Source: Bloomberg News
Cheap beer. For consumers in China, it’s a fact of life. Brew in China, the world’s biggest market, sells at one-third the price in the U.S. Now foreign brewers are wooing the Chinese to pay more for brands that are popular worldwide.
The idea is to get increasingly affluent Chinese (CHHH1) to switch from local beers that sell for as little as 1.87 yuan (30 cents) for a 330-milliliter bottle to foreign lagers such as Budweiser, which costs about 6.13 yuan. To achieve that, overseas companies are acquiring or setting up new breweries across the country to widen the reach for their premium brands.
The four biggest players — China Resources Enterprise Ltd. (291), the partner of SABMiller Plc (SAB), Anheuser-Busch InBev NV (ABI), Tsingtao Brewery Co. (168), which partners Asahi Group Holdings Ltd. (2502); and Beijing Yanjing Brewery Co. (000729) — already account for 59 percent of the beer sold, according to Euromonitor International. They have gained market share as they increased scale. Now they want to boost profitability in the 360 billion yuan market.
“Consuming foreign premium beer has become more and more popular, especially among youngsters who have higher education, higher income and higher acceptance of exotic goods,” said Olive Xia, an analyst with Core Pacific-Yamaichi International Ltd. in Shanghai.
In 2011, consumption of beer rose 4.8 percent to 47.5 billion liters in China. That’s estimated to reach 61.4 billion liters in 2016, with sales growth of premium and standard lagers set to outpace economy brews, according to London-based Euromonitor.
Chinese drink about 35 liters of beer a year. That is less than half the consumption in the U.S. and a third of that in Germany.
Overseas beermakers entered China initially through partnerships with local companies. London-based SABMiller formed a joint venture with China Resources in 1994 and then bought rivals and set up new plants, according to the company’s website. AB InBev entered China in 1984 by providing technology transfers to Zhujiang Brewery in Guangzhou and from 1998 started forming partnerships, according to its website.
Leuven, Belgium-based AB InBev, which in January added to two purchases it made last year, will increase China sales by boosting volumes of its premium brands including Budweiser, and expand geographically through acquisitions and new plants, Karen Couck, a company spokeswoman, said.
“We estimate that we gained share during 2011, with our premiumization strategy leading to a favorable brand mix and growth in net revenue,” said Couck. “The premiumization trend continues with double-digit growth and Budweiser is further consolidating its leading position within this segment.”
Budweiser’s market share in China rose to 1.2 percent in 2011 from 1 percent in 2008, according to Euromonitor data. Share of Double Deer, a local brand InBev acquired, fell to 0.6 percent from 0.9 percent in the period.
Brewers are making their packaging more attractive to win higher-spending customers. Budweiser started selling in cans topped with a gold-colored aluminum foil to protect the lid from dust and give it a premium image.
Foreign beermakers put a lot of effort in promoting their brew at restaurants and bars, said Doreen Wang, head of branding at WPP Plc (WPP)’s Millward Brown.
“On the bar streets, you see more Budweiser and Carlsberg logo shops,” Wang said. “Premium beer is mainly for gatherings of friends and family. On these occasions, consumers are willing to pay more on brands that would give them status.”
Carlsberg A/S (CARLA), which is organizing an event in Beijing next week to unveil a new premium product, said its 2011 sales in China outpaced that of the industry, helped by its premium portfolio.
Price to Rise
Tokyo-based Asahi Group, which entered China in 1994 and in 2009 bought a stake in Tsingtao, plans to support local partners to compete at the lower end and itself focus on the premium segment.
“As the market matures, the price will go up, and profit will expand,” said Takayuki Tanaka, an Asahi Group spokesman.
The average retail price of beer in China was 7.6 yuan ($1.2) per liter last year, compared with $3.7 in the U.S., 687 yen ($8.4) in Japan and 2.9 euros ($3.8) in Germany, according to data from Euromonitor.
The Japanese brewer will widen its reach in restaurants in Shanghai, Beijing and the Pearl River Delta areas, Tanaka said. It’s also counting on consumption patterns to change.
“Diversification of preference for beer and how people drink beer will proceed further,” said Tanaka. “And suggestions such as how to drink beer more delectably will be positive factors.”
On a recent evening, Lu Yizhi, 32, a tour guide, was watching the UEFA Champions League soccer game between AC Milan and FC Barcelona with friends at a sports bar in central Shanghai.
“I like the heavy taste of imported beer, especially the European ones,” said Lu, sipping a mug of Heineken. “I don’t mind paying a few yuan more.”
Consumers such as Lu have seen incomes rising as China’s economy has on average expanded 10.5 percent in the past five years, prompting intense competition among overseas brewers to acquire and grow.
In the past two years, Chinese breweries were the fourth most targeted by buyers worldwide, according to data compiled by Bloomberg. The 18 brewery acquisitions in China, including AB InBev’s purchase of Dalian Daxue Beer Co., totaled $1.7 billion in the two years through April 9, compared with 39 deals valued at $1.5 billion in the previous two years, the data shows.
“In the next five years, we’ll see more consolidation in the sector with industry leaders stepping up acquisitions,” said Li Yun, an analyst at Guodu Securities Co. in Beijing.
Bid for Kingway
AB InBev, Yanjing Brewery and China Resources Snow Brewery Co., SABMiller’s local joint venture, have been invited to make a final offer as early as mid-April to buy six breweries owned by Kingway Brewery Holdings Ltd. (124), controlled by the Guangdong provincial government, two people with knowledge of the matter said in March.
Kingway’s profit fell 4.1 percent last year amid rising competition and higher production costs. Its profit margin in 2011 was 1.98 percent, compared with AB InBev’s 15 percent and Yanjing Brewery’s 8.4 percent, according to data compiled by Bloomberg.
There is room to raise prices of Snow this year and the company’s average selling price could improve as it shifts focus to more premium beer, Frank Lai, chief financial officer of China Resources, said last month. Snow, China’s largest selling brew made by China Resources and partner SABMiller, had a 19.9 percent share last year, according to Euromonitor.
Still, the slowing pace of economic expansion in China may damp consumer demand. China’s Premier Wen Jiabao has set an economic growth target of 7.5 percent this year, the lowest goal since 2004.
“If China’s economy is trending downward this year and next, high-end beer may see sales drop more than local ones as people might be tightening their belt on discretionary goods,” said Jason Yuan, an analyst at UOB Kay Hian in Shanghai.
Beermakers such as Japan’s Kirin Holdings Co. (2503) said there is price competition in the main segment and it will increase profitability by deploying brands such as Ichiban Shibori in the premium segment, Kan Yamamoto, a spokesman, said.
They should be encouraged by consumers such as Lu.
“The first time I drank a foreign beer was about 10 years ago and it was expensive for me at that time,” said Lu, as he watched the soccer game projected on a large screen. “Nowadays, I make more money. Why don’t I treat myself better?”