Snow Brand Milk Products - Company History

A dairy farmers' co-operative against the beating down of milk prices

The origins of Snow Brand Milk Products lie in the limited-liability Hokkaido Dairy Co-operative Association (有限責任北海道製酪販売組合), established in Sapporo in May 1925[1][2]. After the Great Kanto Earthquake, condensed-milk companies from Honshu moved into Hokkaido, and when the depression broke the market for dairy products those companies restricted their intake of raw milk, leaving farmers with nowhere to send their surplus[3]. Utsunomiya Sentaro (宇都宮仙太郎), who had studied dairying in the United States, Kurosawa Torizo (黒澤酉蔵), who led the dairy movement under him, Sato Zenshichi (佐藤善七) and a dozen or so others gathered 629 dairy farmers from Sapporo and more than ten other towns and villages, and began making butter with subscribed capital of ¥5,450[4]. A single share was ¥20, yet even the first instalment was a heavy burden for a farming household[5]. The cost of building the factory was met by Kurosawa and Sato Zenshichi borrowing from a bank in their own names[6]. Manufacturing at the temporary plant — set up in the yard of a farmhouse at Nopporo — fell to Sato Mitsugu (佐藤貢), Sato Zenshichi's eldest son, who had studied at Ohio State University[7]; he did everything from installing the machinery to production and cleaning single-handed, turning the hand-cranked butter churn four or five times a day[8].

Two months after the co-operative was formed, butter production began at the temporary Nopporo plant on 25 July 1925[9][10]. In March 1926 the large and small dairy co-operatives scattered across Hokkaido were bound together as the Hokkaido Dairy Co-operative Federation (北海道製酪販売組合連合会), known as Rakuren[11], and in December that year the trade mark was fixed as Snow Brand (雪印)[12], unifying manufacture and sales. A survey by Kurosawa Torizo, the managing director, who travelled the country selling the product himself, had found that Hokkaido butter was being repackaged under other names such as Oshima Butter, and that poor packaging and inadequate cold storage were spoiling its quality[13]. The company therefore installed the latest American equipment at its central plant in Sapporo and began modern butter manufacture[14]; around 1930 it moved to refrigerated transport, loading ice into railway freight wagons[15], and switched from raw to refined salt[16]. In 1929 the Hokkaido government introduced a butter inspection ordinance that granted a recommendation mark to superior products[17], backing a way of selling in which quality decided the choice.

Refusing to join the price war, and driving out imported butter

The lifting of the gold embargo in 1930 and the great depression of the following year broke the butter market, and Rakuren alone was left holding 800,000 pounds of unsold stock[18]. The market price fell from 95 sen a pound to 40 sen, less than half[19], and rival firms restricted their milk intake while dumping stock[20]. Kurosawa Torizo resolved not to follow the others down in price[21], bore the interest cost of carrying the unsold stock and waited, moving the market with short sales — quoting lower prices while refusing to deliver against them[22]. Sato Mitsugu and Seo Shunzo (瀬尾俊三) crossed to Shanghai, won a United States Navy tender[23], and cleared most of the 70,000 pounds through a special offer that gave a pound free with every two bought[24]. Having waited for their rivals' stocks to run out before selling, they saw the butter price return to its proper level in 1932, and the milk price recovered with it[25].

Japan was then importing 800,000 pounds of butter a year[26], yet the wholesalers would not handle the Hokkaido product. Kurosawa Torizo and his colleagues called on Meidi-ya repeatedly without moving them; they then approached the manager of the Kobe branch[27] and, to strip away preconceptions, packed the butter in American cartons for a tasting — the verdict reversed completely, and the way opened to sell in Kobe and Osaka[28]. Meidi-ya in Tokyo took Snow Brand butter across its whole range, other wholesalers followed, and imported butter disappeared from the Japanese food market[29]. By 1932 Snow Brand accounted for 75 per cent of domestic butter output[30]. In 1935, riding the national policy of earning foreign currency, the company shipped two tonnes of samples to London, signed an export contract for one million pounds with Lonsdale[31], and was placed fourth out of twenty-two countries in tests by the British national testing laboratory[32].

Wartime consolidation and the occupation's deconcentration designation

By 1940 a move to unify Hokkaido's dairy industry had surfaced, with Machimura Keiki (町村敬貴) acting as intermediary in talks with the executives of each firm[33]. In August that year, at the Sagano restaurant in Shiba, Tokyo, with Hokkaido governor Totsuka Kyuichiro (戸塚久一郎) as witness[34], the heads of Rakuren, Morinaga Condensed Milk, Meiji Seika and Kyokuto Condensed Milk met and agreed on a public-corporation scheme that would carry milk processing and land improvement together[35]. In March 1941 the five parties contributed assets in kind to establish Hokkaido Kono Kosha (北海道興農公社), a limited company with capital of ¥12 million, which took over the business[36]; in September it was reorganised as a joint-stock company[37]. Kurosawa Torizo, chairman of Rakuren, became president, and Sato Mitsugu managing director[38]. The Hokkaido government later put in ¥5 million, as did Norinchukin Bank and the Hokkaido Takushoku Bank[39], and dividends were capped at 6 per cent with the excess directed into production equipment[40]. From 1944 into the following year the company extended into pharmaceuticals and made the first penicillin produced in Japan[41].

In April 1941 the Hokkaido plants of Meiji and Morinaga were merged in[42], creating a structure that gathered almost all of the island's raw milk in one place. After the war, in 1946, the land-improvement division was made independent as Hokkaido Nozai Kogyo[43], and in January 1947 the company changed its name to Hokkaido Rakuno Kyodo Co., Ltd. (北海道酪農協同)[44], transferring the shares held by the Hokkaido government and by Meiji and Morinaga to dairy farmers[45]. In February 1948 it was designated under the Act for the Elimination of Excessive Concentration of Economic Power[46]. Kurosawa Torizo pressed for that designation to be lifted with 18,000 signatures, the formation of a delegates' body (五七会) and approaches to the General Headquarters of the Allied forces[47], refusing an offer of under-the-table money and holding to a straight course[48]. Sato Mitsugu spent two years stationed in Tokyo on the problem[49], and the original order to split the company three ways was eased to a two-way split after resistance at an all-Hokkaido dairy farmers' rally and at hearings[50].

The birth of Snow Brand Milk Products in the split, and the listing

In June 1950 Hokkaido Rakuno Kyodo was divided in two under the Act for the Elimination of Excessive Concentration of Economic Power[51], and Snow Brand Milk Products Co., Ltd. was established as the second company with capital of $1M (¥360m)[52]. The surviving company was renamed Hokkaido Butter Co., Ltd., with Mitsui Takemitsu (三井武光) as its president[53]. In the division the Snow Brand mark went to Snow Brand Milk Products, while Hokkaido Butter took the Clover mark that had been used in the Kansai region in the early Showa years[54]. Chairman Kurosawa Torizo and seven other directors were purged from public office[55], and Sato Mitsugu became president of Snow Brand Milk Products[56]. Because the agricultural association that was a shareholder could no longer manufacture or sell dairy products under the Trade Associations Act, its holding was dispersed among individual farmers[57] before the new company could be brought into existence[58].

Only two months after its founding, in August 1950, Snow Brand Milk Products listed its shares on the First Section of the Tokyo Stock Exchange and on the Sapporo Stock Exchange[59]. In December the same year it separated its meat-products and seed businesses as Snow Brand Food Industries Co., Ltd. and Snow Brand Seed Co., Ltd.[60], and made its leather and pharmaceutical divisions into separate companies as well[61]. Sato Mitsugu had taken the split as the moment to make Snow Brand Milk Products a specialist dairy-products company, and set each ancillary business up as its own joint-stock company[62]. In October 1952 Yuki Ice Co., Ltd. (雪アイス) was established, and in March 1957 the company bought the shares of Snow Brand Transport Co., Ltd.[63], binding production, transport and distribution together through subsidiaries.

Into Honshu, and the re-merger with Clover Dairy

Changed in both size and character by the split, Snow Brand Milk Products set out to regain its strength by moving into Honshu[64]. In May 1952 it built five new plants centred on Hanamaki in Iwate prefecture[65], and in 1953 raised a market-milk plant in Tokyo to start its liquid-milk business on the main island[66]. It went on to extend manufacture and sales into Tohoku, Kyushu, Kansai, Tokai and Shikoku[67], and in October 1954 raised its capital to $1.3M (¥480m)[68]. In 1951 it launched Vitamilk, a vitamin-enriched powdered milk, and in 1954 Snow Brand 6P Cheese[69]. Sales for the 1954 financial year reached $25M (¥9bn)[70], and besides the head office the company had a Tokyo branch office, five branches, four sub-offices, 58 factories and 314 processing and milk-collecting stations[71]. Its products at the time were butter, cheese, condensed milk, Vitamilk, skimmed milk powder, butter caramels, margarine, ice cream and market milk[72].

Hokkaido Butter, separated from it by the split, renamed itself Clover Dairy and competed in the same market[73]; but once the occupation ended and the policy environment that had forced the division changed, reunion became the question. In November 1958 Snow Brand Milk Products merged Clover Dairy[74], restoring the pre-split production base to a single whole. Capital, $4.2M (¥2bn) at the time of the merger, had grown to $20.8M (¥8bn) by 1968[75]. In April 1961 it merged Sapporo Rakuno Gyunyu, and in March 1966 listed its shares on the First Section of the Osaka Stock Exchange[76]. In June 1963 the food division's operations were transferred to Snow Brand Food Industries[77], narrowing the parent company's business to dairy products and market milk. Among products, Snow Brand Sliced Cheese and canned Snow Brand Camembert Cheese came in 1962[78], Snow Brand Coffee Milk in Tetra Pak in 1963, and Snow Brand Neo Margarine Soft in 1968[79].

The Yakumo plant poisoning and the top of the dairy industry

In March 1955, in the company's fifth year, skimmed milk powder made at Snow Brand's Yakumo plant caused a mass food poisoning at primary schools in Tokyo[80]. A machine breakdown and a power cut had left the raw milk standing for a long period before it was dried, allowing Staphylococcus aureus to multiply[81]. Of the 7,638 people who ate the school meals, 1,579 fell ill; the Tokyo metropolitan record puts the figure at 1,936[82]. President Sato Mitsugu issued a document to the whole company headed To all employees[83], calling for a fresh start on quality. The document came to be handed down as the origin of the company's quality control — yet a large-scale poisoning by the same Staphylococcus aureus happened once more, forty-five years later[84].

In the year to March 1968 Snow Brand Milk Products accounted for 69.9 per cent of national output of butter, 62.9 per cent of cheese, 37.3 per cent of powdered milk, 22.2 per cent of margarine and 19.4 per cent of market milk[85], and took in 25.3 per cent of the milk collected[86]. Sales for the same year were $293.3M (¥106bn), and the company stood first in the dairy industry on milk-collection spending, on sales and on capital alike[87]. The president was Seo Shunzo, there were 10,281 employees[88], and in the 1966 financial year the company was ranked 175th among the world's 200 largest corporations outside the United States[89]. It ran a divisional structure with eight regional offices, twelve branches, 56 principal factories and 106 milk-collecting plants across the country[90]. Sato Mitsugu had stepped up to chairman in 1963 and became a director and adviser in 1971[91].

A nationwide milk network and the thin margins beneath it

From the 1970s Snow Brand Milk Products moved the centre of its trade to market milk and daily-delivery products, establishing Zenkoku Nokyo Gyunyu Chokuhan (全国農協牛乳直販) in 1972 to build a milk distribution network through the agricultural co-operatives[92]. In the same year it put Nokyo Gyunyu, Japan's first unadjusted milk, on sale in the Tokyo metropolitan area[93]; the plain yoghurt Snow Brand Nature followed in 1979 and Snow Brand String Cheese — now Sakeru Cheese — in 1980[94]. Responding early to the growth of mass retailers underpinned the company's lead in the dairy industry, and the working arm of that response was the group's food wholesaler, Snow Brand Access. Its own distribution network had a reputation for meeting sudden orders, and Access accounted for more than half of consolidated sales of just under ¥1.3 trillion. In dairy products such as butter and cheese the company held 40 to 50 per cent of the market, and there were cases where the same quantity of butter sold twice as much even at a price several tens of yen higher.

Because milk cannot be varied in composition and is hard to differentiate product by product, it became a staple of supermarket loss-leader pricing and returned almost no profit. The manufacturing cost of a one-litre carton, raw milk and labour included, was reckoned at about ¥160, so at a market price of ¥150 each carton implied a loss of ¥10. Manufacturers therefore pushed processed milk and milk drinks carrying added value — low fat, added calcium — and in the late 1990s Snow Brand Milk Products built Mainichi Hone-Buto (毎日骨太), with its raised milk-solid content, into a flagship product with annual sales above $458.4M (¥60bn). For all the strength of its brand, its operating margin was barely different from its rivals', and gross profit per employee was below that of Meiji Milk Products and Morinaga Milk Industry. The measures that would have raised earning power — cutting sales bases and factories — did not go far enough in this period.

Diversifying into pharmaceuticals, and a change of generation before liberalisation

Building on the technology it had acquired in milk, Snow Brand Milk Products established a Biological Science Research Institute at Ishibashi in Tochigi prefecture in 1983, aiming to enter the pharmaceutical business[95]. When the managing director responsible for the institute died suddenly, Katayama Sumio (片山純男), then deputy head of the research division, took over as its director at short notice and led it from the front[96]. Most of the 130 researchers had been recruited from outside[97], pharmaceuticals were a field in which the company had no experience, and the direction of research and development remained a matter of trial and error[98]. Katayama recalled that holding the organisation together had been hard on him, but he made the case for the pharmaceutical business clearly, pulled the team together, and became the first head of the pharmaceutical division in 1985[99].

Katayama Sumio, who graduated from the Faculty of Agriculture at the University of Tokyo in 1951 and joined Snow Brand Milk Products the same year[100], became a director and deputy head of the research division in 1983, senior managing director in 1988 and vice-president in 1990, and took over as president in June 1993[101]. The Uruguay Round negotiations were bringing the liberalisation of dairy imports closer, and the business environment was hardening[102]. Katayama said that Hokkaido's dairy farmers had built competitiveness on a par with the European countries[103], and that having taken the steps it should, the company would now take on the further building of its structure with liberalisation in view[104]. Ishikawa Tetsuro (石川哲郎), president in 1997, said that about ten of the company's 41 factories would have to go, and that with domestic raw-milk production at 8.6 million tonnes against imports of 4 million tonnes, securing raw material was becoming the problem.

Products that did not lean on the Snow Brand name, and overseas tie-ups

In March 1989 Snow Brand Milk Products set up a joint venture, Snow Brand Dole, on an equal footing with Dole Packaged Foods, an affiliate of the largest fresh-produce company in the United States[105]. From April it sold four kinds of 100 per cent natural fruit juice in paper cartons under the Dole brand, achieving first-year sales of $47.1M (¥7bn), 38 per cent above target[106]. The Snow Brand name appeared on the packaging only in small type as manufacturer and distributor, and was not mentioned at all in the television advertising[107]. Sales for the 1990 financial year grew 41.5 per cent to $63.5M (¥9bn), and total sales under the Dole brand approached $89.8M (¥13bn)[108]. Snow Brand Milk Products then held 37.4 per cent of the butter market, 38.6 per cent of margarine and 36.4 per cent of cheese[109].

In January 1990 the company signed a licence agreement with Hershey of the United States and began producing and selling chocolate drinks and chocolate ice cream[110], and it also obtained the right to use the Twinings mark for paper-carton tea drinks[111]. Dole was the first product outside the Snow Brand name that the company had grown to the $69.1M (¥10bn) scale; every earlier introduction of a foreign brand had failed[112]. A deep-rooted supremacy of the Snow Brand brand ran through the company[113] — negotiations were interfered with, or deference to the Snow Brand name kept the company from going far enough[114]. In February 1991 it announced Fresh 70, a five-year medium-term management plan to widen sales from $3.7B (¥530bn) in the 1990 financial year to $7.4B (¥700bn) in 1995[115].

A mass poisoning of 13,420 people and the fall of the board

On 27 June 2000 the Osaka city public health centre received a report of food poisoning from low-fat milk made at Snow Brand Milk Products' Osaka plant[116]. Traced back, the cause lay in a power failure at the Taiki plant in Hokkaido in March that year, which stopped the cooling equipment for three hours[117]; the raw milk left standing at room temperature was made into skimmed milk powder, which was then used at the Osaka plant as the raw material for low-fat milk[118]. Those harmed by enterotoxin, the toxin produced by Staphylococcus aureus, numbered 13,420[119], making it one of the largest mass food poisonings of the post-war era — the second large-scale poisoning caused by the same bacterium as the Yakumo plant case forty-five years earlier[120]. It also emerged that when recovered low-fat milk was reused, part of the opening work had been done out of doors.

The response ran behind events: on 30 June the number affected rose from 145 to 3,572[121]. At a press conference on 1 July the plant manager revealed that the production line had not been properly cleaned, and president Ishikawa Tetsuro was lost for words[122]. Ishikawa broke off a press conference on the night of 4 July with the words I haven't slept[123], and the footage was broadcast again and again. He announced his intention to resign on 6 July, and on 28 July Nishi Kohei (西紘平), who had been due to take office in September, was brought forward[124]. Under Nishi the company decided to close eight plants nationwide including Osaka and to cut 1,000 jobs, 15 per cent of the workforce; the consolidated net loss for the 2000 financial year reached $440.9M (¥48bn).

In October 2000 the company agreed to examine a business tie-up with the Japanese arm of Nestlé, the world's largest food manufacturer, covering dairy products such as yoghurt and lactic-acid drinks. The core businesses — milk, butter and cheese — were kept outside the scope of the talks, and the company held to independent rebuilding. By 2001 sales had recovered from 80 per cent below the level immediately after the incident to 30 per cent below, and butter and cheese regained the leading share in the Kinki region. The recovery rested in part on heavy discounting, however, and in the year to March 2001 sales fell more than $82.3M (¥10bn) short of forecast while the net loss swelled by $57.6M (¥7bn). In March that year the company brought forward the launch of Mainichi Hone-Buto MBP, adding an ingredient that assists bone metabolism, seeking to shift to a way of selling that did not depend on sales-promotion spending.

The Snow Brand Foods beef fraud and the break-up of the group

On 23 January 2002, with the recovery of trust barely under way, newspaper reports revealed that the subsidiary Snow Brand Foods had abused the government scheme for buying up domestic beef under BSE countermeasures[125], passing off cheap imported beef as domestic to claim subsidies improperly[126]. It was the second scandal in eighteen months, and this time it was fraud, a breach of the law[127]. The consumer reaction was fiercer than before, and Snow Brand Foods was dissolved at the end of April 2002[128]. Nishi Kohei judged that there would be no repeat of the earlier reversal brought about by an official declaration of safety[129], and on 5 February, ten days after the affair broke, announced at a press conference that the company would accept capital from outside[130]. His initial design was to bring in Nestlé as the largest shareholder[131], but the Ministry of Agriculture, Forestry and Fisheries and the farm lobby of the Liberal Democratic Party balked at foreign capital entering dairying, and the idea was rejected.

The partner that emerged instead was Zen-Noh, the National Federation of Agricultural Co-operative Associations[132]. On 20 February Norinchukin Bank took the chair in the negotiations[133], and the rebuilding plan announced on 28 March brought Zen-Noh in as the largest shareholder and asked Itochu to take a stake as well, seeking $239.5M (¥30bn) of new capital. Many businesses, market milk and pharmaceuticals among them, were to be separated from the parent, with a partner sought for each: Nestlé for infant formula, the Otsuka Pharmaceutical group for pharmaceuticals and Lotte for ice cream[134]. Nishi said that without a place among the top three in a business proper profits could not be secured[135], pointing to the ice-cream business, fifth or sixth by share, which had been making losses for fifty years[136]. Snow Brand Milk Products itself would remain as a maker of dairy products such as cheese and butter, taking on what it called the $798.2M (¥100bn) cheese plan[137].

The financial damage was deep as well. Against consolidated sales of $9.3B (¥1.16tn) in the year to March 2002, the recurring loss was $281.8M (¥35bn) and the net loss $572.3M (¥72bn)[138]. This reflected extraordinary losses including those arising from the liquidation of Snow Brand Foods, compounded by the write-off of $153.3M (¥19bn) of deferred tax assets. Consolidated shareholders' equity of $514.8M (¥65bn) would have left the company insolvent, so it recorded a revaluation surplus of $306.5M (¥38bn) on land under the Land Revaluation Act to avoid that. Interest-bearing debt at the parent came to about $1.4B (¥180bn), of which $1.0B (¥130bn) was bank borrowing. The plan was to reduce capital of $221.9M (¥28bn) by 98 per cent to cover the accumulated deficit, and to receive $239.5M (¥30bn) of debt forgiveness and $159.6M (¥20bn) of debt-for-equity conversion. At the shareholders' meeting on 27 June all eight of the former directors resigned, and Nishi Kohei was replaced as president by Takanose Tadaaki (高野瀬忠明), an executive officer.

Spinning off market milk, specialising in dairy products, and the merger

The rebuilding plan that broke up the group was carried out as a succession of separations from the parent. In October 2001 the frozen-food business was carved out as Snow Brand Frozen Foods[139]. In October 2002 the infant-formula business was transferred to Beanstalk Snow and the ice-cream business sold to Lotte Snow[140]. In January 2003 the market-milk business was combined with Zenkoku Nokyo Chokuhan and Japan Milk Net and transferred to Nippon Milk Community Co., Ltd.[141], in which Zen-Noh took a 40 per cent stake as the largest shareholder. In milk it overtook Meiji Milk Products to stand first in Japan, and the red-packaged Megmilk was put forward as a fourth brand. The three merged companies cut 1,000 jobs, a third of their workforce.

Once the businesses had been carved out, consolidated sales shrank from $9.3B (¥1.16tn) in the year to March 2002 to $2.9B (¥318bn) in the year to March 2004[142]. In that same year the company returned to profit with recurring profit of $30.5M (¥3bn) and net profit of $12.9M (¥1bn)[143], and from the year to March 2005 it settled back into a constitution earning recurring profit of $60.8M (¥7bn) to $121.9M (¥13bn) on sales in the ¥280–290 billion range[144], and resumed its dividend. In May 2005 it delisted from the First Section of the Osaka Stock Exchange[145]. Nippon Milk Community, which had taken on the market-milk business, made an operating loss of $113.9M (¥13bn) in its first year, 2003, and fell into insolvency; after closing plants and reorganising its logistics and sales bases it returned to profit in the 2004 financial year, and in 2006 escaped insolvency with support from Norinchukin Bank.

In October 2009 Snow Brand Milk Products combined its management with Nippon Milk Community, which had carried the market-milk business, establishing a joint holding company, Megmilk Snow Brand Co., Ltd., and listing it on the Tokyo and Sapporo stock exchanges[146]. Snow Brand Milk Products' own shares were delisted on the integration[147]. A simple aggregation of the two companies' results for the 2008 financial year gave sales of $5.1B (¥525bn) and operating profit of $116.1M (¥12bn), close behind Morinaga Milk Industry in second place. Snow Brand Milk Products, specialised in dairy products, had bought its raw material from Hokuren in Hokkaido alone, while Nippon Milk Community, with thirteen plants nationwide, dealt with nine producer organisations, so the integration strengthened the group's bargaining power upstream. In April 2011 Megmilk Snow Brand absorbed both Snow Brand Milk Products and Nippon Milk Community[148], and Snow Brand Milk Products Co., Ltd., listed since 1950, was dissolved[149].