China's beer industry is brewing a new upheaval and crisis. If adjustments are not made in a timely and sufficient manner, the entire industry is very likely to fall directly into stagnation, even depression.
【Capacity Leap Forward】
On September 15th, Zhuhai Beer's wholly-owned subsidiary, Zhongshan Zhu Beer, initiated a bidding process for a capacity expansion and upgrade project, which will add 300,000 tons of brewing capacity. Prior to this, the company's Meizhou capacity upgrade project officially commenced in August, which will add a new 40,000 bottles/hour bottled draft beer production line.
In fact, Zhuhai Beer is not an isolated case; expansion has almost become the norm for all beer companies this year.
On August 28th, the Carlsberg Foshan Sanshui production base, with a total investment of nearly 3 billion yuan and an annual production capacity of 500,000 kiloliters, officially started production.
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In May of this year, the Yanjing Beer production base, with an investment of 3.6 billion yuan, was established in Rudong, Nantong, Jiangsu. This is one of the largest projects for Yanjing Beer in recent years.
In March, Tsingtao Beer's million-kiloliter high-end beer production base commenced construction at the Qingdao Beer Fifth Plant in Laoshan, with a planned total investment of 5 billion yuan for the project. Last October, the Tsingtao Beer Second Plant's 1 million kiloliter draft beer production base project had already started, with an expected completion by the end of 2024. Once operational, it will become the world's largest draft beer production base.
Similarly, China Resources Beer's previous projects in Bengbu, Anhui, and Zhangqiu, Jinan, also had a production capacity plan of 1 million kiloliters. In July of this year, the first phase of the Zhangqiu project has already started production.
Roughly calculated, the entire beer industry has added several million kiloliters of production capacity this year.
However, on the other side of the coin, the driving force in the beer market has been severely insufficient since the beginning of this year.In the first half of 2024, Budweiser APAC's total beer sales volume was 46.573 million kiloliters, a year-on-year decline of 6.2%, with a 8.5% year-on-year decline in the China region; China Resources Beer's beer sales volume in the first half of the year was 63.48 million kiloliters, a year-on-year decrease of 4.3%; Tsingtao Beer's beer sales volume in the first half of the year was 46.3 million kiloliters, a year-on-year decline of 7.82%.
In terms of performance, Budweiser APAC's revenue in the first half of the year was $3.399 billion, a year-on-year decline of 7.28%; China Resources Beer's operating income was 23.744 billion yuan, a year-on-year decrease of 0.53%; Tsingtao Beer's operating income was 20.07 billion yuan, a year-on-year decrease of 7.06%. Chongqing Beer, Yanjing Beer, and Pearl River Beer barely achieved growth, with a growth rate of only single digits.
According to Tianyancha data, as of the first half of 2024, the number of domestic catering-related enterprises that have been deregistered and revoked reached as high as 10.56 million, with about 600,000 restaurants closing down in the second quarter alone. The catering channel accounts for 40%-60% of the sales volume of beer brands, which will undoubtedly have a fatal impact on beer sales.
On one hand, the business is sluggish, and on the other hand, there is a leap in production capacity. The competition in the beer industry will undoubtedly intensify further, and a more troublesome point is that the product upgrade logic that the industry has relied on in the past few years is also likely to be terminated ahead of schedule.
[End of Premiumization]
In the past 20 years, China's beer industry has gone through two eras of "volume increase" and "price increase".
From 2000 to 2013, domestic beer production increased from 22.31 million kiloliters to 50.62 million kiloliters, with a CAGR of 6.5%, driving the industry's sales revenue from 44.6 billion yuan in 2000 to 181.4 billion yuan in 2013. During this period, leading brands such as China Resources Beer, Tsingtao Beer, and Yanjing Beer疯狂地 grabbed market share through mergers and acquisitions, joint ventures, and other means.
2013 was a watershed year. With the decline in the number of people aged 15-64, the main consumer group of beer, beer production also entered a downward cycle. From 2013 to 2023, beer production decreased from 50.62 million kiloliters to 37.89 million kiloliters.
The game of existing stock forced the industry to reduce production capacity. Chongqing Beer closed a total of 8 factories between 2015 and 2018, China Resources Beer closed more than 40 factories after 2016, reducing production capacity by 5 million tons, Budweiser APAC closed 8 factories between 2016 and 2017, Carlsberg closed and disposed of 17 factories in 2017 alone, and Tsingtao Beer closed 2 factories in 2018 and 2019 respectively.
While optimizing production capacity, leading companies continue to erode regional small and medium-sized brands. From 2017 to 2021, the domestic beer industry's CR5 market share increased from 75.6% to 92.9%. Among them, China Resources Beer, Tsingtao Beer, Budweiser APAC, Yanjing Beer, and Carlsberg's market shares in 2021 were 31%, 22.3%, 21.6%, 10.2%, and 7.8%, respectively. The pattern of five strong companies competing has been formed. With the improvement of the entire industry's competitive environment, the giants gradually gained the right to speak and the pace of development, gradually guiding the industry into the era of premiumization.From 2013 to 2021, the Compound Annual Growth Rate (CAGR) of domestic beer sales price per ton reached 7.2%, marking the industry's official entry into a development stage fully driven by price.
After 2020, the process of premiumization further accelerated. China Resources Beer crafted a "4+4" product matrix, vigorously promoting Super X in the price band of 6-8 yuan to cater to the consumer upgrade of those who dare to venture to the ends of the earth; Tsingtao Beer successively launched several high-end craft beers such as white beer and Pilsner, while upgrading the classic 1903 with a 1903 national trend can; Chongqing Beer, after receiving Carlsberg's asset injection, completed the splicing of the "6+6" brand matrix, becoming increasingly strong in the high-end market.
Because of this, the leading beer companies have had quite good times in the past few years.
China Resources Beer's revenue increased from 31.45 billion in 2020 to 38.93 billion in 2023, with net profit growing from 2.094 billion to 5.153 billion, more than doubling; Tsingtao Beer's revenue increased from 27.76 billion to 33.94 billion, with net profit growing from 2.327 billion to 4.348 billion; Yanjing Beer's revenue increased from 10.93 billion to 14.21 billion, with net profit soaring from 285 million to 855 million.
If the industry's premiumization could continue indefinitely, then the growth of companies would always be guaranteed, but the problem is that this is simply impossible.
Entering 2024, the logic of high-end beer in China has clearly become unsustainable.
The semi-annual report shows that in the first half of this year, the proportion of high-end and above products in Tsingtao Beer's main brand reached 72.6%; the proportion of mid-range and above beer sales for China Resources Beer also exceeded 50% for the first time; the proportion of revenue from high-end products for Chongqing Beer reached 59.4%; the proportion of revenue from mid-to-high-end products for Yanjing Beer reached 68.54%.
When the proportion of mid-to-high-end products reaches 50%, or even above 70%, the potential space for premiumization may already be running out.
In 2023, the average ex-factory price of Chinese beer was 55% of that in the United States, 39% of that in Japan, and 35% of that in Hong Kong. On the surface, domestic beer prices do not seem high, but if we consider the income disparity between regions, this price is actually not low.
Reality has also confirmed this point.In the first half of 2024, Tsingtao Beer's price per ton was 4,282.5 yuan, with a year-on-year increase of only 0.68%, while in 2022 and 2023, these figures were 4.8% and 6.2%, respectively.
From 2020 to 2023, Chongqing Beer's high-end product revenue growth rate dropped from 26.28% to 4%. In the first half of this year, the company's revenue from high-end products priced above 8 yuan was 5.263 billion yuan, with a year-on-year increase of only 2.82%, far behind the 11.45% growth rate of the economy segment.
Against this backdrop, the entire industry is entering an expansion cycle, which is like adding insult to injury.
It is clear that with the end of the demographic dividend and the improvement of health awareness, beer can no longer rely on quantity to drive growth. Once the price cannot be increased, the industry is likely to fall into a struggle for market share.
To continue to maintain growth, it is necessary to find a way out in advance.
[Take Japan as an example]
As a country in the East Asian cultural circle, Japan, which took a step ahead in industrialization, has a strong reference value for many industries in China.
In the 1970s and 1980s, the Japanese beer industry entered a stable development stage, with Kirin, Asahi, Sapporo, and Suntory, the four major groups, firmly controlling the market and driving the rapid increase in the average price of beer under the trend of rising alcohol taxes. However, with the end of the price increase process, the Japanese beer industry inevitably fell into a standstill.
To maintain growth, companies such as Asahi and Kirin have successively entered an era of diversified development.
In 1987, Asahi launched the super beer single product Super Dry, which quickly increased its market share in the draft beer trend. By the end of the 20th century, Asahi successively launched products such as Super Dry, non-alcoholic beverages, whiskey, and RTD (ready-to-drink beverages), continuously expanding the beverage product line, leveraging the technical foundation and brand advantages of the original business.Continuous product development and category innovation have kept Asahi constantly dynamic in its development. In June this year, Asahi launched a high-quality Ready-to-Drink (RTD) product called "The Future of Lemon Sours," which immediately sparked the entire Japanese social media upon its release.
The biggest highlight and challenge of this product is that each can contains a fresh lemon slice. To keep the lemon fresh and ensure it floats up after opening, Asahi spent over three years researching and perfecting this process.
Unlike Asahi's diversification in the food and beverage sector, Kirin focuses its diversification efforts on the bio-health field. Leveraging the fermentation and biotechnological expertise accumulated from its beer business, Kirin has expanded from food and beverages to the pharmaceutical industry.
As early as 1982, Kirin ingeniously applied beer fermentation technology to drug development and successfully launched a drug effective in treating renal anemia, erythropoietin, in 1990.
Long-term beer brewing has also led to breakthroughs in fermentation lactic acid bacteria technology for Kirin. In 2010, the company successfully discovered a special lactic acid bacteria, L.lactis Plasma, which can enhance immunity. After the implementation of Japan's functional food labeling system in 2015, Kirin seized the opportunity to use L.lactis Plasma in its food and beverages, significantly improving the taste and health benefits of the products. Currently, this strain has been used in 44 products by the company and its partners.
In addition to relying on its own technological accumulation for internal expansion, Kirin has also accelerated its layout in the big health field through external mergers and acquisitions since the 21st century. For example, in 2008, it merged with Kyowa Hakko Kogyo, and in 2023, it acquired the well-known Australian health food brand Blackmores.
Kirin's long-term cultivation in the beer market has given it significant brand influence and consumer insight. These intangible assets have directly driven the development of the company's bio-health business, which in turn empowers the innovation of food and beverage products. Cross-selling and resource sharing have brought about a "1+1>2" effect.
As mass consumer goods, beer is naturally limited by population size and consumption levels, and thus will ultimately face an upper limit on development. Companies can only actively respond to this.
Asahi and Kirin provide a blueprint for Chinese beer companies, which should be prepared for the future, seek development beyond beer, and plan and layout in advance, rather than blindly expanding production, ultimately leaving the industry in disarray.