February 22, 2017 1:00 pm JST

World's biggest beer market keeps getting smaller

Third year of falling Chinese output comes amid rumors of consolidation

DAISUKE HARASHIMA, Nikkei staff writer

China's world-leading beer market looks far from a recovery.

DALIAN, China -- Chinese beer production fell for a third straight year in 2016, and the slowness of brewers to pursue efficiency and keep up with changing consumer tastes has stirred speculation that major players may combine.

Beer output totaled around 45.06 million kiloliters for 2016, according to the National Bureau of Statistics, down about 4.4% from a reported figure of around 47.15 million kiloliters for 2015. (Oddly, the bureau gave the year-on-year decline as 0.1% without publishing a revised result for 2015.)

China is the world's largest beer market, double the size of the second-ranked U.S. and eight times that of Japan. Accounting for more than one-fifth of the global market, it heavily influences the performance of the world's leading multinational brewers.

Some within the industry are optimistic that this year will be better. But brewers still confront forces such as China's decelerating economy and President Xi Jinping's crackdown on official extravagance. 

Slow to streamline

Domestic beer companies have yet to resolve issues stemming from acquisitions dating to the prior decade. China once had an estimated 800-plus breweries. But since 2000, large players like market leader China Resources Beer (Holdings) and No. 2 Tsingtao Brewery have swallowed up many smaller ones, leaving five companies to control roughly 80% of the market.

Yet efficiency improvements have been slow, as the dominant brewers have maintained their undersized acquisitions as they were. These sites mainly produce bottled beer, and many are not equipped to churn out canned beer, which is becoming the mainstream. China Resources and Tsingtao, both of which are state owned, may have hesitated to consolidate these breweries out of concern for local employment.

The market also is crowded with too many brands because many of the acquired ones are still available. Minimal increases in production efficiency leave the bloated big players shouldering the burden of their inaction.

Full-blown efforts to produce more appealing brews have just begun. Chinese brewers long emphasized price over taste, selling their product for as little as 2 to 3 yuan (29 to 44 cents) per 500-milliliter bottle. As a result, consumers now perceive domestic beer as cheap. Even midrange and high-end offerings fail to compete with high-profile global brands such as Budweiser and Heineken.

There has been endless speculation that consolidation among big players is brewing. China Resources in July raised 9.5 billion Hong Kong dollars ($1.22 billion) through a private placement of shares. The money likely will be used in an acquisition of the No. 4 player, Beijing Yanjing Brewery, a source familiar with the matter said. Some expect Tsingtao will buy Chongqing Brewery from under Danish company Carlsberg.

Beer goggles?

Chinese beer companies may have propped up output to make their sluggish performance look better.

December production jumped 15.2% on the year after six months of up-and-down volume that rose no more than 4.9%. The sharp year-end increase is unexplained. Summer usually is the high demand season for beer in China, as in other countries, with December typically a down period ahead of the Lunar New Year in late January and early February. Beer producers may have cranked up output to avoid a third consecutive annual decline since the market peaked in 2013.

A similar practice is not uncommon in Japan, though the motivation differs. As beer companies battle for bigger market shares, which affect their marketing strategies for the following year, producers sometimes boost output in the final month of the year to make numbers look good even when sales are not as strong. This at times shows in a month-on-month drop-off in January. The practice is an open secret in the industry.

It is unclear whether Chinese brewers sought to prop up output volume. But if that is their game, consumers may simply fill their glasses with another beverage.

Asia300

Tsingtao Brewery Co., Ltd.

China

Market(Ticker): HKG(168)
Sector:
Industry:
Consumer Non-Durables
Beverages: Alcoholic
Market cap(USD): 6,437.18M
Shares: 1,350.98M

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