TOKYO -- Riding on the success of its newly designed bottles and a growing appetite for Japanese cuisine abroad, tea maker Ito En is rolling toward its second straight record net profit. But the sweet news does not stop there. The Tokyo-based company is about to get an unexpected tail wind from the spread of sugar taxes, especially in Southeast Asia.
For the year ending April, group sales are expected to rise 3% on the year to 492.5 billion yen ($4.34 billion), with net profit increasing 2% to 14 billion yen. Sales in Japan are growing thanks to its renewed mainstay green tea product Oi Ocha, while overseas earnings are also rising with a stepped-up effort to increase its ITOEN brand recognition.
In mid-October, Japan's Food Export Fair was held at Makuhari Messe, a convention hall in Chiba, just outside Tokyo. Ito En's booth, which stood out due to its striking green corporate color, was swarmed with groups of international visitors. During the three-day event, the company held negotiations with buyers from over 30 countries -- including Dubai, Poland, Peru and Russia -- with which the beverage maker had not done any business before.
Seeing an unexpectedly big turnout and the new interest in tea, Ito En President Daisuke Honjo immediately decided to participate in the trade fair again next year and booked a larger booth in the center of the venue.
A health-driven boom in Japanese cuisine is sweeping the world. The extent of this popularity has taken Ito En by surprise. Washoku, or traditional Japanese food, was registered as an intangible cultural heritage by UNESCO in 2013. The Japanese government has since been spearheading events to spread the country's authentic food culture around the globe.
Essential for Japanese food is unsweetened green tea. To ride this wave, Ito En unified its corporate brands overseas into one, ITOEN, two years ago. All the logos of its leaf products such as tea bags have also been changed to ITOEN. The company's strategy is to make inroads into countries where people do not drink green tea frequently with low-cost leaves, and then introduce drinks from its Oi Ocha line to gain sales momentum.
Ito En has been operating in seven countries outside Japan. Leaf product sales by volume jumped 76% on the year in the U.S. and soared 93% in China for the six months through October. At the end of fiscal 2017, the company forecast overseas sales would total 40.8 billion yen, accounting for 8.3% of group sales, and exceeding 10% is becoming a plausible target.
In addition to these efforts, a tail wind for unsweetened drinks has given the company extra momentum. So-called "sugar taxes" are starting to spread around the world, not only in the west, but also in Southeast Asia where the rise of obesity is becoming a major concern. These taxes are imposed on the makers and importers of sugary drinks, based on sugar content levels.
Some states in the U.S. have already implemented the tax and Thailand introduced one in September. Indonesia plans to introduce legislation next year aimed at reducing the content of sugar, salt and fat in food. The U.K. has decided to introduce the tax in 2018.
Sweetened green tea in plastic bottles is widely drank outside of Japan. But to avoid a hit to profitability from the sugar tax, beverage makers are expected to reduce the sugar content in their drinks or develop new sugar-free ones. The fact that Ito En has stuck to unsweetened drinks overseas and in Japan is expected to be a positive factor for its brand image as the world heads to non-sweet green tea.
Meanwhile, at least one global company has taken note of green tea's popularity. In November, Anglo-Dutch company Unilever, which owns the long-established Lipton tea brand, agreed to buy the Tazo tea brand from U.S.-based Starbucks for about $384 million, in an attempt to expand its product lineup to include green tea and herbal tea.
Ito En has a long history and technological strength in handling green tea, but it is no match for Unilever, which operates in more than 100 countries and has extensive sales and marketing networks. If Ito En aims "to become a global leading tea company," as company president Honjo says, then it would need to take further measures while it maintains its green tea lead. Rei Ihara, an analyst at SMBC Nikko Securities, said: "It needs to take steps such as starting local production of tea bags in the markets it enters."
Ito En stock has been on an upward trend since 2015 and roughly doubled over the past three years, against the increase in the Nikkei Stock Average of 31% over the same period. Ito En has a forward price-to-earnings ratio of 40, which does not seem to be too overheated, compared with Coca-Cola Bottlers Japan's 39, and Suntory Beverage & Food's 34. If the route to expanding earnings overseas, the key to growth, is clarified further, Ito En's stock seems to have room to go higher.