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November 12, 2002

China usurps USA as world's largest beer market

by Andy Tiverton-Brown.

Volume sales of beer in China are set to grow by 7% in 2002, while demand increased by more than 40% between 1997 and 2002, compared to growth of just 4% in the US over the same period. This has been stimulated solely by lager and in particular economy brands, with the market being gripped by a fierce price war. This is reflected in the fact that while total volume sales are now larger than in the US, total value sales are some 4 times lower.

Volume sales of wine have also grown, especially red wine appealing to the health conscious Chinese consumer. Beer's gains have primarily come at the expense of spirits, reflected in total value sales of beer exceeding those of spirits for the first time in 2001, as the demand for popular local spirits reached maturity.

Local brewers dominate, as multinationals try to assert themselves

A large number of small localised manufacturers dominate the Chinese beer market benefiting in many cases from protectionism, whereby it is illegal for retailers to sell beer produced outside its province of origin. This creates a very fragmented market, with the largest manufacturer Tsingtao only achieving a market share of 11%.

Given the country’s obvious potential there was a substantial influx of international brewers during the 1990s. Initially, these manufacturers struggled to generate a profit, looking to establish niche premium brands against an overwhelming preference for cheaper economy lagers. In the face of mounting losses and excess capacity some had to cut back, including Foster's, which disposed of two breweries in 1999, and Carlsberg which sold off its unprofitable Shanghai brewery in 2001.

Local partnership is key to market entry

South African Breweries (SAB) has been one success story, by not introducing brands from its international portfolio, but instead preferring to invest in local partnerships which produce low budget brands. As a result it now owns a 49% stake in China Resources Enterprises Co Ltd, China's third largest brewer with market share of over 6%.

Other international players are also adapting their strategy to suit the local environment. Anheuser-Busch, has just reached an agreement with Tsingtao to extend its stake in the company from 4.5% to 27% over the next 7 years. Both parties see mutual benefits from the partnership, with Anheuser-Busch looking to establish itself and gain local knowledge, while Tsingtao will learn from Anheuser-Busch's global marketing expertise.

Interbrew is also taking further steps into the Chinese market acquiring a 70% stake in KK brewery, based in the Eastern province of Zhejiang and then a 24% stake in Zhujiang Joint Stock Company. In light of stagnation in Japan, Kirin has now identified China as its most important market in terms of future development and Foster's has reaffirmed its commitment, having been able to stem the losses which characterised its first 10 years in China.

International brewers cannot ignore China’s potential

In contrast to mature markets around the world which offer limited growth potential, beer volumes in China are set to grow by 35% over the next 5 years, such that it will become larger than the whole of Western Europe combined and account for almost one-fifth of world volume sales by 2007. In 2002 its per capita consumption of beer stands at 18.7 litres per annum compared to an average of 68 litres for Western Europe and 86 litres per annum in the US.

China became an even more attractive market to multinationals after its accession to the WTO. While its full impact may not be felt for many years to come, it should lead to greater liberalisation and the likelihood of protectionism rescinding over the long term.

More immediately there are also signs that the price war is waning as product quality and marketing become more important influences, with standard and premium lagers gaining more popularity especially through on trade channels in urban areas.

In these sectors there is a much greater spread of international brands, for example Asahi Super Dry is the fourth largest standard lager, whilst Budweiser experienced strong growth as the leading premium brand. Demand for branded international lagers is currently tiny in comparison to economy lager, but over the long-term these will increasingly represent aspirational brands as disposable incomes grow.

Until then international brewers are keen to access what is now the world’s largest beer market through partnerships, developing local brands and knowledge on a regional basis, preparing to take advantage of longer-term liberalisation.


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