Suntory SWOT Company Analysis Report

 

Suntory SWOT Company Analysis Report

 

Suntory Ltd

Strategic Evaluation

Swot analysis

Strengths

·         Sound soft drinks business – Suntory has a strong position in the global soft drinks market despite the increasing profile of Chinese companies. The company is the largest Japanese soft drinks manufacturer.

·         Established brand – the eponymous Suntory brand is a very valuable asset of the company as it is still Japan's second best-selling soft drinks brand, and in China, the brand’s market share is increasing year-on-year. 

·         Healthy external relationship – the company’s business relationships with PepsiCo, Nestlé and Unilever have helped it cushion the sluggish growth in soft drinks in the Japanese domestic market and increase its revenue streams.

·         Asian expansion – further expansion China and Southeast Asia may help Suntory to increase its market shares in Asia-Pacific in the long term. The development of the RTD coffee business in the region is expected to bear fruit in the medium term.

·         Proactive to market trends – Suntory is proactive in responding to consumer trends and this is reflected in the introduction of new products in dynamic sectors such as RTD tea and the direct importing of Nestlé’s water brands from France to Japan when imported water brands are becoming popular.

Weaknesses

·         Reliance on domestic market – Suntory’s heavy reliance on the Japanese domestic market has made it susceptible to the sluggish growth of the country’s soft drinks business. 

·         Heavyweight business relationship with PepsiCo – some reliance on Pepsi bottling business makes Suntory vulnerable to any decline in PepsiCo’s global soft drinks business.

Opportunities

·         RTD tea in China – RTD tea in China is forecast to see continuous strong growth in the short to medium term and Suntory is expected to continue to exploit the Chinese market further. The Beijing Olympics to be held in summer 2008 could be a good opportunity for Suntory to introduce its products in more regions.

·         Imported water brands – imported bottled water is becoming increasingly popular in Japan and with imported brands also growing in popularity, the company's agreements to import and distribute Nestlé’s brands should prove a positive move in the short to medium term.

·         Vending operations – further investment in innovative vending packaging will contribute towards the company's continued success in this dynamic distribution channel. The modification of the vending machines and the acceptance of e-money help Suntory to maintain relationships with loyal customers.

·         Online retailing – the growing popularity of online shops can be used to leverage the intense competition in the regular retail channels.

·         RTD green tea in Japan – Suntory is expected to continue to exploit RTD green tea which is set to provide robust growth opportunities.

·         Stronger relationship – the strengthened alliance with PepsiCo in Southeast Asia will help Suntory to be a more serious player across the region.

·         Acquisitions – over the past six months, Suntory has made a few acquisitions, showing that the Japanese player is becoming bolder in terms of acquisition particularly for expanding overseas business and domestic channel development.

Threats

·         Unfavourable demographics – falling birth rates and a declining young consumer population is a threat to all the soft drinks manufactures in Japan, and Suntory is no exception.

·         Increases in marketing spending to maintain interests – Japanese consumers are characterised by short interest in certain products, and the constant need to launch new products could be a costly business, potentially affecting margins. 

·         Growth could be limited – expansion into fast-growing Chinese sectors such as RTD tea will be constrained by the rapid growth of local rivals such as Master Kong and Uni-President Enterprises.

·         Company brands to be under pressure – increased selling of imported brands increases the revenue stream, but Suntory’s own water brands could potentially be pressured.

·         Rising input costs – high commodity prices and energy costs will increase significantly the production costs and put margins constantly under pressure.

Growth Strategies and Future Prospects

Core Businesses

Product differentiation attracting consumer interests

·         RTD tea is Suntory’s core product within its soft drinks business, accounting for one third of its retail value sales. RTD tea is also the biggest soft drinks sector on the Japanese market and recent new product development has been centred around health. Japan is traditionally a tea-drinking country and the drink attracts consumers of all ages and income levels. An ageing population with increasing health awareness is favouring RTD tea, which is gaining ground at the expense of drinks with high-sugar content. Being a more natural alternative, RTD tea appeals to the ever-more sophisticated Japanese consumer.

·         Manufacturers are faced with the challenges to differentiate their products from rival alternatives as consumers demand new products with a natural, authentic image. Suntory’s initiatives include the introduction of Iuemon Cha, a RTD tea made from 100% domestically grown tea leaves, marketed as a high-quality natural product with superior taste in 2006. The launch of Kuro-Oolong Cha is another success for the company. As a qualified FOSHU (Food for specific health use), the product claims to be able to suppress the increase of neutral fat levels when taken with food. 

Oolong tea offers prospects

·         Oolong tea is expected to continue its growth momentum in the forecast period. Historical trends show that Japanese consumers are susceptible to fads and claims of certain ingredients and their functionality. Once the claims or benefits are approved by a certain authority, it can become an instant fad among consumers, and retailers or foodservice outlets are inclined to carry the brand. Oolong tea is commonly used as a mixer with shochu (spirits usually made from sweet potatoes or wheat; very common in Japan), and with the benefits of this product, Suntory is proposing it as a new mixer for the health-conscious consumer. Neutral fat levels are a big concern among the middle-aged working class, and Suntory expects the drink to further grow in popularity by expanding its sales channels to foodservice chains.

Growth Opportunities

Leveraging core brand’s equity

·         The current competitive environment in Japan makes it hard to build up a completely new mega brand. Therefore, the opportunities lie in developing new products under the exiting core brands. Suntory is expected to continue to strengthen the recognition of mega-brand products, such as Iuemon, Oolong Tea and Boss as the company further diversifies its business to encompass premium foods designed with health in mind. Specifically, it will focus on further increasing sales and expanding the market share of these brands while introducing new offerings. Unsweetened RTD tea and RTD coffee remain important products for growth. Historical data show that Suntory has a good success rate in terms of new product launches. If the company continues to deploy its strong research and development facilities in the same manner, more such products will be seen within the next couple of years.

Capitalising on China’s growth

·         In terms of strategic regional expansion, Suntory sees China and Southeast Asia as priority areas for business growth and it is committed to increasing sales significantly.  The company has completed its long-anticipated second soft drinks production plant in Shanghai, China. The plant is known as Suntory (Shanghai) Foods, Co., Ltd and complements the previously built Shanghai Suntory-Maling Foods Co., Ltd. plant. It will produce oolong tea, functional beverages and other soft drinks. First-year production capacity will be 2.5 million cases, which will grow to 7.5 million cases in the future. Suntory has started selling its soft drinks in the Beijing area and the new plant is believed to provide reasonable capacity for future growth. In Taiwan, Suntory’s brands CC Lemon and Nacchan are present though their market shares were not notable yet in 2007.

·         Suntory has secured a presence among mass-market products particularly in East China. However, its real strength is that the company has challenged the existing Chinese distribution system. The company has fixed direct deals with small retail channels and it has contracts with many distributors as Suntory affiliates. Suntory controls the recruitment process of a wholesaler’s manpower. The wholesaler employs the workers under its name and pays their wages, but Suntory pays for the bonuses as incentives – so-called “wholesaler franchise system”. As a result, Suntory products can be seen in almost 100% of general stores (ma and pa shops) in Shanghai. It can be said that this is a business model which not only utilises the existing sales and wholesale channel, but also creates and secures its own sales channel. Suntory is expected to enjoy the economic growth in cosmopolitan Shanghai areas, but the company is faced with the challenge of Chinese players such as Uni-President which has a nationwide distribution network.

·         A relatively strong player in functional drinks and RTD tea, Suntory increased its soft drinks retail volume sales in China by 6% in 2007 and it is the best performer among its Japanese counterparts. The company is likely to increase its offer to the Chinese market, given that it has increased production capacity in the Shanghai area. The success of the Shanghai area should encourage Suntory to expand to other areas of China. In addition, business expansion is planned on the east coast of the US, in Singapore and elsewhere.

Increasingly active in Southeast Asia

·         With the domestic soft drinks market maturing, Suntory has increased its activities in Southeast Asia, where strong growth is projected. The Japanese giant has acquired a 50% shareholding in Tipco F&B and the two companies will jointly develop soft drinks business in Thailand and Southeast Asia.  Tipco has marketed 100% juice under the Tipco brand since 1993 and ranked fourth in fruit/vegetable juice in Thailand in 2007, with a 7% volume share. Looking ahead, the two companies will continue to market juice under the Tipco brand while working together to develop Suntory RTD tea in Southeast Asia.

·         Suntory initially released its Boss RTD coffee in Malaysia and Singapore in December 2007 and it is now launching full-scale sales of RTD coffee in Southeast Asia. The strategic business agreement with PepsiCo, which entails the cooperation of PepsiCo’s production and distribution and other logistics facilities, is set to facilitate Suntory’s penetration into the region further. Suntory’s efforts in these markets should bear fruit in the long term, given that RTD coffee is predicted to grow at a compound annual growth rate (CAGR) of 9% by volume over the 2007-2012 period in Malaysia.

Imported Water Opportunity

·         The direct water importing business from Nestlé France may mean that Suntory can sell a wider variety of products. Imported Nestlé brands including Perrier, S. Pellegrino, Contrex and Acqua Panna have been performing well with the growing demand for imported bottled water brands in Japan. While Suntory can see the growth in revenue streams, the price hikes of energy may put imported products’ margins under pressure.

Limited Potential

Challenge in carbonates

·         Suntory’s strategic objectives are to expand its soft drinks business through various operations such as developing its own brands and strategic alliances with international players. Specifically, Suntory has a business agreement with PepsiCo and manages the relationships with PepsiCo’s nine franchise bottlers in Japan, which covers PepsiCo’s major brands including Pepsi, Diet Pepsi, Pepsi Twist, Diet Pepsi Twist and 7-Up. These brands serve as a big revenue stream for Suntory. The challenge in carbonates is the unhealthy image of the drink as well as the fall in the consumer population for carbonates with the declining birth rate.

Rivals in RTD coffee business

·         Suntory is also bound to meet plenty of challenges when expanding into Southeast Asia. The main challenge is likely to be to counter the competition from established players. Suntory's Japanese counterparts such as Pokka and Ajinomoto are already actively marketing their products and have established their positions. For example, Ajinomoto has two subsidiaries handling its beverages business in the region: Ajinomoto Calpis Beverage (Thailand) Co Ltd and PT Ajinomoto Calpis Beverage in Indonesia. In Thailand, Ajinomoto dominates RTD coffee with a 67% share by volume in 2007. The competition from established players would mean potentially high marketing and promotional costs for starters. Nestlé has a dominant position in Singapore, Malaysia and Indonesia as well as a prominent ranking in Thailand. Its flagship brand Nescafé is synonymous with instant coffee and RTD coffee in many Asian countries. Therefore, Nestlé's global strength and regional reach could potentially be a barrier to market entry.

·         Starbucks is active in both expanding its café business and launching its Discoveries chilled RTD coffee in Asia (already available in Japan, Taiwan and South Korea). The company launched Frappuccino in China’s commercial centre Shanghai in 2007 and it has been well received. A further assault on RTD coffee in Southeast Asia is expected. Starbucks is increasing its market share in RTD coffee in Japan and it is expected to maintain its growth momentum on the back of consumers’ familiarity of the brand in the on-trade channel.

·         The Coca-Cola Company has also increased its activities in RTD coffee and this is demonstrated by its business agreement with Illycafe in which the two jointly produce RTD coffee globally. It will not take long for the products to filter through the Southeast Asia region. Suntory should see The Coca-Cola Company as an underlying threat.

 

Suntory Ltd

Strategic Evaluation

Swot analysis

Strengths

·         Sound soft drinks business – Suntory has a strong position in the global soft drinks market despite the increasing profile of Chinese companies. The company is the largest Japanese soft drinks manufacturer.

·         Established brand – the eponymous Suntory brand is a very valuable asset of the company as it is still Japan's second best-selling soft drinks brand, and in China, the brand’s market share is increasing year-on-year. 

·         Healthy external relationship – the company’s business relationships with PepsiCo, Nestlé and Unilever have helped it cushion the sluggish growth in soft drinks in the Japanese domestic market and increase its revenue streams.

·         Asian expansion – further expansion China and Southeast Asia may help Suntory to increase its market shares in Asia-Pacific in the long term. The development of the RTD coffee business in the region is expected to bear fruit in the medium term.

·         Proactive to market trends – Suntory is proactive in responding to consumer trends and this is reflected in the introduction of new products in dynamic sectors such as RTD tea and the direct importing of Nestlé’s water brands from France to Japan when imported water brands are becoming popular.

Weaknesses

·         Reliance on domestic market – Suntory’s heavy reliance on the Japanese domestic market has made it susceptible to the sluggish growth of the country’s soft drinks business. 

·         Heavyweight business relationship with PepsiCo – some reliance on Pepsi bottling business makes Suntory vulnerable to any decline in PepsiCo’s global soft drinks business.

Opportunities

·         RTD tea in China – RTD tea in China is forecast to see continuous strong growth in the short to medium term and Suntory is expected to continue to exploit the Chinese market further. The Beijing Olympics to be held in summer 2008 could be a good opportunity for Suntory to introduce its products in more regions.

·         Imported water brands – imported bottled water is becoming increasingly popular in Japan and with imported brands also growing in popularity, the company's agreements to import and distribute Nestlé’s brands should prove a positive move in the short to medium term.

·         Vending operations – further investment in innovative vending packaging will contribute towards the company's continued success in this dynamic distribution channel. The modification of the vending machines and the acceptance of e-money help Suntory to maintain relationships with loyal customers.

·         Online retailing – the growing popularity of online shops can be used to leverage the intense competition in the regular retail channels.

·         RTD green tea in Japan – Suntory is expected to continue to exploit RTD green tea which is set to provide robust growth opportunities.

·         Stronger relationship – the strengthened alliance with PepsiCo in Southeast Asia will help Suntory to be a more serious player across the region.

·         Acquisitions – over the past six months, Suntory has made a few acquisitions, showing that the Japanese player is becoming bolder in terms of acquisition particularly for expanding overseas business and domestic channel development.

Threats

·         Unfavourable demographics – falling birth rates and a declining young consumer population is a threat to all the soft drinks manufactures in Japan, and Suntory is no exception.

·         Increases in marketing spending to maintain interests – Japanese consumers are characterised by short interest in certain products, and the constant need to launch new products could be a costly business, potentially affecting margins. 

·         Growth could be limited – expansion into fast-growing Chinese sectors such as RTD tea will be constrained by the rapid growth of local rivals such as Master Kong and Uni-President Enterprises.

·         Company brands to be under pressure – increased selling of imported brands increases the revenue stream, but Suntory’s own water brands could potentially be pressured.

·         Rising input costs – high commodity prices and energy costs will increase significantly the production costs and put margins constantly under pressure.

Growth Strategies and Future Prospects

Core Businesses

Product differentiation attracting consumer interests

·         RTD tea is Suntory’s core product within its soft drinks business, accounting for one third of its retail value sales. RTD tea is also the biggest soft drinks sector on the Japanese market and recent new product development has been centred around health. Japan is traditionally a tea-drinking country and the drink attracts consumers of all ages and income levels. An ageing population with increasing health awareness is favouring RTD tea, which is gaining ground at the expense of drinks with high-sugar content. Being a more natural alternative, RTD tea appeals to the ever-more sophisticated Japanese consumer.

·         Manufacturers are faced with the challenges to differentiate their products from rival alternatives as consumers demand new products with a natural, authentic image. Suntory’s initiatives include the introduction of Iuemon Cha, a RTD tea made from 100% domestically grown tea leaves, marketed as a high-quality natural product with superior taste in 2006. The launch of Kuro-Oolong Cha is another success for the company. As a qualified FOSHU (Food for specific health use), the product claims to be able to suppress the increase of neutral fat levels when taken with food. 

Oolong tea offers prospects

·         Oolong tea is expected to continue its growth momentum in the forecast period. Historical trends show that Japanese consumers are susceptible to fads and claims of certain ingredients and their functionality. Once the claims or benefits are approved by a certain authority, it can become an instant fad among consumers, and retailers or foodservice outlets are inclined to carry the brand. Oolong tea is commonly used as a mixer with shochu (spirits usually made from sweet potatoes or wheat; very common in Japan), and with the benefits of this product, Suntory is proposing it as a new mixer for the health-conscious consumer. Neutral fat levels are a big concern among the middle-aged working class, and Suntory expects the drink to further grow in popularity by expanding its sales channels to foodservice chains.

Growth Opportunities

Leveraging core brand’s equity

·         The current competitive environment in Japan makes it hard to build up a completely new mega brand. Therefore, the opportunities lie in developing new products under the exiting core brands. Suntory is expected to continue to strengthen the recognition of mega-brand products, such as Iuemon, Oolong Tea and Boss as the company further diversifies its business to encompass premium foods designed with health in mind. Specifically, it will focus on further increasing sales and expanding the market share of these brands while introducing new offerings. Unsweetened RTD tea and RTD coffee remain important products for growth. Historical data show that Suntory has a good success rate in terms of new product launches. If the company continues to deploy its strong research and development facilities in the same manner, more such products will be seen within the next couple of years.

Capitalising on China’s growth

·         In terms of strategic regional expansion, Suntory sees China and Southeast Asia as priority areas for business growth and it is committed to increasing sales significantly.  The company has completed its long-anticipated second soft drinks production plant in Shanghai, China. The plant is known as Suntory (Shanghai) Foods, Co., Ltd and complements the previously built Shanghai Suntory-Maling Foods Co., Ltd. plant. It will produce oolong tea, functional beverages and other soft drinks. First-year production capacity will be 2.5 million cases, which will grow to 7.5 million cases in the future. Suntory has started selling its soft drinks in the Beijing area and the new plant is believed to provide reasonable capacity for future growth. In Taiwan, Suntory’s brands CC Lemon and Nacchan are present though their market shares were not notable yet in 2007.

·         Suntory has secured a presence among mass-market products particularly in East China. However, its real strength is that the company has challenged the existing Chinese distribution system. The company has fixed direct deals with small retail channels and it has contracts with many distributors as Suntory affiliates. Suntory controls the recruitment process of a wholesaler’s manpower. The wholesaler employs the workers under its name and pays their wages, but Suntory pays for the bonuses as incentives – so-called “wholesaler franchise system”. As a result, Suntory products can be seen in almost 100% of general stores (ma and pa shops) in Shanghai. It can be said that this is a business model which not only utilises the existing sales and wholesale channel, but also creates and secures its own sales channel. Suntory is expected to enjoy the economic growth in cosmopolitan Shanghai areas, but the company is faced with the challenge of Chinese players such as Uni-President which has a nationwide distribution network.

·         A relatively strong player in functional drinks and RTD tea, Suntory increased its soft drinks retail volume sales in China by 6% in 2007 and it is the best performer among its Japanese counterparts. The company is likely to increase its offer to the Chinese market, given that it has increased production capacity in the Shanghai area. The success of the Shanghai area should encourage Suntory to expand to other areas of China. In addition, business expansion is planned on the east coast of the US, in Singapore and elsewhere.

Increasingly active in Southeast Asia

·         With the domestic soft drinks market maturing, Suntory has increased its activities in Southeast Asia, where strong growth is projected. The Japanese giant has acquired a 50% shareholding in Tipco F&B and the two companies will jointly develop soft drinks business in Thailand and Southeast Asia.  Tipco has marketed 100% juice under the Tipco brand since 1993 and ranked fourth in fruit/vegetable juice in Thailand in 2007, with a 7% volume share. Looking ahead, the two companies will continue to market juice under the Tipco brand while working together to develop Suntory RTD tea in Southeast Asia.

·         Suntory initially released its Boss RTD coffee in Malaysia and Singapore in December 2007 and it is now launching full-scale sales of RTD coffee in Southeast Asia. The strategic business agreement with PepsiCo, which entails the cooperation of PepsiCo’s production and distribution and other logistics facilities, is set to facilitate Suntory’s penetration into the region further. Suntory’s efforts in these markets should bear fruit in the long term, given that RTD coffee is predicted to grow at a compound annual growth rate (CAGR) of 9% by volume over the 2007-2012 period in Malaysia.

Imported Water Opportunity

·         The direct water importing business from Nestlé France may mean that Suntory can sell a wider variety of products. Imported Nestlé brands including Perrier, S. Pellegrino, Contrex and Acqua Panna have been performing well with the growing demand for imported bottled water brands in Japan. While Suntory can see the growth in revenue streams, the price hikes of energy may put imported products’ margins under pressure.

Limited Potential

Challenge in carbonates

·         Suntory’s strategic objectives are to expand its soft drinks business through various operations such as developing its own brands and strategic alliances with international players. Specifically, Suntory has a business agreement with PepsiCo and manages the relationships with PepsiCo’s nine franchise bottlers in Japan, which covers PepsiCo’s major brands including Pepsi, Diet Pepsi, Pepsi Twist, Diet Pepsi Twist and 7-Up. These brands serve as a big revenue stream for Suntory. The challenge in carbonates is the unhealthy image of the drink as well as the fall in the consumer population for carbonates with the declining birth rate.

Rivals in RTD coffee business

·         Suntory is also bound to meet plenty of challenges when expanding into Southeast Asia. The main challenge is likely to be to counter the competition from established players. Suntory's Japanese counterparts such as Pokka and Ajinomoto are already actively marketing their products and have established their positions. For example, Ajinomoto has two subsidiaries handling its beverages business in the region: Ajinomoto Calpis Beverage (Thailand) Co Ltd and PT Ajinomoto Calpis Beverage in Indonesia. In Thailand, Ajinomoto dominates RTD coffee with a 67% share by volume in 2007. The competition from established players would mean potentially high marketing and promotional costs for starters. Nestlé has a dominant position in Singapore, Malaysia and Indonesia as well as a prominent ranking in Thailand. Its flagship brand Nescafé is synonymous with instant coffee and RTD coffee in many Asian countries. Therefore, Nestlé's global strength and regional reach could potentially be a barrier to market entry.

·         Starbucks is active in both expanding its café business and launching its Discoveries chilled RTD coffee in Asia (already available in Japan, Taiwan and South Korea). The company launched Frappuccino in China’s commercial centre Shanghai in 2007 and it has been well received. A further assault on RTD coffee in Southeast Asia is expected. Starbucks is increasing its market share in RTD coffee in Japan and it is expected to maintain its growth momentum on the back of consumers’ familiarity of the brand in the on-trade channel.

·         The Coca-Cola Company has also increased its activities in RTD coffee and this is demonstrated by its business agreement with Illycafe in which the two jointly produce RTD coffee globally. It will not take long for the products to filter through the Southeast Asia region. Suntory should see The Coca-Cola Company as an underlying threat.