Comment – Beer – China: Thinking Big
Whilst China has the biggest beer market in the world, be on the lookout for Chinese beer exports
Our beer commentator, Larry Nelson, was in Beijing last week. While there, as we would hope, he turned his attention to the country's beer market - the world's largest. What's another word for 'large', Larry?
China is big. Bigger than a breadbox big. Mega, gargantuan big. The biggest elephant in the biggest room you can imagine big. Ginormous. Humungous. Imagine the biggest thing that you can think of – and then double it in size.
For safety’s sake, triple it. Honestly, in my role as just-drink’s brewing columnist if there is just one simple thing that I need to impress upon you, dear reader, this year, it is this: The future of the world as we know it rests with China. If your business plan doesn’t take account of what’s happening there, then you need to address this now. In fact, cease reading this column and sort it this very minute.
Based on current projections, economists estimate that China will surpass the US to become the world’s largest economy by 2020. And that's the view of economists - ever the pessimists. Take this to your local betting shop: China will surpass that milestone before the end of this decade, not afterwards.
The levels of investment being injected into the country are breathtaking. Last week, China’s Ministry of Commerce reported that direct foreign investment (DFI) into the country is projected to surpass US$100bn this year, an increase of $10bn from 2009 - that in itself is an impressive result set against 2009’s worldwide decline in DFI.
In more human terms, the pace of growth - and the pressures on infrastructure that it exacts - has never been clearer than of late, and in larger-than-life terms. In recent months, the Beijing-Tibet highway has been gridlocked periodically by coal trucks bound from Inner Mongolia for power plants on the east coast. According to state television, the latest snarl involved 10,000 trucks.
China is, of course, the world’s largest market for beer. It has been less than a decade since it overtook the US to become the world’s number one market and has been pulling away ever since. According to international drinks market consultancy Canadean, in 2009, the Chinese market totalled 441.6m hectolitres. Thirst in the US for the fruits of barley and hops last year reached 241.7m hectolitres. (Russia ranked third with 111.6m hectolitres; Brazil, also moving up the rankings, was fourth at 110.2m hectolitres.)
And, there’s considerable scope for further growth. Chinese per capita cons umption is estimated by its brewing industry representatives to be 30.2 hectolitres. (For comparison, Canadean ranks New Zealand 20th globally at 76.8 litres per capita.)
For the multinationals in China, the growth in beer volumes of recent years has been a tonic compared to the tepidness of developed markets.
- Carlsberg, with its operations concentrated in the less populous west, reported a 10% gain in organic beer volumes for the first half of this year.
- SABMiller, with a 49% stake in joint venture China Resources Snow Breweries, also reported a 10% gain in beer volumes in its year-end figures to May 2010. Snow, a virtual unknown outside of China, is the world’s largest beer brand, with it and two recently-launched premium brand extensions accounting for 90% of CR Snow’s total production.
- Anheuser-Busch InBev, with breweries in the south and a regional presence with Harbin in the north-east, found itself apologetic for reporting a modest 2.3% increase for the Q2 ’10, because of unseasonable weather in the eastern provinces. (Pause here for a moment and consider this: in any other global market a 2.3% increase would be gold star territory for a brewing executive.)
With three consecutive years of 10% increases in consumption – and the inherent demands on production, CR Snow added 20m hectolitres in capacity this past year alone, with four greenfield plants coming on line in addition to three acquisitions – the good times are coming to an end. Chinese brewers are forecasting continued growth but at a less red-hot pace, with “stable” volume increases between 3% and 5% over the next five years.
The rub is that, while the demand for beer appears insatiable, there’s not a lot of money being made. For example, A-B InBev reported a Q2 ’10 EBITDA margin of 11.8%, down from 15.6% the previous year, with the decrease due largely to increased marketing expenses in the run-up to the Budweiser- (and Harbin-) sponsored FIFA World Cup 2010.
In Beijing, the latest retail sensation is French hypermarche chain Carrefour. Here a 660ml bottle of Beijing Beer from Asahi will cost you a modest CNY3.10 (roughly equivalent to US$0.45). A 330ml can of market leader Snow, meanwhile, will set you back CNY3.50. Retail prices are better in the on-trade, as might be expected, but still not yet at the point to excite shareholders.
While a vast market, there is some evidence that consolidation is taking place. According to Chinese brewers, the top three producers, CR Snow, Tsingtao and Yanjing, already account for 47% of the country’s output and, worryingly for the rest of the industry, more than 80% of the profit pool.
This in a country where there is still more than 200 companies operating 479 breweries. From this total, 39 producers and 46 breweries can be eliminated; the ageing, under-invested state-owned capacity is being squeezed out.
With the Chinese government stimulating domestic demand in the face of collapsed export demand during the global economic recession, there is evidence of premiumisation in the market and a move away from malty lagers. (Witness CR Snow’s launch of Snow Draft.) There is also increasing variation in tastes evident, with darker beers and imports aplenty available at Carrefour, although at the very top end of prices. That said, a 500ml can of Greene King IPA is a bargain at just over CNY10.50, equivalent to GBP0.99, making it almost as cheap as in its British home market.
Yet, beer imports are negligible and exports are virtually non-existent. But for how long? The same Ministry of Commerce report cited above found outward investment totalled $56.5bn in 2009, ranking China fifth overall in direct foreign investor, up from 12th in 2008.
And there’s the rub: if you don’t have a strategy for the Chinese market in place, the odds are that very soon they will have one in mind for your market – if not already. The Chinese know how to think big. Do you?
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