Japan’s chocolate market: Sweet spot for investors

Between 2016 and 2020, the Japanese chocolate market has been growing 4-5% per annum, faster than the entire confectionery market which has been growing around 1%. A rise in health consciousness and demand from senior citizens in Japan has driven this rise, as marketing chocolate based on its potential health qualities has proved effective. With the market set to continue on its current growth path, chocolate companies in Japan are providing promising opportunities for both domestic and international investors.

The two largest chocolate companies in Japan are Meiji Holdings and Glico. They have consistently grown their share of the market and now hold dominating positions with Meiji increasing its market share from 26% to 27% and Glico from 8% to 12% in the past seven years. The introduction of new products with supposed health benefits has spurred this expansion. Meiji launched a product called “chocolate effect” that contains the compound polyphenol which is known for lowering blood pressure, while Glico created a product called “gaba” which contains GABA, gamma-amino butyric acid, marketed to reduce stress.

The popularity of these products has increased their customer base, attracting more consumers to indulge in chocolate goods, and ultimately fueling an expansion of the market. A similar phenomenon which led to higher sales of bio yoghurt has been previously seen in Japan. The case of Meiji R-1 yoghurt which appeals to consumers due to its immunity improvement properties is a typical example of companies recognising that promoting a product which plays on the demand for “health consciousness” is a fruitful method for success in the competitive Japanese market. Now, the chocolate industry is catching up and capitalising on such trend also.

Despite their domestic reputation, Meiji and Glico do not enjoy the same recognition abroad. For Japanese food companies to succeed in overseas markets, they must have strong brand recognition, be unique and seen as the “only one” of a kind, represent “Japanese quality”, and have a distribution network rooted in local markets. A good example of this is food manufacturer Kikkoman, known for its soy sauce. It expanded overseas in the 1950s and developed a distribution network. It was the first company to exploit the stronger demand for Japanese food from foreign consumers as part of a health conscious diet, succeeding in fitting the criteria of being the “only one”.

In the case of Meiji and Glico, their lack of exposure overseas is also due their scale and revenues being much smaller than global competitors like PepsiCo and Mondelez. In terms of distribution networks, Glico has restructured its Asian subsidiaries and made acquisitions in the US, while Meiji has globalised its procurement line and product development, and re-emphasised its distribution efforts using e-commerce. In China, where e-commerce constitutes 20% of retail sales, Glico has agreed to offer some of its products exclusively through Tmall, a Chinese language website for business to consumer online retail, intending to raise its presence in the e-commerce space.

For these two major companies to expand overseas, both must look to strengthen their branding, not just for the chocolate market but for all their high quality health promoting goods, as they have been doing in Japan. In recent years, some Western governments have introduced fizzy drink and crisps taxes in an attempt to promote a healthier lifestyle; this could be a tailwind for Meiji and Glico. In emerging economies, we are seeing a rise in cases of diabetes, obesity and other lifestyle related diseases. What’s more, food products are increasingly promoting the removal of unhealthy contents. “No Trans Fat”, “Non-GMO”, “Gluten Free” are all commonly seen labels on food items informing consumers that products exclude harmful contents. Both Meiji and Glico could use this trend to further drive their expansion by pushing their products that contain healthy ingredients and actively advertising them on labels. The current environment presents strong growth prospects for these two companies and further opportunities for investors in potentially new markets.

With a focus on a healthy lifestyle, there are markets beyond chocolate that are worth noting as they also provide good opportunities for investors in Japan. Bio yoghurt drinks that improve the immune system and reduce visceral fat have all seen rapid growth in sales, such as Meiji’s “R-1” mentioned earlier, “Gasseri bacteria SBT2055 yoghurt” by Megmilk Snow Brand, and “Synbiotics Yakult W” by Yakult Honsha. Among Japanese manufacturers, “In Jelly” by Morinaga, “Calorie Mate” and “Soyjoy” by Otsuka Pharmaceutical have all seen a jump in sales. Much of the demand is from the health conscious younger generations which prefer simple and easily accessible goods. These products are likely to hit the global market soon.

One of the strongest advantages of Japanese companies is the high quality of the products that have been honed through years of communication with the demanding, yet sophisticated, Japanese consumer. Undoubtedly, the spike in demand for “health conscious” goods presents promising opportunities for investors as Japanese food companies are set to grow both domestically and globally.

 

Munehisa Matsumoto is a senior analyst at Sumi Trust

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