The Brazilian has gone on record many times by saying that consumers, wherever they are and whatever their means, crave the thought of moving up a category, from value to core brands, then to premium and later a prestige brand. It’s all part of human nature.
While this might be a central tenet of B-school marketing theory in whatever consumer segment that needs to be defined, the strategy is being played out in AB InBev’s Asia-Pacific beer market, and is central to its dominance of China’s upmarket category.
The Far East has been turning into a fortress for AB InBev, with revenues enjoying impressive growth and its Budweiser Apac regional beer unit toasting the world’s second-biggest IPO of the year in Hong Kong two months ago.
Compared to its total revenues increasing by two-thirds of a million between 2016 and 2018, the company’s Asia-Pacific division saw its growth nearly double that of its parent.
The regional business is expected to add a further US$0.61bn by 2020, driven by healthy organic growth resulting from an increasing demand for more expensive brews and strong overall performance of the company’s e-commerce business, especially in China. That’s according to the Trefis forecast platform.
In China’s market, now long viewed as a benchmark for shifting demographics and an explosion in newly wealthy customers, AB InBev claims Budweiser leads the premium market by a country mile, accompanied by its Corona and Stella Artois brands which are also up high in the reassuringly expensive category.
As Brito put it recently in an interview with Bloomberg TV: “As middle-class consumers have blossomed, the market has become very special because they have traded up. And there we are with brands waiting for them to migrate upwards.
“As long as our consumers are doing well, they will continue to trade up,” he added. “That’s something you will see all over the world: in more mature markets and in less mature ones, there is a segment of consumers who are looking for the next opportunity to trade up.
“And in beer, in particular, that’s an opportunity in them.”
The world's biggest beer market
China is now the world's biggest beer market, with an annual consumption of 45.7bn litres a year. But the colossal numbers mask the reality that despite AB InBev’s strength in the premium category, it only has a 16% overall share, according to Euromonitor data. This puts it in third place in a market dominated by local brands, and particularly Snow Beer, the world’s most popular even though it is known to very few drinkers outside China.
Though much is made of the tariff war taking place between the US and China, the global brewer’s chief executive likes to shrug the trade tussle off as immaterial to such a “glocal” business model as AB InBev’s.
“Ninety-five percent of what we produce is local. We source locally, we brew locally and we sell back to local communities,” he said recently. “So our supply chain is not as international or global as the car industry, for example.”
Away from China’s vast and ritzy—and fragmented and cutthroat—market, Southeast Asia could hold better prospects for AB InBev. The company still does not feature even in the top 10 brewing groups in a region that like China is also dominated by local brands. But for the giant to progress, it must first make headway in the Philippines and Vietnam, Southeast Asia’s undisputed beer heavyweight markets.
According to its chief executive, AB InBev’s brands are growing very fast, albeit “coming from a small base.” To really make a mark in the region, the multinational could replicate the success of Thai Beverage by making a canny acquisition or two.
In 2017, the regional major went on to become the regional leader after it snapped up Vietnam’s Sabeco in a US$4.8bn deal that immediately saw it assume number one spot in Southeast Asia by volume.
Given how many of the area’s leading beer companies are locally based with strong distribution networks in the region, each one could be a target for the multinational, if it was so minded to spend money for share of the market.
Though Asia-Pacific as a whole has been AB InBev’s fastest-growing region overall, seeing its share in total revenues increasing from 13.4% in 2016 to 15.5% last year, gross margins have always been lower there than the parent company's in the past. This has been mainly due to it having a higher proportion of sales of premium brands in developed markets such as North America and Europe.
However, a growing focus on the premium category across all its markets will stand it in good stead in the region, and especially in China through its strong e-commerce infrastructure, to deliver gross margins that could bring better growth than AB InBev’s global operation. Indeed, Trefis predicts that the gap in margins between Budweiser Apac and its parent to narrow in the next two years.
“The company’s management expects the Apac division to be the primary growth and value driver for the company, due to which it recently listed its Apac operation on the Hong Kong stock exchange, which fetched the company about US$5 billion,” the forecaster said.
“The segment is likely to be the company’s fastest growing division, with its improving profitability helping it to catch up with the company’s high margins.”