Japan: Asahi announces second medium-term management plan

Asahi Breweries, Ltd. formulated and is currently implementing its Second Medium-Term Management Plan covering the three-year period from 2004 through 2006. Based on this plan, we are reforming our business structure and organizational character with the aim of creating a new Asahi Breweries Group with abundant growth potential.

Specifically, we are working to further strengthen the domestic alcoholic beverages business, which provides a steady cash flow stream, while enhancing the profitability of existing Group businesses.We are also promoting the recreation of the entire Asahi Breweries Group business structure through aggressive investment in order to drive future growth.

This year is an important one for Asahi Breweries as it is the final year of the Second Medium-Term Management Plan. Taking into consideration the results and issues from the second year of the plan, our mission for 2006 is to complete reforms to realize a robust profit structure and a diverse growth structure for Asahi Breweries Group. To achieve this, we will pursue challenges and progress that take us up to the next growth step.

Overview of 2005 and First Two Years of the Second Medium-Term Management Plan
1. Domestic alcoholic beverages business
2. Group business
3. Overseas business

Initiatives for 2006
1. Domestic alcoholic beverages business
2. Group businesses
3. Overseas business

Overview of 2005 and
First Two Years of the Second Medium-Term Management Plan


1. Domestic alcoholic beverages business

Market condition in 2005
Last year saw some major changes in the beer-type beverage market, which is a core segment in the alcoholic beverage market. In addition to the introduction of a new trading system by industry players, the new genre (no-malt beer) market expanded three-fold year-on-year on the back of new product releases. Nonetheless, this was insufficient to ensure overall market growth, and consequently, the scale of the beer-type beverage market as a whole decreased by a little over 3% compared with the previous year.

Despite the slowdown in growth rate, the markets for ready-to-drink (RTD) beverages and Otsu-type shochu including Awamori continued to expand.

Status of Asahi Breweries in 2005
In the first year of the Second Medium-Term Management Plan, Asahi Breweries implemented a series of profit structure reforms in its alcoholic beverages business. This had a number of positive effects. Leveraging off this success, we aimed to realize new growth in the domestic alcoholic beverages business in 2005 by significantly boosting the value of core brands, and by developing and offering new products and services in response to evolving customer needs.

As the top manufacturer in the area, we sought to revive the beer market. We further enhanced our beer brand appeal, especially by increasing the freshness and draft beer quality of Asahi Super Dry.

In happoshu (low-malt beer), we strove to cater to continuing diversification in consumer preferences. We launched Asahi Honnnama Gold, a new addition to the Honnama series based on the concept “drinking satisfaction,” while in the new genre market we introduced Shinnama in April and Shinnama 3 in November with a new flavor and packaging. As a result of these efforts, we further improved our appeal in the beer market and increased combined shipment volume of happoshu and new genre on a year-on-year basis. However this was not enough to propel full-scale revitalization in the beer business, or drive growth in the overall Beer-type beverage market.

In the rapidly growing RTD beverage and shochu markets, we concentrated management resources into core brands with the objective of realizing considerable sales expansion. As a result of aggressive product development such as with product innovation and new seasonal products under the Cocktail Partner brand, which has grown into one of our leading brands, sales of RTD beverages surged 26% year-on-year to 9.61 million cases (one case = 24 x 250ml bottles). This was the fourth successive year since 2002 that we achieved double-digit growth in this area. Meanwhile, sales of Shunka Shibori grew 9% as the introduction of new flavors for each season proved effective. We thus strengthened our position in the fruit-flavored chu-hi market.

In shochu, we added imo-jochu (sweet-potato shochu) to our Kanoka brand to enhance our market presence. With an increase in both the household and commercial market, the annual sales volume of Kanoka shochu rose three-fold year-on-year to 2.66 million cases (one case = 12 x 720ml bottles).

In spirits, we sold a greater volume of Taketsuru, one of our main domestic whiskies, in both the household and commercial sectors. We also achieved steady growth in sales of Black Nikka Clear Blend.

In wine, we recorded considerable growth in our domestic Sainte Neige brand, particularly in the antioxidant-free and organic series. Although the overall industry fell into decline, we realized around 5% growth in our overall wine operations.

We also made steady progress in the creation of an optimum production system and in boosting cost-competitiveness in our core alcoholic beverages business. Besides merging Asahi Kyowa Liquor Manufacturing Co., Ltd. and Nikka Whisky Distilling Co., Ltd. and transferring the functions of Asahi Kyowa’s Tsuchiura factory to Nikka Whisky’s Kashiwa factory, we merged Asahi Beer Winery, Ltd. with Sainte Neige Wine Co., Ltd.


2. Group business

In our domestic soft drinks business in 2005, Asahi Soft Drinks Co., Ltd. achieved a sales volume increase well over the average industry growth rate. Apart from strengthening the three core brands WONDA (canned coffee), Mitsuya Cider (carbonated drink) and Juroka-Cha (blended tea), we released the original new products SUPER H2Osports drink and Wakamusha for the green tea market. We were able to improve our profitability through continued structural reforms, thereby realizing enhanced performance for the third consecutive year.

In the food and pharmaceuticals business, Asahi Food & Healthcare Co., Ltd. posted a substantial increase in sales thanks to double-digit growth in sales of core brands such as Actio (supplements), BALANCEUP (nutritional snack bar) and MINTIA breath mints. We also promoted the shift to a profit-oriented structure though a business reshuffle.

To drive future growth, we looked to venture into new business territories. Last year, we acquired the shares of LB Ltd.’s two companies in Saitama and Nagoya, incorporating the chilled beverage business into the Group’s portfolio. Through the addition of Sanwell Co., Ltd., a manufacturer of health foods, we expanded the business scope of our food and pharmaceuticals business.


3. Overseas business

During 2005, we worked to enhance the profitability of our existing businesses, such as those in China, Europe and the United States, and to cultivate new markets, notably in Asia.

In China and Asia, which are key regions in our overseas operations, we rearranged our structural organization at the beginning of last year, establishing a new China Business Headquarters in Beijing, and then in autumn, a general business center in Bangkok, Thailand for the Asia/Oceania region (excluding China) to enable quick decision-making and policy execution locally.

In the Chinese beer business, our local beer companies – including Beijing Beer Asahi Co., Ltd., which has a brewery in its second year of production, and Hangzhou Xihu Beer Asahi Co., Ltd., which focuses on the Zhejiang Province – achieved sales growth in their respective regions. As a result, total annual sales volume from all beer companies that we have a stake in increased to 585,000 kiloliters.

Through active market cultivation in ASEAN nations such as Thailand and Cambodia, sales volume of Asahi Super Dry in Asia (excluding China) and Oceania doubled compared with the previous year to roughly 1.6 million cases (one case = 20 x 633ml bottles).

In Europe, we aimed to increase Asahi Super Dry sales in the commercial market in England, especially draft beer, to make the most of continued strong sales there. To this end, we commenced the local production of Asahi Super Dry in September last year. Due primarily to bolstering sales in England, we managed to realize a double-digit sales volume increase in Europe compared with the previous year.

With the objective of expanding the foundations of our soft drinks business in China, we established a joint venture, Tingyi-Asahi-Itochu Beverages Holding Co., Ltd., in 2004. This company recorded robust sales of teas, fruit drinks and mineral water last year as well, while remarkably increasing productivity after receiving technical assistance from Asahi Breweries Group.

Looking back at the first two years of the Second Medium-Term Management Plan, we have made steady progress in improving our market position, particularly with our core brands, in the alcoholic beverages market, which includes RTD beverages and shochu. Despite this, certain challenges to growth remain in our alcoholic beverages business, which centers on beer-type beverages.

In all business areas – alcoholic beverages, soft drinks, food and pharmaceuticals, and other businesses – we reduced manufacturing and logistics costs and increased efficiency by reducing fixed costs. Consequently, we were able to boost profitability in respective business arenas, and to push ahead with reforms towards a profit-focused structure despite a rapidly changing business environment.

We also expanded into new business territories through new investment. This helped us secure new business foundations that promise future growth in our food and pharmaceuticals business and overseas business. Additionally, the positive effects of group-wide structural reforms began to emerge.


Initiatives for 2006

As the final year in the Second Medium-Term Management Plan, we aim to complete reforms towards the realization of a robust profit structure and a diverse growth structure for Asahi Breweries Group. To achieve this, we will pursue challenges and progress that take us up to the next growth step.


1. Domestic alcoholic beverages business

Through our structural reforms, it is imperative that we enhance the growth potential of the Group’s core domestic alcoholic beverages business. To achieve this, we will strive to recreate foundations for growth throughout the entire business by channeling management resources into the beer-type beverage business, which is central to this sector.

Asahi Super Dry is now entering its 20th year on the market. As such, we will push aggressively forward with initiatives aimed at increasing its freshness and draft beer quality. We remain dedicated to bringing satisfaction to our customers by providing unique quality and flavor. As a leading beer manufacturer, we seek to promote full-fledged revitalization in the beer market by further boosting the brand value of Asahi Super Dry and the value of beer as a whole.

Our product strategy revolves around the keyword “freshness.” At the beginning of the year, we released “2006 New Year packs,” in which Asahi Super Dry packs were delivered to stores within three days of production. Moving on from this concept, we will provide these “freshness packs” to mass retailers every month. Ahead of this campaign, company employees will give in-store explanations of the difference in value and quality of Asahi Super Dry. Certain major in-store events will also be held. Our aim is to rejuvenate the beer market, working to do so from the ground up.

On a communication front, Asahi Super Dry will be a special co-sponsor of the Asian Qualifying Round of the 2006 World Baseball Classic to be held in March. As the official sponsor of Japan’s representative team, we will roll-out a dynamic marketing campaign befitting Japan’s leading beer brand in support of their challenge to be the best in the world.

In other efforts to boost the recovery of the beer market, we will further promote our draft beer Jukusen – which grew three-fold in the premium beer market last year – in the commercial market. We will also propose new concepts that promise to make the beer-drinking experience even more enjoyable.

In happoshu, we have systematically increased the quality of the three products introduced under the Honnama (genuine draft) brand since 2001 in order to draw out the characteristic flavor of each. Shipments of the revamped products will commence at the end of January. In line with the increase in quality, we plan to conduct an advertising and marketing campaign to portray the casual, fun world-view that Honnama evokes. By doing so, we aim to reinforce the presence of the Honnama brand in the happoshu market.

In the new genre market, we seek to boost the brand strength of Asahi Shinnama 3, which has sold well since its release on November 22 last year, via attention-grabbing advertising and promotional campaigns.

Elsewhere, we aim to further raise the market visibility of our core brands of shochu, RTD beverages, spirits and wine. The purpose of this move is to generate a marked increase in overall sales of alcoholic beverages.

In shochu, we intend to boost sales of the Kanoka brand to 3.3 million cases (one case = 12 x 720ml bottles) and bolster the product concept behind our line of shochu that includes Satsuma-tsukasa and Ichibanfuda.

In RTD beverages, we will further strengthen the core Cocktail Partner and Shunka Shibori brands while meeting the wide range of customer needs with the unique brands HiLiki, Hon Chu-Hi, and Fauchon.

In spirits, we will strive to expand our market position through our core domestic whiskeys Black Nikka Clear Blend and Taketsuru. At the same time, we will propose a new style of whiskey-drinking for entry-level users through new key brands such as Black Highball.

In wine, we aim to continue expanding sales of our domestic brands by combining them with the Sainte Neige brand in accord with the merger with Asahi Beer Winery.



2. Group businesses

In the domestic soft drinks business, Asahi Soft Drinks Co., Ltd. will continue with the creation of a structure that promotes long-term growth and expansion through a variety of initiatives that include: implementing a growth strategy focused on core brands; reforming sales and supply chain management systems; and strengthening cost competitiveness.

In the food and pharmaceuticals business, we will work to further expand the profit base of Asahi Food & Healthcare Co., Ltd., which achieved profitability last year in the fourth year after its inception. Besides striving to increase sales of core products such as MINTIA and Actio, we will look to create new diet support products based on the results of functional research into beer yeast as well as new entrants for the Aguri related business.

In line with our full-scale entry into the growing field of chilled beverages, we have positioned the two LB companies as key to the success of this business. As such, we aim to foster and strengthen these companies so that they are quickly transformed into core businesses for the Group. From 2006, we will reinforce the ties between LB (Saitama) and Asahi Soft Drinks Co., Ltd. on both production and logistics fronts. This will enable us to maximize Group synergies as we move forward with business expansion.


3.Overseas business

In our overseas business, we seek to enhance profitability and secure a growth track through business development, especially in China and Asia. Going forward, we hope to make this business into a key profit generator for the Group.

In the Chinese beer business, we will help to boost the competitiveness of the local beer companies that we have invested in, while investigating into further investment aimed at expanding sales.

In rapidly growing South East Asian countries and East Asia, including Taiwan and Korea, we intend to increase the profitability of our beer businesses via a policy of growth and expansion and the creation of an optimum supply chain.

Moving forward, the soft drinks market in Asia is expected to grow as a whole and competition to increase. In response, we will strive to strengthen the profit base of our soft drinks business there, centered on Tingyi-Asahi-Itochu Beverages Holding Co., Ltd. and Haitai Beverage Company, by providing assistance through Asahi Breweries Group technology and by offering support with business management. In 2006, we will continue to aggressively promote our expansion strategy for Tingyi-Asahi-Itochu Beverages Holding, which registered a significant year-on-year improvement in performance in 2005.

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