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.

As I visited the various types of retail outlets that sell alcohol in Beijing, I started to notice something. An increasingly amount of retailers are dedicating shelf space to grape wine.  Don’t get me wrong, wine still lives in the shadows of bai jiu and beer in terms of consumption in China.  However, wines are definitely making their presence known in the aisles and shelves of supermarkets, convenience stores and specialty shops.

I especially took notice of this in my neighborhood, Wudaokou. Wudaokou is located in the Northwest part of Beijing, where there is a high concentration of universities. Within kilometers, we have Peking University and Tsinghua University, often compared to as the Harvard and MIT of China. I suppose Wudaokou’s US equivalent would be Harvard Square? A year ago, I had to trek across town to find a bottle of wine. Not anymore.

Every neighborhood in China has a local convenience store that is within walking distance and is stocked with all of your basic needs. Up until now, my local shop only carried bai jiu and beer. Now they offer 3 local brands of red wine. Though, had I not been in the beverage aisle, I would have mistaken it for soy sauce.

The two main supermarkets in my neighborhood might have carried wine but if they did, I didn’t see it. Now, its hard to not notice the shelves of wine sharing an aisle with the shelves of bai jiu.

The specialty tobacco and liquor shops typically carry more tobacco than liquor. And the liquor is often limited to just bai jiu. The Changers Tobacco and Wine shop located at the south gate of Tsinghua University, has remodeled and built a wine corner with Wudaokou’s largest collection of imported wines.

Even the 7-11 in Wudaokou has decided to carry grape wine, both local and imported brands. As a matter of fact, you can now place your order for this years harvest of Beaujolais Nouveau at 7-11.

What is even more impressive than the selection of wine I now have at my disposal. Is the dedicated sales staff in these aisles. I applaud the effort local brands and their distributors are making to train staff, so they can inform consumers and make recommendations. Even the cashier at the 7-11 was able to highlight the uniqueness of Beaujolais Nouveau. I was impressed with the pitch but not the price.

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….

If you missed any of our other weekly theme research broadcasts, head over to the broadcast page and click on the downloads.

Recently in Shanghai, we’ve begun to notice Taiwan Beer popping onto shelves in convenience stores and restaurants throughout the city. Taiwan has been lobbying to gain access and trademarks in the Chinese beer market for over a decade and its recent success could be attributed to a warming in relations. It’s no surprise that Taiwan’s beer of choice is heading to the mainland, but will Chinese consumers buy a beer with such political baggage as this carries? It’s an interesting topic to debate, and if successful could trigger more and more cross-straight product and advertising.

Reuters has an excellent video on this topic as well as a good breakdown of the Chinese beer market.

Chivas and Black label have succeeded in becoming men’s most favorite alcohol, however, baiju is more often seen at important political banquets or business activities. It seems like there are places where men can’t be without alcohol. Some say, man is like alcohol and alcohol is like man. Men like drinking because alcohol understands them. Alcohol and men are inherently linked. Happy or sad, a man can pour his feeling into alcohol. The spirit of alcohol merges one’s feelings about life and human experience, making happiness, sadness and alcohol all the same, just mere sediments at the bottom of our hearts.

I conducted a quick survey on Xiaonei. 178 people all born in the eighties took part. 21%of them don’t like alcohol or had never drunk any before, whereas 25% like beer the most. So it seems that beer has become the favorite alcohol for the eighties generation. Beer gives ’80 hou’ (80′s kids) a sense of belonging. Maybe as we are still young, we haven’t yet tried Chivas or Black Label. Maybe we are too trendy, so we don’t like the old fashioned liquors which our grandparents like, such as Maotai(茅台) and Wuliangye（五粮液）。

Us eighties kids are in the course of becoming adults and with so much uncontrollable fervor, it’s no suprise we like a clear refreshing drink. Beer isn’t as strong as liquors, it disregards Champagne’s elegance and grape wine’s sweet & sour taste. What remains is endless joy and spontaneity.

The connection between drinking beer and the body’s sensation is irrelevant, what is relevant is the feeling of the heart. The beer brand Carlsberg have become the first flagbearers of the 80’s generation, shouting out their unhappiness. Their youthfulness and vigour seems to be propelling this group into the mainstream of society. Compared with previous mainstream groups this one is much cooler, and therefore they have become the object of attention for the older brand of Carlsberg.

中国的酒肯定有历史，可是中国酒的设计现在还在历史中迷失我想：这里面有附庸风雅的成分；有官僚礼品的原因；有不敢离开固有历史的僵化；有市场眼光的低 下；有保守求稳的设计思维；有不求上进的懒惰… … 看看日本的设计，让我们那么多光辉的岁月转化成真正令人敬佩的力量才是正经事.

Chinese wine certainly has a long history, but the design of Chinese wines has been lost in this history. I think the reasons are: the need to be elegant; that wine is a sort of bureaucratic gift for officials; the fear of moving away from a rigid history; a low perception of the alcohol market; conservative design thinking and uninspired, lazy design.

We should take a look at the design of Japanese wines. What we should do is turn our glorious years of history into a truly admirable design.

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!