China Consumer, Talking Point

By the throat

Carlsberg buys brewery in probably the biggest beer market in the world

By the throat

Thirsty work: brewers compete for his taste buds

The brewing industry long ago figured out that if you stick a man in front of a TV that is showing football he will – almost without fail – drink beer. So during the World Cup the brewers expect a surge in sales. Britons, for example, will reportedly consume 211 million extra pints over the next month.

Harbin Beer is hoping for a frothy month too. As the World Cup’s official beer in China (Harbin’s owner AB InBev has the sponsorship master deal with FIFA), it is targeting a major sales hike. It will be using the South African event to boost its market share. That won’t best please one of its main competitors in China, SABMiller – which is originally from South Africa.

Is there a China beer champion?

No, the country lacks a recognised “national” brand. Tsingtao is probably the best known of the Chinese beers overseas, although it is really an early example of foreign involvement in the industry, having started out as the Anglo-German Brewery Company in 1903. The venture’s first chairman may have been a Scot (and shareholders included a French religious order) but Tsingtao’s heritage was a German one. Most of the company’s initial investors, its first brew masters and many of its early customers (the German navy was stationed close to the brewery in Qingdao) were all Teutonic in their tipple of choice.

Despite its history, Tsingtao has never been dominant countrywide. And today – as in the past – the leading breweries battle it out from rival provincial strongholds.

The multinationals are back on the scene too. SABMiller, with a 49% stake in CR Snow (a venture with China Resources Enterprise), has close to a fifth of domestic sales. Snow’s brands are prominent in Jilin and Liaoning in the northeast, as well as a central belt of provinces extending east from Sichuan across to Jiangsu.

Tsingtao (14% national share, and with Japan’s Asahi as a major investor) now dominates in Shandong and Shaanxi. AB InBev (12% share) has a southeastern foothold through its Sedrin beers, as well as a northeastern one via its ownership of Harbin Brewery (China’s oldest, started by a Russian in 1900). And Carlsberg is also in China, with a smaller market share but a growing presence in some of the western provinces, where per capita consumption trails the national average. This month it agreed to pay $379 million to become the lead shareholder in Shanghai-listed Chongqing Brewery.

Of the leading brewers, only Beijing Yanjing, which rules the roost in the Chinese capital and in Hunan province, lacks a foreign partner.

It’s a diverse landscape, although one that is showing signs of consolidation. According to AB InBev data, the top 4 firms had a 57% market share last year, up on 19% a decade ago. There are still at least 250 different brewers, but that is a steep decline on a few years ago.

And more customers to serve too…

China first topped the beer-drinking league (by volume) in 2002, overtaking the US.

What gets the analysts excited today is the potential for further growth. At an average of 31 litres, Chinese per capita consumption ranks 81st globally. That is a little above the international mean but still only a third of the liquid diet ofcountries like the US, Australia and the UK. And it doesn’t come close to the Czechs, who manage a belt-loosening 150 litres, or a weekly ration of almost nine bottles.

Of course, parallels with Prague are less helpful than comparisons to how much other Asian nations are drinking. It turns out that the Chinese already consume more than many of their neighbours, and that they are catching up on the Japanese and Koreans. But at least sales are growing, which is not the case in some mature markets. The size of China’s beer drinking population, as well as beer’s expanding ‘share of throat’ (at the expense of teas and spirits) makes it a crucial market.

So scaling up is key?

Yes. The major brewers are either buying up the best regional performers (SABMiller and AB InBev also submitted bids for Chongqing Brewery, for instance) or putting in their own new capacity in their target provinces. The objective is to achieve economies of scale, as well as to channel a smaller number of aspiring ‘national’ brands through the existing distribution networks.

This is pretty much what SABMiller first set out to do in 1994, pairing up with state-owned China Resources to buy the Shenyang Snowflake brand, before acquiring another leading brewer in Sichuan. It has since spread its footprint into a series of other provinces through an ongoing acquisition strategy.

A different approach to 20 years ago?

In the 1990s, when they first started turning up in China, the foreign firms expected to do well. Spurred by the low consumption metrics, as well as a disparaging view of local product quality and marketing know-how, the strategy was often to sell their existing beer portfolio through joint ventures established in the leading cities.

But in their keenness to get started, they overlooked a pretty fundamental issue: price. Most Chinese beer drinkers weren’t interested in sipping on a little foreign sophistication, especially when it cost so much more than the local alternatives. Loyalty to domestic brands was a lot more stubborn than had been expected. It didn’t matter how many marketing dollars the multinationals threw at the problem: the premium segment was too small to support their ambitions. Many retreated with heavy losses.

And the market today…

With incomes up over the last 15 years, the top-end brands are becoming more popular. Sales of premium beers (bottles selling in bars or restaurants for Rmb10 and up, like Budweiser and Carlsberg) have doubled in the last six years, according to Euromonitor, a much faster increase than for the market in general.

Despite this, premium beer is still only about 6% of total sales. Brands selling at between Rmb3 and Rmb6 a bottle (including some of SABMiller’s Snow varieties) make up two-thirds of the market, according to Bloomberg, with the Rmb6-10 range (Tsingtao’s sweet spot) contributing another 10%.

The really cheap stuff (bottles at Rmb2 or less) is a market the multinationals have steered well clear of. At that price, quite a few locals must wake up wishing they had too…

The future is in trading up…

Despite the market’s size, profit margins have been slender. But the plan is to encourage drinkers to move towards higher-priced choices. AB InBev sells more than 20 different beers, for instance, but relies on just three (Budweiser, Harbin Ice and Sedrin) for two-thirds of revenues and three-quarters of gross profits.

And the end game for the leading brewers is to slake the thirsts of middle-and-high-income customers (150 million of them today, InBev says, and potentially more than 400 million in 10 years time).

To reach their lofty targets, the brewers are likely to make more acquisitions – with a view to gaining further footholds across China’s fragmented beer market.

That consolidation makes sense, but as Carlsberg has quickly discovered it won’t be without incident. Yesterday, 500 workers from its recently acquired Chongqing Brewery went on strike – capping a month in which industrial action has plagued foreign firms in China.

The workers say they fear for their jobs, and oppose the Carlsberg acquisition, reports the 21CN Business Herald. Further evidence, perhaps, that beer can also give you a headache.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.