Japan from the inside out

Small beer and bigger government

Posted by ampontan on Monday, July 23, 2012

“To suckle fools and chronicle small beer.”
— William Shakespeare, (Othello, ii.1)

AFTER the law governing the types of stores that were allowed to sell alcoholic beverages was amended in 1989, large discount stores wasted no time in stocking their shelves with booze. As a result, consumers became less interested in paying the suggested retail prices, which led to greater price competition. But taxes accounted for 46.5% of the price of beer, making it difficult to discount. Therefore, the large discounters started importing and selling cheaper beer from overseas. Japan’s brewers became alarmed.

The brewers set to work to create a product that could still be sold as something resembling beer, but which contained less than 67% malt. A beverage with that percentage of malt or higher was classified as beer for tax purposes. Their problem was to come up with something drinkable. Low-malt beer products were already available, but they had only a 5% market share despite their lower price.

In October 1994, Suntory launched sales of its Hops product. Containing 65% malt, the arrival of the new beverage marked the creation of the market for happoshu, a term that was officially translated as sparkling spirits. The term low-malt beer also works.

In May 1995, Sapporo began selling a product called Drafty that contained less than 25% malt, which placed it in the lowest tax category. The brewers kept beavering away to improve the taste of the products, and sales started rising. As a result, the government amended the law to tax happoshu at the same rate as beer if the malt content was at least 50%.

The new tax rate took effect in the fall of 1996. The brewers complained that it denigrated their product development efforts. But then Suntory developed a product with less than 25% malt in May 1996 to beat the new tax. They called it Super Hops.

The market for happoshu expanded further when industry leader Kirin began offering products. Asahi was the last holdout and refused to make any because they claimed it was ersatz beer. They changed their mind in 2001 when all their new real beer products developed in the interim fizzled.

These beverages accounted for 48.2% of the beer market in April 2003, up from a 37.2% share the previous year. The government raised their taxes by 10 yen a can in May. The producers’ response was two-fold. First, they shifted their emphasis from price to value, volume to quality, and market share to profit. Second, they stepped up development of the beer-like beverages with less than 25% malt content. The industry refers to these drinks as the “new sector”, but the mass media coined the phrase “third beers”.

They also started developing beer-like products with no malt at all, which are sometimes referred to as “fourth beers” and are classified as liqueurs. Some of those beverages are made with soy peptides or corn. One is made with green beans and sugar cane. They can’t legally be called beer, but the producers get around that by using words with beer connotations in their names. The first of these products was Sapporo’s Draft One in 2004.

As a result of the greater consumption of third beers and non-alcoholic beer, the market for happoshu started cratering in the late 2000s. Third beer outsold happoshu for the first time in 2008, and the market share of the latter fell to 15.4% in 2011. Asahi, Suntory, and Sapporo said they would cut back production of, but not eliminate, their happoshu products because customers had become loyal consumers of some brands.

The National Tax Agency raised the tax on third beers by 3.8 yen a can in 2006, while reducing it by 0.7 yen per can on regular beer to mollify the industry. The government also changed the laws governing the materials used in the development of these beverages to prevent the creation of new beer-like products using different ingredients.

Of course the industry as a group has been conducting market surveys of consumer preferences and product awareness. They put the results of one survey on line (in Japanese, in PDF files).

One question they asked of consumers was their reason for drinking certain products. Here are the primary responses, with multiple answers possible.

Real beer
It tastes good (73.0.%)
It makes me feel good (53.8%)

It’s cheap (73.8%)
It tastes good (36.8%)
The taste and quality have improved (25.8%)

Third beer
It’s cheap (84.4%)
It tastes good (39.4%)
It’s easy on the household budget (28.7%)

Further, 74% of the respondents didn’t know that the tax rate for happoshu was higher than that of other low-alcohol products apart from beer, such as pre-mixed cocktails and chuhai beverages. Broken down by sex, that was 80% of women and 67% of men, in a category primarily targeting women.

In fact, when asked to estimate the actual percentage of taxes on beer, happoshu, and third beer, respondents underestimated the rate by roughly 10 percentage points in all three categories.

Remember that Suntory was the first beer company to develop a happoshu beverage in 1994? By now you can already guess what they announced last week:

Suntory Holdings Ltd. plans to stop producing and selling happoshu low-malt quasi-beer, becoming the first major brewer to exit the happoshu market.

The firm finished producing its core happoshu product, “MD Golden Dry,” in June, and all of its happoshu products should disappear from stores by autumn…

Regarding Suntory’s shipments of beer and beer-like beverages in the first half of 2012, it sold 470,000 cases of happoshu, which is 40.4 percent down from the same period last year, and happoshu accounted for only 1.6 percent of shipping volume. One case is equivalent to twenty 633-liter bottles…

With the move, Suntory seems to be intensively allocating funds to its premium beer, including “The Premium Malt’s.

The information in this post confirms about a half-dozen basic laws of economics and handsomely validates the functioning of the paradigm that is the market.

It also demonstrates that the public sector is, as always, incapable of putting two and two together, and that their inability to add results in subtraction. In the quotation at the top of the post, the character Iago is referring to women. Nowadays, his observation is more applicable to the revenuers and G-men everywhere.

Kirin used everything but the kitchen sink to promote one of their ersatz beers. The song is performed by the Candies, three young women who appear briefly in a film clip at the end.

But Seto Asaka is more to the taste of the younger generation in this add for Super Hops.

2 Responses to “Small beer and bigger government”

  1. toadold said

    More and more studies in the US and Europe are showing positive health benefits for the moderate consumption of beer and specifically the benefits of the hops content. It is helpful for cardiovascular function and the hops is quite helpful to elderly people in that the silicon compounds in it promotes increased bone strength. I would make the argument that the excessive tax is harmful to public health and is costing money for extra medical care. I’m trying to get my US congress critters to support cheaper beer for the elderly. ;P
    They also seemed resistant to my idea about a law forbidding politicians from consuming alcohol until they leave office.
    T: Also the very dark beers, such as Guinness Stout, are said to have the same beneficial properties as red wine.

    Which reminds me…


  2. John G said

    I totally remember Hops and Drafty. Drafty even came out with a dark version, which was as awful as you would imagine. If it weren’t for all of these taxes, brewers could instead be using all of their talent and resources to make beer that tastes good, as opposed to passable products that people can afford.

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