Beer Near Term Prospects Better Than Spirits

China's well documented targeting of big ticket spirits as part of a wider crackdown on over-the-top gift giving has had a crippling effect on the sales and share prices of some of the key players in the luxury spirits space. The Chinese premium baiju producer Kweichow Moutai and France's Remy Cointreau (it is a major player in high-end cognac) have been two of the worst affected alcohol companies as judged by the steep declines in their shares prices over the past eighteen or so months.

Over this period, China's beer industry has attracted more interest from the global majors, with the pace of deal making picking up. We believe there is room for more consolidation and that the beer industry is presently operating below its long-term potential with relatively low profit margins reflective of the more no-frills image of beer in China, compared to other markets globally, where it is has been easier to premiumise the industry.

Over the next three to five years, we expect to see more consolidation take place, led by markets leaders such as SABMiller. Economic power within the wider industry structure will gradually shift to become more favourable towards the leading beer companies as their market power grows.

China Catching Up In Per Capita Stakes
Beer Sales Per Market

China's well documented targeting of big ticket spirits as part of a wider crackdown on over-the-top gift giving has had a crippling effect on the sales and share prices of some of the key players in the luxury spirits space. The Chinese premium baiju producer Kweichow Moutai and France's Remy Cointreau (it is a major player in high-end cognac) have been two of the worst affected alcohol companies as judged by the steep declines in their shares prices over the past eighteen or so months.

Over this period, China's beer industry has attracted more interest from the global majors, with the pace of deal making picking up. We believe there is room for more consolidation and that the beer industry is presently operating below its long-term potential with relatively low profit margins reflective of the more no-frills image of beer in China, compared to other markets globally, where it is has been easier to premiumise the industry.

Over the next three to five years, we expect to see more consolidation take place, led by markets leaders such as SABMiller. Economic power within the wider industry structure will gradually shift to become more favourable towards the leading beer companies as their market power grows.

China Catching Up In Per Capita Stakes
Beer Sales Per Market

Beer is slightly less profitable in China in terms of the margins most companies are able to extract compared to markets like the US and Brazil, where the industry structure is much more favourable for the market leaders. Retail prices of beer in China are relatively low, and profits historically have mainly come from the scale of operations rather than premiumisation.

Key multinational players like SABMiller, AB InBev and Carlsberg will continue pushing to increase their market share in China mainly through two different strategies: marketing their most powerful brands at the national level and taking control over regional brands. The first strategy has been slow to work so far, even if Chinese consumers' interest in Western brands has increased in recent years, especially in large cities.

The second strategy has been more successful and will be particularly important in addressing two major challenges seen in the Chinese beer industry: fragmentation and high distribution costs. Similar to AB InBev's recent acquisition in April 2014 of Siping Ginsber for roughly EUR450mn, leading brewers have poured plenty of yuan into the Chinese market. In February 2014, UK-listed SABMiller agreed to purchase Kingsway Brewery for USD864mn. AB InBev also acquired Nanchang Asia Brewery around the same time. Carlsberg alone has stakes in no fewer than 40 domestic firms in the country.

Going forward, we believe premiumisation strategies focused on innovation and market segmentation will be the most successful. In fact, manufacturers have started to rethink their offering, tailoring their products to niche high-spending consumer groups in the country. SABMiller has split its Snow brand into five price segments and three formats. Similarly, Carlsberg has been working on a Carlsberg Chill and Carlsberg Light specifically for the Chinese market, and AB InBev launched its premium Bud Light Platinum and Quilmes Night, targeting partygoers in the country.

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Related sectors of this article: Food & Drink, Drink
Geography: China
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