Below is the transcript of a CNBC exclusive interview with Suntory Holdings President and CEO, Takeshi Niinami. The interview will play out in CNBC's latest episode of Managing Asia on 20 December 2019, 6.30PM SG/HK (in APAC) and 11.00PM BST time (in EMEA). If you choose to use anything, please attribute to CNBC and Christine Tan.
Christine Tan: Niinami-san, thank you so much for talking to me. You appointed president and CEO in October 2014. How does it feel to be the first chief executive outside the founding family to head the 120-year-old drinks maker?
Takeshi Niinami: I was so much attracted to Gary Saji, now Chairman of Suntory Holdings, because he has big dreams and huge aspirations to be global, leveraging the strength of Suntory which come from a 120-year legacy. So, I was so impressed by Gary Saji and that made me decide to join Suntory Holdings. So, I didnt feel any obstacle for me to join Suntory Holdings because of family business, because I wanted to work together with Gary Saji to push this company to be a global company, based on Japanese culture, based on Suntory culture. As a matter of fact, Suntory culture definitely comes from Japanese culture which thinks more of nature. I like that kind of company to be global. I wanted to make it happen, so I think my aspiration and Mr Saji's aspiration got together and that made me decide to join.
Christine: What was the learning ropes like? What was the learning curve for you?
Niinami: Oh, good question. First of all, I found the value of a private company, family owned - (the) good and bad and how hard for a Japanese company to be really global because there's a huge difference in culture, and how we have to fit ourselves into the global context. A lot of challenges which we didn't know. First of all, we like not to have conflict or even discussion, negotiations, arguments whatsoever. It has to be very vague, ambiguity, we love it! (smile) Not to hurt anybody. Whereas, western culture maybe, maybe even Asian culture, to be straightforward, not to have conflict in the future. (smile). I would say western standard and Japanese standard are very different. But how to compromise or to take the good parts? Sometimes, our ways are very good -- not to be straightforward, but overall, I think clarity is better for us to communicate with people.
Christine: Let's talk more about that, because one of the things you had to do as CEO Suntory was to integrate the US$16 billion acquisition of U.S. spirits maker Beam in 2014. You've compared the integration process to the film "Lost in Translation". Tell me about some of the frustrations you felt trying to align both companies. Where was it coming from?
Niinami: First of all, Beam thought that they would lead everything because they are global, whereas Suntory was trying to be global. So, Beam thought they had the mandate to manage the entire spirits business, whereas we thought that we are the parent, we want to manage the entire business, not the Beam management. There was the conflict between how to manage the entire fleet of Suntory's spirits business. We wanted Beam management was to cruise the ship, and the Captain himself was Matt Shattock, as a matter of fact, he did a great job. But the Captain should have the "where to go", "how to go", should be consulted, and should be decided by the parent. So, this governance structure was vague when the integration began. So, I altered it to the (gesture) parent decides governance issues, then the management - Matt Shattock - you do it. Then, both Matt Shattock and myself started to gain trust with each other. But there was a huge cultural gap, because Suntory was not fully ready to be global. Because we think more of the culture of ambiguity, whereas Beam culture is clarity. So, ambiguity and clarity, does not make productivity.
Christine: How did you merge the two?
Niinami: First of all, I tried to convince people in Japan to be clear cut, to communicate with Beam people, whereas I told the Beam management that this is Japanese culture. If they say "yes" like this (Niinami nods), it doesn't mean yes. So, you have to make it clear whether that they agreed or not. So, both parties tried to understand even simple things. Clarity versus ambiguity: how to put them together to understand each other.
Christine: Was there a lot of unhappiness involved?
Niinami: That's right. For example, U.S. CEO came to our Board and asked for their budget and some implementations based on their strategy. He thought he got that fully agreed. But it wasn't after three months, he found. But he told everyone - his peers and his management team - that I've got it! But three months later, it was not. So, he was so disappointed. I'm sorry for that. But that series of misunderstanding happened. And then, I joined the integration program and I told everybody from both parties, there must be big differences between the two companies in terms of culture. Legacies are different, histories are different, so let's work together. First of all, what is the value? The value comes from Suntory because you're the parent - the value comes from a principle that started from founder Shinjiro Torii -- "Yatte Minahare" which is "Go for it and let's make it happen", but don't copy any other competitor's products. We got to be innovative. All the thinking about are consumers, the clients and society, and give back to society. But because Beam was listed - they only thought about a quarterly based profits and sales - we care about that, but we have a long-term vision based on the principle. So, I tried to instill the founder's spirit as a corporate principle. So, I created the Suntory University for both parties to gather, to talk, based on the founding spirits. And that overcame lot of difficulties because that's a mutual, shared value. And we learned how to manage cash. Often the case, a Japanese company is not good at managing cash. Instead, we just seek only, you know, market share and top line. We increased the gross margin rate tremendously by learning from Beam Suntory.
Christine: As a parent company, do you think Beam has now accepted the fact that the Japanese Suntory is now in charge?
Niinami: I'm sure they fully understood the value of a Japanese company Suntory and a Japanese context, because that's a huge differentiation for them. U.S. team Pernot, U.S. team Diageo - what they don't have is Japanese flair, Japanese culture.
Christine: Well, it has been five years, are you done with the integration process? You say that both companies are now completely aligned in terms of vision and corporate objectives?
Niinami: Yes, I'm sure. We accomplished the first phase - to be one. So, we are one team.
Christine: As part of the integration process, you decided to combine the distillery skills of both companies, but you know, these two companies have their own unique way of making whiskies. How do you get two proud cultures with a strong heritage to put aside their differences and work together when it comes to distillery?
Niinami: I assume that the first -- both parties in manufacturing processes. My assumption was they only want to produce all this good quality, good quality for our consumer. That's their mission. And I thought, sure, even though we had a very different history. They had more than two hundred years. Ours is one hundred years. And they have, as you said, they have a huge pride. But they wanted to learn from each other. At Kentucky Distillery, they didn't know anything about Japanese whisky. We at Yamazaki, Hakushu - they didn't know anything about the Kentucky bourbon, which means bourbon. So, both parties were so curious about something they didn't know. And they rendezvoused to study each other with a huge respect to each other. That was a success factor for us to see products which were launched by the collaboration of the two parties.
Christine So, you would say that was a huge success?
Niinami: That's right. So not only whisky - Roku which is craft Gin, and even the Jim Beam. We worked it together. How we can change the quality for the better. We discussed this so seriously. But the underlying fact is we respect each other.
Christine: So, there was no suspicion?
Niinami: No, not at all.
Christine: The Beam acquisition gave Suntory a bigger presence outside of Japan, where growth has been sluggish. But it also led the company with a huge pile of debt. You've had to sell off and offload some of your businesses. You've had to sell off Suntory's hamburger and sandwich franchise (Right) as well as Beam's sherry and brandy business. What else are you doing to improve your balance sheet?
Niinami: Well, up until now, we sold almost what we thought should be offloaded and we did. We increase the increase to the operation capability. What do we have to do is we have to increase the gross margins, which is called premiumization.
Christine: And how do you do that, by cutting costs?
Niinami: No. We are branding more and more those big brands which were sleeping like Bakers, Basil Hayden, Knob Creek, they have wonderful brands but are underutilized. How we can brand furthermore to get stronger recognition from consumers is premiumization.
Christine: To premiumize your products would suddenly be a good way to improve your operating margins which have been low, much lower compared to your two bigger rivals, Pernot Ricard and Diageo. What sort of progress do you hope to make in this area?
Niinami: I think at least five to six points. Definitely, you can do that. We will invest to the brand investment that will slip down gross margin for the time being as an investment. So, within five years' time, the dollar gross margin will pick up at least 5 percentage.
Christine: So, you can close the gap with your bigger rival?
Niinami: Yes, yes.
Christine: The Beam deal gave Suntory also access to the very profitable U.S. spirits market. How much more can you extract growth from the U.S. market? How do you want to grow in the US?
Niinami: Let's say a decade or so, I assume 5 to 7 percent growth still in the U.S. because the U.S. market accepts innovation. So, we have to be more innovative to offer something new to the market. The U.S. market is a very unique comparing with Japan and the Europe. As long as it's an innovative story or a story like 100 and 200 years or something new, all the consumers would love it. Whereas I know in Asia and Europe, aged statement, like 12 years, 20 years, 30 years. In the US, we don't state the age expressions so much, but something new like East meets West product like Legent, that has innovation.
Christine: That goes very well in the US market?
Niinami: Right. That's right. So that's why we sell only in the U.S. So, the U.S. market is very interesting for us to push us towards more innovation, more innovation, so we can grow in the market. The growth in the US, at least 5 to 7.
Christine: What will your expansion plans look like in the next few years? What new markets are you looking to get into?
Takeshi Niinami: India and China. In China, Baijiu is a still big giant. Only 2 percent of the total sales in China comes from other than Baijiu and from other countries.
Christine: You think you can take on Baijiu?
Niinami: No, I don't think so. Baijiu is so respected and well-liked by Chinese consumers. However, there is a clue - that people are trying to sip different alcohol products and cognac is right there and the brown spirits whisky is burgeoning. I know it will take us so long a time to enjoy the profits, but there is a big trend that Chinese consumers are trying to taste something different.
Christine: So, you eye-ing the Chinese market, but at the same time, you recently made comments that you're going to put your investment on hold in China because of the U.S. China trade war. Has there been a change in strategy on your part?
Niinami: At this moment, there is no plan yet. But I would say five years from now, we will think about producing products like nutritional products and probably more soft drink or less alcohol content product in China. So, in my mind, there is a plan to produce products in China. But at this moment our presence is very small.
Christine: So, you're going after the non-alcoholic segment in China?
Niinami: Yes, no alcohol and less alcohol content. We have some small business already in China, but more and more, I sense that even younger generations in those countries are shifting towards health consciousness. So, that is of a tailwind to win again.
Christine: It's a big opportunity for you?
Niinami: That's right.
Christine: Over the last few years, you've expanded and acquired an array of products to include a larger variety of nonalcoholic drinks like Orangina, Ribena and Lucozade. What else would you like to add to that portfolio? Anything else out that you want to acquire?
Niinami: As for acquisitions, I don't think anything is on the table. The reason is that we have already brands to develop and we have still markets to develop, such as India, other countries like Vietnam, Thailand, Thailand. Indonesia - we are already there. So, we can expand geographically. What about India? What about the Bangladesh? Those unique products, that's what do we have to do? And if there is a chance, opportunity to acquire some bottlers we might think about. But mostly, how we can leverage incumbent and the current product lines.
Christine: Niinami-san, these days, there is a scarcity of good Japanese whisky in the market. Is there a whisky crisis happening in Japan right now?
Niinami: Yes, whisky crisis is happening in the world too, as for Suntory whisky. But the fact is we can't display enough. So, my apologies. However, we are now producing so that we can supply enough.
Christine: But what is behind this whisky shortage?
Niinami: The reason is because Soju which is local spirits which emerged all of a sudden when we were doing fine to sell Suntory whisky. That happened almost 15 years ago. Because of the huge pull down of whisky sales, we reduced production for the time being. For example, we sold casks of whisky to other countries because we needed the cash.
Christine: So, how long do you think it'll take to resolve these supply issues?
Niinamii: Good question.
Christine: Because whisky takes time to age.
Niinami: So, give us five or six years, but even five, six years from now, I can't guarantee that we can supply enough to the market. However, we are always cautious because all this consumer trend changes. So, we have to be very careful to all this to observe what's happening.
Christine: You recently launched a new bourbon Legent which is really your baby because that's right out of your efforts to integrate the beam acquisition and it's actually a symbol of combining the eastern western techniques of distilling. How are sales for the Legent coming along?
Niinami: That's right. Our sales are fantastic. The sales are very good in the U.S. And again, we have to produce more because of the very, very limited supply. We have to increase the capacity to be able to supply enough.
Christine: So, what's next after Legent? What new spirits can come out of the Beam Suntory relationship? Is it a secret?
Niinami: Well, stay tuned. (Laughs)
Christine: But you are working on something?
Niinami: That's right. That's right.
Christine: Suntory's also Japan's third largest beer brewer. Your efforts to merge with Kirin in 2010 were unsuccessful. With domestic beer sales slowing down. Are you making any headway growing this segment overseas?
Niinami: Yeah, because other beer is premium line and that needs a complexity in producing to order the best quality. We need good quality water and really good people to brew a premium beer. So, considering those factors, it's a huge challenge to go overseas.
Christine: So, if you can't take your beer overseas, does it still make sense to stay in the brewery business?
Niinami: There is still a growing need for a premium beer in this country. Even. Plus, we have innovation to reduce the sugar content out of beer. And we have the technology of offering the non-alcoholic beer. These skill sets can be transported to China or Southeast Asia. So, fighting in Japan and winning the game means a lot for us, because as you said, this is a really headwind market. But how we can win creates how we can win the games in other countries. I'm not saying that we will be producing beer in other countries, however, because of a beer business which is tough, gives us a lot of learnings from doing business in this country.
Christine: Any plans to revisit the merger with Kirin?
Niinami: No, not at all. Not at all. I mean, we really respect Kirin. We are learning from them. And still we have some contacts here on the individual basis probably because we were very close to. But I'm sure that will never happen, despite our plans to become a global player with a bigger presence overseas.
Christine: When I look at your sales, most of it, about 60 percent still comes from your domestic market. Here in Japan, where do you see Suntory in the next 3, 5, 10 years?
Niinami: Yes, we have a long-term vision and plan. By 2030, our sales target is US$40 billion dollars and 60 percent of sales will come from overseas. Now, 60 percent comes from domestic (market) and we will grow in Japan, too. But 60 percent will come from overseas.
Christine: You have 11 years to achieve that. Will you be around to make that?
Niinami: I will be. I will be.
Christine: The founder's grandson, Nobutada Saji now sits as chairman. As your mentor, what's the most valuable piece of advice he's given you?
Niinami: I mean Suntory and Beam, there was a huge, huge issue which was governance - how to govern. And I was in a hurry to restructure the governance. I was so in a hurry, and I was called in by Gary Saji, Nobutada Sagi, "Tak, don't be in a hurry so much. Take it easy." I visited Chicago in the US so often, I didn't stay in the office, "Tak, you're not only working on the integration of Beam, you're CEO of Suntory Holdings (laughs), you have to take care of other business here." I was just like this (gesture). I was in the silo, always. Gary Saji talked to me, "Tak, take a look at this. This says, "Don't be in a hurry, take it easy." but read it like that, "Take it easy, but in a hurry" (laughs) like that, yes. And I asked, which part? (laughs) because I know he is always in a hurry to make things happen.
Christine: Well, he was the one that made the $16 billion integration (That's right) of Beam anyway.
Niinami: That's right. I'm sure he was in a hurry (laughs) -- there was a huge amount of cash and all debt. But, you know, I was in a hurry and he saw me so much in a hurry that from his experience, that would cause a lot of problems.
Christine: So, he made you focus?
Niinami: Right. So that's the strong direction always, he gives me.
Christine: So, have you fixed your governance issue?
Niinami: Yes, that's right. I did. So, I tried not to be in a hurry and I communicated in depth with Matt Shattock and we tried to gain trust. And I thought - instead of pushing him to accept the model I thought of was for governance, I tried to communicate, to understand.
Christine: You're 60 years old, you graduated from Harvard, you've been described as internationally minded, one of the most internationally minded executives here in Japan with close ties to Prime Minister Shinzo Abe. How would you describe your leadership and your management style? What do you like as a boss?
Niinami: I don't like a status quo. Because. Things are changing. So, my mission is always to respond to future changes. So, I don't want... I don't want to stay with how things have been operated. So, I always like to find the different ways to approach things. That's why Lawson has been very successful competing with its arch rival 7-11. So, my mission is to look into the future - how to position ourselves to be a different player.
Christine: And finally, you spent the last five years as CEO of Suntory Holdings. As the first chief executive outside the founding family, what impact do you want to make as you continue to grow the company? What do you want to achieve?
Niinami: To create more global leaders. Suntory was very much domestic minded. Though we went through a series of acquisitions, but still we are a Japanese company. It's good, but we need more leaders - understanding the values of diversity. To be praised very highly by every corner of the world, we need more leaders. And I want to leave the legacy that Suntory is the right company to create good global leadership.
Christine: And Chairman Saji is on board with your idea?
Niinami: Yes, we are so much aligned for that. I'm so confident about that.
Christine: Is he in a hurry?
Niinami: Yes. In a hurry. (Laughs)
Christine: Niinami-san, thank you so much for talking to me.
Niinami: Thank you very much.
END
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