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Suntory Holdings rode two decades of surging popularity for Japanese whisky. Then the coronavirus hit, shutting down cities and means for people to gather. (Photo by Tomoki Mera)
The Big Story

Suntory thirsts for new markets as coronavirus upends whisky empire

CEO Takeshi Niinami says innovation is key to restarting growth

JOHN GAPPER, Nikkei Asian Review editor-at-large, and NANA SHIBATA, Nikkei staff writer | Japan

TOKYO -- When Bob Harris, the jaded movie star played by Bill Murray in the 2003 film "Lost in Translation," flies to Tokyo to advertise Suntory's Hibiki 17-year-old blended whisky, he behaves in a way that now seems reckless. He sings at a karaoke club, rides in a packed elevator, and drinks in a crowded hotel bar. "For relaxing times, make it Suntory time," Murray's character declares.

These are not relaxing times for Suntory Holdings. Its biggest market, Japan, has only just emerged from a COVID-19-induced state of emergency that emptied out bars, restaurants and karaoke clubs. Although customers are now tentatively returning to entertainment venues, the outlook for the drinks business is one of prolonged upheaval.

It follows a long period of global growth for the company, which rode two decades of surging popularity for Japanese whisky, followed by a "premiumization" of the drinks business, as younger drinkers turned to craft spirits or single malts from historic distilleries, such as Suntory's fabled Yamazaki. Suntory now faces fundamental questions about the way it operates.

Suntory CEO Takeshi Niinami says that spirit makers will need to be creative to overcome a sales slump.   © Photo by Manami Yamada

If customers have less money in the economic downturn, will they still pay higher prices for expensive spirits? If large gatherings are restricted, will they socialize in smaller groups or just stay at home?

"Suntory loves human contact, which is an instinct of human life," Suntory's CEO Takeshi Niinami said in an interview with the Nikkei Asian Review. "People are a bit stressed out by working from home, so I don't think on-premise will disappear. It will thrive, but not at such a scale. It is obvious that we will reduce gatherings, but people will still gather, maybe in their neighborhoods, so local bars and restaurants will have more of a chance."

To thrive, Niinami believes that spirit makers will have to be imaginative. Suntory has innovated its way out of crises before, but this time the challenge is enormous. The pandemic has put everything from premiumization to the business model of bars in question. Niinami, a Harvard-educated executive who spent 12 years in charge of the convenience store chain Lawson before coming to Suntory, knows his company must prepare for change.

"We have to be creative in how people can be connected. Don't give up," Niinami said. "I am encouraging our senior executives to see what we can do. We are thinking about new occasions for people [to gather] and what we can offer, such as a new cocktail. Something to cheer people up."

The coronavirus pandemic has reduced the number of people drinking at bars, reducing demand for high-end spirits.   © Reuters

But adapting will be costly for companies with traditional marketing and distribution models. Suntory is also heavily focused on a few countries while its rivals such as Diageo are more diversified. "Suntory's key weakness is that it is highly reliant on just two markets: Japan and the US," said Matthew Barry, a consultant at the research group Euromonitor International. "COVID-related problems in either of the two, whether from new lockdowns, a recession, or both, would hit Suntory hard."

High times and highballs

The distinctive taste of Suntory's single malts comes from Osaka and the surrounding Kansai region, the rice-growing heart of Japan.

"If you gave someone a bowl of udon soup in Osaka and they had a Suntory whisky, they would understand the connection," said Brian Ashcraft, author of Japanese Whisky: The Ultimate Guide to the World's Most Desirable Spirit. "Suntory is first and foremost a whisky company and first and foremost an Osaka company. ... Its whiskies are very balanced and do not overwhelm you the way that others can."

Kansai spring water is a key ingredient but Japanese distillers tend to use imported barley, relying on maturation and blending to make a distinctive spirit. "They are using Scottish copper stills, often importing barley from Scotland. But the warmer environment there is a catalyst for all kinds of reactions," said Jonny Fowle, spirits specialist at the auction house Sotheby's. "There is a more intense maturation that creates a really distinctive taste, with dried fruits and spices."

Suntory has ridden a wave of demand for premium liquors, but stocks of its fabled single malts are running low.   © Photo by Tomoki Mera

Suntory was founded by Shinjiro Torii in 1899 to counter imported wines and spirits with homegrown products. It has a long history of pleasing local tastes, opening its Yamazaki distillery in 1923 and launching its signature Suntory kakubin, square bottle, in 1937. But even the Japanese market has waxed and waned as office workers turned to beer and shochu, a spirit distilled from rice and barley. Today's global demand for Japanese whisky was unimaginable 20 years ago.

"We would get these old Japanese bottlings in 1999 that we couldn't sell," said David Wainwright, a Hong Kong-based whisky merchant who was then head of spirits at Christie's auction house in London. "I remember trying to sell a case with a couple of Karuizawas, a Mars 25-year-old and some other bottles and no one would buy it. The seller came in to pick it up and said, 'Well, I'd better drink them, then.'"

That was an expensive binge -- a bottle of Karuizawa 52-year-old Zodiac Rat sold in London for $435,273 on March 18, and some of Suntory's single malts are similarly expensive. A bottle of 50-year-old Yamazaki fetched $343,000 at auction in Hong Kong in 2018.

International demand for Japanese whisky started to expand in the early 2000s, as Japanese whiskies won international prizes for the first time -- culminating in Yamazaki Single Malt Sherry Cask 2013 being named as best whiskey in Jim Murray's Whiskey Bible in 2015. This coincided with a wider thirst for historical craft brands, rather than mass-produced liquors, particularly among millennials.

The craft boom played to Japan's strengths, with single malts from distilleries that sounded exotic and authentic. "People tend to think that anything from Japan will be high-quality, because it has a reputation for making things really well and people taking pride in work," Wainwright said. "Japan is fashionable, culturally, and people look to it and observe it, especially in Hong Kong, Taiwan and China."

As demand rose, supply of aged single malts remained flat -- it is impossible to create more barrels of 25-year-old whisky. To make matters harder, Suntory had cut production in the slump of 30 years ago and sold off some barrels cheaply. It halted sales of Hibiki 17 in 2018 as supplies ran down. Prices have spiked, with excitement highest at Hong Kong auctions drawing wealthy Chinese and Asian buyers. "The last year has been outrageous, really. It defies economic convention," said Fowle of Sotheby's.

The Japanese whisky revival helped to balance a decline in Suntory's sales of soft drinks and foods in Japan last year, with overall overseas sales (excluding excise taxes) rising to 42% of its total. Its strength in spirits was cemented in 2014 by its $16 billion acquisition of Jim Beam, the U.S. bourbon distiller, which it is using as a platform for global growth.

Although soft drinks and food contribute most of its revenues, with sales of 1.29 trillion yen ($11.97 billion), excluding excise taxes, in 2019 against 773 billion yen for alcoholic drinks, its 136 billion yen profits from soft drinks and food were surpassed by 144 billion yen from alcohol. The pandemic could accentuate this -- Goldman Sachs estimates that operating profits from its beverages and food division will fall by 10% this year.

The thirst for Japanese single malts tracks a broader trend toward premiumization, with U.S. distillers' sales of "super premium" Scotch whiskies growing from 10.4% of total revenues in 2009 to 32% in 2019, according to the U.S. Distilled Spirits Council. While spirits sales volumes have been flat in many countries, drinkers have been willing to pay more for premium drinks. Suntory's spirits revenues in Japan rose by 7% last year.

The top malts will remain in demand. But the question for Suntory and other distillers is what happens to the premium market in the pandemic era, when drinkers are less likely to be introduced to new drinks in bars. "If you go into a bar and order an unfamiliar whisky, you are only $10 out. But if you buy the wrong bottle, that is expensive," said Paul McInerney, senior partner of consultancy McKinsey in Tokyo. The result could be drinkers experimenting less and distillers' margins falling.

Drinks companies such as Diageo and Pernod Ricard make about a third of their sales by volume through on-premise outlets such as bars, but more than half of sales by value, according to Morgan Stanley. Prices are higher in bars and bartenders also prompt customers to try out new spirits. "It is a prerequisite for launching a brand," said Niinami of Suntory's on-premise sales. "[Bar owners] want to promote new drinks, so it is very important for us and imperative to make this up. It is not a big portion, but it means a lot."

Suntory has experience of responding to sharp sales falls. In 2008, during a whisky slump, it launched a campaign for the whisky and soda highball using its well-known Kakubin spirit. The campaign, starring the Japanese actress Koyuki, was vital in reviving whisky drinking, in restaurants and then as ready-to-drink highballs at convenience stores. Niinami thinks that Suntory must again reinvent drinking customs to recover from the pandemic.

This time, he thinks it can popularize the drinking of cocktails in smaller Japanese cities and at home by hiring Tokyo bartenders to give online lessons. "Digital means a lot, to introduce how to make fantastic cocktails to local bars that can't hire top-notch bartenders. We have strong contacts with great bartenders, and they can be like teachers. There is less business now and we need to support bars. ... This will be a great chance for cocktail making."

The need to promote premium spirits is particularly acute in Japan, where regulations are more lax than for Scotch or U.S. bourbon -- some cheaper whiskies can be distilled from molasses rather than barley, and may be only aged for two or three years. "You can import Scotch or Canadian whisky, mature it in a barrel for a while and call it Japanese," said Liam McNulty, a Tokyo-based whisky expert who writes the Nomunication blog. "The cheap stuff drives a high percentage of convenience store sales."

McInerney argues that Japan's distillers can learn from brewers -- including their brewing divisions -- which persuaded customers to drink premium beer at home as well as in bars in the mid-2000s. "People will spend more time at home and will want interesting drinks for home occasions," he said. "Distillers could sell party packs in smaller sizes and collaborate more with online retailers and supermarkets. There is an opportunity to propose how [spirits] can be fun."

But making spirits fun at home is only part of Suntory's challenge. The company also needs to address its overreliance on Japan and the U.S.

Bold ambition

Niinami got a shock when he first tasted Oaksmith, a blend of Scotch whisky and premium U.S. bourbon aged for four years in white oak barrels, which Suntory launched in India in December. "The first time I tasted it, I thought 'my goodness, it is not good.' But they told me, 'the Indian way is to drink it with water.' When you drink it neat, you do not have a good aroma but when you put in water, it is beautiful."

Suntory's launch of Oaksmith, along with its new blended whiskies Legent in the U.S. and Ao in Japan, is vital to its future growth. Branding and promoting blended whiskies is a way to get around the shortage of aged single malts, and is a way to combine the expertise of its blenders both in Japan and at Beam's distillery in Kentucky -- what it calls the "East-Meets-West competitive advantage." It is also a recognition that Suntory must make more inroads in emerging markets such as China and India.

Niinami is optimistic about India, arguing that the country's young technology engineers and scientists are a natural market for Japanese whisky, rather than the Scottish brands that play to the country's imperial past -- despite the fact that Suntory picked a Scotch-like name for Oaksmith. "The younger generations understand quality, they travel globally and they have fantastic palates. They make money, they are ambitious and they like something new. There are so many potential customers there."

Oaksmith is part of a concerted effort by Niinami to diversify into emerging markets. Diageo, the world's largest diversified spirits company, is more evenly distributed around the world, with 35% of net sales in 2019 in North America, 24% in Europe and Turkey and 20% in Asia-Pacific, more than half in India and China. "The reason Suntory bought Beam is we want to globalize, but Beam Suntory did not have a good presence in emerging markets," Niinami said.

Beam Suntory suffered management tensions following the acquisition, including a tussle over Niinami's push to move its head office from Deerfield, Illinois, to Chicago. He finally declared the post-merger integration complete in March 2019 but now regrets that Beam Suntory did not move faster into China. "I think it is doing very well now. Perhaps we could have done more in China with [Courvoisier] cognac. That is the concern that stays in my mind still. We do not have a footprint in China and the economy is coming back."

China is a hard market to crack, with celebrations and business drinking dominated by baijiu spirit distilled from sorghum, such as Kweichow Moutai, but Pernod Ricard has made progress with its Martell cognac among younger drinkers in first tier cities such as Shanghai. "China is the biggest emerging market but was not really a target for whisky until recently. The French were early with cognac, and the Chinese have really got into it now," said Fowle of Sotheby's. Although cognac was among the luxury gift items affected by an anti-corruption crackdown in 2014, China remains a significant market for the spirit.

That is a broader lesson for Suntory: Whisky and bourbon cannot lead in every market. One recent success is Roku, a Japanese craft gin it launched internationally in 2017 at the urging of Beam executives. "It was a big request because they love Japanese flair, and gin is popular in markets like the U.K. and Spain. I had big doubts because here we do not drink much gin in Japan, so I could not tell if it was good or not. I listened to them and it went very well in Spain, and we took it to the States."

Niinami still has faith in the potential of whisky in emerging markets, particularly across Southeast Asia. He believes Suntory can draw from its experience in Japan by expanding its highball and ready-to-drink brands in markets such as Taiwan and South Korea. Highballs could have an additional appeal as a lower sugar alternative to beer and wine. "Health-consciousness was already there and will get promoted by the virus. You want to be healthy because you do not know whether you get infected."

His strategy fits Suntory's spirit of yatte minahare, or bold ambition. "We pursue the thrill of invention and relish in the now, because we know the future belongs to those who are fresh, free and unhindered," Beam Suntory's website declares. But Suntory is not entirely uninhibited about pursuing expansion. Chairman Nobutada Saji and Chief Operating Officer Nobuhiro Torii are both members of the founding family, and family ownership imparts a longer-term perspective than at some listed companies.

Even Niinami, with his professional managerial style, sounds mystical when he talks about it. "The important thing is to be long-living, surviving forever. We are standing on the founding spirits. We make big mistakes sometimes but we learn from them how to conduct business. Unless we can serve society, we are not allowed to use natural water. It should be passed onto the next generation; it is very precious. I would not say it is a religion, but it is a mindset ... of the family."

That belief in cultivating Suntory over decades rather than years or quarters comes in useful in a time of sudden disruption. The company needs new ways to promote its most profitable brands and to establish itself in fresh markets, but preserving the essence of Japanese whisky is equally vital. "We have to be modest and stay with society. That is the Japanese sense," Niinami said. "I know Japan pursues too high-quality sometimes, but we have to enjoy the long journey."

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