When Japan’s industrial breweries recently announced their intentions to brew craft beer, most of the country gave a collective shrug. Why wouldn’t they? Mainstream media reported their entry into craft beer as a matter of fact absent any controversy. There were some cries of protest among loyal customers of small-scale breweries and those that consider themselves craft beer advocates. If you’re an industrial brewer, they complained, what you make isn’t craft. It’s just trying to take advantage of the cool cultural cachet that true craft breweries have created. That’s predatory. Many others–including us at the Japan Beer Times and probably quite a few craft brewers–have been carefully analyzing the developments.
Last issue’s feature on this topic drew attention to the problem of the term itself. What exactly is “craft beer”? Before Kirin’s entry, no consumer or industry group in the 20 years since small-scale brewing’s inception in Japan had defined it in a way that has been democratically approved by Japan’s slightly more than 200 small-scale breweries. In many ways, there never seemed to be much need. Their combined production volume was not even 1% of the total market and the industrial breweries paid the segment little attention. The turnaround and growth of craft beer in Japan, however, was hard to ignore for long, especially with consumption of mainstream lagers having fallen for decades.
The American beer market has provided a lurid preview of the ugly conflicts that can erupt between craft brewers and large industrial breweries when the two segments meet. Will the Japanese beer market devolve into the same discord and mutual resentment? It’s worth taking another look at the history of craft beer’s growth in America for cautionary tales.
Brooklyn Brewery co-founder Steve Hindy recounts the most formative episodes in his 2014 publication “Craft Beer Revolution: how a band of microbrewers is transforming the world’s favorite drink” (2014). While many are familiar with the deep rifts between craft breweries and industrial breweries in the U.S., not everyone knows exactly how this began. In Japan where such enmity doesn’t exist (yet), it can seem somewhat baffling. Hundreds and hundreds of sake breweries spanning a wide range of production volume have coexisted more or less peacefully in Japan for centuries. Why can’t beer companies be the same?
Distribution has been a major flashpoint in the U.S. This stems from the so-called three-tiered system, which doesn’t really exist in Japan. According to U.S. state laws (with interesting exceptions in California and New York), breweries must sell first to distributorships. Distributors then in turn sell to retail locations. This structure is the relic of a decades-old compromise because Prohibitionists believed a brewery’s ownership of a distributorship or of retail locations would make it easier for them to contribute to the dissolution of society. A distributorship acts like a buffer. Naturally, people in Japan are scratching their heads because companies like Kirin and Sapporo own chain retail locations across Japan. Society isn’t falling apart and craft breweries are thriving.
Fritz Maytag, founder of Anchor Steam and the godfather of craft beer in America, urged craft brewers to embrace their distributors because it prevented larger brewers from running a monopoly by owning distributorships. But between the idea and the reality lie the shadows. At least one big brewery basically did ‘own’ the distributors and that’s where a major rift began.
The makings for an industry war were already present in the 1990s. As mentioned last issue, Jim Koch, founder and CEO of Boston Beer Company, had launched radio and television advertisements championing his company as the little guy fighting against big, bland beer. His antagonistic marketing was quite effective. Craft beer was beginning to chip away at the market share of the large breweries, too. August Busch III of Anheuser-Busch, whom Hindy describes as a “ferocious leader,” took the fight back to craft beer at the distribution level. In 1996 he demanded that distributors devote “100 percent share of mind” to selling AB products. He sweetened the deal for distributors by offering incentive packages (or the veiled threat of yanking his products, often the lifeblood of distributors). This seemed, in effect, monopolistic practice and four California breweries, including Anderson Valley, filed private actions with the U.S. Department of Justice Antitrust Division. The government took no action and the pain began. Small brewers faced neglect or even being dropped by their distributors. Shortly thereafter, Charlie Papazian’s organization (see last issue) pushed forward with its definition of “craft brewer”. This became the basis for the official Brewers Association definition today and more firmly established the “us vs. them” paradigm.
Hindy identifies the breaking of the stranglehold on the distribution networks as one of the seminal moments in the evolution of craft beer in America. Not all distributors caved in to AB’s pressure. European import beers helped pave the way for craft and some distributors could see the loyalty of consumers to craft brands. They took a chance in carrying craft beer and educated their staff to better sell it. For most it paid off. This shift has helped drive the explosive growth of craft beer in America since.
Simply because craft breweries were able to move their products increasingly through more distributors, however, didn’t mean that all their headaches ended. Distributors carry many brands and are not always proactive about selling all of them. Some brands languish in their portfolios. This is one of the biggest gripes heard from brewers in America. Many conference seminars are devoted to helping guide brewers through distributor challenges. So why can’t they just switch distributors? Because of state franchise laws. Distributors, of course, are generally not lazy and work hard to sell their products. They are making investments of time and money in helping to build some of the brands. If a brewery can switch to a competitor at the drop of a hat, distributors lose that investment. Therefore, under these laws, brewers must buy their way out of contracts, which can cost hundreds of thousands of dollars. Craft brewers are not fans of these laws.
Unbeknown to most Japanese breweries exporting to America, the laws apply to them as well. If they aren’t satisfied with the pace at which their product is selling through a given importer, they might have to come up with money they probably don’t have to unwind that partnership. Japanese breweries considering export to the U.S. would be wise to research their future partners carefully. Unless Japanese breweries are exporting, this three-tiered system is of little consequence to them.
Japanese breweries typically sell kegs, bottles and cans directly to retail locations like bars and restaurants. Cold delivery services as provided by shipping companies Sagawa and Kuroneko make it easy. There is little to prevent breweries from reaching the consumer except their own failure to take initiative. It is mind-blowing to most brewers I speak to outside of Japan that Japanese breweries can even ship beer directly to the consumer. Many breweries have online sites and there are a handful of other retail sites that carry the products of multiple breweries. Craft beer at your doorstep with just the click of a button. Most people living in Japan take this freedom and convenience for granted.
Bryan Baird of Baird Brewing in Shuzenji has spoken publicly on this topic both in Japan and overseas, and had the following to say:
“As a fledgling small brewer you want as much freedom (legal or otherwise) as possible to bring your tiny volume of lovingly crafted beer to the market. Until the distribution tier became enthusiastic about craft beer in the U.S., I believe the three-tier system was a major impediment to growth of the craft beer market. In Japan, the lack of a legally mandated three-tier system benefits small brewers in my view. On the other hand, the lack of relatively large and established distributors handling craft beer in volume in Japan clearly makes it harder for the craft brewer to achieve significant growth quickly.”
Put another way, the presence of a three-tiered system is a double-edged sword, and so is the lack of one. Japan actually does have businesses that collectively act as a kind of a three-tiered system. There are hyper-local distribution companies (known as ton’ya) operating in neighborhoods all across Japan, but only a rare few, like Yamaoka in Kyoto, actually specialize in craft beer. Ton’ya are the businesses that Japan’s industrial breweries typically rely on to distribute beer to local bars and restaurants. Not yet, craft brewers. Not while they sell more of their beer directly to bars and restaurants.
In the end, the ability of Japan’s small brewers to circumvent the very networks that industrial brewers could, in theory, use to squeeze them out of the market has likely contributed to a lack of friction. I’ve suggested this to several upper level employees of industrial breweries in Japan and they seem to agree. There’s also the question of whether Japan’s big breweries would even try something like Busch III if an obligational three-tiered system existed.
Japan’s industrial breweries were involved in the launch of independent small breweries in Japan after deregulation in 1994. Some of these industrial brewers actually trained the employees selected to run these small operations. In some cases, the breweries even received equipment and kegs. Over the years, I’ve asked many older employees of Japanese industrial breweries the reason why. It’s consistently the same answer: microbreweries are a part of the beer family and we wanted to help. Certainly there were underlying motivations, right? Certainly there’s a conspiracy here, right? Perhaps not. Perhaps the industrial breweries presciently realized that a cooperative approach would behoove them in the long-term. Twenty years later, as they push into the craft beer segment, there certainly seems to be little protest as of yet and maybe that owes a little to the early goodwill. It’s important to note here that Suntory is now suing Asahi over a non-alcoholic beer patent. The beer industry isn’t completely infused with that legendary Japanese virtue of harmony, but there does seem to be some cultural influence playing a role in this current absence of conflict between large and small brewers.
The story wasn’t so dissimilar in America, though. As Sierra Nevada founder and CEO Ken Grossman noted in our interview with him (issue #20), in the early days of the craft beer revolution in America, he was able to call on colleagues at industrial breweries for technical support. Other pioneers of American craft beer, including Maytag, have noted the same. Maytag has even chastised members of the craft beer community for making disparaging comments about the industrial breweries, in part because of their early help. Still, it’s very hard to blame craft brewers for venting their anger and frustrations against mega-breweries; it is in fact their collective voice of protest that has given such strength to the movement. Ultimately, the industry isn’t as black and white as it’s often perceived or portrayed.
When reached for further comment on what he thought were seminal moments in the craft beer movement in America, Hindy brought attention to the reduction in excise tax levied against breweries. In 1976 the U.S. Congress reduced the tax per barrel (roughly 119 liters) by $2 on the first 60,000 barrels (which is more than any craft brewery in Japan) for breweries producing under two million barrels annually. This represented significant savings for the forty or so breweries that were struggling at the time. The change in the law was enabled by the lobbying power of industrial breweries. That two million also came to represent a defining characteristic of “small” breweries in America until recent changes in the definition to accommodate Samuel Adams and Yuengling, America’s oldest brewery. Amazingly, when Congress altered the law again in 1991, it left the $7 rate for small brewers untouched. Here, I’d like to quote a passage from Hindy’s book:
“In a 1995 speech at the Craft Brewers Conference, King* said the large brewers were the key to keeping the tax differential. Stroh, Coors, Miller, AB, G. Heileman Brewing Company… all supported keeping the small brewers at $7-per-barrel. ‘That’s one reason I get upset when I hear people denigrate these (big breweries’) beers,” King said. ‘You can say you have the best beer in the world–I am sure all of you have great beers–but it hurts our industry when in speeches, in writing, or in any way we denigrate anyone’s beer.’ Wise words that still ring true.”
*Henry King was the president of the large brewers’ trade association, the US Brewers Association.
The point in sharing this is to provide a touchstone for discussion of the situation in Japan. One large issue stymying the growth of craft beer in Japan (and accounting for the high price you pay for it) is the exorbitant tax rate of ¥222 per liter. Given that this is higher than other alcohol types in Japan, you could certainly call it punitive and unfair. Nothing short of a miracle would be necessary for the Japanese government to significantly reduce the beer taxes due to lobbying from the industrial brewers. Or any other reason for that matter. The government is struggling to find ways to bolster itself financially. Just look at the recent 3% increase in consumption tax. In the government’s pursuit to raise the tax again to 10% to cover its massive deficit, there seems little chance it would lower taxes on beer that much.
So what could the industrial brewers do for small brewers and why would they do it anyway? Let’s return to the “beer family” claim, even if you are suspicious or cynical. Again, mainstream beer consumption has declined for decades now. Certainly the primary reason for industrial brewers to enter the craft segment, which is growing, was to try to stem their shrinking numbers. But Japan’s industrial breweries aren’t really losing any significant market share due to the growth of the craft beer industry like in America. Industrial brewers face two much larger challenges, one of which they can’t win: demographics. Japan’s aging society means fewer people are drinking. The other problem is that people are choosing alcoholic beverages other than domestic beer. The large breweries would like more people to just choose beer in a general sense, but to complicate matters, the larger holding companies of industrial breweries may have other divisions carrying products that compete against beer. The breweries, at least, have a direct interest in supporting beer culture and consumption. Craft beer is helping to fortify that.
If Japan’s industrial breweries are genuinely interested in maintaining a robust beer culture that helps them and small brewers alike, then they should use their collective power to lobby for a repeal of the silly laws that essentially prevent home brewing (you can legally brew less than 1% alcohol beer, but who the hell does that?). This is no easy struggle and would be a tremendous sign of good faith to all craft beer lovers. For starters, the tax authorities are certain to raise the alarm for fear of losing precious tax revenue to people just drinking at home all the time. Certainly, executives at industrial brewers might be equally concerned that if people are brewing and drinking at home, they will be drinking less commercial beer–maybe even some craft brewers feel the same. But decades of data in America, where there are over a million homebrewers now, indicate that this just isn’t the case. When people have such frequent and intimate a connection to beer, they are likely to drink more of it, and not just at home. Many become entrepreneurs and go into the craft beer industry, too, which creates a remarkable number of jobs according to the research of numerous respected economists.
But since all this is unlikely to happen, let’s return to the primary reason industrial breweries want to enter the craft segment: they see opportunity. It’s sexy, it’s exciting and, most importantly, it’s growing. This is due to the efforts of Japan’s small craft breweries, with craft imports providing some additional dynamism to the mix. Thank you, craft brewers, for this amazing market. Are Japan’s industrial breweries interested in solely taking from it or also contributing to it? Are they going to simply wear the clothes of a craft brewer or embrace the spirit and practices that give it such appeal?
Case Study: Spring Valley Brewery
As Japan’s small brewers scramble to better define their identity and their product in the face of potential exploitation and consumer confusion, it seems that most people who consider themselves craft beer drinkers agree that craft beer means more than just a variety of styles with special names or labels. It means more than being brewed on small equipment. And a craft brewer is bound to a philosophy that involves deeper customer and community engagement as well as a commitment to quality.
Spring Valley Brewery, a wholly-owned subsidiary of Kirin Beer, appears to have investigated the meaning of “craft brewery” more thoroughly than most other breweries, industrial and small alike. And they are actively trying to embrace what they see as the formula. They genuinely think of themselves as a craft brewery and want to be accepted as such.
In March, I spent an evening at each of the brewpubs, in Daikanyama, Tokyo and Namamugi, Yokohama, with several core members of the company, including the president. These were not stiff people in suits just holding up bottles at a press conference. They were friendly, salt-of-the-earth types who clearly loved beer (and drank a lot of it both nights). The beers themselves were all of consistently good quality and interestingly did not conform strictly to style guidelines. The company had also very carefully thought about pairing, and the pairing flight was great. The bar counters even featured Randalls, which I’d never seen in Japan. Popular among beer geeks in America, these are used to dry-hop beer on spot, though Spring Valley (admittedly with financial and technical resources from Kirin) had further developed these so that there was more consistency of flavor between each pour. They are innovating, as they said they would.
I think what impressed me the most, however, was their enthusiasm and spirit of inquiry. They were ready to challenge me on certain points in my last article and also ask my opinions of their beers. One brewer even asked me for a list of beers he should try overseas–something I’m rarely asked. That kind of attitude bodes well for the brewery.
I left wondering myself what craft beer in Japan means when these people are trying so hard to create it. I also tried thinking about how I would feel if Japan’s second largest publishing house, for example, launched a slick beer magazine. How would my little team and I react to this publisher of superior resources that had entered the game more out of a sense of opportunity than a love of the lifestyle? (This actually happens often with mooks, or one-off magazines). That’s probably how many small breweries feel and I’m very sympathetic to their position, having seen their struggles since coming to work in Japan in 1997.
During that same week, I traveled down to Osaka for the opening of Minoh Beer’s newest Beer Belly taproom. There, I spoke to brewmaster Oshita Kaori about the developments. She and other craft brewers had reasonable concerns about the industrial breweries’ motivations and appropriation of the word “craft beer”. She also had two interesting questions I hadn’t considered. Was the president of the subsidiary a current Kirin employee? No. He’s one of eight full-time employees of Spring Valley, but a former Kirin employee. Do they brew their beer at the two facilities? They brew over 50% on site, the remainder on a small system on the Kirin campus.
These questions (and their answers) don’t delineate or define anything yet. But it is encouraging to see that small brewers like Kaori are very carefully considering what makes them, them. The questions that she and no doubt others are asking also reveal that there might be room for acceptance of places like Spring Valley Brewery among the old guard of craft brewers. The bigger question is what consumers will decide.
I’d certainly go back to Spring Valley. But as I say that, I also remember all the funky people at Kaori’s bar that night, laughing, hugging each other and taking pictures of the revelry. It was a real sense of community that I’d never abandon either. The best small breweries across Japan have all created these loyal micro-communities and they are all interconnected like cells. Spring Valley’s bigger challenge might not be making “craft beer”, but creating a genuine sense of community, which can take years. Meanwhile, I suspect Japan’s small brewers will be striving to strengthen their communities. A challenge to identity can often do that.
Craft beer isn’t dead in Japan. It’s just getting started.
This article was published in Japan Beer Times #22 (Spring 2015) and is among the limited content available online. Order your copy through our online shop or download the digital version from the iTunes store to access the full contents of this issue.