Rising Sun Behind The Clouds

It was all going so well. Japanese whiskies winning prizes at every major competition, bartenders going crazy for them, consumers following suit, auction prices going stratospheric, Suntory buying Jim Beam. Everything spoke of an industry in robust health, ready to become a significant world force in volume and quality. Then the realization hit that the whiskies were on allocation, that Nikka was removing all age statements from its single malt range. What happened?

To understand that, you need to go back in time. In order to sell, say, a 15 year old whisky, you have to have made the spirit 15 (or more) years ago. In order to sell increasing volumes of 15 year old whisky, you have to have anticipated that demand 15 or more years ago. The situation in Japan 15 and more years ago was very different from what it is today. Export had only just started, single malt was still a new concept, the once massive domestic market was flatlining (at best), and distilleries were essentially being mothballed.

Jota Tanaka, chief blender at Kirin (owner of Gotemba distillery) describes it as ‘the Ice Age.’ “By 2003, the [domestic] Japanese whisky market had shrunk to one-fifth of its 1983 peak,” he explained. “There was a rise in the popularity of shochu [a traditional unaged spirit] in the 1980’s, then a revision of the liquor tax in 1984. Both triggered the two decades of decline. During this period, distillers reduced their stock and production.” A similar situation affected Nikka, whose sales peaked in 1989. Production at the firm’s sites decreased throughout the 1990s.

Even after the decline had been halted, the domestic market remained flat until around 2008. Export—led by single malt—was helping, but from a tiny base and only in a few select markets: France and the UK were priority in those early days. Distillers were optimistic, but cautiously so.

Sudden Blossoming

The dramatic revival in Japanese whisky’s fortunes therefore took them by surprise. “In 2014, the domestic market was 60 percent greater than it had been 2008,” Tanaka pointed out. “On top of the reactivating Japanese market—which came about thanks to the whisky Highball—the rest of the world had discovered Japanese whisky!” The question that distillers are now facing is how to manage this demand at home and in export off a low stock base, while simultaneously building up holdings once more.

Whisky firms always have to second guess what consumers might do in the long-term. “In those days of decline, nobody could have imagined this huge growth,” explained Takahiro Itoga, senior global brand director of marketing at Suntory Brands. “Since it takes a long time to produce high-quality whiskies, we have had to put many of our products on allocation in order to supply sustainably.” It also means that all firms are focusing on a few priority markets; in Suntory’s case the U.S., UK, France, Germany, Singapore, and global Travel Retail.

“It has to be remembered that the age statement is not the sole essence of a whisky. The quality of each cask is different.”—Shinji Fukuyo, chief blender, Suntory

Suntory prefers to use the term ‘excessive demand’ rather than ‘insufficient stock’ when talking about the situation, though this does infer that the only way to get around the issue is to dampen down demand, something Itoga refutes. “We don’t think we can control the demand,” he said. “Demand is made by consumers. What we can do is to supply as much whisky as possible to meet that demand.”

They can do little else, but moaning about the lack of whisky made decades ago is a waste of time.  There was little else that distillers could have done. The issue now is how to manage the stock and the situation.

The most dramatic response came this year from Nikka, which withdrew all age statements from its Yoichi and Miyagikyo single malts in every market, replacing them with new no age statement (NAS) variants. “We have decided to have most lines under allocation to control the volume growth,” explained Emiko Kaji, international sales and marketing manager at the firm. “With the current stock levels, we could not expand the business significantly. We will be focusing mainly on Europe [where Nikka has had a significant presence since 2000] and the U.S.”

As distillers add more NAS bottlings, people like Suntory’s chief blender, Shinji Fukuyo, become even busier.

Gift of the Ancestor

No matter how good its projections might have been, no one could ever have anticipated what was to happen to Nikka in 2014-15 as a result of the daily screening of “Massan,” an NHK-TV soap opera based on the life of the firm’s founder Masataka Taketsuru and his wife Rita. “Massan” fever gripped the nation and Nikka’s sales at home have soared.

“That was definitely unpredictable!” said Kaji. “Although the drama was a perfect opportunity to celebrate our 80th anniversary, the demand made the situation more difficult, as the sales volume in Japan is much bigger than in foreign markets.

“The recent craze in the domestic market is mostly because of the drama and it will gradually calm down,” he said. “If we exclude the impact by the drama, the growth we are seeing is organic and we should manage it, though it will take several years to balance sales and demand. Furthermore, we will need to wait more to accelerate growth again.”

The three majors were cautious about how long it would be before an equilibrium between supply and demand would be achieved. As Tanaka pointed out, “it depends on the scale and the rate of the demand. If these are far greater than our current projection, it would take forever!” When pushed, he thought that, in Kirin’s case, at current rates of growth it would be “at least five years.”

While it has not been as dramatic as Nikka in its rearranging of its portfolio, Suntory has also introduced NAS variants to its Yamazaki and Hakushu single malts, as well as its Hibiki premium blend.

“We developed these to increase the opportunity to meet more consumer demand,” explained Shinji Fukuyo, chief blender at Suntory. “We will continue to provide age-statement whiskies based on the idea that they too deliver quality.

“It has to be remembered that the age statement is not the sole essence of a whisky,” he stressed. “The quality of each cask is different. Some whiskies tend to peak when young. We can therefore find more flexibility in terms of volume and various types of whisky flavors by utilizing NAS whiskies.”

Freeing the Masters

What has been striking when talking to Japanese blenders is how NAS is seen as an opportunity for creativity. Speaking on the topic in France recently, Nikka’s chief blender Tadashi Sakuma said, “If I make a Yoichi with an age statement, I want to make that whisky the personification of the characters you get from different styles and casks at that specific point in time. [All of the Japanese single malt distilleries make multiple styles of whisky. These are then aged in a wide variety of casks, and then blended in different ratios for each expression.] ‘This is Yoichi at 12.’

“An NAS allows me to express the nature of the distillery in a wider and more creative way,” he explained, “as it frees me from the restrictions of aging and allows me to utilize any of [the] whiskies we reserve. We have not launched a successful ‘premium’ NAS brand yet. Establishing such a brand would be an exciting opportunity.”

This view of NAS as an opportunity for whisky to stretch out in creative terms was shared by Fukuyo. “The development of NAS whisky gave me a chance to reconsider the value and essence of maturation,” he said. “I noticed that some whiskies have excellent aroma and flavor, which comes from long maturation, and others have a touch of unique character when they are relatively young. Meanwhile, I realized—again!—that some whiskies deteriorated with excessive maturation.” He also widened the types of whiskies he used to create new expressions of the two malt distilleries, such as the use of wine casks for Yamazaki for example, and lightly-peated Hakushu.

“The NAS range [Yamazaki, Hakushu, Hibiki Japanese Harmony, Yamazaki Sherry Cask, and Hakushu Heavily Peated] have been selling well,” he continued. “That indicates that NAS whiskies would be acceptable in the market as long as they have distinctive value which is dependent of aging. We’re seeing that our customers are appreciating the unique taste profiles of our range, and that they do not expect every product to be labeled with an age.”

This is not a new development for Kirin, which has had NAS at its core range since the distillery was founded in 1972. “With NAS offerings, we can have more freedom in our blend,” said Tanaka. “We believe that each whisky has its own character and its maturation peak. There is always a peak for any food or drink. Once it goes over that peak, its quality goes down.” He showed me a graph tracking whisky maturation that slowly peaked and then subsided.

“The graph shows the maturation curve of whisky in general,” he said, “but each whisky has its own peak, and its timing and duration would be different [from] each other and depend upon the production method, mashbill, distillation, barrel aging, and so forth. We are making our product by blending various whiskies at their peaks to bring out the best of those appealing, fully mature characters of each whisky.”

Each of the firms has also taken a proactive route in explaining their own approaches to the theory and practice of NAS: Tanaka’s graph, Nikka’s showing of the flavor-led blending blocks utilized by Nikka: sherry and sweet; peaty and salty; woody and vanillic; fruity and rich; some of which are available at the two distilleries, or to sample (and blend with) at the firm’s Blender’s Bar in Tokyo. Like his colleagues, Fukuyo has also been on the road giving talks that deconstruct the new NAS variants. This openness on the part of all three firms to the exciting creative potential opened up by NAS has undoubtedly helped in the more positive reception toward Japanese NAS. Each of the blenders sees it not as an inevitable consequence of a stock shortage, but as a way in which to expand whisky’s potential. 

Ichiro Akuto, who founded Chichibu in 2008, must carefully allocate his limited stocks.

Growth and Maturity

Each of the firms is also increasing the volumes it is producing. “We have gradually increased production for the past decade,” said Sakuma, “and are making an investment in our production facilities now. We don’t need to add any more stills because our sales in Japan 30 years ago were three times as large as today.”

There has also been considerable investment in Suntory. Both Yamazaki and Hakushu have increased capacity, with more stills being installed, while there is new warehousing at the Ohmi facility. “We’ve also improved the quality and diversity of the whiskies we make,” said Fukuyo, “such as the new continuous still in Hakushu, which was introduced in 2014 in order to have new types of [grain] whisky.”

Increased capacity is heartening news, but the fact remains that Japan still has relatively few new distilleries, especially considering its growing reputation globally and the domestic boom. One exception is Chichibu, founded by Ichiro Akuto in 2008. Here—inevitably, given its youth—tightness of stock is also an issue.

“It’s necessary for Japan to have more distilleries, as it will activate the market and provide whisky drinkers with a wider choice.”—Ichiro Akuto, founder, Chichibu

He built the distillery with painful first-hand experience of how a downturn in a market can have catastrophic results. His family’s distillery in Hanyu was closed, and then demolished at the turn of the century as a direct result of the domestic collapse.

With only seven years of stock available, Akuto is faced with the dilemma of having to meet demand internationally for his whisky through limited annual releases, while still retaining sufficient stock for long-term aging. It is a different, but equally tricky balancing act to that faced by the majors.

“In 2004 when I decided to found a new distillery, the whisky market in Japan was still shrinking,” he recalled. “It’s no wonder that people did not understand why I was going to start a whisky business!”

What he did was start to bottle the Hanyu stock he had managed to buy back and hand sell it to the influential Japanese bar trade and on export markets. In the end he got the backing to start Chichibu.

Chichibu remains an exception. Japan has not seen the equivalent of the global craft distilling movement. There are plans for a new distillery in Hokkaido, one in Shizuoka, and talks of more, but the fact remains that for the foreseeable future, the responsibility for volume, quality, and image in the international markets will be shouldered by Suntory and Nikka.

“2016 will see a few new distilleries opening,” Akuto confirmed. “They are all small in scale and I am sure we will see more in the future. This will help whisky lovers have more choices, and will definitely contribute to activating the industry. It’s necessary for Japan to have more distilleries, as it will activate the market and provide whisky drinkers with a wider choice.”

Selections are changing at Tokyo’s liquor shops as new bottlings appear (and prices rise). (Photo by AP Images/Shuji Kajiyama)

The New Rising Sun

On the positive side, ’Brand Japan’ remains strong. The country will host the Rugby World Cup in 2019, the Olympics the year after, and tourist numbers are growing 30 percent year on year. What though of whisky? If we take Tanaka’s estimate of stocks being in balance by 2020, will Japan still be the coolest kid on the block?

By then, the Irish category will be more firmly established, bourbon will have grown more significantly in export, while the Canadian industry might just have rediscovered its self-confidence. Then there’s all the other smaller-scale distilleries in Europe, North America, and Australia—and Scotch whisky. Potentially it will be a very different whisky world.

“We see the current situation as a great opportunity for us,” said Itoga. “Consumers want to try and understand Japanese whisky more than ever. We have not yet established Japanese whisky as a category… Therefore we will focus on creating and communicating our distinctiveness.

“We will provide the best quality whiskies we can, but quality always comes first and that is what will keep this momentum going in the long run, even if the allocation might have to be continued for a while.”

That the future will be based around the quality of product was the consensus. “It is very unfortunate that we cannot respond in full to the demand due to the low level of stock,” said Akuto. “However, whisky needs maturation. The launch of products which do not reach the expected quality levels will lead to the loss of market share. History has shown us that. We should rather focus our efforts on quality maintenance and improvement than fear we might be losing opportunities.”

“We do not necessarily think we are missing an opportunity,” Tanaka concluded, “but we need to make sure we continue to be humble and deliver the best products, otherwise this interest in Japanese whisky will end up as hype. At Kirin we have not marketed our product overseas yet, but we see the opportunities and are planning to enter into some export markets such as the U.S.

“As Japanese whisky has yet to be fully defined, there are no boundaries and rules that limit our creativity. We consider the growing market as being like a ‘blue ocean,’ because we believe we can cultivate new frontiers in whisky and make the overall market bigger.”

Japanese whisky’s early days were spent trying to define how it was ‘Japanese,’ which meant that innovation and creativity are part of its DNA. The underlying characteristics that set it apart from other whisky styles have long been established, and quality has always been an important element within this.

What we are seeing now is a new, forensic examination of these principles. The domestic market was built on cheap blends. No more. The 21st century consumer demands quality. The question now is how to deliver that.

Whether you call this a stock shortage or excessive demand, the fact remains that distillers have been forced to examine once more what Japanese whisky means and to extrapolate from that what it now can become. Their responses to these challenging conditions have already opened up new avenues to explore. A new chapter could be starting.

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