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Purchase of Lucozade Takes Suntory Holdings a Step Closer to Becoming A Truly Global Company

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By: Euromonitor Research

    Suntory Holdings looks set to buy the Lucozade and Ribena brands from GlaxoSmithKline for US$2.1 billion as it seeks to expand its sales outside Japan. A prominent player in its home market, Japan, where Suntory held the second largest value share in soft drinks and the third largest in alcoholic drinks in 2012, has been on the lookout for international acquisitions since its merger with Kirin fell through a couple years earlier, in an effort to become a truly global company. The Lucozade brand alone would add at least US$1 billion in foreign sales, in retail price terms, mainly in the UK, where Suntory had little presence before. Earlier this year, the company announced ambitious growth plans to double its global sales by 2020.

    Source: Euromonitor International – Centre for Analytics, Modelling and Innovation – Competitor Analytics Board

    Note:  Market overlap is a measure of competitive proximity between two companies. Twocompanies are considered competitors if they are present in the same category and country. We are using the lowest level category data available in Passport, and categories are defined as per Passport categorisation. Market overlap is equal to the minimum sales of two companies in a given category.

    For example, both Suntory Holdings and Coca-Cola are present in the ginger ale category in Japan, where Coca-Cola had sales of US$64 million and Suntory US$6.7 million in 2012. Therefore, based on this category, the overlap between the two companies is US$6.7 million. Total overlap is the sum of all country/category combinations where there is some overlap.

     

    What does it mean for both companies?

    GlaxoSmithKline is reportedly looking to refocus on its core pharmaceutical business and so is expected to divest a number of non-pharmaceutical brands. Lucozade has been one of the company’s main non-pharma assets, generating retail value sales in excess of US$1.1 billion thanks to leading sports drinks in the UK and Ireland and commanding a significant share in a number of emerging markets.

    For Suntory, this acquisition marks a noticeable push into foreign markets. Suntory Holdings is a diversified Japanese FMCG company with a focus on soft drinks and alcoholic drinks (although recently its soft drinks division has been spun off as a public company). In addition, Suntory has a presence in packaged food and consumer foodservice. Internationally, the company is best known for its Schweppes brand of tonic water.

    Japan accounts for the vast majority of Suntory’s retail value sales. The percentage may vary slightly depending on whether retailing and consumer foodservice are included, but the actual percentage is between 75-80%, which makes this acquisition even more important from the standpoint of diversifying sales away from Japan. Up until this announcement, Suntory’s portfolio has largely comprised Japanese brands in RTD tea and coffee, as well as lager and whisky.

    Suntory Holdings – Diversified in Terms of Categories but 78% of Sales are From Japan

     

    Source: Source: Euromonitor International – Centre for Analytics, Modelling and Innovation – Competitor Analytics Board

    Note: Retail value sales 2012. The colours on the “top categories” chart indicate 2011/2012 growth in fixed US dollar exchange rate terms. 

    Japanese FMCG companies remain focused on Japan

    Japanese FMCG companies have been notorious for their reliance on the Japanese market, and Suntory is no exception. As can be seen from Suntory’s peers below, the majority of Japanese companies are very conservative with regard to international expansion, even when Japan’s own population and economy has been shrinking. This puts Japanese FMCG companies in stark contrast to export-focused Japanese consumer electronics and automobile companies, and multinationals such as Coca-Cola or Procter & Gamble. There are some exceptions, for example Kikkoman soy sauce, but the main direction of Japanese consumer goods companies has been inwards.

    A somewhat odd addition to Suntory’s list of main competitors is Coca-Cola, which leads Japan’s soft drinks market and is in fact the closest competitor to Suntory in terms of market overlap. Interestingly, it’s not cola where the competition is happening in Japan, since Suntory does not have presence in cola, but RTD Coffee, Asian Still RTD Tea and Still Bottled Water. The three categories, combined, added a whopping US$ 9 billion to Coca-Cola’s Japanese sales, in retail value terms, and US$ 7.4 billion to Suntory’s sales in 2012. The remaining competitive set comprises mostly Japanese companies – Asahi, Kirin, Sapporo, Ito En and others.

    Top Four Competitors of Suntory Holdings and Their Presence Globally, 2012

    Source: Euromonitor International – Centre for Analytics, Modelling and Innovation -Competitor Analytics Board

    Note: Retail value sales, all Passport industries, countries ranked by sales (from largest to smallest).  

    Except Kirin, which has a significant presence in Australia, the majority of Japanese FMCG companies rely on Japan, with this reliance posing risks over the long term, considering the uncertain Japanese economy and declining population. To make the situation worse, multinationals like Coca-Cola have been very active in Japan (Japan is Coca-Cola’s second largest market globally for soft drinks), putting pressure on Japanese companies in their home market.

    With this in mind, the expansion strategy of the Japanese FMCG companies is noticeably beginning to shift. Suntory Holdings, at least, has been very public about their goal of becoming a true global player, and wants to shape the company in a way that is suitable for global business. And the results so far are encouraging. With the exception of Asahi, non- Japan has outperformed growth in Japan. Clearly, there is a question of scale, and it’s easier to grow sales when you are starting from a low base, but if Suntory efforts pay off, the other Japanese FMCG companies are likely to follow suit.

    Non-Japan Growth  Outperforms Japan Growth 

    Source: Euromonitor International

    Note: Retail RSP, Passport figures (only industries covered by Passport considered).

    With Suntory now listed on Japan’s stock exchange, its focus on expansion is likely to intensify. A stock market listing typically encourages companies to reward growth more, given how important the future growth expectations are in the fundamental valuations of stock prices.  Suntory Holdings has also been public about their plans to invest US$5 billion in international expansion as it looks to double its sales by 2020.


    Where does Suntory compete with Coca-Cola?

    In terms of competition with Coca-Cola, the largest overlap between the two companies, aside from Japan, was in the following categories in decreasing order in 2012:

    Largest Overlap Between Suntory Holdings and Coca-Cola Outside Japan, 2012

    Largest Overlap between Suntory Holdings and Coco-Cola Outside Japan
     

    Source: Euromonitor International Centre for Analytics, Modelling and Innovation – Competitor Analytics Board

    In Western Europe, Lucozade’s main market, Suntory has already made some successful acquisitions previously and the company already has presence in the region, particularly in France. It bought the Orangina brand, for example, which is one of the leading competitors to Fanta in juice-based orange carbonates. In France, Orangina in fact leads Fanta in terms of value share.

    Suntory and Coca-Cola – Market Overlap in Western Europe

    Source: Euromonitor International – Centre for Analytics, Modelling and Innovation- Competitor Analytics Board

    Note: In the chart above, numbers indicate the seven largest overlaps between Coca-Cola and Suntory Holdings, in a decreasing order. Colour indicates the market share held by the company. Darker colour reflects higher market share, lighter colour – lower market share. Grey indicates markets where a company does not have market share. For example, Juice-based carbonates
    in France is the largest common market for Coca-Cola and Suntory.

    This acquisition will give Suntory a significant boost in both the UK and sports drinks, both of which have been among the company’s weakest areas in Western Europe in comparison to Coca-Cola. Lucozade was clear category leader in the UK sports drinks category in 2012, holding a 60% share and a huge lead over Coca-Cola’s Powerade and PepsiCo’s Gatorade. If Suntory can maintain Lucozade’s momentum and continue the relationship with retailers and marketers that has resulted in the brand occupying prominent shelf space, the acquisition will heavily support
    Suntory’s competitive stance against Coca-Cola in Western Europe and its plan to become a global player.

    This is the company’s second major acquisition in Western Europe following its purchase of Orangina, which brought brands such as Orangina (orange carbonate), Pampryl (juice) and Energade (sports drinks) under Suntory Holdings’ umbrella.

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