China's market may be too fragmented for strong profits

China's massive beer volumes are set to rise further, but market fragmentation and weak margins may sink SABMiller and Anheuser-Busch InBev's profit hopes in the country indefinitely, an analyst has claimed.

China accounts for 25% of the world's beer consumption, but generates just 3% of the global profit pool, according to a report on the Chinese beer market by Bernstein, released today (6 February). And, despite premiumisation efforts, brewers SABMiller and A-B InBev are unlikely to lift operating profits by more than a couple of percentage points before 2020, Bernstein said.

“China is unlikely to be a major source of profits for A-B InBev and SABMiller for decades... maybe never,” the study says. 

Bernstein estimates that A-B InBev will grow its China-sourced EBIT from 1% of group EBIT to 3% by 2020 while SABMiller can only raise its percentage of group EBIT in the country from 2% to 3% because of weaker premiumisation moves.

“There is no doubt about the volume growth potential of China; but selling prices and margins are still very low by international standards due to market fragmentation,” the study says.

SABMiller holds a 49% stake in China's biggest brewer, China Resources Snow. A-B InBev is the country's third largest player behind Tsingtao.

The report also says that China's regional sectors are mostly three-tier “slugfests”, with three brewers fighting for dominance as companies seek to expand beyond their strongholds. These battles have led to a “very competitive environment” that looks set to continue, the report adds.

Volumes outlook remains strong, and Bernstein said annual per capita consumption could rise from the current 33 litres to above 50 litres by 2020. US annual consumption is about 70 litres.

Yesterday, SABMiller's Chinese JV agreed to buy Guandong-based Kingway Brewery Holdings for US$864m.