National focus key in China's beer market
SABMiller has made up ground on its rival Anheuser-Busch in the developing Chinese beer market over the past two years. But, writes Dean Best, both companies will have to take the long-term view as they seek to establish truly national brands.
Earlier this year, it seemed SABMiller had gone a long way to settling a score with arch-rival Anheuser-Busch (A-B) in one of global beer's key battlegrounds, China.
In October, the London-listed brewing giant announced that China Resources Snow Breweries (CR Snow), a local venture in which it holds a 49% stake, had become market leader in China, overtaking closest rival Tsingtao, in which A-B owns 27%.
SABMiller said the venture's success had been driven by the emphasis on marketing Snow as a national brand to China's ever more brand-conscious consumers. And that strategy looks set to have made Snow the best-selling beer in China this year. "Snow volumes in 2006 are estimated to be 2.5m kilolitres (25m hectolitres) - that's bigger than Tsingtao or Yanjing by some margin," says CR Snow chief marketing officer Jason Hou.
SABMiller therefore seems to have recaptured the ground it lost to Anheuser-Busch two years ago when the latter prevailed in the race to buy Harbin Brewery.
For CR Snow, its marquee brand has grown because of the brewer's strategy of snapping up breweries across China. Last Friday (15 December), CR Snow took its tally to 47 with the acquisition of breweries in Shanxi province and in the autonomous Chinese region of Inner Mongolia. Furthermore, CR Snow has two greenfield breweries in development.
CR Snow believes its strategy of buying breweries close to individual markets helps moderate distribution costs and build national awareness of the Snow brand. "We want to move further west to the layout of the whole nation. We will do this via acquisitions, expansion and greenfield breweries," insists CR Snow general manager Humor Wang.
And the brewer's focus will be on the Snow brand, despite the dozens of local and regional beers in its portfolio. "Our strategy is to concentrate on Snow; we do not plan to invest much on the other brands," Wang says. "We want to increase the share of Snow among our total sales."
The ambition to make Snow China's first national beer brand is clear. However, a number of potential pitfalls lie ahead for multinational brewers desperate to gain a strong foothold in the world's largest beer market.
China's beer industry remains highly fragmented; despite a wave of consolidation in recent years, there remain over 500 breweries across the country. What's more, although relatively affluent urban consumers are becoming more brand-aware, the country's populous rural poor are fickle and extremely price-conscious.
The price of a 640ml beer can be as little as US$0.12, which represents how difficult it is for brewers to make a profit in China. And, although improvements in distribution have been made, getting beer from A to B across this vast nation is still a challenge.
Steve Burrows, the president and CEO of Anheuser-Busch International, believes the fragmented - and regional - nature of the market means a national brand has yet to emerge.
He says: "In some places in China, its CR Snow that is the market leader; in some places it's Tsingtao; in other places it's InBev. It's a mixed bag because of the regionality of the beer industry - which is a lot like the US beer market 50 years ago. Some have the potential to be a national brand; Tsingtao, Snow and Budweiser have the potential (but) there is no pure national brand in China."
In the three years since CR Snow launched its offensive to turn Snow into a national brand, the brewer has focused on building its presence along the Yangtze River and up the east coast. However, only now is Snow starting to make inroads into Beijing; and it is yet to enter that most brand-conscious of Chinese cities, Shanghai.
Hou acknowledges that CR Snow faces a number of hurdles in building Snow into a truly national brand. Building a national communication campaign for Snow is key, Hou says. "We face a lot of challenges in developing Snow as a national brand. We need a lot of marketing investment - but returns from that will not come immediately."
And there's the rub. To build a brand in China's fledgling beer market requires a hefty amount of marketing investment - but with the selling price of beer still low, it is difficult to generate profits to fund that investment domestically.
However, once brands gain resonance with Chinese consumers, brewers can charge more for their product - and go some way to generating a profit from its business in the country. The multinational brewers in China are betting big that the power of brands will spread throughout China as the economy grows and wealth spreads. What's clear is that long-term investment is needed in a market where it could be years before brewers enjoy meaningful profits.
Nevertheless, the fragmented nature of the Chinese beer market suggests that further consolidation in the industry is all but guaranteed - and with that, the concomitant rise in prices and margins.
"Two things would help revenues," says A-B's Burrows, "an improved mix, which means more premium beer, and further consolidation." Premium beer, Burrows says, represents 20% of the market but is growing two to three times faster than cheaper beers as more affluent Chinese consumers trade up to branded offerings.
Burrows believes "significant consolidation" is necessary but is coy over whether A-B would be an active participant in that process. "We might consider looking at opportunities but there are few good properties left," he says. Should A-B need further capacity in China, Burrows insists the brewer could tap into the combined 62 sites owned by Harbin and Tsingtao throughout China.
The potential of the Chinese beer market is not in doubt. China is the world's largest beer market by volume but per capita consumption stands at 23 litres - very low compared to Western standards. And with incomes rising, China represents a potential goldmine for brewers wanting to alleviate the problems caused by stagnant beer consumption in the West.
Brewers like Tsingtao and CR Snow have carved out strong positions in the market and by looking to take their beers national, they are more likely than others to capitalise should the Chinese embrace brands anywhere near as readily as consumers in the West.
However, consolidation is only likely to shake the market up further, and with local brewers still being snapped up on an almost monthly basis, the fortunes of the world's brewing giants in China are not yet set in stone. As Burrows puts it: "Sure, it's always nice to be the biggest but that doesn't always mean that you're the best. It's premature to state a clear victory."
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