and in San Miguel. This has deepened its exposure to markets with better 12 Asahi 1.6 - growth prospects than its domestic Japanese market. 16 Corporate Positioning Kirin Holdings - Beer © Euromonitor International Competitive Activity Overview 2008-2010

SABMiller AB InBev Molson Coors • Acquires Grolsch. • InBev acquires Anheuser-Busch. • Joint venture in the US with • Joint venture in the US with • Makes several divestments in South SABMiller. Molson Coors, creating Korea, US, UK and Eastern Europe to • Acquires 5% of Foster‟s, the MillerCoors. pay down debt accrued in the number one ranked • Extends import operations in acquisition. Australian brewer. Western Europe. • Acquires 50.1% stake in Cobra beer outside India.

China Resources Heineken Modelo • Snow now the largest global • Acquires elements of Scottish & • Objects to InBev‟s takeover beer brand. Newcastle. of Anheuser-Busch and • Acquires four more • Announces joint venture with Anadolu. starts arbitration breweries in China. • Acquires assets in Africa, Western and proceedings. Eastern Europe. • Announces proposed acquisition of FEMSA.

Anadolu Asahi • Forms a joint venture with • Acquires a 19.9% stake in Heineken in several number two ranked Chinese markets; venture looks to brewer Tsingtao. jointly acquire Uzbek • Buys Cadbury Schweppes‟s operation. Australian beverage unit for • Acquires assets in Georgia. A$1.2 billion.

17 Competitive Positioning Kirin Holdings - Beer © Euromonitor International M&A Activity Boosts Leading Brewers’ Volumes

2008 acquisitions increase volumes, 2009 growth is hit by wider economic issues • The acquisitions in 2008 increased volumes, but growth in 2009 is hit by the global economic crisis. • Brewers with exposure to both Western and Eastern Europe have been hit the hardest by the declining volumes in key markets. A-B InBev‟s disposal programme to pay down debt has also had a negative impact on its volumes. Leading Global Brewers Volumes 2007-2009

Anheuser-Busch InBev SABMiller Heineken Carlsberg China Resources Tsingtao Modelo Molson Coors Beijing Yanjing FEMSA Kirin 2009 Asahi 2008 Anadolu Diageo 2007 Schincariol Empresas Polar Henan Jinxing San Miguel Suntory Guangzhou Zhujiang Oetker-Gruppe

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 Volume (litres mn ) 18 Competitive Positioning Kirin Holdings - Beer © Euromonitor International Consolidation Rush Amongst the Top Brewers

• All the current major brewers took part in the Consolidation Within the Global Beer consolidation, which has marked the beer industry for over a decade. Market: % Volume Share • Out of the top 10 brewers in 2000, only Modelo and Heineken still had a place in the top 10 rankings in 2009 without a name change due to merger or acquisition. • In the emerging markets of Middle East and Africa, Asia Pacific and Latin America, brewers have rushed to capture volume growth there. In mature markets, the consolidation took place in the value markets of North America and Western Europe, with brewers looking to balance their portfolios between value and volume markets. • This has led to a dramatic increase in the volumes of the top 10 brewers, which have captured an increasing proportion of the global beer market since 2000. • This consolidation activity has left relatively little scope for acquisitions in some major markets and has pushed up the value of the independent breweries left. • The acquisition of FEMSA by Heineken will increase the percentage of global volumes owned by the top 10 13.6% brewers by 190 basis points (based on 2009 volumes) to 61.8%. This is due to FEMSA being included in Heineken‟s share and Kirin becoming a top 10 global Top Five Next Five Others brewer. Inner ring: 2000 Middle ring: 2004 Outer ring: 2009 provisional 19 Competitive Positioning Kirin Holdings - Beer © Euromonitor International Japanese Brewers Look Internationally

• The declining and ageing Japanese population Overview of Japanese Competitors Acquisitions shook the large Japanese brewers from their inward focus to look abroad for new markets in the last 2006-2010 decade to combat the certain decline in Japan. The Company Target Notes favourite acquisition targets seem to be beverage (both brewers and soft drinks) and food companies in Acquires total control of Kirin Lion Nathan Asia Pacific and Australasia, with one large notable Australasian brewer exception of Suntory‟s acquisition of Orangina in Acquires 49% of San Miguel Europe. Brewery, which in turn San Miguel • This is a much needed defensive move by the Kirin acquires international Brewery Japanese companies, which had not participated in breweries from parent the acquisition activity driven by the large Western company brewers since the end of the 20th Century. The Acquires food company in realisation that Japan is a market in decline with Kirin National Foods Australia heavy competitive activity and that acquisition targets Acquires European rights and were being snapped up by Western companies Suntory Orangina required them to act quickly and decisively. It is no production wonder that the majority of activity has been in Asia Acquires 50% stake in Thai Suntory TipCo F&B Pacific and Australasia, due to the similar time zones soft drinks company and trading links. The majority of Asia Pacific Acquires Kronenbourg excluding Japan offers growth prospects especially Kronenbourg Sapporo Vietnam from Carlsberg China, and Australasia offers a cash cow as befits a Vietnam mature market. Acquired control of Canadian Sapporo Sleemans brewer Asahi acquires 19.9% stake in Asahi Tsingtao second-ranked Chinese brewer 20 Kirin Holdings - Beer © Euromonitor International

Strategic Evaluation

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Market Assessment

Category and Geographic Opportunities

Operations

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21 Market Assessment Kirin Holdings - Beer © Euromonitor International Strong Presence in Australasia and Asia Pacific

• Kirin has a strong presence in Asia Pacific and Australasia, but a small presence in other markets like North America and Western Europe. • Its presence in Asia Pacific particularly in Japan is mitigated by the sheer size of the Chinese beer market in volume, where it is relatively small player. • It has no major presence in the fast growing markets of Latin America and the Middle East and Africa.

Kirin Beer Regional Presence in 2009 and Growth Prospects 8 MEA 7

6 AP

2014 2014 - 4

3 AUS LA 2

% CAGR 2009CAGR % EE 1 NA WE 0 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 -1

-2 Market size in 2009 (litres mn) Bubble size indicates 2009 company volume share range: 4.1-41.1% Black bubbles: Western Europe, Eastern Europe, Latin America, North America and Middle East and Africa indicate no or limited presence (less than 0.1% regional market share). 22 Kirin Holdings - Beer © Euromonitor International

Strategic Evaluation

Competitive Positioning

Market Assessment

Category and Geographic Opportunities

Operations

Brand Strategy

Recommendations

23 Category and Geographic Opportunities Kirin Holdings - Beer © Euromonitor International Japanese Market in Long-Term Decline, Trading Down

Unusual beer duty system creates unusual market conditions, drives trading down • In Japan, beer is taxed on malt content unlike most other nations. A heavy tax is applied to drinks containing malt content of over 66.7%. • This has led to the development by all the major brewers of low-malt (Happoshu) and non-malt beer (New Genre) alternatives. Happoshu has a lower tax rate than full beer, and New Genre beer even lower than that. • Happoshu and New Genre beers have both driven growth in the economy segment, with consumers trading down due to the lower prices of these products. New Genre and Happoshu are mostly consumed at home, with consumers preferring to trade up to standard and premium beers in the on-trade. • Imports of cheap economy beer from Korea and other markets and the launch of private label beer by Japanese retailers could threaten Kirin‟s and the other large Japanese brewers‟ current grip on the market.

Japanese Beer Market Overview 2009 Changing Face of Japanese Lager Market 2004-2009 8,000 Market Size - mn litres 7,042.5 7,000 6,000 % CAGR 2009-2014 -0.5 5,000 4,000 Per Capita Consumption - litres 55.2 3,000

Volume (litres (litres mn) Volume 2,000 Off/On- trade split % volume 82/18 1,000 0 Kirin - Volume Share (Rank) 34.5% (1) 2004 2005 2006 2007 2008 2009 Premium Lager Standard Lager Economy Lager 24 Category and Geographic Opportunities Kirin Holdings - Beer © Euromonitor International Fierce Competition in Japanese Market

Four main brewers do battle in a declining market Declining Population and Key Beer • With the top four brewers accounting for 88% of beer Demographic in Japan 2004-2014 volume sales, the Japanese market is very competitive. 140,000 • Recently, small local brewers akin to the craft brewers of the US and the real ale brewers in the UK have sprang 120,000 up in Japan and started to capture market share from 100,000 the top four brewers with unique beers. The growth of the small brewers is illustrated by the increase in share 80,000 for “Others”, up from 5% in 2000 to 11% in 2009. This 60,000 was after the Japanese government lowered the 40,000

minimum amount of beer needed to become a licensed („[000s) Population brewer from two million litres to 60,000 litres in 1994. 20,000 Japanese Major Brewers Market 0 Shares, 2009

Others Kirin Population Aged 20-40 Population Aged 0-19, 41+ 12% 35% Long-term decline in beer due to population Suntory trends 11% • The declining and ageing population in Japan is the main cause of the overall decline in beer in Japan, with volumes expected to fall at a CAGR of nearly -1% over Sapporo 10% the 2009-2014 period, equal to 160 million litres. • Another factor is younger consumers moving away from beer to RTDs. Volume sales of RTDs are predicted to Asahi grow at a CAGR of 1% over the forecast period, but this 32% will only add 19 million litres. 25 Category and Geographic Opportunities Kirin Holdings - Beer © Euromonitor International Australia Looks Set for Steady Growth, Trading Up

Duopoly market being threatened Major Brewers Volumes in Australia 2004- • The beer market in Australia has traditionally been 2014 dominated by Foster‟s and Lion Nathan, which is 2,500 now owned by Kirin. This duopoly became 2,000 threatened recently by Pacific Beverages (a joint venture between Coca-Cola Amatil and SABMiller), 1,500 which grew its share to 1.4% by 2009, focusing on the premium segment. 1,000 • Woolworths, a leading retailer, has also Volume (litres (litres mn) Volume 500 strengthened its portfolio of private label beers and in 2009, it acquired a 25% stake in boutique brewer 0 Gage Road. Woolworths has a near 35% share of 2004 2005 2006 2007 2008 2009 2012 2014 grocery retailing in Australia and this could help Lion Nathan Kirin Fosters Other Total increase private label sales in this market. Australia Beer Segment Breakdown 2004, Australia Beer Market Overview 2009 2009, 2014

Market Size - mn litres 1,875.9 10% 12% 19%25% % CAGR 2009-2014 1.9 17% 13% Premium Lager Per Capita Consumption – 89.7 litres Standard Lager Off/On- trade split % volume 80/20 Others Kirin - Volume Share (Rank) 39.9% (2) 70% 69% 65%

26 Category and Geographic Opportunities Kirin Holdings - Beer © Euromonitor International New Zealand Strong Premium Growth Forecast

New Zealand Beer Market Overview 2009 Near duopoly market in New Zealand • The two largest brewers Kirin (Lion Nathan) and Asia Market Size - mn litres Pacific Breweries DB Breweries, which is part owned by Heineken accounted for almost 80% of beer volumes in % CAGR 2009-2014 0.8 2009. Domestic brands more popular Per Capita Consumption – litres 73.8 • The majority of beer volumes are accounted for by the Off/On- trade split % volume 71/29 brewers‟ own labels, with licensed volumes playing only a small part. Kirin distributes several A-B InBev, Diageo Kirin - Volume Share (Rank) 47.9% (1) and the Corona beer brands in New Zealand. Strong Premium Growth New Zealand Beer Market Volumes by Segment 2008-2014 • Premium lager is expected to be the major driver of beer growth in New Zealand over the 2009-2014 period. 350 In 2009, Kirin lead the segment with a 37% volume 300 share. 250 New competitor targeting premium segment • Recent entrant Pacific Beverages has captured a 2% 200 volume share in the premium segment in just 2008- 150 2009. 100 • Pacific Beverages is a 50/50 joint venture between Coca-Cola Amatil and SABMiller in Australasia, and is

Volume (litres (litres mn) Volume 50 focused on the premium segment of beer and other 0 alcoholic beverages. 2008 2009 2010 2011 2012 2013 2014 Others Dark Beer Economy Lager Standard Lager Premium Lager 27 Category and Geographic Opportunities Kirin Holdings - Beer © Euromonitor International San Miguel in the Philippines

Standard lager dominates market • Standard lager accounted for nearly 92% of beer volumes in the Philippines in 2009 and is predicted to be the fastest growing segment over the 2009-2014 period. • The imported lager segment is tiny, making up less than 0.1% in 2009. • Premium lager is also a very small segment of the market, accounting for less than 4% of total beer volumes. This segment is mostly targeted at the more affluent consumers and is out of the reach for most consumers. • San Miguel dominates the beer market with its namesake brand and its variants, but also has several other brands like Gold Eagle, Red Horse and Cerveza Negra supporting its core brand.

Philippine Beer Market Overview 2009 Philippines Beer Market Major Brewers 2009 Market Size - mn litres 1,598.0 SABMiller , Others, 1.3 5.7 % CAGR 2009-2014 4.1 Asia Per Capita Consumption – litres 17.4 Brewery, 5.8 Off/On- trade split % volume 73/27

San Miguel* Volume Share (Rank) 87.2% (1)

Notes: * Kirin owns a 48% stake in San Miguel San San Miguel Corporation maintains control Miguel, 87.2

28 Category and Geographic Opportunities Kirin Holdings - Beer © Euromonitor International Philippines Set for Growth

Several growth factors exist in the Philippines Philippine Population Growth1999- • The per capita consumption of 17.4 litres in 2009 is 2020 slightly above the Asia Pacific market average of 16 litres. 120 However it is below China (32.3), Taiwan (20), Vietnam 100 (18.5) and the world average at 27 litres illustrating the market still has potential to grow. 80 • Beer is relatively unaffordable but is becoming less so in 60 the Philippines, with the average daily disposable income 40 to beer unit price ratio of 1.9 litres a day in 2009 up from 1.8 litres in 2004.With disposable incomes expected to million Population 20 rise, beer could become more affordable to more of the 0 population. Planned infrastructure projects particularly in 1999 2004 2009 2014 2020 transport, power and telecommunications could also Population over 18 Population under 18 potentially lower distribution and production costs in the future. A planned excise increase in 2011 of 8% should San Miguel in Philippine Beer Market, mitigate some of the increase by rising unit prices. Volume 2004-2014 • With a young population, the number of potential 2,000 consumers is also set to increase. In 2009, almost 60% of the population were over the legal drinking age of 18; 1,500 this is set to increase to 62% by 2014 and 64% by 2020. 1,000 • These factors combined show that the potential for beer and alcoholic drinks in general in the Philippines is great. 500 • With San Miguel Brewery having a near monopoly of the beer market it (and Kirin having a stake in the company, it (litres mn) Volume 0 too) is in a very good position to benefit from growth in beer in the country. San Miguel Brewery San Miguel Corp Others Forecast Volumes 29 Category and Geographic Opportunities Kirin Holdings - Beer © Euromonitor International San Miguel International Adds More Asia Pacific Options

• The acquisition of San Miguel Brewery International from its parent company by San Miguel Brewery increases its exposure to markets outside the Philippines. There are opportunities to strengthen its operations further by acquisition or investment in these markets particularly Vietnam and Thailand. • The Thai beer market is dominated by the local companies Boon Rawd and Thai Beverage, with a combined share of 87% in 2009. Volume sales of beer are expected to decline over the 2009-2014 period, due to the recent uncertain political and economic climate, which has hit tourism. The market dynamics, however, still exist for beer to grow in the longer term, with low per capita consumption and a relatively young and growing population. Thai Beverages fell further behind Boon Rawd, as its volumes declined in 2008 and in 2009, so could be seen as an acquisition target. • Vietnam has a high CAGR of over 7% predicted for beer, driven by a rising middle class, low per capita consumption, a relatively young and growing population and increased tourism. Vietnam has attracted several large brewers, including Carlsberg, SABMiller, Heineken and Sapporo, due to the growth opportunities for beer. SABECO is the leading brewer in Vietnam and could be seen as an opportunity to expand in the Vietnamese market through acquisition or an equity holding. Beer Market Overview: San Miguel International

Hong Kong China Vietnam Indonesia Thailand

Market Size – litres mn, 2009 165.2 43,001.8 1,623.6 233.9 1,939.4

% CAGR 2009-2014 -0.1 7.3 7.2 1.8 -0.8

Per Capita Consumption – litres 2009 23.4 32.3 18.5 1.0 30.0

Off/On- trade split % volume 2009 47/53 68/32 28/72 40/60 65/35

San Miguel % Volume Share (Rank) 3.0 35.4 0.2 31.7 0.5 2009 30 Category and Geographic Opportunities Kirin Holdings - Beer © Euromonitor International Chinese Beer Market Expands, but Kirin is a Small Player

Chinese beer boom set to continue Chinese Beer Market, Volume 2004- • The boom in the Chinese beer market seen over the last 2014 decade is set to continue. China will extend its lead as 70,000 the world‟s largest beer market. 60,000 • The greatest growth is expected in economy lager, 50,000 meaning that economies of scale in production and 40,000 distribution are key to survival in the Chinese market. 30,000 • The quality of infrastructure and the sheer size of the 20,000 country are also key to gaining volumes in the Chinese

Volume (litres (litres mn) Volume 10,000 market, meaning that production has to be relatively close 0 to consumption. This is heightened because of Chinese consumers‟ preference for fresh beer.

Chinese Beer Market Overview 2009 Leading Chinese Brewers 2009 Market Size - mn litres 43,001.8 China % CAGR 2009-2014 7.3 Others Resources 38% 19% Per Capita Consumption 32.3 Tsingtao 13% Off/On- trade split % volume 68/32 Chongqing A-B InBev Kirin - Volume Share (Rank)* 0.1% (17) 3% 10% Note: * Kirin also owns several stakes in brewers in the country Guangzho including Miguel, Dalian Daxue Brewery and Hangzhou u Zhujiang Henan Beijing Qiandaohu. 3% Jinxing Jinxing 4% 10% 31 Category and Geographic Opportunities Kirin Holdings - Beer © Euromonitor International China: Economy Beer Dominates, But Trading Up Apparent

Economy beer dominates in China • The growth in the Chinese beer market is dominated by economy beer, which are low margin but high volume and normally purchased in the off-trade. Volume sales of economy beer grew at a CAGR of 9% over the 2004-2009 period and is still expected to grow further, at a CAGR of 7% over the 2009-2014 period. • Economy beer in China is likely to drive global volumes, and is set to account for 49% of global beer absolute growth over the forecast period. The Chinese beer market as a whole is predicted to account for 58% of total beer growth. Trading up to standard and premium beer brands • In the review (2004-2009) and forecast periods (2009-2014) trading up to standard and premium brands was and will be apparent, as both segments increase their share of beer sales in China. Standard and premium beers combined accounted for 9% of total beer sales in 2004, 11% in 2009 and a predicted 12% by 2014. The growth in premium lager will move China up from sixth in the global rankings in premium lager in 2009, to fifth by 2014. • Dark beer and stout beer have little penetration in China. Low/non- alcohol beer has minor sales, which are expected to grow at a CAGR of 10% over the 2009-2014 period, to account for around 0.1% of total beer volumes in 2009. Chinese Beer Market by Segment 2004-2014 70,000 60,000 50,000 40,000 30,000 20,000

Volume (litres (litres mn) Volume 10,000 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Premium Lager Standard Lager Economy Lager 32 Category and Geographic Opportunities Kirin Holdings - Beer © Euromonitor International China Could be a Key Market for Kirin

Relatively small but increasing presence in China Asahi takes a stake in Tsingtao • Kirin's presence increased in China through its equity • In comparison to Kirin, its nearest Japanese competitor stakes in San Miguel Breweries but this added only a Asahi acquired a 19.9% stake in the second largest few production assets. It has in addition to this its own Chinese brewer Tsingtao in 2009 and has sought to and other equity holdings present in the Chinese market. increase economies of scale in its own business. • The main issue with Kirin‟s holdings in China is the • This stake gave Asahi large exposure to the Chinese geographical disparity between it and its equity partners‟ beer market through a brewer with established production locations and its relatively small scale. This production, distribution and marketing. could hold back its progress in China until it can no • Kirin announced in 2009 that is was to look at synergies longer viably operate in the market especially against between its existing Chinese business and Tsingtao, larger players like Tsingtao and China Resources. including the licensed production of Tsingtao in its facilities. Kirin runs the risk of losing out in China • Gain scale through acquisition: this could mean several small acquisitions, due to the high equity stakes in top Chinese brewers held by other major brewers. Alternatively, Kirin could look to acquire one large acquisition of the last remaining independent brewers like Henan Jinxing. Purchasing equity stakes in China is expensive, as Asahi‟s recent acquisition of an equity stake in Tsingtao illustrates, with every 1% share of the Chinese beer market costing around US$250.8 million. • Partner: partner with other brewers to purchase raw materials to lower costs. Included in this, could be a joint venture, with a large brewer like Carlsberg, Suntory, Asia Pacific Breweries or one or several local Chinese players, to look to acquire/develop new Chinese regional markets to increase presence. • Look to exit market: this should be a last resort as the Chinese market offers strong growth potential, but if Kirin cannot gain scale, pulling out and spend its resources elsewhere could be more lucrative.

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Number and Type of Kirin Production Facilities • In 2009, Kirin announced that it was closing two breweries in Japan, in order „to rectify the discrepancy Type Country Number between sales and production capacities‟. The decline in beer consumption in Japan is responsible for this, and Brewery New Zealand 4 other Japanese brewers may follow suit and close under- Brewery Australia 5 used and older production facilities. • In Japan, Kirin Brewery operates seven regional sales Brewery Japan * 11 and marketing divisions, 44 regional head offices, 16 sales branches, and three research institutions. Brewery China * * 2 • Kirin directly holds a 25% equity stakes in two Chinese Spirit‟s USA 1 brewers each with one brewery. Increasing its stakes in these companies maybe an option; alternatively, it could Spirit‟s and RTDs Australia 1 look to form an alliance with San Miguel Breweries Chinese operations to extend its reach in China. Spirit‟s and RTDs Japan * * * 2 • Kirin has increased its 49% stake in San Miguel Brewery Spirit‟s and RTDs New Zealand 1 which has operations in several Asian Pacific markets: • Philippines Wineries USA 1 • China (2 breweries, one in the South and the other In Wineries New Zealand 1 the North) • Hong Kong Wineries Australia 6 • Thailand Notes: * Kirin has announced it is closing its Tochigi and • Vietnam Hokuriku breweries in Japan in 2010, thus reducing its number of breweries in the country to 9. • Indonesia * * Kirin owns or holds several equity stakes in Chinese brewers either directly or through San Miguel. * * * Owns two distilleries in Japan but one has ceased production and been mothballed. 35 Operations Kirin Holdings - Beer © Euromonitor International Exports and Licensing for Growth

Looks to license brands for growth Kirin also operates licensed brands in own • Kirin has sought to partially mitigate its lack of presence markets in regions where it does not operate through licensing its • Kirin also holds several licences for other brewers‟ brands to other brewers. Licensed volumes in these brands in several of the markets it operates in. These markets tend to be small but could develop over time. brands give its own portfolio increased depth, particularly with well-known international brands.

Licence Brand Country Holder Brand Country Owner Brand Wells & Japan Heineken Heineken United Kingdom Kirin Ichiban Young's Guinness, Kilkenny, Japan Diageo Smirnoff Ice Russia Heineken Kirin Ichiban Japan A-B InBev Kirin Ichiban, Kirin Light Kirin Ichiban, USA A-B InBev Kirin Light Australia Heineken Heineken, Amstel Staroprahmen, Australia A-B InBev Budweiser, Beck‟s

New Zealand Modelo Corona Extra

Beck‟s, Stella Artois, Oranjeboom, New Zealand A-B InBev Boddington‟s, Bass, Leffe, Belle-Vue, Hoegarrden

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International appeal Tough Japanese market driven by innovation • Kirin has looked to increase its international presence • In Kirin‟s domestic market, new product development with licensed production and marketing with local drove volume development. This did help to steal share partners. Local production and using local partners and drive new category sales, but also saw some allows Kirin to benefit in several ways: cannibalisation. • Cheaper costs than importing the product from Japan • Innovation is incredibly important in the Japanese especially in European and US markets. market, with several variants spanning all three types of • Gains access to a local partner‟s distribution network beer lager, happoshu and new genre (no malt beer) without having to maintain it own operations. Japan and low- and non-alcohol beers. • Gains local market knowledge from partner. • Packaging type and size is also important to product development to try and gain an edge over competitors in • In the UK, for example, the brand Kirin Inchiban is licensed to local partner, the brewer Wells & Young‟s. a fiercely competitive market. This has also included The brand is marketed as a high-end premium beer and Kirin releasing limited edition versions of previous its marketing and outlets reflect this. heritage branding on its current product range. • Seasonal variants based on spring, summer, autumn • It is also aligned with Asian consumer foodservice outlets linking its Japanese heritage. and winter are also available during the year. • Kirin has recently changed to more premium ingredients • A certain amount of localisation of the brand took place, with a draft version as well as bottles being made for its core brands in Japan such as Kirin Ichiban available due to the high proportion of on-trade sales in Shibori. The company has promoted this move and kept the UK market. the price at the same level to increase interest in the brand in what can be a price-sensitive market.

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39 Recommendations Kirin Holdings - Beer © Euromonitor International Look for International Growth to Offset Domestic Decline

Increasing stake in San Miguel Brewery Look to China for long-term growth

• Kirin could look to deepen its international exposure • Kirin‟s position in China is relatively weak compared to through taking control of San Miguel Brewery if the its major rivals. There are limited opportunities to make majority owner San Miguel Corporation allows this. San a large acquisition in China unless a competitor looks to Miguel Corporation has stated in early 2010 that its divest its holdings, which seems unlikely. stake in the brewing business is not for sale. But as San • If an opportunity arises to acquire, buy an equity stake Miguel Corporation looks to move away from fmcg into or partner with a large Chinese brewer, Kirin should heavy industry and infrastructure it may look to divest its seriously consider the prospect to take advantage of stake to raise capital for new ventures or acquisitions in growth in the market. the medium to long term. • The company could also look at acquiring smaller Chinese brewers to bolster its presence.

Look to other Asia Pacific markets for growth Acquisitions for beer face internal hurdles

• China dominates the region‟s and the world‟s beer • Kirin‟s operations in other categories of alcoholic drinks, volume growth, but other markets in Asia Pacific offer non-alcoholic drinks, packaged food and other growth opportunities. categories place constraints on the amount of finance • Kirin should look to strengthen its prospects in markets available for expansion. Acquisitions may provide a like Vietnam, Thailand and others. The company could higher return on investment than those in beer. do this through acquisitions or through its equity holding • Every acquisition opportunity should be looked at for the in San Miguel Brewery. value it offers Kirin as a group to meet the targets set by the management in its long-term strategy.

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