China beer market: Dragon ready to swallow US
Around 60 international brewing concerns have gone into China over the past 20 years, and so far almost all are losing money.
To those who do not know China, this may seem puzzling. The country is already the second largest beer market in the world, getting through more than 17 billion litres per year, and even with annual growth estimates revised downwards from 10% to 5% China is still expected to overtake the United States as the world's largest consumer within the next four years.
The Chinese taste for beer goes back to the establishment of breweries by the foreign powers in the treaty ports around the beginning of the 20th century, but the rapid growth in sales of the product began as recently as the 1980s, according to market analyst Simon Clennell.
"The industry just mushroomed between the mid-1980s and 1993, and every city had to have a brewery. It was almost a matter of prestige. They were mostly state-owned breweries and the number grew to almost 900 - some cities had two or three - but it's now believed to have come down to something like 400 to 500," explains Clennell.
The 1990s saw a major influx of international players, and in 1999 around 10% of those breweries were under the management of foreign brewing concerns including Anheuser-Busch, Asahi Breweries, Bass Brewers, Carlsberg, Foster's, Heineken, San Miguel and South African Breweries (SAB). Of the 45 or so production facilities most were losing money, and many investors are now seeking to cut losses.
Bad luck and bad judgment have both played their part in this lacklustre performance. With per capita consumption estimated at about 13 litres per year - less than half the world average - rapid growth was presumed, when in fact a recession and oversupply led to a market slowdown and price cutting. At one point a large bottle of beer was selling on the street - much of China's beer is bought from street vendors - for 1 yuan (about £0.07 pence sterling/$0.11 cents US). It is now up to 3 yuan, but while foreign beers are considered in some, though not all, cases to offer better quality and a more attractive image as part of a lifestyle, only a tiny percentage of the population can afford them.
"Most people in China are not rich, and the foreign breweries just can't turn it out for that sort of price, so they've tended to base their marketing on premium products, which sell well in restaurants in the big cities, but the volume is not all that great. A lot of the foreign breweries are struggling because they can't sell enough. I think just about all of the big breweries have got round the problem by producing a premium product and a local product under a local name, but even then some of them are finding it difficult," says Clennell.
Australia's Foster's is a case in point. Although the beer did well enough in markets local to the company's three joint venture breweries, sales alone were insufficient to cover costs, and the increased expenses of transport and advertising made the beer unattractively expensive elsewhere. Foster's has now closed two of its breweries while keeping a third unprofitable operation open in Shanghai to maintain a position in the market.
Belatedly the international brewers seem to be learning that they have to take the Chinese breweries on at their own game - at the bottom end of the market.
South African Breweries (SAB), one of the few foreign investors doing well in Chinese brewing, has ignored foreign branding and image building from the outset, and concentrated on good quality budget brands for local markets.
By providing investment, technology and expertise to state-owned breweries it has built strong regional niches for brands including Keller and Snowflake which enjoy good local sales and are kept affordable by minimal investment in transport and promotions.
Anheuser-Busch, which refused to discount its premium priced Wuhan produced Budweiser during the price cutting war and took a loss accordingly, is now brewing a lower priced beer called Buddy's. This competes directly with the local Chinese breweries and also with larger concerns with a national presence.
The market leaders among these are the Beijing Yanjing Beer Group with just over a 4% share of the national market, and Tsingtao Brewery with almost 3%. These companies, and others like them including the Guangzhou Zhujiang Beer Group and Sichuan Blue Sword Group, are growing.
Breweries which are failing to compete are now being sold off cheaply, and rather than incur the cost and trouble of transporting beer long distances over China's unreliable roads and railtracks, successful concerns are buying them up and forming consolidated groups.
"San Miguel was one of the first to start setting up breweries in various parts of the country, but now it's mostly consolidation within the Chinese industry. There are something like eight to 10 groups and the lion's share is in their hands," says Clennell.
One of the most aggressive of these groups is the country's number two domestic brewer but biggest beer maker overall and number one exporter. Tsingtao, which accounts for 90% of China's beer exports, has turned what was a flagging domestic business around dramatically over the last couple of years, probably partly in response to shareholder pressure after its listing on the Hong Kong stock exchange.
"Tsingtao was a slow starter," comments Clennell. "It sat on its laurels for a long time as it was the best known brand in China, but then it started to lose domestic share at a very alarming rate. Tsingtao started buying up other breweries, particularly in Shandong, but they're now brewing in 10 or 12 different parts of China."
One result of the emergence of big brewing groups, Clennell notes. Is a burgeoning standardisation of taste where previously there was regional variation.
"Generally northerners tend to like stronger beer, it gets weaker and weaker in the middle and stronger again as you get to the south," he claims. "But what you're getting now is a lot of national brands developing, and consolidation in taste as well. The same thing that happened in Britain and the States over probably 100 years has happened in China in 15."
One mistake foreign breweries have tended to make, but which Chinese operations generally don't, is overspending on promotion. Advertising is not driving the market. Price and distribution, however, are the main concerns.
In Beijing, where the Five Star Brewery, founded in 1916, had enjoyed market dominance for generations, the upstart Beijing Yanjing Beer Group which was not founded until the 1980s usurped its position by taking control of grass roots distribution.
"Yanjing now has 85% of the Beijing market," claims Clennell. "It did that by getting control of the guys on tricycles who pedal up and down the hutongs (lanes) peddling beer. By and large it's not advertising. It's having your products in the right place at the right time. Once you've done that, advertising will help but it isn't the main thing."
The problems that have beset foreign brewers in China are not likely to change with WTO admission. There are obstacles to successful foreign participation in the market built into China's geography, culture and state of economic development. These will not disappear with tariffs and the overt bureaucracy of protectionism. The most noteworthy effect of lowered tariffs is likely to be cheaper grain, which should make production cheaper for everybody but will not alter the tilt of the playing field.
Some foreign participants in the market are withdrawing altogether. Others are gritting their teeth and announcing, as people doing business in China are wont to do, that they are "in it for the long haul". The haul could still be very long indeed.
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