Once more into the breach

A report in the People's Daily that beer production in China rose by 15.2% last year must have been cause for cheer at the world's largest brewing companies. It meant vindication of the decision to head back to the country for another round after the disastrous experience of the 1990s. Since China overtook the US to become the world's largest beer producer in 2002, companies such as Anheuser-Busch, Inbev and Heineken have been charging back into China armed with a new strategy. Instead of trying to set up their own breweries and peddle expensive foreign brands they have eaten a bit of humble dumpling and realized the benefits of buying into established local labels.

It's not just beer barons who are paying attention to this trend. The industry is significant as a weathervane for the fate of all foreign companies in China because it is one of the few sectors without any government restrictions on foreign ownership whatsoever. The foreign brewers that succeed in China will be examples for investors in other industries where restrictions will be lifted over the next couple of years.

Between 1993 and 1996 multinational breweries poured over US$1bn into buying Chinese breweries or establishing their own. For many, the plan was to capture market share with their premium foreign brands through clever marketing and in no time, the high-end of the market was saturated. By 1998, most investors were cutting their losses and exiting as quickly as they had rushed in. Australia's Foster's was the first to sell up to local brewers followed by Bass, Carlsberg, San Miguel and Asahi. The last company to hang on to the old model of establishing its own brewery to produce its own brand was the considerably smaller Australian company Lion Nathan, which makes Steinlager. After seven years of losses, Lion sold its China operations last year to the world's number three brewer by volume, London-based SABMiller, for almost US$20m less than it paid for them.
Plan B
Plan B for tapping into China's elusive beer market called for buying shares in success ful local brewers and, since the middle of last year, even buying local labels outright. The battle between SABMiller and the world's number two brewer, Anheuser-Busch, for China's number four brewer, Harbin Breweries, was a salient example of the new approach. Anheuser-Busch eventually beat SABMiller to take 100% control of Harbin by paying US$757m – 70% more per liter of beer sold than it paid the previous year for a stake in Tsingtao Breweries.

This latest purchase brought its investment in China up to US$1.2bn. In addition to Harbin, it now has a large operation in Wuhan making its premium label Budweiser, as well as an agreement to increase its stake in China's number one producer, Tsingtao Breweries, to 27% in the next couple of years.

Not that any of the other global brewers are being left behind. Fully saturated and stagnating markets in Europe and the US are keeping their attention focused on the East and the ever-alluring promise of the China market.

The world's largest beer maker, 639-yearold Belgian company Inbev, didn't invest in China until 1997 but spent most of last year buying into established local operators. It now has 18 breweries, a portfolio of local brands and is now the third largest brewer in China, with market share of 9%.

SABMiller already has interests in 30 breweries in northeast and central China and a 49% stake in China Resources Breweries – China's second-largest – while Heineken, Scottish & Newcastle and Carlsberg (the world's third , fifth and sixth largest respectively) have all made numerous investments in Chinese beer makers. Even the fast-retreating Fosters dived back into the swill, buying stakes in the established Shanghai and Guangming brands.

Top dollar prices
Like Anheuser-Busch, these companies are often paying wildly inflated prices for local brands in order to beat their competitors in the new strategy. Of course, as with most industries in China, the potential of the beer market is enormous. China has accounted for 30% of global beer industry growth in the last five years and while the average per person consumption of beer in 2004 was 50 liters in Japan and 84 liters in the US, it was just 19 liters in China.

Rising urban incomes are boosting demand for all consumer products, including beer, and although 90% of sales are currently in the low-margin, low-price, low-image segment, beer makers are betting that more disposable income will allow consumers to move from more popular brands to the premium brands.

China still doesn't generate the profits developed markets do. The market remains highly fragmented and suffers from overcapacity and ruthless competition. Some top domestic players, such as Beijing government-owned Yanjing, have resisted partnerships with the big foreign players. And as brewing undergoes massive consolidation – the brewery count has dropped from 500 to 200 in the last four years – these local brands have also been snapping up smaller labels across the country. We may have to wait another four years before seeing how successful Plan B turns out to be.