Since ancient times, alcohol has been an important source of tax revenue for rulers.
And it still holds true in Japan, where over the last 10 years the Finance Ministry has met attempts by breweries to produce cheaper brews with tax increases.
To try and keep prices down, Sapporo Breweries Ltd. and Suntory Ltd. recently introduced new beer-like drinks that are not classified as beer or low-malt “happoshu” under the country’s convoluted liquor tax system.
The yet-to-be classified beverage, nicknamed “the third beer,” follows the release a decade ago of happoshu, which initially ducked the tax.
Sapporo and Suntory are seeing stronger-than-expected demand for the new brews, thanks to low prices.
The new suds’ growing popularity, however, could pose a problem for breweries: If they sell too well, they will be targeted by tax authorities.
Sapporo, the nation’s third-largest brewery, debuted Draft One in February. Suntory, the fourth-largest, followed with Super Blue in June.
At a Mine Mart liquor store in Tokyo’s Koto Ward, a case of 24 500-ml cans of Draft One recently sold for about 3,600 yen, around 500 yen cheaper than a case of happoshu. A case of beer would have cost 2,000 yen more.
“Since its debut, Draft One sales have continued to grow,” store manager Tomokazu Gunji said, adding it is the third-fastest-selling brand in the store.
“At first, customers were drawn to the prices. Then they found that the taste is similar to happoshu,” he said.
The key to the new drinks’ low prices lies in the tax rate. The liquor tax on a 350-ml can of Draft One is 24.20 yen and that for Super Blue is 27.78 yen, compared with 46.98 yen for a can of happoshu and 77.70 yen for beer.
In terms of liquor taxes, a drink is defined as beer only when its malt content is 67 percent or more of its total ingredients after water.
Drinks with less than 67 percent malt fall under the category of happoshu, which is then divided into an additional three classifications. Most happoshu fall into the third group — malt content of less than 25 percent, which is slapped with the lowest tax.
Happoshu ingredients typically also include rice and corn.
Draft One enjoys an even lower tax because it does not contain malt, opting for a yellow pea protein instead. It is categorized under “others.”
According to Sapporo, ducking liquor taxes was not what the firm had in mind four years ago when it started developing Draft One.
“We first looked into creating a drink that would not contain malt to offer a lighter taste than traditional beer,” said Hirofumi Jin, manager of Sapporo’s brand marketing department.
The quest for a no-malt brew was not a major aim of the company, and the effort was secondary to work on Sapporo’s mainstay products.
But the no-malt research suddenly got management’s attention when the government last year hiked the tax on happoshu for the second time.
The company knew that a drink with no malt would be in a category not affected by the tax increase.
“It is true that the tax hike accelerated (the Draft One) market launch,” Jin said.
Draft One was an instant success. During its first six months, it beat Sapporo’s initial full-year sales target of 10 million cases and prompted the company to increase its goal to 17 million cases.
The new concoction was a lifesaver for Sapporo, which has been struggling in recent years. In the last two years alone, it released 10 new happoshu brands, but none of them survived.
Thanks to Draft One, the brewery’s parent, Sapporo Holdings Ltd., forecast this year’s net profit will be its highest in 15 years.
Industry officials, however, say that it is still too early to tell whether these new drinks will prove as popular as happoshu.
In fact, Japan’s two largest breweries, Kirin Brewery Co. and Asahi Breweries Ltd., say they do not plan to launch competing products in the near future.
But when Suntory in October 1994 debuted the first happoshu, with Sapporo following suit a year later, similar comments were made by their bigger rivals — some executives scornfully called the new brew “fake beer.”
Kirin and Asahi eventually debuted their own happoshu. As a result, happoshu now accounts for about 40 percent of the malt-drink market in Japan.
If the new drinks draw similar popularity, they will fall under the scrutiny of the tax office.
After seeing a large number of beer lovers defect to happoshu, the government raised the liquor tax on it twice, in 1996 and 2003.
The Finance Ministry, in justifying the tax increases on happoshu, cites the guiding tax office principle of “fair and just taxation,” reckoning that since people regard happoshu the same as beer, it should be taxed the same.
“From the viewpoint of the tax system, similar rates should be applied to similar products. Otherwise, it stifles fair market competition,” a ministry official claimed.
Asked about the possibility of a tax increase on the new drinks, Suntory Senior Managing Director Masao Tachiki told a recent news conference: “We have always been exposed to the risk of a tax hike. Looking back in history, market popularity has been followed by a tax hike.
“But the social environment is changing. I don’t think a tax hike can be made so easily these days.”
Finance Ministry officials said, however, that they are paying very close attention to the market performance of Draft One and Super Blue, and will consider a levy increase if the products begin to take a substantial market share.
For the government, which is seeing tax revenues fall, any low-tax beer rival may be a source of money that cannot be passed up.
Of the 1.68 trillion yen in alcohol-tax revenues in the last fiscal year, a little over half came from beer, and the Finance Ministry believes any decline in tax revenues from beer should be offset by higher levies on other types of alcohol.
There is concern in the industry about the negative impact that fears over tax increases on new drinks could have on companies.
“It hurts the motivation of breweries to innovate,” said Sadami Kikugawa, economics professor at Kyoto Sangyo University, who studies liquor taxes and deregulation.
The government should revise the liquor taxes, which now only punish the breweries that try to develop cheap beer alternatives, he said.
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