SAPPORO HOLDINGS LIMITED
Annual Report 2005
The Keys to Growth
Financial Highlights
Years ended December 31
Thousands of
Millions of yen U.S. dollars
2005 2004 2005
Net sales ¥453,671 ¥494,930 $3,842,394
Net income 3,630 4,643 30,743
Yen U.S. dollars
Per share: Net income
Primary ¥10.20 ¥13.07 $0.09
Diluted 9.18 12.01 0.08
Cash dividends 5.00 5.00 0.04
Thousands of
Millions of yen U.S. dollars
Shareholders’ equity ¥111,411 ¥ 92,263 $ 943,599
Total assets 563,845 602,112 4,775,518
Capital expenditures 16,218 10,269 137,359
Depreciation and amortization 22,075 25,330 186,966
Note: U.S. dollar amounts are translated from Japanese yen, for convenience only, at the rate of ¥118.07=US$1, the exchange rate prevailing on December 31, 2005.
Contents
The New Medium-Term Management Plan 1Message From the President 2
At a Glance 8
Review of Operations
Alcoholic Beverages: Sapporo Breweries Ltd. 10 The Japanese Beer Industry and
Sapporo Breweries 12
Soft Drinks: Sapporo Beverage Co., Ltd. 13 Restaurants: Sapporo Lion Ltd. 14 Real Estate: Yebisu Garden Place Co., Ltd. 15 A Responsible Corporate Citizen 16
Management 18
Five-Year Summary 19
Management’s Discussion and Analysis 20
Consolidated Balance Sheets 26
Consolidated Statements of Income 28 Consolidated Statements of
Shareholders’ Equity 29
Consolidated Statements of Cash Flows 30 Notes to Consolidated Financial Statements 31 Report of Independent Auditors 46
Corporate Data 47
Net Income (¥ Million)
Operating Income (¥ Million)
Net Sales (¥ Million)
0 100,000 200,000 300,000 400,000 500,000 600,000
01 02 03 04 05
557,233 511,752 479,520 494,930 453,671
0 5,000 10,000 15,000 20,000 25,000
01 02 03 04 05
19,786 10,978 13,331 23,648 10,300
0 1,000 2,000 3,000 4,000 5,000
01 02 03 04 05
4,390 1,168 2,413 4,643 3,630
➔
Following adoption of this new framework, we effectively utilized resources to improve return on invested capital and lower financial liabilities to suitable levels. The result was improvements in financial liabilities that far exceeded targets, as we made real progress in strengthening our financial position.
Stronger Financial Base
We are accelerating the development of new and related businesses that exhibit synergies in terms of our management resources and expertise. As a first step, Sapporo Breweries entered the shochu (Japanese distilled spirits) business in April 2006. Looking ahead, we will pursue alli- ances and M&As to promote the creation of future growth drivers.
New Fields
➔
The Launch of
Sapporo Lion Ltd.
The foundation of Sapporo Lion Ltd. dates back to the opening of Japan’s first beer hall, the Yebisu Beer Hall, in 1899 by Japan Beer Brewery
Company. The restaurants business was passed on to DaiNippon Beer Company Ltd. and became a company called Kyoei Corporation in 1936. In 1979, this company was renamed Sapporo Lion Ltd.
The Launch of
Sapporo Beverage
Co., Ltd.
Sapporo Beverage was spawned from a 1957 joint venture (terminated in 1973) between Sapporo Breweries and Canada Dry. From 1985, the company operated as Sapporo Beer’s Beverage Co., Ltd., and assumed its present trade name in 2004.
The Launch of
Sapporo
Breweries Ltd.
In 1949, DaiNippon Beer Company Ltd. was divided into two companies, Nippon Breweries, Ltd. and Asahi Breweries, Ltd. While Nippon Breweries, Ltd. assumed ownership of the Sapporo and Yebisu trademarks, it restarted its business by introducing a new brand name, Nippon Beer. The Sapporo Beer label was later revived in 1956 in Hokkaido, with Nippon Breweries, Ltd.
renaming itself Sapporo Breweries Ltd. in 1964.
The Sapporo Group’s operating environment has undergone major changes in recent years, including lower overall demand due largely to a decline in Japan’s drinking-age population, as well as changes in consumer values and Japan’s distribution and tax systems. This climate, in turn, has demanded that the Sapporo Group initiate business transformations of its own.
A Changing Market
Along these lines, the Sapporo Group adopted a holding company framework in July 2003. This put in place a structure capable of leveraging speedy, flexible management through the independence and autonomy of Group companies, together with the capturing of Group synergies, to drive improvements in Group value.
New Corporate Structure
Building on Progress Today...
Sapporo History
➔
➔
The Birth of
Yebisu Beer
In 1887, the Japan Beer Brewery Company was established by a group of entrepreneurs from Yokohama and Tokyo. In 1890, Yebisu Beer was launched, marking another milestone in the history of Sapporo Breweries. Yebisu Beer subsequently garnered strong support as a beer originating
from Tokyo. The Ebisu name was later to be
used for a nearby train station and neighbor- hood in Tokyo.
The Formation of
DaiNippon Beer
Company Ltd.
In 1906, Kyohei Magoshi, president of the Japan Beer Brewery Company, merged the Japan, Sapporo and Osaka brewing companies to form DaiNippon Beer Company Ltd., with a 70% share of the Japanese beer market. DaiNippon Beer Company Ltd. made a major contribution to the development of Japan’s beer industry by improving brewing techniques and the natural ingredients used, as well as in other ways.
The Launch of
Yebisu Garden
Place Co., Ltd.
In 1985, the decision was made to redevelop the former site of Japan Beer Brewery Company’s factory, which was constructed in 1889 in Tokyo’s Ebisu district. Yebisu Develop- ment Co., Ltd. was established to oversee this project in 1986. In 1992, the company was renamed Yebisu Garden Place Co., Ltd.
The Birth of
Sapporo Lager
In 1876, the Hokkaido Development Commission (Kaitakushi) established the Hokkaido Development Commis- sion Beer Factory, employing as brewmaster Seibei Nakagawa, who had recently returned from studying the art of beer making in Germany. The following year, Sapporo Lager was
born, prominently displaying the
Pioneer’s symbol, the North Star. It was thus that Sapporo Beer was born.
Sapporo Breweries Ltd.
Sapporo Beverage Co., Ltd.
Sapporo Lion Ltd.
Yebisu Garden Place Co., Ltd. Sapporo
Holdings Limited
Happo-shu
(low-malt beer) Shochu
Wine and Spirits
Beer
Beer Happo-shu New Product Genre*
0 100 200 300 400
0 1 2 3 4
323.3 220.7
2005
2003 2004
289.8
Financial Liabilities D-E Ratio
(¥ Billion) (Times)
3.7
3.1
2.0
0 300,000 600,000 900,000 1,200,000
669,659
398,666
482,020
280,368 141,135
2001 2005
(KL)
*New Product Genre=Total of Draft One and Slims
Domestic and International Shipment Volume Financial Liabilities/D-E Ratio
➔
...With Initiatives for
Growth Tomorrow
In February 2006, Sapporo Holdings
announced a new three-year, medium-
term management plan. Guided by
this plan, the Sapporo Group is
making a clean break from the reforms
of the past, all the while bolstering its
management base and creating
growth drivers for the future. Position-
ing the next three years as a second
stage of growth following the
transition to a holding company
structure in July 2003, the company
is boldly promoting sustainable
growth and working to optimize its
enterprise value.
The New Medium-Term
Management Plan
➔
Message From the President
Takao Murakami
President and Representative Director, Group CEO
2005 in Review
March 30, 2006 marked one year to the date since my appointment as President and Representative Director, Group CEO of Sapporo Holdings. The past year saw the environment surrounding our four key operations— Alcoholic Beverages, Soft Drinks, Restaurants and Real Estate—grow more acute, with greater bipolarization in consumption trends, further erosion of borders that once separated certain sectors, and more diversification in customer tastes. Conditions like these demand a company’s full capabilities, among them the ability to accurately develop products and services that are sure to go over well with customers; the nurturing capacity to establish products as brands; and cost competitiveness.
(¥ Million)
2003 2004 2005
Net Sales 479,520 494,930 453,671
Operating Income 13,331 23,648 10,300
Ordinary Income 6,788 18,005 6,602
Financial Liabilities 323,369 289,854 220,723
D-E Ratio (Times) 3.7 3.1 2.0
ROE (%) 2.5 5.2 3.6
Return on Invested
Capital (ROIC) (%)* 3.1 6.0 3.0
*ROIC= Earnings before interest and taxes (Ordinary income + Interest expenses)/ Invested capital (Shareholders’ equity + Financial liabilities)
In this market environment, Sapporo Holdings posted consolidated net sales of ¥453,671 million, down 8.3% from the previous year, and operating income of ¥10,300 million, down 56.4%. Net income, meanwhile, declined 21.8% to ¥3,630 million. The decline in net sales stemmed from slumping sales volumes in Alcoholic Beverages and Soft Drinks. Lower earnings resulted largely from higher brand creation costs in Alcoholic Beverages. As in the previous year, we declared a full-year dividend of ¥5.0 per share. ROE was 3.6%.
The New Medium-Term Management Plan
2005 was the second year of our management plan ending in 2006. The Group enacted initiatives vital to meeting two critical objectives—improve ROIC and reduce financial liabilities to appropriate levels. While our financial liabilities target was met in 2004, we succeeded in lowering levels even more, thereby further improving our financial position. Regarding ROIC, while we achieved our target in 2004, decreased earnings in 2005 pulled ROIC lower. This was an unsatisfactory result.
Volatility of this kind in operating performance sug- gests to me that the Sapporo Group’s profit structure is not yet on a solid footing. What this means is that we are still highly susceptible to the impact of changes in the external environment. At the same time, another problem I see is the Group’s strong dependency on its Alcoholic Beverages business. To address these concerns, I believe we must take a different approach from the past to pro- mote sustainable growth of the Sapporo Group. I am convinced that taking steps to further enhance the Group’s management base and create future growth drivers are necessary to the effort to boost enterprise value.
Based on this reasoning, we have launched a new medium-term plan one year earlier than scheduled. Follow- ing on from the previous plan, where a “three-year rebirth” was the major theme, the purpose of this latest plan will be to build the Group structure needed to achieve second- stage growth.
2004 2005 2006 2007 2008
Previous Plan
<Three-Year Rebirth>
New Plan
<Second-Stage Growth>
2004~2006
2006~2008
2009~
2009
Review of the Previous Medium-Term
Management Plan
The Sapporo Group assumed its current holding company structure in July 2003 by launching a new framework built on four main operations—Alcoholic Beverages, Soft Drinks, Restaurants and Real Estate. With 2004 through 2006 as a time for its “three-year rebirth,” the Group conducted business guided by the previous business plan.
The two years since the start of the plan have seen major swings in operating results. Nevertheless, reductions in fixed costs and interest-bearing liabilities, alongside other structural reforms, helped put in place a base for moving to the next stage of growth. This progress, as well as the rapidly changing environment for operating companies, and the different timing requirements of each business, prompted the decision to speed up initiatives at the earliest possible stage to lay the groundwork today for sustainable growth in the future. To this end, although the current plan is still under way, we drafted a new medium- term plan starting in 2006 with the goal of improving future Group value.
>> Initiated structural reforms with sale of hotel
business, posting a gain of ¥6.8 billion on a sale price of ¥50.1 billion.
>> Applied impairment accounting earlier than re-
quired, removing future risks. Booked charges of
¥13.5 billion, including losses on sale of real estate.
>> Full-year contribution from the 2003 closure of two
breweries in Alcoholic Beverages yielded a ¥2.3 billion reduction in fixed manufacturing costs.
>> Reduced financial liabilities by ¥33.5 billion from
the previous year-end.
<2004 Highlights>
(YoY Changes) Effect of higher sales volumes in
Alcoholic Beverages, Soft Drinks, etc. ¥10.7 billion Benefits of cost reductions at all operating companies ¥9.2 billion Decrease in sales of real estate for sale (¥8.1 billion)
Sales promotion expenses, etc. (¥0.6 billion)
The New Medium-Term Management Plan
The quantitative targets for the new medium-term management plan are found in the charts on page seven. In the drive to meet these targets, we plan to pursue nine basic Group strategies.
1) Basic Policy Regarding Customers
Through all the Group’s businesses, the Sapporo name will be synonymous with contributing to enrichment and enjoyment in various lifestyle scenes throughout people’s lives. As always, efforts at each operating company will focus on strengthening communication with customers and boosting the contribution made by each company.
2) Strike a Balance Between Growth and
Financial Soundness With New Investments
When organizational realignment took place in 2003, one key proposition was to bolster the financial position by reducing financial liabilities. The next three years will see further reductions in financial liabilities skillfully balanced with the enactment of strategic investments vital to supporting future growth.
3) Strengthen Framework of Four Businesses
Rebuild Alcoholic Beverages and Real Estate businesses to ensure more consistent earnings and structurally reform Soft Drinks and Restaurants businesses to improve earn- ings. Taking optimal advantage of benefits offered by its present structure, the Group will balance the need for cohesiveness with individual autonomy, boosting manage- ment efficiency by maximizing synergies both between Sapporo Holdings and each operating company, and among the operating companies themselves. In tandem, Sapporo Holdings will play a pivotal role in supporting reform initiatives being unveiled at a faster pace at each operating company.
>> In Alcoholic Beverages, forward-looking investments
in the form of sales promotion expenses enabled Draft One and Slims to build market share in the new product genre market, lifting sales volume 21% year on year.
>> By responding to bipolarization in consumption
trends, Yebisu sales volume rose 1% year on year despite an 8% decline in overall beer demand.
>> Earnings declined in Soft Drinks due to a change in
product mix and other factors, despite unchanged sales volume. Nonetheless, major strides were made in lowering the breakeven point by closing the Kanagawa Plant and implementing other reforms to improve the profit structure. (Full-year contribution of cost reductions from closure of ¥0.4 billion a year)
>> Continuation from 2004 of a recovery in the Restau-
rants segment lifted same-store sales 2% year on year; together with a strong performance at new format outlets, operating income increased ¥0.3 billion.
>> Overall occupancy rates in real estate leasing
operations improved, with mainstay Yebisu Garden Place achieving an occupancy rate of nearly 100%.
>> Sharply reduced financial liabilities, as in 2004;
financial liabilities stood at ¥220.7 billion at Decem- ber 31, 2005, down ¥69.1 billion year on year.
<2005 Highlights>
(YoY Changes) Lower sales in Alcoholic Beverages and Soft Drinks (¥7.3 billion)
Higher sales promotion expenses (¥6.0 billion)
Benefits of cost reductions at all operating companies ¥0.8 billion
Other ¥1.1 billion
Low-alcohol Drinks
Soft Drinks Alcoholic Beverages
Shochu
New and Related Business Domains
Existing Domains Targeted Areas for Each Operating Company
Rich and Enjoyable Lifestyles
Sports and Health Business
Real Estate New-format
Restaurant Outlets
Ready-made Food and Catering Businesses Health and Functional
Drinks and Foods
Restaurants Chilled Drinks and Foods
New Real Estate Development Property Management
4) Structurally Reform Operating Companies
Strive to quicken the pace of structural reforms at each operating company. Improve earnings bases in existing businesses, maximize and effectively utilize management resources, and nurture growth businesses for the future, all through far-reaching business growth projects formed between Sapporo Holdings and the operating companies.
5) Raise Group Earnings
The Sapporo Group has realized about ¥10.0 billion in cost reductions over the last two years. The goal during the next three years is to duplicate that success by the end of 2008, by focusing primarily on reducing manufacturing costs and logistics expenses, using personnel expenses and sales promotion expenses more efficiently, and improving the efficiency of back-office operations. In doing so, we will implement Group management that will strengthen our earnings base and make us more resilient to changes in the operating environment.
6) Increase Strategic Investments
Create growth drivers to support sustainable Group growth by making investments of ¥70.0 billion over the next three years in strategic initiatives and facilities. Some specific investment areas will include alliances and M&As, exemplified by entry into the shochu business, greater investment in R&D, and investments in real estate develop- ment to maximize use of Group assets. While making these investments, utilize cash flows over the same three-year period to reduce financial liabilities by ¥40.0 billion.
7) Develop New and Related Businesses
To create growth drivers for the future, each operating company will accelerate efforts to develop new and related businesses that exhibit synergies in terms of management resources and expertise with current businesses. To this end, strategic investments will be made chiefly in areas such as R&D, alliances, and M&As.
In Closing
2006 will see my second year as President and Representa- tive Director, Group CEO coincide with the first year of our new medium-term management plan. Both for me person- ally and for the Sapporo Group, this promises to be an extremely important year. In fulfilling its duty as the Group’s publicly owned representative company, Sapporo Holdings recognizes that the return of profits to sharehold- ers is its paramount management concern. While
maintaining a stable dividend as our fundamental policy, we will determine dividends with reference to our operat- ing results and financial position.
April 1, 2006
Takao Murakami
President and Representative Director, Group CEO Group Sales and Earnings Targets
2008 Targets 2005 Consolidated Net Sales (¥ Billion) 520.0 453.6 Consolidated Operating Income
(¥ Billion) 28.0 10.3
Group Financial Targets
2008 Targets 2005 Financial Liabilities (¥ Billion) 180.0 220.7
D-E Ratio (Times) 1.5 2.0
ROE (%) 10 3.6
8) Strengthen R&D and Product
Development Capabilities
Further strengthen alliances between R&D divisions involved in forward-looking projects, with Sapporo Hold- ings serving in a coordinating capacity, with a view to establishing joint Group research centers. At the same time, further bolster functions found in projects designed to strengthen the Group’s product development
capabilities. Also create new value propositions in the same vein as Draft One and The Fruit Sparkling.
9) Promote CSR-based Management
The Sapporo Group’s 130-year history is both a testament to its existence in harmony with society, as well as to the fact that the Group is considered a vital part of society. CSR is regarded as a key strategy supporting sustainable growth of the Group. Therefore, CSR-based management befitting Sapporo will be promoted across the Group.
From these nine basic strategies, the Group, centered on Sapporo Holdings, will strive to raise performance in its four main operations over the next three years and pro- mote Group growth over the medium and long terms to maximize enterprise value. In this way, the Group hopes to meet the expectations of its many and varied stakeholders.
At a Glance
Share of Net Sales
Sapporo Lion Ltd.
Restaurants
Sapporo Breweries Ltd.
Alcoholic Beverages
Sapporo Beverage
Co., Ltd.
Soft Drinks
Yebisu Garden Place
Co., Ltd.
Real Estate
Operating Revenues (¥ Million)
75.2%
Share of Net Sales 14.1%
Share of Net Sales 5.8%
Share of Net Sales 4.8%
Sapporo Holdings
Limited
Net Sales(¥ Million)
Operating Income (¥ Million)
479,520 494,930 453,671
0 100,000 200,000 300,000 400,000 500,000
2003 2004 2005
13,331 23,648 10,300
0 5,000 10,000 15,000 20,000 25,000
2003 2004 2005
2003 2004 2005
341,924 364,585 341,077
0 100,000 200,000 300,000 400,000
2003 2004 2005
65,169 69,324 63,897
0 20,000 40,000 60,000 80,000
2003 2004 2005
26,591 26,611 26,331
0 10,000 20,000 30,000
2003 2004 2005
33,430 22,506 21,696
0 10,000 20,000 30,000 40,000
Products and Services Highlights
■In the second year after its launch, Draft One continued to record steady growth, as did Slims, a new product aimed at more health-conscious consumers. This performance resulted in overall growth of 21% in new product genres.
■Although overall beer demand in Japan fell 8% year on year, sales of Yebisu beer grew 1% thanks to successful measures in response to increasing bipolarization in consumption trends.
■Beer
■Happo-shu (low-malt beer)
■Wine and spirits
■Shochu
(Japanese distilled spirits) Operating Income (Loss) (¥ Million)
■In Soft Drinks, sales volume remained almost on a par with the previous year despite forecasts to the contrary due to the impact of record-breaking temperatures the previous summer. Operating income, meanwhile, declined due to changes in the product mix and other factors.
■In efforts to reform the earnings structure, major strides were made toward lowering the breakeven point through closure of the Kanagawa Plant and other measures.
■Fruit juice-based soft drinks
■Mineral water products
■Economic recovery in Japan and other factors helped the restau- rant sector stay firmly on a recovery track. The Group’s Restaurants business saw a 2% year-on-year increase in same-store sales, for a second consecutive year of same-store sales growth.
■While 13 new outlets were opened, the Group pushed forward with closing those outlets that showed no prospects of a quick turnaround in earnings. The Group had a total of 202 restaurant outlets as of December 31, 2005, 5 fewer than the previous year.
■Ginza Lion, the paragon of Japan’s beer hall chains
■The Agura chain of Japanese-style beer halls
■The Brasserie chain of French-style beer halls
■The real estate sector began to see both improved occupancy rates for offices buildings located mainly in and around Tokyo, as well as a halt in once-declining rent levels. The Group’s real estate leasing operations also saw improved occupancy rates, and mainstay Yebisu Garden Place achieved an occupancy rate of nearly 100%.
■Construction continues on the Ginza 7-chome Multifaceted Building (Ginza, Tokyo), scheduled to open its doors in fall 2006.
■Yebisu Garden Place
■Sapporo Factory
2003 2004 2005
4,542 18,810 6,555
0 5,000 10,000 15,000 20,000
2003 2004 2005
(835) 466 (693)
–1,000 –500 0 500 1,000
2003 2004 2005
(1,089) 229 551
–1,500 –1,000 –500 0 500 1,000
2003 2004 2005
13,511 5,973 5,840
0 5,000 10,000 15,000
Alcoholic Beverages
Sapporo Breweries Ltd.
Review of Operations
In Japan, overall demand for beer and Happo-shu declined 8% for the year despite an ongoing economic recovery. The entry of rivals into the new product genre market, one which Sapporo pioneered with the creation of Draft One, sparked a flurry of activity, lifting the share of this market as a whole from around 5% in the previous year to about 16%. Overall demand for beer, Happo-shu and new product genres nonetheless edged nearly 3% lower on the year.
This climate notwithstanding, Draft One, as the forerunner in the new product genre market, posted a nearly 10% jump in growth from a year earlier. Yebisu Beer, the premier name in premium beer, also staved off competition from rival brands, bucking weak overall beer demand to record growth in market share for the 13th consecutive year. During the year, we revamped core brands and launched new product genre offerings, and also nearly completed efforts to source 100% of our malt and hops from contract growers*—a noteworthy achievement for any beer producer in the world. In fact, Sapporo Breweries’ reputation grew during the year for its one-of-a-kind emphasis on quality ingredients and its image as a company that actively addresses safety and reliability concerns from the consumers’ perspective.
Despite these pluses, lackluster Happo-shu sales and other factors pulled sales in the Alcoholic Beverages segment (including sales from Sapporo Breweries) down 6.5% to ¥341,077 million. Operating income declined 65.2% to ¥6,555 million because of this as well as higher sales promotion expenses.
* Total completion as of January 2006 manufacturing report.
The Medium-Term Management Plan
~Recognizing the Environment
We recognize that the Alcoholic Beverages business is facing an external environment of the type described below. This recogni- tion served as the basis for formulation of a new medium-term management plan.
[Environment Surrounding Alcoholic Beverages]
• Increasingly borderless in certain sectors of the market, diversification of drinking scenes, emergence of low-alcohol and light drinks
• Increasing health consciousness and desire for genuine quality
• Slight downward trend in demand but active seniors and women are new drivers of demand
• Sapporo’s share of Japan’s alcoholic beverages market is around 8%, but there are ample opportunities to grow
In Alcoholic Beverages, we pursued Sapporo’s unique value proposition in a
drive to gain unmatched positioning and capture market share in beer,
Happo-shu (low-malt beer) and new product genres, as well as other alco-
holic beverage categories. Looking ahead, this segment will continue its
contribution to earnings as one of the Sapporo Group’s core operations.
Operating Targets From Medium-Term Management Plan
2008 Targets 2005
Operating Income (¥ Billion) 20.0 6.5
Operating Income Ratio (%) 5.3 1.9
Collaborative Contract Farming
System
Since its earliest days, Sapporo Breweries has had a strong commitment to the quality of ingredients and the products made from them. It remains a company dedicated, without compromise, to the pursuit of better quality as well as to outstanding safety, reliability and taste. Against a backdrop of increasing consumer interest and awareness concerning food safety, Sapporo Breweries in September 2003 declared its intention to source all of its malt and hops from contract growers by 2006. True to its word, Sapporo Breweries achieved this goal in January 2006.
Through close cooperation with growers to produce high-quality raw materials, this system allows Sapporo Breweries to ascertain the grower, cultivation method and even the specific field used for ingredi- ents. In short, it is a commitment to delivering even more flavorful and reliable products to customers.
Sapporo Breweries has thus built a sophisticated and sound management system that demands nothing less than fine-quality raw materials, whether they are produced in Japan or overseas, and trust- worthy growers. Sapporo Breweries is at the vanguard of the beer industry world-
wide in its dedication to quality right from the time the first seed is sown. Moving forward, we will continue to put in place systems and structures that keep us at the forefront of the beer industry.
Medium-Term Management Plan
~Basic Strategies
Amid this operating environment, we established five strategies as part of our new management plan in a bid to achieve growth for Sapporo Breweries and the Alcoholic Beverages business: 1) Assuming a severe external environment, create an operating
structure with the ability to generate sustained cash flows. 2) Clarify the mission of each business to create strategic
resources and concentrate investments on targeted domains in order to develop corporate brands and rapidly establish new earnings bases.
3) Improve brand mix and build and strengthen core brands in each price range to increase business stability.
4) Capitalizing on product development strengths, increase and strengthen core brands in the premium price range (occupied by Yebisu Beer) and standard price range.
5) Reduce costs further by continuously reforming structures in each value chain to substantially lower the breakeven point.
Medium-Term Management Plan ~Key Initiatives
We consider the following seven specific key initiatives vital to implementing the above basic strategies:
1) Comprehensively evaluate businesses from both a qualitative and quantitative standpoint, taking into account factors such as level of market appeal, competitive advantage, and return on investment, to reshape the business portfolio.
2) Bolster newly entered shochu and low-alcohol beverage businesses, quickly nurturing both into core businesses that contribute to earnings.
3) Focus strategic investments on entry into new businesses, manufacturing reforms and R&D.
4) Reduce fixed costs and turn more advertising and personnel expenses into variable expenses to substantially lower the breakeven point.
5) Underpinned by a focus on sourcing all malt and hops from contract growers under a collaborative contract farming system and a distinctive emphasis on delicious, safe and reliable ingredients, strengthen the corporate brand. 6) Improve earnings in wine and spirits through structural reforms. 7) Grow profits through an overseas strategy for expanding
business in the U.S. and Canada.
We have earned wide recognition in Japan for the qualities that have come to define the Sapporo brand—handpicked natural ingredients and a focus on taste. In remaining committed to these defining qualities, we will continue our quest to raise both enterprise and Group value.
Liquor Tax in Japan
In Europe, the U.S. and elsewhere, the tax rate on alcoholic beverages is based on alcohol content. Japan, however, has used a different system. The country’s Liquor Tax Law divided alcoholic beverages into 10 categories, including sake, shochu, beer, and whiskey, according to differences such as ingredients and production methods. Changes were made to this law in May 2006, with the introduction of four broad tax classifications:
“sparkling,” which includes beer and Happo-shu; “fermented,” including wine and sake; “distilled,” a category which includes whiskey and shochu; and “hybrid,” including liqueurs. The new
“sparkling” category is further divided into four sub-categories— beer, two types of Happo-shu and other sparkling alcoholic beverages—according to the ingredients and malt content.
Generally, European countries and the U.S. levy high tax rates on whiskey and other distilled spirits but low tax rates apply to beer and fermented alcoholic beverages such as wine. Japan, however, imposes its highest tax rate on beer, making the retail price of beer in Japan the highest among major industrialized countries.
A Changing Market
Beer is by far Japan’s most popular alcoholic beverage, account- ing for more than three-fourths of total sales of these beverages. To respond to this enormous consumer need while holding down the price, Sapporo Breweries and other major Japanese brewers started selling Happo-shu, which reduces the tax by adding corn starch, barley and rice to hold the malt content under 25%*. A new product genre, which has an even lower tax rate and price, has been developed using methods and ingredients that do not belong in either the beer or Happo-shu categories. Demand has risen steadily for Happo-shu and this new product genre since their launch, with consumers attracted by the affordability of these products. These two versions of beer are now firmly established as alcoholic beverage markets in their own right and are generating significant growth in sales volumes.
* A beverage is classified as Happo-shu when the malt content is less than 67%, although most have a content of under 25%.
Domestic Liquor Tax (post-May 2006 amendment to Liquor Tax Law)
Beer
An alcoholic beverage produced by fermenting malt, beer yeast, hops, water and other ingredients
Other Sparkling
Alcoholic
Beverages
*2A beverage made by fermenting beer yeast using pea protein
Happo-shu
*1A sparkling beverage that uses raw materials that are not classified as ingredi- ents for beer
Malt Content 67% or more Under 25% –
Liquor Tax
(Per 350ml can)
Draft One
Sapporo Breweries developed Draft One, a new product genre, by using pea protein instead of malt when fermenting beer yeast. Draft One went on sale in Japan in February 2004. Another product made from pea protein, Slims, made its debut in May 2005. This beverage responds to the increasing health consciousness and preference for low-calorie bever- ages among consumers. Sapporo Breweries has garnered massive support from customers with these two products. Both are malt-free beverages that are at least 40% cheaper than conventional beer yet boast quality and taste that match the real thing.
The Japanese Beer Industry and Sapporo Breweries
*1 Generally, Happo-shu with a malt content less than 25% *2 Draft One
¥77.00 ¥46.99
¥28.00
Sales and earnings both declined during the year, impacted by intensifying
competition and other factors. Guided by the new medium-term management
plan, we will strive over the next three years to expand the Soft Drinks busi-
ness domain and make operations profitable by energizing existing business,
conducting extensive cost reductions and aggressively pursuing alliance and
M&A opportunities.
Review of Operations
Backed by sales of sugar-free beverages, overall demand in the soft drinks market grew by an estimated 2% year on year, despite forecasts to the contrary due to the impact of record-breaking temperatures the previous summer. In this environment, although we took steps in the growing green tea category to expand sales of key brands and introduce higher added value, Sapporo Beverage was nonetheless impacted by greater competition. In the carbonated beverage and juice categories, where Sapporo Beverage is particularly at home, we posted improved year-on- year performance in both fields, supported by products that showcase our distinctive advantages.
Sales in the Soft Drinks segment (including sales from Sapporo Beverage) were ¥63,897 million, down 7.8% from the previous year. We posted an operating loss of ¥693 million, a decline of ¥1,159 million from the previous year’s profit.
Growth Strategies and Key Initiatives
With a scale of ¥3.9 trillion, Japan’s soft drinks market is forecast to see greater erosion of borders in certain sectors and bipolarization in consumption trends, alongside more M&As and business alliances between manufacturers and sellers/distribu- tors. Modest growth, however, is expected to continue. Given these conditions, our goal is to achieve growth under two major strategies outlined in the new medium-term management plan—
“strengthen existing business domains” and “target new business domains.”
Under “strengthen existing business domains,” we will pursue the following initiatives:
1) In the dry-storage market, concentrate investments on existing brands with potential and nurture as core brands. 2) Focus more on nurturing and strengthening value-added
products in existing product fields.
3) Bolster the Group R&D framework to enhance new product development capabilities.
4) Develop products for different business formats and sales channels.
5) Consider M&As and alliances to strengthen the direct sales system in the vending machine business.
6) Establish and refine the SCM system, review unprofitable domains, and raise productivity by rightsizing the workforce.
Initiatives under “target new business domains” will include: 1) Make greater use of M&As and alliances to drive business
growth.
2) Advance into the chilled drinks, chilled foods and health and functional drink fields.
By breathing new life into existing businesses, enacting sweeping cost reductions and broadening our business fields, we will work consistently toward completing the new medium-term plan and achieving profitable operations.
Soft Drinks
Sapporo Beverage Co., Ltd.
Operating Targets From Medium-Term Management Plan
2008 Targets 2005
Operating Income (Loss) (¥ Billion) 2.5 (0.6)
Operating Income Ratio (%) 3.1 (1.1)
Restaurants
Sapporo Lion Ltd.
Review of Operations
While the restaurant industry continues both to contract and face competition from other industries, signs of recovery have emerged in existing store sales in formats with relatively high alcoholic beverage sales. With “reinvigorating beer halls” as a key slogan, we worked in this climate to boost earnings at existing outlets and to increase sales at newly opened outlets. The result was a second consecutive year of growth in same-store sales, as well as the opening of 13 new restaurant outlets. We also closed 18 unprofitable and other outlets, leaving a total of 202 outlets as of December 31, 2005.
The foregoing resulted in sales in the Restaurants segment (including Sapporo Lion sales) of ¥26,331 million, down 1.1% from the previous year. Operating income, however, climbed 140.6% to ¥551 million.
Growth Strategies and Key Initiatives
Despite a contraction in market scale in the restaurant sector as a whole, take-out businesses and other peripheral markets are steadily growing. Major companies are increasingly dominating the market. In response, we are taking Sapporo Lion’s manage- ment on the offensive. From this stance, we are addressing four basic strategies in the medium-term management plan: 1) Leverage strength as a leader in beer halls to reinvigorate
existing outlets and continue to open new outlets to raise store earnings.
2) Expand new format outlets such as Kakoiya and Tomoru. 3) Continue to develop formats for greater diversification in
business development.
4) Step up cost-reduction efforts through greater use of Web- based ordering and other initiatives as well as standardization within business formats.
Accompanying these four basic strategies are the following seven key initiatives:
1) Use customer database to reinvigorate existing outlets. 2) Use M&As to expand formats and business fields.
3) Enter the catering business and develop business targeted at seniors through this business.
4) Expand the ready-made meal business.
5) Use Web-based ordering and foodstuff traceability systems to expand outside sales.
6) Promote food safety using the contract farming system for foodstuffs.
7) Integrate management of sports clubs, health clubs and restaurants.
In this way, we are expanding Sapporo Lion’s business scope and refining its earnings base, all befitting the company’s role as an important channel for serving customers the Group’s mainstay alcohol, soft drink and food products.
Founded 107 years ago, Sapporo Lion serves as an important channel for
serving customers the Group’s mainstay alcohol, soft drink and food
products. Mindful of this role, we are steadily implementing measures
highlighted in the new medium-term management plan to expand business
scope and improve our earnings base.
Operating Targets From Medium-Term Management Plan
2008 Targets 2005
Operating Income (¥ Billion) 1.5 0.5
Operating Income Ratio (%) 4.3 2.1
Compared to the Group’s other three core operations, the Real Estate
business operates on a different timetable with relatively low volatility, making
it a consistent source of earnings. As we aggressively push ahead with real
estate development primarily focused on prime real estate holdings, our goal
is to develop a business model focused on development and creation to
generate greater cash flows.
Review of Operations
Japan’s real estate sector saw improvements both in occupancy rates for office buildings located mainly in the Tokyo metropolitan area, and in rent levels in certain regions. At Yebisu Garden Place and other leased office buildings, we took steps to maintain or improve operating rates. In parallel, we sponsored events and fairs, and carried out store renewals at Yebisu Garden Place and Sapporo Factory, two properties with commercial facilities. These and other actions were part of an ongoing effort to differentiate our facilities from those of rival properties, thereby enhancing their capacity to attract customers.
These actions notwithstanding, sales in the Real Estate segment (including Yebisu Garden Place sales) edged 3.6% lower year on year to ¥21,696 million. Operating income was down 2.2% to ¥5,840 million.
Growth Strategies and Key Initiatives
As external real estate conditions continue to improve, we are pursuing three basic strategies in the Real Estate business as part of the medium-term management plan:
1) As a structural reform measure, move from a property management and operation business model to one focused on development and creation to promote new value. 2) Upgrade existing leased properties and develop new
properties to expand asset-based business; also, develop non-asset-based businesses such as sports and health, property management and construction management.
3) Continue implementing measures to improve financial soundness in tandem with development investments in asset- based business.
To accompany these basic strategies, we have also laid out four key initiatives:
1) Strengthen asset management for and generate higher profit margins from leased properties, including Yebisu Garden Place, Sapporo Factory and existing properties in Ginza. 2) Actively develop the Group’s real estate holdings, making
optimal use of real estate at the Group level.
3) Advance projects such as construction of the Ginza 7-chome Multifaceted Building, extension of Sapporo Factory and utilization of the former site of Sapporo Breweries company housing, and move forward with commercializing new properties.
4) Extend sports club facilities in Sapporo and collaborate with subsidiary Sapporo Sports Plaza Corporation to strengthen operating base in sports business.
Along these lines, we will actively promote real estate development centered on prime real estate holdings as we develop a business model focused on development and creation to generate greater cash flows.
Real Estate
Yebisu Garden Place Co., Ltd.
Operating Targets From Medium-Term Management Plan
2008 Targets 2005
Operating Income (¥ Billion) 7.0 5.8
ROA* (%) 7.8 6.7
* Note: ROA based on EBITDA
A Responsible Corporate Citizen
The Sapporo Group’s management philosophy is to make people’s lives richer and more enjoyable. Anchored by this philosophy, we practice CSR-based management that serves as the foundation for consistent growth and earnings. Under its medium-term management plan, Sapporo Holdings will strengthen CSR as one of its key strategies for supporting sustainable growth of the Sapporo Group. Sapporo Holdings believes that this approach will raise the enterprise value of the Group as a whole and meet the expectations of stakeholders from a long-term perspective.
Raising Enterprise Value by Adhering to
Corporate Ethical Standards
The Sapporo Group continues to raise its enterprise value and build cordial relations with society based on the Sapporo Group Code of Business Conduct. As well as having a Whistle-Blower’s Hotline and Helpline system, we established in March 2005 the Group CSR Promotion Committee. The goal of these and other initiatives is to conduct business activities of the Sapporo Group in a sound manner by preventing impropriety as well as by ensuring the early detection and containment of any such acts should they occur.
Customers and the Sapporo Group
In March 2005, we established the Quality Assurance Department as part of our ongoing efforts to improve quality at every stage of the Sapporo Group’s operations, from raw materials to finished products. In another quality-related initiative, we are fashioning a collaborative contract farming system to ensure greater traceabil- ity with respect to the products of our beer and Happo-shu operations. Steady progress is being made in line with our plans in this regard. So that customers get the most out of our prod- ucts, we also actively supply information concerning responsible drinking. At the same time, structures are in place to reflect customer feedback in products and services as well as to safe- guard customers’ personal information. In these and other ways, we are working to earn the absolute trust of customers.
The Environment and the Sapporo Group
Guided by the Sapporo Group’s basic environmental philosophy, the Environment Protection Committee of each operating company sets environmental action plans and goals. Working toward their respective goals, each company is engaged in environmental protection activities appropriate to their opera- tions. Measures include resource and energy conservation, actions to help prevent global warming, the reduction of indus- trial waste and product recycling. In tandem with these measures, the Sapporo Group is improving communication with stakehold- ers, such as by publishing a social and environmental report, while also working with stakeholders to reduce the environmental impact of business operations. Through these activities, we are determined to help create a sustainable society.
★ Enjoy Alcohol in a Responsible Way Sapporo has published a booklet to educate and enlighten customers on alcohol and its proper use.
★ Social and Environmental Report 2005
Corporate Governance and Compliance
The Sapporo Group regards strengthening and enhancing corporate governance as one of its top management priorities. As such, the Group strives both to improve management transparency and enhance management supervision functions critical to attaining its business targets. The Group is also determined to bolster compliance to ensure continuous growth in its enterprise value.
The Corporate Governance Framework
Sapporo Holdings became the holding company of the Sapporo Group on July 1, 2003, but continues to use the previous corporate auditor system. As of March 30, 2006, the Board of Directors had six members, one of whom is an outside director, and the Board of Corporate Auditors had four members, two of whom come from outside the company. While Sapporo Holdings has not fully adopted the Committee System, it has established a Nominating Committee and a Compensation Committee with the goals of increasing transparency in respect to the nomina- tion and remuneration of directors and preserving a sound management structure.
Supervision of Operating Companies by
Sapporo Holdings
The holding company system means that supervisory functions (holding company) and the execution of day-to-day operations (operating companies) are completely separate at the Sapporo Group. The Group has also established a Group Management Council responsible for ensuring flexible decision-making and coordinated strategies for the entire Group. The council tracks business progress at each operating company and meets to discuss key issues at each, related to business execution. More- over, each operating company president commits to achieving certain management objectives, thus clarifying his company’s share of responsibilities for the Group’s management goals.
Status of Internal Control System
In tandem with adoption of a holding company framework in July 2003, the Sapporo Group has put in place Group management and operational regulations—particularly procedural regulations for delegating decision-making authority between the holding company (Sapporo Holdings) and the operating companies, and the division of operational tasks among each organization. Along with the formulation of other internal rules, these and other steps have been taken to bolster the Group’s system of internal controls. Sapporo Holdings’ Group Audit Department, meanwhile, conducts internal audits that encompass the operating compa- nies, subsidiaries and all other members of the Sapporo Group.
Corporate Governance Framework
Appointment/Dismissal Appointment/Dismissal
Reports Appointment/Supervision
Audits Monitoring
Representative Director
Operating Compan y Operating Compan y Operating Compan y Internal Auditing Section Annual Meeting of Shareholders
Nominating Committee Compensation Committee
Board of Corporate Auditors Corporate Auditors/Outside Auditors
Group Risk Management Committee Group Environment Protection Committee
Operating Compan y
Management Council Group Management Council Board of Directors
Directors / Outside Directors
Management
(As of March 30, 2006)
Board of Directors
Satoshi Noguchi Kunie Okamoto ** Norio Henmi ** Kazunori Kai
* Outside Director
** Outside Auditor
Board of Corporate Auditors
Yoshiyuki Mochida
Director
Kazuo Ushio
Director
Shinji Saito
Representative Director and Executive Managing Director
Takao Murakami
President and Representative Director, Group CEO
Hiroaki Eto
Director *
Yukio Ashibu
Director
Five-Year Summary
Years ended December 31
Millions of yen
2005 2004 2003 2002 2001
Net sales ¥453,671 ¥494,930 ¥479,520 ¥511,752 ¥557,233
Alcoholic Beverages 341,077 364,585 341,924 374,524 417,906
Soft Drinks 63,897 69,324 65,169 70,512 68,608
Restaurants 26,331 26,611 26,591 28,050 29,041
Real Estate 21,696 22,506 33,430 24,999 27,968
Other 670 11,904 12,406 13,667 13,710
Operating cost and expenses 443,371 471,282 466,189 500,774 537,447
Operating income 10,300 23,648 13,331 10,978 19,786
Income (loss) before income taxes
and minority interests 6,573 7,762 2,270 (3,349) 3,102
Net income 3,630 4,643 2,413 1,168 4,390
Yen Per share:
Net income:
Primary ¥ 10.20 ¥ 13.07 ¥ 6.95 ¥ 3.45 ¥ 12.96
Diluted 9.18 12.01 – – 12.90
Shareholders’ equity 305.00 259.81 245.80 314.69 312.71
Cash dividends 5.00 5.00 5.00 5.00 5.00
Millions of yen Year-end data:
Shareholders’ equity ¥111,411 ¥ 92,263 ¥ 87,364 ¥106,527 ¥105,945
Total assets 563,845 602,112 630,637 717,486 729,601
Financial liabilities 220,723 289,854 323,369 384,303 372,864
ROE (%) 3.6 5.2 2.5 1.1 4.2
Capital expenditures 16,218 10,269 10,081 13,640 12,256
Depreciation and amortization 22,075 25,330 28,435 31,463 32,322
Sapporo Holdings Limited and the Sapporo Group
The Sapporo Group adopted a holding company framework on July 1, 2003. Under this new framework, Sapporo Holdings Limited (the Company), as the holding company, oversees four main operating companies in the Alcoholic Beverages, Soft Drinks, Restaurants and Real Estate businesses. Aiming to be powerful companies in their respective industries, the four main operating companies are implementing management reforms and building new business models.
In terms of the scope of consolidation, the Company had 14 consolidated subsidiaries and 4 equity-method affiliates in the year ended December 31, 2005.
Operational Overview
The Japanese economy shook off early weakness in imports and production in 2005, as capital investment continued to grow. Together with firm consumer spending and other factors, a sense prevailed that business conditions in the country had indeed turned toward a modest recovery.
In this climate, the operating environment in the alcoholic beverage, soft drink, restaurant and other industries where the Group is active grew more acute, with greater bipolarization in consumption trends and more diversification in customer tastes. These conditions tested the full capabilities of companies in each area, including their ability to accurately develop products and services sure to go over well with customers, their nurturing capacity to establish these products and services as brands, and companies’ cost competitiveness.
Consolidated Operating Results
Net Sales
Net sales declined ¥41,259 million, or 8.3%, to ¥453,671 million, largely as a result of lower total sales volume in beer, Happo-shu and new product genres. Sales in the “Other” business segment were also lower due to the December 2004 sale of the hotel business.
Cost of Sales and Gross Profit
Tracking the decline in sales, the cost of sales fell ¥28,235 million, or 8.3%, from the previous year to ¥311,191 million. The cost of sales ratio was unchanged from a year earlier, at 68.6%.
Gross profit decreased ¥13,024 million, or 8.4%, to ¥142,480 million. The gross profit ratio was 31.4%, identical to that of the previous year.
Management’s Discussion and Analysis
Gross Profit and Gross Profit Ratio(¥ Billion, %)
Selling, General and
Administrative Expenses and Percentage of Net Sales (¥ Billion, %)
Net Sales and Cost of Sales Ratio(¥ Billion, %)
Net Sales (¥ Billion) Cost of Sales Ratio (%)
Gross Profit (¥ Billion) Gross Profit Ratio (%)
Selling, General and
Administrative Expenses (¥ Billion) Percentage of Net Sales (%)
01 02 03 04 05
557.2 511.8 479.5 494.9 453.7
70.1 70.7 70.6 68.6 68.6
01 02 03 04 05
166.7 150.1 140.9 155.5 142.5
29.9 29.3 29.4 31.4 31.4
01 02 03 04 05
147.0 139.1 127.6 131.9 132.2
26.4 27.2 26.6 26.6 29.1
Net Income and Net Income Per Share (Primary)(¥ Billion, ¥)
Operating Income (¥ Billion)
Shareholders’ Equity and ROE (¥ Billion, %)
Net Income (¥ Billion) Shareholders’ Equity (¥ Billion)
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses edged up ¥324 million, or 0.2%, to ¥132,180 million. This increase mainly reflected a year-on-year decline of ¥3,574 million in sales incentives and commissions offset by an increase of ¥3,937 million in advertising and promotion expenses.
Operating Income
Impacted by the foregoing results, operating income decreased ¥13,348 million, or 56.4%, to ¥10,300 million. The operating income ratio, meanwhile, fell 2.5 percentage points to 2.3%.
Other Income (Expenses)
Other expenses decreased ¥12,159 million to ¥3,727 million. In addition to reductions in interest-bearing debt and the closure and sale of the site of Sapporo Beverage’s former Kanagawa Plant, other contributors to an increase in other income included the sale of a former company housing site.
Other expenses stemmed from losses posted mainly for the disposal of production equipment, as well as an impairment loss due to a decline in the market value and profitability of certain properties. The latter was the result of the earlier-than-required application of impairment accounting for fixed assets enacted last year.
In net financial income (expenses), calculated as the sum of interest and dividend income minus interest expenses, efforts to reduce interest-bearing debt and other actions led to expenses of ¥2,672 million, down from ¥4,122 million in the previous year.
Income Before Income Taxes and Minority Interests
As a result of the above and other factors, income before income taxes and minority interests declined ¥1,189 million, or 15.3%, to
¥6,573 million.
Income Taxes and Net Income
Income taxes applicable to the Company, calculated as the sum of corporation, inhabitants’ and enterprise taxes, reversals of prior period income taxes and deferred income taxes, totaled ¥2,943 million. The statutory tax rate for income before income taxes and minority inter- ests was 44.8%. Prior-year reversals came mostly from revisions to taxable income reported by the Company on its fiscal 2003 tax return.
As a result, net income was ¥3,630 million, down 21.8% from the previous year. Diluted net income per share declined ¥2.83 to ¥9.18, while ROE decreased from 5.2% to 3.6%. Cash dividends for 2005 were ¥5.0 per share, and the payout ratio was 54.5%.
01 02 03 04 05
19.8 11.0 13.3 23.6 10.3
01 02 03 04 05
4.4 1.2 2.4 4.6 3.6
13.0 3.5 7.0 13.1 10.2
01 02 03 04 05
105.9 106.5 87.4 92.3 111.4
4.2 1.1 2.5 5.2 3.6
Segment Information
Alcoholic Beverages
While the market was invigorated by the entry of other companies into the new product genre market that the Company pioneered with the creation of Draft One, the ongoing decline in beer and Happo-shu sales pulled total domestic demand lower in 2005. Draft One, meanwhile, saw a nearly 10% jump in sales volume despite the aggressive entry of rivals into the new product genre market. Slims, a product first sold in May, also proved a hit with customers, breaking new ground as the only product for health-conscious consumers in this market. Conse- quently, total sales volume for new product genres rose 21% over the previous year.
In the Black Label brand, a drive to underscore the appeal of the Sapporo Breweries’ collaborative contract farming system garnered strong support from loyal customers, holding the year-on-year decline in sales to 9%, the same as for overall domestic beer demand.
In Happo-shu, Hokkaido Namashibori, the core brand in this category, underwent a revamp in November that included the use of malt grown solely in Hokkaido, as Sapporo Breweries showcased its one-of-a-kind emphasis on quality ingredients. These efforts notwithstand- ing, the impact of new product genres caused overall Happo-shu demand to fall 37%.
The brand strength of Yebisu Beer, widely considered to be Japan’s preeminent premium beer brand, continues to run in a class of its own. Amid lackluster overall domestic beer demand, Yebisu Beer sales volume grew by 1%, expanding its market share for the 13th consecutive year. All told, total sales volume for beer, Happo-shu and new product genres was 7% lower year on year. As a result, segment operating revenues declined ¥23,508 million, or 6.5%, to ¥341,077 million. Operating income decreased ¥12,255 million, or 65.2%, to ¥6,555 million.
Soft Drinks
Supported chiefly by sales of green tea, mineral water and other sugar-free beverages, overall demand in the soft drinks market grew by an estimated 2% year on year, despite forecasts to the contrary due to the impact of record-breaking temperatures the previous summer.
Sapporo Beverage took steps to reinforce its offerings in the growing sugar-free beverages category, as well as to expand sales in the carbonated beverage and juice categories, two areas where it is particularly at home. In the growing green tea beverage category, while the Company moved assertively to expand sales particularly of its key Gyokuro-Iri O-Cha brand, the fiercely competitive environment held overall sales lower year on year.
Operating revenues declined ¥5,427 million, or 7.8%, to ¥63,897 million, and the segment posted an operating loss of ¥693 million, a decline of ¥1,159 million from the previous year’s profit.
Restaurants
Amid ongoing market contraction, the restaurant industry continues to face stiff competition from convenience stores and other industry sectors. Nevertheless, signs of recovery began to emerge in existing store sales in formats with relatively high alcoholic beverage sales.
In this climate, Sapporo Lion strove to boost earnings at existing outlets and to increase sales at newly opened outlets. The result was a second consecutive year of growth in same-store sales, with sales higher not only at beer halls in the Tokyo metropolitan area but also at Japanese dining formats and major outlets in regional cities. Sapporo Lion opened 13 new restaurant outlets and closed 18 during the year. In addition to the termination of contracts for some outlets operating under franchise agreements, the closures included those outlets showing no prospects of a quick turnaround in earnings. All told, Sapporo Lion counted a total of 202 remaining outlets as of December 31, 2005.
Segment operating revenues were ¥26,331 million, edging ¥280 million, or 1.1%, lower year on year. The segment recorded a substan- tial improvement in earnings, with operating income up ¥322 million, or 140.6%, to ¥551 million.
Real Estate
In Japan’s real estate sector, improvements both in occupancy rates for office buildings found chiefly in the Tokyo metropolitan area and in rent levels in certain regions, fueled a general sense that the sector’s long downtrend had finally leveled off. At Yebisu Garden Place and other leased office buildings, Yebisu Garden Place made capital investments to further enhance amenities at these properties and engaged in active leasing activities in an effort to maintain or improve operating rates.
At Yebisu Garden Place and Sapporo Factory, two properties with commercial facilities onsite, the operating company sponsored events and fairs, and carried out store renewals, in a drive to improve customer services and promote sales. These and other actions were part of an effort to differentiate Sapporo facilities from those of rival properties, thereby enhancing their capacity to attract customers. In real estate development, construction continues on the Ginza 7-chome Multifaceted Building, a new commercial building.
These actions notwithstanding, a substantial year-on-year decrease in sales from real estate for sale caused operating revenues in the Real Estate segment to decline ¥810 million, or 3.6%, to ¥21,696 million. Operating income was down ¥133 million, or 2.2%, to ¥5,840 million.
Other
Sales in this segment declined in step with the sale on December 1, 2004 of The Westin Tokyo by the segment’s mainstay hotel business. As a result, segment operating revenues declined ¥11,234 million, or 94.4%, to ¥670 million. The segment operating loss was ¥130 million.
(Millions of yen) Depreciation and
Operating Operating Amortization Capital
Revenues Income/Loss Expenses Expenditures
Alcoholic Beverages 341,077 6,555 13,840 12,143
Soft Drinks 63,897 (693) 215 274
Restaurants 26,331 551 636 1,158
Real Estate 21,696 5,840 7,337 1,544
Other 670 (130) 47 1,099
Assets, Liabilities and Shareholders’ Equity
The Sapporo Group has adopted a cash management system (CMS), a move that enables Sapporo Holdings to centrally manage fund allocation within the Group. The concentration at the Company of cash flows generated by individual Group companies helps to preserve fund liquidity, while flexible and efficient fund allocation within the Group serves to minimize financial liabilities.
The Company strives to secure fund procurement channels and liquidity to make certain that ample funds are on hand to cover present and future operating activities, as well as the repayment of debts and other funding needs. Necessary funds are procured mainly from cash flows from operating activities, loans primarily from financial institutions, and the issuance of corporate bonds.
Assets
Cash and cash equivalents and time deposits stood at ¥25,442 million as of December 31, 2005, down ¥33,270 million from a year earlier, the result of funds from the sale of business operations in the previous year being appropriated for loan repayments and the redemption of corporate bonds. Notes and accounts receivable—trade declined ¥8,100 million to ¥71,726 million, in line with lower sales. In line with the closure of a soft drink manufacturing plant and sale of the site, as well as depreciation, property, plant and equipment, net fell ¥10,962 million to ¥340,771 million. Investment securities, meanwhile, rose ¥19,162 million to ¥50,849 million, reflecting higher market values for listed stockholdings.
As a result, total assets as of December 31, 2005, stood at ¥563,845 million, down 6.4% from a year ago.
Capital Expenditures (¥ Billion) Long-term Debt(¥ Billion)
Total Assets and ROA(¥ Billion, %)
Total Assets (¥ Billion)
01 02 03 04 05
729.6 717.5 630.6 602.1 563.8
0.6 0.2 0.4 0.8 0.6
01 02 03 04 05
12.3 13.6 10.1 10.3 16.2
01 02 03 04 05
268.4 254.1 279.2 209.2 157.8
