Premium opportunities in Chinese beer market

China may have overtaken the US as the world's biggest beer market, but the growth potential there is far from exhausted. But consumption patterns are changing, with rural drinkers taking over from their urban counterparts in driving market growth.

Chinese beer consumption grew by around 6 per cent in 2002, helped by steady economic growth and increasing disposable incomes, but as beverage industry analysts Canadean point out in a new report, the traditionally strong urban market could finally be reaching maturity.

In addition to boasting the largest population on Earth, China is a huge country geographically. Consumption varies greatly from region to region but is particularly strong in urban areas among 25-45 year olds.

However, the explosive growth seen prior to 1997 has now slowed. Rural per capita consumption is almost 60 per cent lower than that in towns and cities, offering significant potential for expansion, Canadean said.

But international players will still find it hard to take advantage of this potential. Chinese consumers have a very strong affinity with domestic brands, which account for an estimated 96 per cent of all beer consumed, Canadean said. But local producers are not particularly efficient, with production capacity exceeding consumption by some 40 per cent, resulting in an inevitable price war.

With the cost of imported barley continuing to rise, and to reduce margins, many smaller producers are finding it increasingly difficult to survive. Half of the country's 500 breweries are facing bankruptcy.

The problems are compounded by exceptionally high transport costs which restrict the sale of most beers to within a limited radius of the production plant. Meanwhile, the well documented SARS epidemic has seriously affected restaurants, tourism and the entertainment industry.

But if locally produced standard beer continues to dominate the market for now - accounting for almost 90 per cent of the market - consumers are now becoming more sophisticated and are developing a strong taste for premium beers.

Fuelled by a recent boom in pubs and bars, premium beer is the fastest growing sector, increasing by 34 per cent in 2002 alone. Competition between local and imported premium beers is fierce, with numerous new products being launched as companies attempt to gain a foothold.

Although it has many obstacles to overcome, the Chinese beer market offers plenty of cause for optimism, Canadean claims. Domestic production is now the biggest in the world and thanks to Taiwan lifting a ban on goods imported from mainland China, 2002 exports rose by a very encouraging 54 per cent. The upgrading of equipment and technology has greatly improved beer quality and huge new distribution channels have been provided by the continued expansion of supermarkets and cash and carry outlets.

Canadean predicts a slight increase in 2003 with further modest expansion expected in the short term. But the government policy of one child per couple, introduced 20 years ago, has not yet impacted the core beer drinking audience of 25-45 year olds. When it does, the picture could be an altogether different one.

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