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What's Driving the Japanese Whiskey Boom?

By John McKenna – Jan 24, 2014 at 9:29AM

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With a resurgence in global whiskey sales, Japanese whiskey sales have soared, with Suntory brands like Hibiki and Yamakazi winning critical acclaim among some of the toughest to please critics. But is the current resurgence a sign of a healthy industry in the future, or just a fad?

Call it the benefit of a wealthier world, call it a resurgence of 1920s luxury, but however you look at it, whiskey has had a huge comeback in the past decade. Once the drink of choice for your uncle on Christmas Day, it has become the symbol of the developing world's young businessmen and stylish elite. While there will still be a demand for the classic Scotches and Irish whiskies, whiskey experts and connoisseurs are surprised to learn that the hottest trend in whiskey comes not from the shores of Ireland or the rivers of Kentucky, but from the cold mountains of ... Japan?

No, you read that right. Japanese malt whiskey has recently taken the world by storm. Leading the charge is Suntory, owners of the premium whiskey brands Yamakazi and "Distiller of the Year" winner Hibiki, and as of Jan. 14, the owners of Jim Beam (BEAM.DL). Sales for Suntory products internationally were 21% of their sales total, part of the sixth straight year of record sales. This month, in response to the newfound admiration for Japanese whiskey, Suntory has increased its output for Yamakazi for the first time in 45 years, and is looking to expand its Hibiki exports by 3.6 million bottles by 2016, as well as a $19.35 billion revenue target. Moreover, with the $13.6 billion purchase of Jim Beam , Suntory has become the third-largest premium spirits brand in the world in terms of assets and has created a foothold in the thirsty U.S. marketplace.

Why Japanese whiskey?

I'll admit, I was surprised upon learning about Japanese whiskey, because whiskey is one of the last things I'd associate with Japan, the birthplace of sushi, sake, and teriyaki. Yet brands such as Yamakazi and Habiki have received stellar reviews by whiskey conisseurs worldwide. According to company sources, these brands use Scotch-style techniques in their crafting, which make them familiar to whiskey enthusiasts . Yet, unlike their ancestors in Scotland, there are fewer regulations regarding their make in terms of ingredients and aging methods, as well as a shorter lineage than the centuries-old brands from the Highlands. The result: Japanese whiskey is about "increasing flavors" versus adhering to tradition, which to local makers means more room to be creative. And it's been paying off.

Japanese whiskey, despite its new and popular entry, isn't displacing any competitors. Since there are multiple styles of whiskey, using different ingredients like rye and corn mash, multiple styles have created a diverse client base across most regions, whether it be the bourbon drinkers of Wall Street, the peat-aged fans of Parnell Street in Dublin, or the Scotch lovers of Canary Wharf. In fact, when the deal between Suntory and Jim Beam was announced, publicly traded spirits stocks rose by about 2% across the board (with Jim Beam improving to over $82 per share). This signals that investors see industrial growth potential, and there is enough of a market to keep investors and drinkers' thirsts quenched.

Will the craze last?

The tough part about being in the whiskey business is that it is a product that derives a lot of its value from the barrel-aging process, particularly scotch-like brands. In the 1990s, a drop-off in demand led to many small-time producers in Japan halting production of their young malts. This has left supply short of demand, a gap that has makers Suntory and local rival Nikka opting for "no-age" brands of whiskey. Yet according to whiskey expert Frank Coleman, we are in a "global whiskey renaissance" where new premium distillers are popping up, so it is likely that the craze is here to stay.

Yet whiskey makers like Suntory and Jim Beam deal in a business that depends on predicting product demand a decade or more in the future, where consumer attitudes can change in a heartbeat. The inclusion of no-age whiskies will help keep up sales in the short term. As long as Americans have a hankering for good old hometown Kentucky bourbon, Suntory may have enough diversity to keep it in the game even if there is a tail off 20 years down the line.

John McKenna has no position in any stocks mentioned. The Motley Fool recommends Beam. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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