The Beer Market: Consolidation and Competition

Unlike the US market for beer, which has been steadily dropping in prominence over the last 5 years, China’s beer market stands as the world’s most lively.

China is now the world’s largest producer and consumer of beer. China’s Snow Beer is now the world’s largest brewer by volume and the market share leader in China. Tsingtao is a close second and is rapidly innovating its product line up. Yanjing, a local producer, is third. SABmiller and ABinBEV are in the hot pursuit with their foreign brands, domestic purchases and controlling stakes in other breweries. (SABmiller owns 49% of Snow).

But there are over 300 beer producers in China! While the heavy hitters listed above control more than 60% of the entire market, small local producers continue to dominate away from China’s Tier 1 and Tier 2 cities.

Enter consolidation. As beer’s biggest players continue to eye the China market, they will look to buy up these smaller producers and increase their reach deeper across China. Awhile back, Harbin Brewery and Sedrin were gobbled up by what is now ABinBev.

If consolidation is one key trend to watch, increasing competition is certainly the second most important trend. While China’s beer market may wow potential investors with its size, this is a hard place to succeed. China’s beer is cheap. As one industry expert explained, a keg of Snow sells for about US$ 35. But most of that value is from the steel in the keg. The liquid inside, the actual beer, composes only a tiny fraction of the cost of the filled keg. Snow thrives off its volumes and must be the biggest in the world in order to survive with its razor thin margins. Budweiser, considered a premium brand, sells for about 1 USD. Again, small margins.

With these thin profits, beer companies have to be creative to differentiate themselves, attract new customers and convince people to spend a little more and avoid the cheap bottles on the shelf.

Two examples of this trend are Carlsberg and Suntory. Both are clearly targeting the younger generations in an attempt to bring in new drinkers with a more premium product.

Carlsberg’s campaigns attempt to speak to China’s post 80s generation with their overt displays of attitude and cool. Suntory, with its Mix flavored drinks, is trying to convince China’s female population, a segment not too keen to drink bitter and calorie rich beer, to try their new fruity creations. Many other brands are sponsporing music concerts and younger events to try to attract these drinkers. (China’s official drinkage age is 18.)

These are pretty smart strategies. As our internal research demonstrates, China’s younger drinkers prefer beer. Of course, beer is also incredibly cheap and always available in this segment’s favorite locations: Karaoke joints, restaurants and streetside eateries and clubs.

As consolidation takes over China and competition heats up, enoVate will surely be here to deliver insights and strategy for all of you interested in China’s beer.

China’s Wine and Spirits: “The Budding Yuppie Phase”

While China’s beer market faces a future of intense consolidation and competition, the spirits market in China is, in the words of one industry expert, in the Budding Yuppie Phase.

This contact was referring to alcohol consumption in China’s Tier 1 and Tier 2 cities and the drinking habits of China’s middle and upper class citizens in these cities. While even premium beers (excluding imports) remain relatively cheap in China, the wine and spirits market is in a completely different phase.

“Budding,” refers to the almost adolescent stage of growth in the market. Wines, vodkas, whiskeys, rums, etc are all rather new to China. Only recently have Chinese in big cities started to consume these products but their consumption has skyrocketed in the last few years and will continue to grow.

By yuppie, we refer to consumers’ tastes for brands. Consumers are not yet “mature” and concerned with finding eccentric niche brands. Chinese consumers are not looking to locate a Pinot Noir to convince their friends of their knowledge of wine. Instead, many Chinese are just looking for well-known international wine and spirits brands and buying them to display their wealth. After all, as many who have experienced long Chinese banquets know, those bottles of French wine aren’t for appreciation. Many times they will just be chugged alongside Baijiu and beer.

Chinese consumers are buying Scotch in such large quantities that they even caused a supply scare last year. Research suggests that Chinese consumers are doing so because Scotch is world renowned and perceived as a symbol of status. The most famous premium vodkas also do well in China because of their brand awareness.

Have you strolled around Shanghai or Beijing recently?

If so, you would notice the explosion in wines.  Chinese consumers in tier 1 cities are buying up all the foreign wines they can. Again, most consumers want to display their wealth or impress guests, friends or coworkers. Tea is meant for appreciation, not wine.

We are not neglecting the importance of China’s domestic wines. Baijiu will of course, still be an important drink for banquets and business. Other Chinese wines (huangjiu, etc) will also continue to be consumed at family gatherings, at restaurants and at the dinner table. We at enoVate are not ignoring these products, we only worry that their brands are losing their resonance with China’s youth and thus may have a hard future in a saturated market.

We at enoVate thoroughly enjoyed our time analyzing the alcohol market. Should you need any of your own tailor help within this industry, contact us at matt@enovatechina.com.

Have you heard the rumors about fake wine in China?

At least in Shanghai, it’s hard to walk a block and not see a wine store. Eventually, you start to wonder about possible quality control issues. Is this little shack of a wine store really selling “authentic” French product?

So today we at enoVate wanted to learn a little more about wine in China.

One report, back in 2004, seems to have sparked all of this attention. According to a survey by the China National Administration for Industry and Commerce, more than 70% of “imported” wines sold in restaurants and hotels in the Beijing, Shenyang, Chengdu and Zhengzhou were found to be fake. 70%!

More recently in 2007, The Shanghai Academy of Sciences reported that more than half of all wines in Shanghai were counterfeit.

Clearly a lot of those wines you see for sell are not what the label says they are.

But what makes a fake wine?

Most products are in fact just wine produced in China and poured into bottles with counterfeit foreign labels. Many alcoholic beverages (whisky, beer, vodka,etc) are similarly faked.

But some inexpensive “wines” may not even be wine at all. In a recent report, Chinese investigators discovered that many wines consisted of little more than water, pigment and alcohol, with trace amounts of grape juice.

Here is an interesting case of one counterfeit producer in Guangzhou. Makes you wonder how many times you have had a glass of something similar.

Read here about Canada’s troubles with the industry.

China has certainly been stepping up enforcement. The problem, however, is clearly ingrained in the industry and not likely to disappear anytime soon. Technology may help though. Here is a list of some of the latest techniques to help fight counterfeiting.

Here too is another interesting technique.

enoVate will keep an eye on this industry. We will also now suspect most wines we imbibe….

Yup. Harbin beer, a smooth lager, is China’s oldest brew. It beat out Tsingtao by three years! A quick surview of enoVate’s Chinese staff suggests that this tidbit is common knowledge in the Middle Kingdom. Regardless, this beer is worth learning about.

Harbin Brewery was founded in 1900 by Russians in the northeastern city of Harbin to supply beer to Russians working on the Trans-Manchurian Railway Project. Later, a group of Chinese and Czech’s took it over. During WW2, the brewery again reverted back to Russian hands when Soviets took it over. Eventually, in 1950, the brewery was taken over by the Chinese State.

Earlier this decade, after a prolonged battle with SAB Miller, Anheuser-Busch (now ABinBEV) finally bought the company and now controls it outright.

Despite its long history, Harbin beer isn’t, in fact, a major player on the China domestic scene. It is not in the top 10 of beers in China and so doesn’t control even 1.5 percent of the beer market. Even in Shanghai, it can be hard to find a bottle of Harbin.

But ABinBev is looking to change that. The company hopes to reach 187 different markets in the Mainland this year (most outside of the North, it’s traditional power market) and 200 by 2010, up from 157 markets in 2008. The beer is now available in the US and many other markets and, as new reports flowing out of the company affirm, they are looking to make a national Chinese brand to compete with Tsingtao.

Good luck Harbin beer!

There are numerous reasons for cosmetics prime placement on the first floor of all department stores, but foremost among them is cosmetic’s sheer market power. Estimates suggest that the cosmetics market in China will still grow 11% in 2009, just 1% less than 2008’s rate. Clearly, these goods are recession-proof.

In China, the cosmetics industry is not only resilient, but also huge. This author has estimated its size from anywhere between a $5 and $10 billion dollar industry in 2008. Why the range in figures? Different definitions. Viewing the segment from a legal perspective, many would include shampoo, hair dyes and deodorant in the definition of cosmetics. Many others cap their inclusions at just skin care, perfumes, lipsticks, fingernail polishes, eye and facial makeup preparations, items most consumers consider “cosmetics” or the “beauty market.”

At least in China, skin care products are certainly the force behind these figures. In the Mainland, skin care accounts for an incredible 80% of the beauty industry’s product share. Colorful facial makeup, in China, does not command the same attention it does abroad. As anyone who has lived in China understands, skin is big business here.

As with many other markets in the Mainland, the cosmetics market is also highly segmented. P&G and its Olay brand control the biggest share of the market. L’Oreal is a close second with about 10% of the entire market and made a cool $1 billion in revenues in 2008. After these two powerhouses, we see Estee Lauder, Shiseido, China’s Jahwa, Avon and others. But, according to sources, the top 20 cosmetic manufacturers hold only about 50% market share. That means there are hundreds of local brands out there that we won’t have space to detail here

Don’t assume that we are only talking about women consumers. Men’s skincare is a growing segment with cosmetics. L’Oreal reported that men’s products now contribute almost 12 percent of L’Oreal’s sales revenue in China and this figure is expected to dramatically increase. It’s pretty hard to avoid Biotherm ads nowadays and many brands report that their men’s business is their fastest growing segment.

And how are Chinese getting these goods. In fact, the distribution network is fairly similar to other nations’ markets. Specialty retailers and departments stores are the first stops for premium and mass premium cosmetics. Supermarkets, grocery stores and pharmacy chains (Watson’s in particular) provide mostly mass market and a few more premium products.

China, though, remains unique for two reasons: Taobao and direct selling. As enoVate blog readers will know, Taobao is a force to be reckoned with. As our own contacts have told us, many cosmetic brands worry about Taobao. Chinese consumers are smart. Many visit department stores to sample cosmetics and then buy them off Taobao at home and for a discount. Other customers use brands’ websites to do their own research but then Ctrl T over to Taobao.

Direct sellers themselves haven’t yet found the pot o gold in China. In Taiwan, 1 in 4 buy their cosmetics from direct sellers. In China, the figure is 1 in 20. The Chinese government very early on made clear is dislike of these “unscrupulous multilevel marketers” and banned direct selling until 2006. Mary Kay, the first “direct seller” to enter the China market, originally created a network of retail stores. After the lifting of the ban, Mary Kay, Avon and others have reignited their direct selling activities and continue to expand. enoVate will certainly keep an eye on these developments.

From men’s cosmetics to Taobao’s growing clout, enoVate will continue to keep abreast of these cosmetic trends!

First and most importantly, celebrity endorsements are as much art as science. While some marketing professors and other thinkers have tinkered with a way to measure the effectiveness of an endorsement on the brand, the majority of materials out there suggest that this link is almost impossible to measure. Some endorsements clearly drive a company’s sales. Some do not. Others are just plain difficult to analyze.

Sometimes an endorsement clearly affects sales. Let’s take the local clothing brand Semir. In 2003 they chose Nicholas Tse, a Hong Kong star, as their endorser.

A wise decision. Sales of Semir’s clothes jumped in 2003. The brand added 100 franchises in 2003, a number far greater than that of 2002. For the five years that Nicholas was the spokesperson, Semir was averaging 50% increases in sales each year! Customers in stores were reported to say things like “I love Semir because of Nicholas!”

Here is a clear example of an endorsement driving sales. Semir’s clothes weren’t driving the increase: the line that Nicholas endorsed was certainly not too different than previous seasons. Apart from Nicholas, nothing about Semir was new.

But there are also some mismatched partnerships. Many Chinese citizens refuse to believe that Tiger Woods, the world’s greatest golfer, should be driving a buick. Buick is reportedly paying Tiger USD 8mil/yr for this endorsement, but is it fair to assume that he is not creating 8mil in new car sales?

And what is your celebrity isn’t the squeaky clean poster child you paid for? Who remembers Barry Bonds’ inhuman growth and Kate’s taste for white powder? hm….

Brands and their legal teams have figured out how to at least build in an insurance plan with these endorsements. Morality clauses! These legal gems are embedded in endorsements contracts. If an endorser violates this provision, a company has a legal right to end the contract. The prohibitions can include almost anything the company wants to put in, from breaking the law to just talking bad about the brand.

Some believe that celebrity endorsements are a sure way to better a brand. Others vehemently disagree. There are thousands of papers and polls that will prove either point.

So let’s be bipartisan and try to derive something out of this mess. Well, it’s clear that choosing the right celebrity to endorse your brand can, at least, NOT hurt your it. Best case scenario, that celebrity can actually be good enough to drive people to purchase. But a poor choice can certainly hurt your image.

Because there are very few ways to accurately measure the effect of your celebrity (except in a few extreme cases), it’s also inherently risky to hire an expensive celebrity, a human likely to make mistakes and fumble in the public spotlight, to endorse your product.

But as Semir’s example proves, a smart choice that matches the brand image and desires of your customers can clearly propel your brand into the stratosphere. China has yet to invent a Q Score (America’s scoring system for its celebrities and their likability) but here is a partial list that details the going rate for some Chinese celebrities. It’s anyone’s guess if any of these expensive talking heads will help your brand, but at least choose someone who fits your image. enoVate hopes to not see Jackie Chan endorsing Nascar.

One day, as I drank coke, I suddenly thought of 非常可乐(Future cola, a local soft drink brand). Then I was thinking about how they lost their market share in tier one and tier two cities. Originally, these markets were saturated with Future Cola advertisements, a strategy that made many of us believe that a local brand might finally able to stand out in this industry. But what happened?

Another local fast food brand “德克士” (Dicos) was about to breakthrough but was soon almost squeezed to death by KFC and McDonald’s. In the end, they were able to win market share only in tier three and tier four cities.

However there are still some Chinese brands like “真功夫”（real kung fu） and “老娘舅” （Lao Niangjiu）that are finding their way to success. These brand wars don’t just occur in the food and soft drink industries. Let’s look at some other brand and their stores in China.

NIKE and ADIDAS, two brands that now combined control at least half of China’s sportswear and trendy shoes markets. Yet they have both expended an immense amount of time and resources to wrest this share.

You can find that colors of their shoes are not the same as what they sell overseas. A lot of Chinese people complain colors and design are different here, but you have to admit that they sell pretty good, the reason is simple , trends at abroad do not comply with Chinese market. Therefore, most of people work for their china design team are locals, I believe this is also happened in other countries.

China, as one of the biggest export bases in the world and its the population and consumption trends provide an always enticing market for all foreign brands. Millions each year are spent on manpower and resources to research the China market and its consumers. In general, China’s mindsets are different than their western counterparts, so much of this research is a good idea. And China is a complex place with huge differences in geographies, wage levels and spending habits. Shanghai is China’s poster child city of wealth and cosmopolitan flair so many brands enter the market first there and then move to other locales.

Generation differences are especially difficult to address in China’s market. It’s a hard work for brands to win the hearts of young consumers! Like the Italian brand Diesel. Diesel is a far from a luxury brand abroad, but it quickly became a top brand in Hong Kong and mainland. Actually I really admire the company or agency that helped them improve their brand image. This company helped Diesel appear on the first ten pages of magazines next to brands like LV and Boss and some of the world’s most expensive brands. This work has directly helped elevate the brand’s image. Such tactics may not work for every brand. There are some foreign brands that have failed in china because they went the wrong direction with the brands.

Therefore, in China, the brands will be like an old Chinese saying: 近朱者赤近墨者黑（one takes the color of one’s companions). Trends in foreign countries is like China’s national policy: sustainable development. But in any case they should sit in the right seat .

In the world of endorsements, this summer will be remembered for the idol drama “一起来看流星雨” (Let’s go to see the Meteor Swarm together ). The TV show was adapted from Japanese manga artist Yoko Kamio’s “Boys of flowers,” a piece that had already spawned successful TV series in Japan, Korea and Taiwan.

Hunan TV Station released the mainland version this summer with great fanfare. The response was overwhelming, though not necessarily positive. Many decried the show as the worst example Shanzhai on Chinese TV. Others supported the show. Either way, few predicted the amount of attention and commentary the show would generate.

While some will remember the show for its ability to take 5 former reality TV contestants from obscurity to instant stardom, we at enoVate are more interested in the show’s ad placements and impact.

Fans and detractors of the show were most vocal about the never before seen level of advertising. A product placement ad appeared almost every 5 minutes. From the MG car that the characters drove to the school uniforms that were created by Metersbonwe, many scenes were filled with obvious product placements. Even the shampoo was clearly an ad placement.

Many online started to protest against the show’s level of sponsorship. Netizens complained that they felt inundated with hard sells and ads and that they were no longer watching a drama but rather an extended commercial.

If we ignore the online noise for a moment, we can find some insightful takeaways. The show quickly topped Hunan TV station’s list of most watched programs. Since the show launched online, up to 30 million people searched for its name on busy days. The program’s two main actors, Zheng Shuang (郑爽) and Zhang Han (张翰), have both made it into the top 3 “most searched entertainers” list. Other actors（Yu Haoming 俞灏明and朱梓骁 Zhu ZiXiao) are also ranked within the top 20.

While we cannot quantitatively access the impact of these product placements, if the above example of actors catching fire is in any way representative of the power of the show, brands should be pleased with their strategy. The show’s audience was the 15 ~ 28 years old segment, the most important consumer group in China. Despite the grumbles from some about the saturations of ads, these brands were tied to some of the biggest stars in China over the summer and anyone who tuned into the show is now more aware of these brands and their products. Even if there wasn’t a direct increase in sales from some of these brands, they were, at the very least, still the topic of conversation for millions of young Chinese this summer. This author thinks that is a great example of the old adage “any publicity is good publicity.” As a viewer, sure, I would have appreciated a few less obvious ad placements, but as marketer I can appreciate the power of the strategy. A more creative use of ads will hopefully appear next summer, but until then, we can sit back and appreciate this summer’s most impactful marketing.

And what is better than Shanzhai YODAs!

This Yoda doesn’t strike this author as particularly wise. Not sure his gaze will strike fear in the galaxy’s evil doers!

Luckily I also found my yoda halloween costume on taobao.

The Green 001 shoe is itself a success in eco friendly design. The shoe body, insoles and shoelaces use natural eco-friendly materials such as paper materials and better cottons.The “Green 001″ also comes with a unique shoebox that showcases a new logo and the slogan “ONLY ONE EARTH.”  There are pictures of endangered animals on the bottom of the box. In addition, a picture of  Maathai, a Kenyan environmental activist and winner of the Nobel Peace prize, is printed on the box. Yup, you get it, this is one GREEN shoe.

Yesterday enoVate’s Street Team hit the mall to interview young Chinese about their attitudes on eco friendly products. Check out some local fashion and hear what people are saying:

Humin Shi, a 20 year old from Shanghai, remarked that he really didn’t know much about eco products. Our Street Team brought along an organic cotton T and a regular T for comparison. When Humin felt both he said “wow! I truly think that the organic material is more smooth and comfortable.” Humin said he would certainly pay more for an organic T

These two were happy to learn that there were organic cotton Ts and other eco products on the market. Both said that they would certainly pay more for an organic T, as long as they knew it was truly an organic product that was better for the earth.

We encountered similar reponses. While a few people weren’t too worried about ecofriendly products, most people, after they learned a little more about the eco friendly organic T, said that they would buy the organic one, even if it cost more! As for how much more they would be willing to pay? Answers varied, but most suggested that they would be willing to pay between 20 to 50 RMB more for the shirt!

As eco week comes to close, enoVate will be compiling even more research. Look for more!