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For foreign businesspeople in China, it is the most cliched of scenarios - the over-ambitious company lured to disaster by the appeal of China's seemingly bottomless potential. The past 30 years is littered with examples. Is Heineken about to become the latest?

Heineken will try to ride trends in China of an ever-growing middle class

Heineken will try to ride trends in China of an ever-growing middle class

The Dutch brewer today announced it will effectively take a 20% stake in the Snow beer operator Chinese Resources Beer in return for a US$3.1bn investment. CR Beer will also get the licence to produce Heineken's namesake lager in China, Hong Kong and Maca?u.

The partnership, with CR Beer owner and sprawling state-run conglomerate China Resources Enterprise, will according to Heineken give its core beer fresh access to China's most extensive distribution network - one in five beers sold in China are in the Snow portfolio. As Heineken sees it, it will be a much-needed boost for a brand that could claim to be the world's most travelled. Of the 192 countries Heineken is sold in, China is one of the brand's weakest, accounting for just 0.5% of the total beer market and 5% of the premium beer market. That's a long way off rival Anheuser-Busch InBev, which according to Euromonitor figures has a 16% share of the China beer market through its Harbin and Budweiser brands.

A-B InBev grew that share through a lot of hard work and marketing investment, something that Heineken has so far failed to do while going it alone in China. The brewer may be the world's second-biggest but when it comes to tackling a market the size of China, it lags behind. On a trip last year to Chengdu, a sizeable city of ten million in China's south-west Sichuan province, I saw one of the main entertainment zones - known locally as Beer Street - dripping in Budweiser and Harbin advertisements as tables of young Chinese drank to raucous dance music. The only Heineken presence I came across was a branded bar in a dark bowling alley in a corner of one of the new malls recently opened on the central shopping district. The bar looked great, but it lacked one thing - customers.

Today, Heineken CEO Jean-François van Boxmeer said the CR Beer deal will change this dynamic. CR Beer serves 5m outlets across China, and while Heineken lager won't be available in all of them - to protect the beer's premium positioning - its footprint should be greatly enhanced. Meanwhile, Heineken's two existing Greater China breweries will be bolstered by brewing opportunities across CRB's 91 plants, or at least those deemed suitable to house the special fermentation tanks the lager requires.

On the surface, it looks like a winning scenario for Heineken. Bernstein analyst Euan McLeish, who predicted Heineken would plump for a licensing deal with CR Beer when rumours surfaced earlier this year, said today the company is "effectively exchanging a small loss-making wholly-owned business for an expensive long-dated option". It is a long-term plan that has legs - according to van Boxmeer, premium beer is currently 10% of the Chinese beer market but is expected to grow to 25%. 

But the Chinese beer market is not like others that Heineken operates in, where only two or three large players dominate. In contrast, China is still affected by a history of regional beer powerhouses. That might be tough for beer companies but it is great for travel. Any trip around China is given extra allure by the opportunity to discover new beers in each region, be it Blue Sword's 528 in Sichuan or Dali beer in Yunnan. Consolidation has started (the two beers mentioned above are now owned by CR Beer and Carlsberg respectively) but with no one company owning more than 30% of the market (according to Euromonitor figures), competition remains fierce. Therefore, despite being the world's largest beer market by value, margins in China are often cited as among the lowest in the global beer industry. As McLeish, a former SABMiller strategist based in Hong Kong, told me last year, international beer companies only expect to start making strong profits in markets with at most two dominant players.

Will this then lead Heineken to failure in China? The industry has already seen one international brewer exit the country when Asahi backed out of its Tsingtao stake as profits tumbled. And Heineken itself is well aware of the dangers of low-margin markets. In its H1 results released this week, Heineken's share price fell after growth in the economically-straitened Brazil slashed FY operating margin estimates.

Brazil, however, may be an example of why Heineken can succeed in China. The margin drop was not because of losses in Brazil, it was because more people than expected were buying Heineken beers (through its recently-acquired Brasil Kirin unit). The only problem was that compared to Heineken beers in other countries, Brazil's are much cheaper. The trick then is to persuade consumers to move up the value chain, and that's something Heineken, with its portfolio of complementary brands, is adept at doing. In China, management would argue that this is pushing at an opening door. The expansion of Budweiser has shown there is a thirst for international brands, Meanwhile, China's middle class keeps on growing.

All Heineken has to do now is hope those trends continue - and avoid becoming another cautionary tale in the long list of China's corporate casualties.

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