Foreign brewers tap thirsty China
market By Michael
Mackey
SHANGHAI - Foreign brewers are
aggressively tapping the China market, the
largest-volume beer market in the world, with a
population of of 1.3 billion and annual consumption of
only 18.5 liters per person. The possibilities of profit
make the mouth water, even more than a cold, frosty beer
on a hot day.
Foreign brewers are using
multi-pronged strategies to gain entre to the market,
and a new round of consolidations, mergers and
acquisitions is likely to expand and reshape one of
China's most fragmented industries.
China has
500-1,000 breweries - no one really knows how many. The
two biggest names, the largest beer makers, are Tsingtao
and Guangdong Kingway, but no beer has a strong national
presence. There are Great Wall, Green Bamboo, Golden
Lion, Golden Lotus, Brigade Light and hundreds more.
They tend to be strongly regional brands, a consequence
of the market being fragmented by too many brewers, poor
distribution and lack of a strong, established
advertising culture.
The latest entry into the
acquisition fray is Edinburgh-headquartered Scottish
& Newcastle, which is to acquire a 19.5 percent
stake in Chongqing Brewery Co (CBC) to bolster its
presence in China. S&N will initially pay 525
million yuan (US$63.4 million) for 50 million state
shares at 10.5 yuan ($1.27) per share. For that S&N
gets board representation and becomes the second-largest
shareholder of the Shanghai-listed brewer, Chongqing,
behind only the Chongqing Beer Group with the largest
stake of 34.55 percent.
S&N, which entered a
partnership with CBC in the early 1990s, is convinced
that this is the way forward for the company and its
shareholders, its role in the Chinese market and for
Chongqing.
"This investment is a natural
evolution of a 10-year year relationship with Chongqing
Breweries," John Nicolson, chairman of S&N's
international beer division, said in a statement.
"Building on this relationship is an excellent way for
S&N to become part of one of the biggest and
fastest-growing beer markets in the world. We have long
admired the strength of the business and its managers
and look forward to contributing to its further
success."
Huge untapped potential in China's
beer industry Polite rhetoric and public
relations aside, the message is clear: Chinese beer,
unlike wine, is a big market and getting in is a high
priority for international brewers, not only because a
huge population moving toward a leisure society is keen
on foreign products, but also because the local industry
has untapped real potential and capacity.
Market
leader Anheuser-Busch, which makes Budweiser and Bud
Ice, was candid about these twin themes - why foreign
brewers are expanding aggressively into the Chinese
market.
In a statement to Asia Times Online,
Stephen J Burrows, president and chief executive officer
of Anheuser-Busch International Inc, said the company
has "a two-pronged strategy for our international
business that includes promoting Budweiser as the
leading premium beer around the world and investing in
leading local brewers in markets with a good volume and
profit growth potential".
This is borne out, he
said, by the leading position of Budweiser with sales of
more than 2 million barrels or 2.38 billion liters (2.38
million hectoliters) in China, and its minority
investment of 9.9 percent in Tsingtao Brewery Co Ltd,
China's largest brewer.
China, Busch noted, is
now the largest-volume beer market in the world, but low
per capita consumption, 18.5 liters, in a population of
1.3 billion, creates formidable opportunities for
growth.
The same - huge Chinese market potential
- can be said of virtually any sector in the nation, and
those eyeing the market should be cautious and carefully
consider the actual wisdom of acquisition.
Paying four times the net asset
value A striking assessment came from Qiao
Baijun, a beverage-industry analyst with China Galaxy
Securities, who told the China Daily on February 12 that
the price Scottish & Newcastle was paying was four
times the listed Chongqing Brewery Company's net asset
value (NAV). That, he said, was a clear demonstration of
foreign companies' eagerness to tap into the China
market.
Whether such a premium price indicates
management's foresight or business sense is academic; it
also raises, particularly for foreign firms, major
questions about shareholder value.
Providing a
more sober and countervailing view, one major
brewing-industry source, speaking on condition of
anonymity, pointed out that this is the second phase of
consolidation in the Chinese industry. The first phase
back in the early 1990s saw international breweries
buying into China also at steep premiums, only to sell
up and move out later. They found market conditions
difficult, distribution systems poor or non-existent and
regulations cumbersome. But 10 years later, the rush is
on, the economy is expanding prodigiously and Chinese
companies are eager to buy, sell, merge, partner,
innovate and make big money.
So brewers now are
taking a second, more sober look, and they like what
they see, said the industry source. "Step by step, they
are looking to get back in." Purchase prices, he said,
could be determined by things other than the asset value
of breweries themselves - such as distribution networks,
market share, name recognition and growth potential.
This situation - purchase price reflecting more
than bricks and mortar - was also the case during
Heineken Asia Pacific Breweries acquisition of a 21
percent stake in Guangdong Brewery Holdings.
Heineken acquires chunk of Guangdong
stocks Here, in a case of complicated corporate
structure, the purchasing firm was Heineken Asia Pacific
Breweries China Pte Ltd (HAPBC), an associate of the
Dutch brewing giant that acquired the Guangdong stocks,
arguing it would be "earnings enhancing".
With
133.768 million new shares and 165.496 million existing
shares at HK$1.85 (24 US cents) per share, it definitely
enhanced earnings for the Chinese side, and only time
will tell for the Dutch investors.
Initially,
though, they are pleased to be able to brew
Heineken-branded beer in China and hope to be doing so
in six months, but business timetables often slip. They
also have other plants in China.
"Brewing
Heineken lager locally will be the platform for the next
phase of growth in China," Kok Poh Tiong, CEO of Asia
Pacific Breweries, an associate of HAPBC, said in a
statement posted on the company's website. "This move
makes economic and strategic sense for Asia Pacific
Breweries. Capacity utilization of our Shanghai brewery
will increase significantly while cost saving arising
from local production can be invested into building the
Heineken brand volume growth activities in the China
market."
While Guangdong Brewery Holdings, which
is listed in Hong Kong, is one of the most profitable
listed breweries with operations in China, one
consultant called the acquisition "a massive amount of
money for a sector that is very competitive and highly
fragmented".
Fragmented market, 500-1,000
brewers The numerous brewers, mostly local and
regional, mean the market is fragmented, the problem
compounded by inadequate distribution systems and
advertising. So what Heineken and any foreign brewer is
buying in China is strong positioning, but only in a
local, at best a regional, sense - national position may
come later.
Some brands are known only in one
city. Underscoring this point, China has only a handful
of microbrewers, and then they tend to be in
cosmopolitan cities such as Beijing, Shanghai and
Guangzhou. The China market as a whole is decades away
from widespread appreciation of and demand for micro
beers.
"Foreign brewers are buying for capacity
initially," said a Shanghai-based consumer-affairs
consultant. "They have bought brands that they know are
successful. They don't tend to build up failed brands or
rebrand."
Some companies, such as Carlsberg,
have even been willing to take on a political risk - a
politically correct risk - to acquire market share.
Along with the Danish Industrialization Fund for
Developing Countries (IFU) Carlsberg acquired 50 percent
of the share capital of Lhasa Brewery, making it the
market leader in Tibet's fast-growing beer market. The
Tibet beer market was estimated at about 730 million
liters (730,000 hectoliters) in 2003 - consuming far
less than the national per capita average of 18.5 liters
in the region of sparse but growing population. The
potential for further increase is strong, because of
continued economic growth - China is pouring Han Chinese
into the region - and increasing urbanization among the
young generation.
Political correctness pays
off financially Despite the political
correctness, which doesn't always pay off economically,
Carlsberg as a commercial organization did what was best
for its own profitability and for the Chinese beer
market.
"The acquisition is a natural part of
Carlsberg's strategy to acquire breweries with a strong
market position in emerging markets, especially in Asia
and Eastern Europe," the company said. But it was a
logical next step from Carlsberg's acquisition of the
entire share capital of two breweries, the Dali Beer
Group and Dali Beer. Yunnan, China's most southwesterly
province, is near Tibet and Dali is the province's
largest brewery. Yunnan has a population of 43 million
but a per capita beer consumption of only 4.2 liters -
it has a lot of catching up to do.
What remains
to be seen is how many foreign acquisitions and how much
investment will be required before China establishes a
genuine national beer market that can operate in a
global context.
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