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Business deals

Heineken and CR Beer aim to quench China's premium beer thirst

Partnership to vie with local rivals, AB InBev for leadership in lucrative market

A $3 billion deal signed today by two brewing giants has intensified the fight for leadership in China's premium beer market, a segment which is considered critical for future success in the industry.

China Resources Enterprise, the owner of China's largest brewer China Resources Beer, said Thursday it will buy 5.2 million Heineken shares, a stake of 0.9%, for 463.63 million euro ($536.6 million). Meanwhile, the Dutch brewer will take a 40% stake in CRH Beer, the majority shareholder of China Resources Beer, for HK$24.35 billion ($3.1 billion).

Under the partnership, the two companies will also merge their existing operations in mainland China, Hong Kong and Macau. Heineken, which is the biggest brewer in Europe and the second-biggest in the world, has agreed to license its Heineken brand to its Chinese partner in the Middle Kingdom.

CR Beer's move comes as brewers across China have been rushing to persuade consumers to favor quality over prices. Tsingtao Brewery, the country's second-largest beer producer by sales, has recently introduced its new Pilsner product to attract millennials, while Guangzhou Zhujiang Brewery Group, another leading beer maker, has made similar moves. Earlier this year, AB InBev, the world's biggest brewer, broke ground on its new craft beer production facility in Wuhan city in central China, marking the start of the Belgium-based multinational's effort to produce high-end beers in Asia- Pacific.

A deal along these lines for CR Beer, much discussed online by market speculators even before its signing, has long been viewed as the company's route to break into the more lucrative premium sector. In a media briefing on Monday, Hou Xiaohai, chief executive of CR Beer, wasted little time to confirm the speculation.

"The first goal of this partnership is to accelerate CR Beer's progress in advancing into China's high-end brewer market," Hou told reporters. "We want to seize leadership in this sector in the next five to 10 years."

CR Beer is already a market leader in China, grabbing roughly a quarter of the country's multibillion-dollar market by selling cheap beer to a large number of cost-conscious customers. Its flagship product, Snow Beer, for example, costs only one-third of Heineken.

But this business model may not last long. According to Euromonitor International, China's beer sales having been shrinking in volume terms, and the market intelligence firm expects further declines. With the Chinese population rapidly aging and wealthier youth demanding higher-quality beers, analysts say future success in China will come from the sales of premium beer, which has higher profit margins.

"CR Beer in recent years has tried hard to gain a toehold in the Chinese premium beer market, but having Chinese brands alone is not sufficient for us to gain a large market share," Hou said. "The fact is that international brands have dominated the premium beer market while Chinese brands have only taken a secondary position."

Calling the deal "a historical moment in the Chinese brewing industry," Hou said CR Beer expects to gain international brewers' know-how by engaging in the day-to-day operations of Heineken's factories in China and working closely with its management team.

"InBev has been performing very well in terms of selling premium beers. We hope that our partnership with Heineken will help us catch up and even surpass InBev on premium beer sales in the coming years," Hou said.

Part of that will be achieved by boosting the sales of Heineken Beers in the Chinese market, Hou said. For now, Heineken's presence in China remains insignificant, with a market share as low as 0.5% last year.

But that does not worry Hou, who attributed Heineken's slow sales to a lack of distribution channels in China.

With CR Beer's widespread distribution channel, "we want to make Heineken the number one brand in China's premium beer market," he said.

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