Action: We initiate coverage of four beverage sector stocks, assigning an Outperform rating to Suntory Beverage & Food (SBF; 2587), and Neutral ratings to Coca-Cola Bottlers Japan Holdings (CCBJH; 2579), DyDo Group Holdings (2590), and Ito En (2593). In this report, we summarize our sector stance and investment view on individual companies. Sector overview: Competition is intensifying in the beverage industry. Not only is there (1) no sign of a recovery in demand from COVID-19, but also (2) the supply-demand balance has been skewed by capacity expansion at two major players in the sector, and (3) the beverage CPI has turned down again after rebounding from a bottom in 2014. We can identify no real leader in the beverage sector. To a certain extent, earnings recovery at CCBJH hinges on pursuing higher sales volume, while SBF aims to aggressively expand small PET bottle sales to minimize container mix deterioration. For both, focusing on sales has a certain logic. Vending machine businesses, which saw a sharp drop in demand under COVID-19, have been surprisingly resilient; we accordingly do not see vending machines as drivers of consolidation among sector majors. Transition from competition to coordination appears unlikely so long as the industry’s profit pool is not damaged. On the other hand, the Japanese beverage sector already trades at a significant discount to global peers, so we think pessimistic views on sector prospects are already priced-in to some extent. Beverage demand tends to correlate with human activity. As Japan starts to emerge from COVID-19, we think companies able to respond to sudden changes in demand will be the ones best equipped to survive and wield their strength. From this perspective, we initiate coverage of SBF with an Outperform rating.