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Chinese brewers poised for further consolidation

Beer market shrinks for third straight year while foreign brands thrive

Young Chinese consumers are increasingly turning to foreign beer brands.

DALIAN, China -- Faced with a shrinking domestic market for the third straight year, China Resources Beer and Tsingtao Brewery have struggled to turn around their fortunes, fueling speculation that China's two biggest brewers may join hands.

Production last year in the world's largest beer market amounted to 45.06 million kiloliters, about twice that of the second-place U.S. But the market peaked in 2013 and has declined ever since. Domestic output fell 4% in 2016, according to recently released figures.

Keen on acquisitions

"We are paying careful attention to every opportunity for mergers and acquisitions," said Hou Xiaohai, CEO of CR Beer, choosing his words carefully during the late March session where the company presented its annual figures. Net profit for the country's largest brewer declined 6% to 629 million yuan ($91.2 million) in 2016, so the pressure is palpable.

Questions concerning CR Beer's M&A strategy dogged Hou that day. Japanese brewer Asahi Group Holdings is said to be planning to sell off its 20% stake in Chinese affiliate Tsingtao, which holds the No. 2 market share in China. Should CR Beer scoop up those shares, the resulting alliance would control more than 40% of the market.

When asked about Tsingtao, Hou spoke haltingly. "We are interested," he said. "We will make an announcement if we decide anything, but I cannot say anything else."

Tsingtao's net profit plunged 39% last year to 1.04 billion yuan. Domestic sales by volume dipped about 7%, reflecting the dire situation on the ground.

This appears to be the first time the top two Chinese brewers have reported drops in profit in the same year.

Hard to swallow

Not only has economic growth gone soft, the austerity measures imposed by the Chinese leadership have sapped demand from lavish banquets. Consumer tastes have also diversified to other alcoholic beverages like wine and whiskey.

Much of the beer produced in China comes in 500ml cans costing about two to three yuan each. But "all of them have 2-3% alcohol by content, the flavors are thin and flat, and consumers have become tired of them," said an executive at a major brewer.

Apparently lending credence to that view, foreign imports are enjoying brisk demand despite the overall shrinking market. Imports grew 20% to 646,000 kiloliters in 2016, according to Chinese customs data.

Euromonitor, the British research firm, predicts the Chinese market share for premium labels, a category costing 9 yuan or more and occupied mostly by foreign brands, will climb to 13% in 2020 from 6.6% in 2015.

Prices of foreign labels range between 8 yuan and 10 yuan, but their flavors afford them a competitive advantage. "Foreign beers are appealing because they have their own different flavors," said an employee at an information-technology company in Dalian. "I can choose [a beer] that matches the food I'm eating or whatever mood I'm feeling that day."

The 30-year-old, who fell in love with foreign beer at bars and restaurants, said that "from now on, I'll choose based on quality."

Survival of the fittest

The shift in market dynamics and consumer tastes has hit other Chinese brewers as well, with earnings underperforming across the board. Fourth-ranked Beijing Yanjing Brewery saw its profit and sales both narrow for the first nine months of 2016.

Tsingtao, which suffered the same fate for two straight fiscal years, is seen to be in a poor position to handle a turnaround on its own, prompting a series of maneuvers surrounding its shares. Asahi's 20% stake is worth about $1.2 billion based on the current share price, according to Chinese media and other sources.  

Besides CR Beer, Danish brewer Carlsberg is reportedly looking to make a bid for Tsingtao. But Tsingtao, aiming to survive on its own, is making a play for Chongqing Brewery, a unit under Carlsberg's umbrella.

Meanwhile, CR Beer has raised 9.5 billion Hong Kong dollars ($1.22 billion) and dissolved a joint venture with British beer giant SABMiller. The Chinese brewer is also said to be considering a purchase of Beijing Yanjing Brewery.

About 800 brewers once crowded the Chinese beer market. But starting in the 1990s, when the economy took off, CR Beer and other players scaled up by buying out small regional outfits. Now the five biggest brewers control 70% of the market, and the oligopoly may consolidate even more as the leaders fight to survive on a smaller playing field.

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