Cheap Beer's Burp in the Road

The newsroom refrigerator was nearly packed full. Junior reporter Junko sat at the office kitc hen table eating her lunch. I continued working.

"Big night tonight," I said. I unloaded the last 6-pack of Kirin's new Gokunama brand happoshu from the cart and held it in my right hand.

"How so?" She looked up.

"In order to keep up with Japan's latest beverage market trends, I like to do an in-depth study immediately after a new brand of happoshu is introduced." I placed the pack of Kirin's latest alternative to beer into the refrigerator.

"Yeah, but that stuff is going to be taxed like regular beer soon enough."

"As I'm sure you heard the happoshu tax increase proposal was overturned once again late last year. This is two years in a row that we drinkers have been victorious over greedy government officials' attempts to raise the price. It's getting to be like child's play."

"The idea is a waste anyway. Even though alcoholics like you will pay a premium to drink raw sewage if there is a guarantee of at least 5 percent alcohol content, most other people will cut back on drinking happoshu because it tastes terrible. And what about next year? The increase will surely be attempted again."

"My dear, for someone like me, a person who looks ahead hours when making decisions, this one year might as well be a lifetime."

I closed the refrigerator door and smiled. Junko returned to her eating.

At Liquors Hasegawa's North Exit branch in the Yaesu Shopping Mall underneath Tokyo Station, manager Shunji Hasegawa has seen a lot in his 30 years of selling beer, wine, and whiskey to thirsty Japanese drinkers on the move through the busy station. He's weathered the oil shocks of the '70s, temporary economic downturns, and the ever-changing whims of the Japanese consumer.

But if certain bureaucrats get their way he's going to face perhaps his greatest challenge yet: an increase in the tax levied on a very popular alcohol innovation - happoshu. "If it happens, business will be very tough," he grimaces.

Happoshu, or literally "sparkling liquor," is a beer-like low-malt alcoholic beverage that is extremely popular with consumers because of its very low price relative to regular beer. The price difference is due to a tax categorization loophole.

After noticing its great popularity, government officials are keen to fix it so that happoshu is priced closer to that of regular beer and scoop off, what they hope to be, that extra froth. The mild taste of this tipple is another matter entirely, though, and beer aficionados wonder if a price boost wouldn't simply cause happoshu to lose all of its fizz altogether.

Currently, an average 350-milliliter can of happoshu has a suggested retail price of 145 yen, roughly 75 yen less than that of regular beer. The all-important alcohol content is typically the same as that of regular beer.

The majority of the price difference is in the alcohol tax. The Liquor Tax Law of Japan defines beer to be an alcoholic beverage with 66.7 percent malt content. Happoshu contains less than 25 percent malt, a percentage that gives it an alcohol tax that is less than half the amount imposed on beer.

Along with prices for fast food, clothing and real estate, to name but a few, the low price offered for these alcoholic beverages is yet another symptom of the deflationary economy that exists in Japan today.

Things were different in the 1980s. This was a time of high economic growth. In those days, family incomes were growing and brand loyalty reigned. Manufacturers reaped large profits as consumers snapped up goods at nearly any price.

Today, times have changed; household budgets are being cut; consumers are looking for bargains; and retailers must cut manufacturing and distribution costs to oblige.

Suntory first introduced happoshu to Japan in October 1994. Since then each of Japan's four top breweries have developed their own brands.

Today's market is awash in a great variety of concoctions whose attraction to the consumer is generally through some kind of visual stimulation conceived by the maker rather than an emphasis on the taste of the product.

Sapporo's "Brau" features lettering and artwork that alludes to brews from Germany, the location of the brewing techniques adopted by most major Japanese brewers.

But perhaps the most talked about happoshu brand has been Suntory's "diet," promoted on television commercials by Prime Minister Koizumi's son, Kotaro. In the ads, he holds a can up to the camera, enjoys a few gulps, and smiles. He explains that the drink is delicious and then continues to explain that by simply enjoying this cold brew one can become slimmer.

There has been nothing slim about happoshu's results, however. Since its inception, shipments have posted year-on-year gains and today account for over 30% of all beer sales in Japan - the world's fifth largest beer market.

Rather ironically, it is the ongoing plans of the elder Koizumi and his bureaucratic friends that might eventually put a crimp in his son's business.

With business booming at such a nice clip, the Liberal Democratic Party's Tax Research Council last year decided that it wanted to increase the tax of happoshu to nearly that of regular beer. The Ministry of Finance proposed that the increases be done gradually in increments of 20 yen. A similar measure was tried by bureaucrats the year before but it was shot down. Last year's attempt fared no better; it was defeated in December.

The proposed increase was to make up for a shortfall in tax revenue and fund economic stimulus measures for small and medium-sized businesses. Preliminary estimates by the Council have revealed that upwards of 250 billion yen could be generated annually from such a move.

Japan's beer makers joined forces to lead the charge against the measure. A lobby group was formed and a web page launched, complete with a logo featuring an angry-faced silver can with red bandana and bubbles fizzing above its top. Visitors to the web page today are thanked by the can for their support during the most recent fight.

With the ruling Liberal Democratic Party's popularity, and strength, having declined due to a series of scandals over the past year, its chances of pushing the measure through anytime in the immediate future appears small. The added threat of a consumer backlash, a possibility given the nature of Japan's economy, further lessens the likelihood.

Given this, it is still anticipated that a similar tax increase plan will eventually be tried by bureaucrats once again when political and economic conditions are more favorable.

But the measure's latest defeat aside, wouldn't a price increase cause happoshu to lose its one great selling point - low price, and cause that anticipated tax revenue to disappear?

"It tastes like medicine," says Ayumi Wada of Asahi's Hon-nama brand. The 28-year old masseuse and drinker of Ebisu beer does admit to occasionally drinking Kirin's Tanrei because of the price and the fact that among happoshu choices its taste "is the best of the worst."

From behind the counter at his shop, Hasegawa gives an equally negative assessment of the taste of all the brands. But to him, they generally all taste the same. He emphasizes that since the alcohol content is roughly the same as regular beer, the bang-for-your-yen principle is the most important aspect to sales, especially in this economy.

Out of Japan's 10-year economic downturn, cheap alcohol has been one of the few positives. Most would like it to stay that way, taste be damned.

Wada adds, "Generally, it is too light. It doesn't taste good. If the tax were raised, I would never drink happoshu. I would just drink Ebisu."

She is not alone.

Hideki Kimura, a 32-year old maintenance worker, making a whiskey purchase at the counter of Liquors Hasegawa, shrugs his shoulders and says, "I'd just always buy Sapporo beer if the tax were raised."

"If the tax goes up," Hasegawa explains while ringing up Kimura's sale, "of course people will stop buying it. Basically, the government is stupid."

There is a very good reason why happoshu's taste is lousy; it is made with cheap ingredients. Malted barley will generally give a real beer its flavor. In happoshu, less expensive starches and sugars replace malted barley in the brewing process.

"People who know beer will say this isn't beer," says Hidekazu Yoshihira, a professional brewer of seven years with an operation located in a suburb just outside of Tokyo.

Yoshihira, who almost never drinks happoshu himself unless it is the only drink available when he is out of his house, adds, "It is best to classify it as something other than beer."

He sees the industry headed towards further developing products that all taste the same, with any depth, character, and differences between the brands being completely lost.

"The companies are making the taste milder to encourage the consumer to drink more," he says.

The initial success of happoshu has bred some hefty competition. With taste not being a key to sales, there is no brand loyalty among consumers. Price is all that matters. Thus, a full-blown happoshu price war has been raging over the last year among the major brewers.

It began on March 1st when Kirin introduced its Goku-nama brand at a price that was 10 yen less than the competition's price of 145 yen. Kirin was able to do this by cutting production costs, sales rebates, and television advertising. The cans are gunmetal gray with only blue lettering to simplify manufacturing processes. Only blue is used for the lettering on the shipping boxes as well.

Asahi and Suntory responded quickly by matching Kirin's price, but only for a short time. After that price drop, Asahi's Hon-nama quickly became the biggest selling happoshu at Hasegawa's shop.

Asahi was the last major brewer to develop a happoshu brew. Kirin and Asahi have been battling for market share for some years now. It wasn't until just a few years ago that Asahi finally surpassed Kirin as Japan's number one brewer with its "Super Dry" regular beer brand. At the time, Kirin was focusing on developing a line of happoshu products.

The strategy worked for Kirin. Today, Kirin commands a happoshu market share of nearly 40 percent, the most of any brewer. Sensing success on the part of Kirin and the other brewers with happoshu, Asahi finally relented and Hon-nama was the result.

How low can the price go? Thus far, nobody knows. But prices have been falling so quickly that happoshu has been turning up in discount liquor shops for less than 100 yen a can.

Even if the tax is increased one day, is it be possible that some people might actually continue to buy happoshu because they have become accustomed to the taste? It is a possibility. Happoshu does indeed have supporters, though admittedly very few.

Kenji Araki manager of Liquors Hasegawa's main store in the same mall sums up his opinion of happoshu as: "Yes, it is like water. But it is light and good in a refreshing way. Some people like it for this."

The 45-year old Araki argues that some people who might previously have shunned happoshu because of its low, working class-type association could perhaps turn to it as a trendy alternative to beer.

This is not as strange as it might sound. In 1994, brewing regulations in Japan were lessened. The minimum annual volume of output required for a brewing license for beer was lowered from 2,000 kiloliters to 60 kiloliters. For happoshu, the requirement was set at a paltry 6 kiloliters.

This easing has made it easier for smaller operations to start churning out smaller, hand-crafted products. Some of them have even been happoshu with ingredients that have included vegetables and fruit.

In Kawagoe, Saitama Prefecture, Koedo Brewery uses local potatoes for its mild "Sweet Potato Lager." Topping them in uniqueness in ingredients is "Iyo Tangerine Happoshu," crafted by a small brewery in Kawanoe, Ehime Prefecture with the juice of tangerines found in the prefecture.

Araki believes that happoshu does indeed have a legitimate niche in the beer market. "Even if the tax were increased, some people would buy it," he says. "Certainly it would not be as popular as it is today, but it would not go away either."

Note: Edward Gelband contributed to this report from the Tokyo Bureau.