Insights into the Japanese Craft Beer Industry

Japan is experiencing the start of its 2nd microbrew boom by riding on renewed consumer interests, convergence of passionate craft brewers in Japan, and rising import costs that is making domestic craft beers more affordable for consumers. I have been an avid craft beer fan since 2010 when I had my 1st bottle of Wittekerke Rose in a Belgian restaurant. Since then, I have been a fan of various craft beers, such as North Taiwan Lychee Beer, Hitachino Nest Beer, Hoegaarden Forbidden Fruit, and Brimmer Brewing Golden Ale. Intrigued by the recent surge in popularity of craft beer, I began to visit various breweries and brewpubs in Japan to discover the driving forces behind this phenomenon.

Brief History of Craft Beer in Japan

Japan’s beer culture can be traced back to 17th century Edo Period when the Dutch opened a beer hall for sailors travelling between Japan and the Dutch Empire. In 1853, Koumin Kawamoto, a medical doctor, brewed one of the 1st beer in Japan based on instructions from a Dutch book. By the Meiji Period, the Japanese beer industry started to flourish with the arrival of overseas brewers and the establishment of breweries such as Spring Valley Brewery in 1870 and Hokkaido Kaitakushi Beer Brewery in 1876. The Beer Tax Law was enacted in 1901 which was followed by minimum production volumes of 1,800 kiloliters for brewing licenses. This law greatly restricted the growth of small-scale brewers in Japan and contributed to the domination of the Japanese beer industry by major breweries such as Kirin Brewery Company and Osaka Beer Company (now known as Asahi Breweries). As the demand for beer increased rapidly during the economic recovery of Japan in 1950s, the minimum production volumes for brewing licenses was raised to 2,000 kiloliters in 1959 to further solidify the position of major breweries in Japan.

The beer landscape remained relatively stagnant until 1980s. Licensed production of foreign brand beers was started in 1983, and the major breweries engaged in the Dry Wars (ドライ戦争) in 1987. The Dry Wars led to the development of happoshu (low malt beer) and cheap malt-free “third beer”. The industry experienced a rejuvenation when the minimum production volumes for brewing licenses was lowered significantly to 60 kiloliters for beer and 6 liters for happoshu. This development heralded the start of the 1st microbrew boom in Japan, where hundreds of brewpubs and microbreweries sprung up to take advantage of the deregulation opportunity.

Unfortunately, the 1st microbrew boom was short-lived and the industry peaked at 310 microbreweries in 1999. The newly minted microbreweries were trying to produce “mini-industrial” beers and they were not able to produce high quality products that appealed to the palate of domestic consumers. By early 2000s, numerous players exited the market with approximately 280 microbreweries surviving in 2007.
Despite the initial grim outlook, craft brewers managed to beat market expectations. Within a stagnant beer industry that is expected to register -0.8% compound annual growth rate (CAGR) through 2016, the craft beer market is expected to experience growth rates of 0.5% to 1.0% where more than 40% of craft beer production will be sold online. Why are the craft brewers able to survive and thrive in a niche segment of a stagnant industry? It boils down to the existence of a passionate craft beer community.

Key Successful Factors of Japanese Craft Beer Industry

The craft beer market is well supported by a passionate community of craft beer fans who have formed the non-profit Japan Craft Beer Association (JCBA) in 1994. The association is responsible for organizing two of the biggest beer competition in Japan, namely the International Beer Competition (since 1996) and the Japan & Asia Beer Cup (since 1998). Two of the key social drivers behind this growing craft beer trend are the accessibility of information and products via the Internet, and the changing palate of the Japanese people. The majority of craft beer consumers are younger than 40 years old and they consume craft beer as a social trend or as a tasty complementary beverage to increasingly complex food styles.

More importantly, the industry is attracting international craft brewers who are passionate and committed to the long-term future of the Japanese craft beer industry. One great example is the talented brew master, Scott Brimmer, from Brimmer Brewing which is located in Kanagawa. Although the craft beer brewery was only established in 2011, it has already won numerous awards, including bronze awards for his Porter and Golden Ale at the International Beer Competition in 2012. In the absence of market pressures from major breweries in Japan, these microbreweries are allowed the space to grow and thrive in the industry.

In my opinion, the existence of passionate craft beer fans and brew masters helps to create a great platform to fuel the growth of the industry as follows:

a. Mutual network effect.
As the craft beer fan community grows, the craft beer brewers and companies will grow accordingly to help supply the demand for the products. Recently, Blue Moon Brewing from USA has announced its plans to increase its efforts in cultivating the Japanese market by educating consumers about its Belgian craft beers.

b. External network effect.
As the craft beer community grows, the attractiveness of the craft beer market increases which serves to attract more fans, brew masters, and companies into the industry. Kiuchi Brewery is a classic example of a traditional sake brewery that saw the market opportunities for craft beer, and launched a successful brand of craft beers called Hitachino Nest Beer in 1996. The brewery remains one of the largest exporters of craft beer in Japan, with over 60% of sales from overseas markets.

c. Retention effect.
As the community experience satisfaction and convenience in experiencing and sharing their passion for craft beer, it helps to “stick” the customers, brew masters, and companies to the craft beer platform, thus increasing the platform's retention rate.

Challenges for the Japanese Craft Beer Industry

Although the Japanese craft beer industry is currently booming, it is only a small fraction of the total beer market which is estimated to be worth around US $29 billion. The current state of the Japanese craft beer industry is similar to the early days of the craft beer industry in USA where a majority of the microbreweries are experiencing capacity and distribution issues. However, craft brewers in Japan have learnt their lessons from the 1st microbrew boom and are proceeding with caution. They are slowly building up organizational capabilities and production capacities, and maintaining close ties with domestic suppliers and consumers. Craft brewers are willing to sacrifice short-term profits from overseas markets by satisfying the long-term demands of their domestic customers. A majority of the craft brewers will only attempt to venture overseas once they have built up sufficient capabilities to meet both the domestic and global demand for their products.

Another key piece to the growth of the market is consumer education. Craft beer players are slowly investing in consumer education to inform customers about the best ways to consume their products. During the 1st year anniversary of Brimmer Brewery in March 2013, the brewery held a “craft beer and buffet dinner” event in Hilton Tokyo to showcase the food pairings with their award-winning Porter and Golden Ale. At the launch party for Blue Moon Brewing in Japan in June 2013, a large portion of the party was devoted to educating consumers on the pouring and serving of Blue Moon, and the food pairings with the beer.

Parallels with the Japanese Sake industry

Interestingly, the key issues and challenges of the craft beer industry are also encountered in the sake industry. The Japanese sake industry can be traced back to the Nara Period (710 – 794 AD) and can be largely divided into traditional breweries and regional jizake breweries (equivalent of craft beer breweries). The industry is declining as the consumption of Japanese sake has decreased to only a third of what it was at its peak in 1975 where 1.7 million kiloliters of sake was produced in Japan. This declining trend can be attributed to the aging population of its consumers which is typically over 55 years old and the traditional brand image of sake which does not appeal to the younger generation.

Despite the gloomy domestic outlook, there is a silver lining to the sake industry where it is experiencing increasing overseas demand with exports reaching 14 million liters in 2011. This trend can be attributed to the growing popularity of Japanese food styles in overseas markets. Similar to the craft beer industry, the Japanese sake industry faces the same issues of distribution and consumer education. Entities, such as the Japan Prestige Sake Association and the Sake Service Institute, have emerged to promote the industry and conduct consumer education in order to grow the consumer base for Japanese sake.

All this talk of Japanese craft beer and sake is getting me thirsty. I guess it is time to gather a few of my close friends and head down to the nearest brewpub for some nominication.

What do you think of the future of craft beer in Japan? Share your thoughts and experiences!

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