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Shifting Power in the Beer Market

July 26th, 2014

There is an on-going global economic shift in power from West to East, a phenomenon the beer market began to witness years ago. In 2002, according to Euromonitor International, China overtook the USA to become the leading beer market in terms of volume sales. However, in spite of this achievement, China still has some way to go before it can claim to be the world’s biggest beer market by value.

Following years of mid single-digit to low double-digit volume growth rates, the Chinese market boasted a volume size more than twice that of the USA in 2013. Yet, when it comes to value sales, China is yet to reach the dizzy heights of the USA. In 2013, the Chinese beer market was 79% the value size of the USA beer market in fixed USA dollar exchange rate terms, so is not too far off from overtaking it. In fact, Euromonitor International forecasts that by 2017 China’s beer market will grow by 45% and thus assume the leading position in value sales terms.

Source: Euromonitor International

 

Looking to the future, China derives its potential for further volume and value growth from a range of macroeconomic and demographic factors. Positive volume growth in China is forecast to continue to 2018, significantly aided by a growing legal drinking age population and increasing affordability. When comparing the affordability of a 330ml can or bottle of beer, one observes a converging relationship between the two markets. This degree of affordability, in hours worked, is primarily derived from rising disposable incomes, which are forecast to grow in double-digit terms over 2013–2018. As the legal drinking age population is expected to grow faster in China than in the USA over 2013–2018 in absolute terms, brewers will be capturing prospective demand that has been dormant for years. This will derive from expansion in the consumer base due to demographic and market-related dynamics such as urbanisation and the spread of modern retail channels.

Source: Euromonitor International from national statistics

 

Taking a closer look at the USA and China, growing consolidation was witnessed in China over 2008–2013, while the USA is highly consolidated, with 88% of volume sales deriving from the top five brewers in 2013. In the USA, saturation in acquisition activity was significantly affected by anti-trust laws and the growth of the craft beer market that slightly reversed the consolidation trend between 2008 and 2013. In China, the attractiveness of volume sales growth rates prompted major Chinese and multinational brewers to pursue wider provincial coverage. Exciting prospects for volume sales attracted the biggest brewers in the world to China, with them entering various provincial markets.

Opportunities for global brewers to expand in China are unlike those in the USA, where acquisitions are restricted by high sunk costs and anti-trust laws. In China, the government is protective of domestic companies and will actively apply policies that do not give majority control to non-Chinese organisations. For such a reason, non-Chinese brewers such as Carlsberg A/S and SABMiller Plc. are entering and expanding in China’s beer market via strategic alliances or joint ventures. SABMiller was technically the fourth biggest brewer in China in terms of volume sales in 2013, but does not register as so. This is because it has only a 49% minority share in China Resources Enterprise and Snow, the biggest beer brand by volume in China and the world, thus not qualifying as its owner. Carlsberg’s ranking of fifth, meanwhile, derives from its provincial associates and the acquisition of local brewers.

 

Source: Euromonitor International

 

In emerging beer markets it can be expected that unit prices will become more affordable and consumers will opt to trade up to superior brands. With expected income growth and increased affordability in China, the market will begin to see changes in the beer pricing landscape. In 2013, economy lager in China accounted for 82% of overall beer volume sales, compared to 25% in the USA. Even though China is the largest market in terms of volume sales, it is still relatively immature, as highlighted by its undersized premium beer segment. China’s current prominence in terms of economy lager highlights the significant potential of the premium space, alongside further volume growth in the economy segment. By 2018, Euromonitor International expects economy lager to account for 76% of standard lager volume sales. Whereas in the USA, slower dynamics will see the premium lager segment grow to a 27% share of standard lager volume sales.

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