China's beer market anything but fragile

Foreign brewers investing in China is hardly a new phenomenon, but one that has changed over the past few years. Many overseas investors had bailed out by 2000, undone by over confidence in their brands.

Initially, foreign investors came to China and established their own breweries or took over small local brewers to produce and market their own product. However, internationally established brands have never made much of an impression on Chinese consumers, who have remained loyal to their local favourites, such as Tsingtao, Harbin and Chongqing. A notable casualty was Carlsberg, who lost $20million in two years before it sold its Shanghai plant to Tsingtao in 2000.

With a 40 per cent rise in China's beer consumption since 1997, foreign brewers were forced to change their tactics. Instead they targeted some of the nation's largest beer companies.

"A joint venture with an established local partner is far less risky, because the foreign brewer can benefit from its partner's established distribution network, brand loyalty and production prowess,"​ said Secretary-General of China Alcoholic Drinks Industry, Wang Yancai.

China produces more than 24 million tonnes of beer a year, and has now surpassed the US as the world's largest and fastest growing beer market. According to beverage research company, Canadean, beer sales in China rose by 6.3 per cent in 2002, compared to 1.3 per cent in the US and 2.6 per cent in Europe. Canadean anticipates that China's beer market will expand by as much as 5 per cent per annum until 2008, compared with growth of 0.7 per cent for the US and 2.5 per cent for Europe through 2005.

The merger and acquisition frenzy started in October 2002, when Anheuser-Busch raised its shares in Tsingtao Beer from 4.5 per cent to 27 per cent. "This transaction revealed a new opening for foreign brewers frustrated by previous efforts to break into the Chinese market,"​ said Qiao Baijun, an industry analyst for China Galaxy Securities.

Latest official figures show that China has more than 500 small and medium sized breweries, with an average annual production of 50,000 tonnes. Together with foreign brewers, this accounts for 75 per cent of the market, with the rest shared by three producers, Tsingtao, Yanjing and Chian Resources Enterprise. This fragmented beer market provides a perfect hunting ground for powerful companies with a strong appetite for smaller regional players, and significantly, it is one of the few industries in China where foreign ownership is unrestricted by government.

AB's acquisition ahead of SABMiller took its share stake up to 36 per cent, with both previously having a 29.4 per cent stake, and the remaining 40 per cent owned by Hong Kong investors. Under Hong Kong Stock Exchange rules, the 36 per cent stake triggered a mandatory offer by AB for the remaining shares in Harbin Brewery that it didn't already own. This ceded control of the brewery over to AB.

S&N's purchase from Chongqing Beer is being cited as an example of the eagerness of foreign brewers in the local acquisition game, with the company agreeing to pay more than four times the net asset value of the brewery.

Analysts predict that the ultimate goal of investors is to maximise profits by producing own brand products. Heineken, which acquired a 21 per cent stake in Guangdong Brewery, announced it will produce its own Heineken brand beer in China within six months.

"We will see a rapid consolidation of the nation's beer market in the coming few years,"​ said Baijun. "We expect that a few companies, probably with some foreign connections, will emerge as the dominant players."​