The following article which was written by me. It is a bit outdated, I hope it is still useful for a brief introduction of beer industry in China.
Beer industry is being driven by restructuring and acquisitions of domestic breweries and foreign investors
Beginning in spring 2005, annual beer production capacity of 25,000,000 metric tons in China. Discussions on China’s breweries-mergers and acquisitions have primarily centered on two questions; whether China’s domestic breweries can expand a sharing of the industry, and whether it will be acquired by foreign investor.
In respect of whether domestic breweries have expanded rapidly, beginning in October 2001, when the CRE/SABMiller launched investment to the market by acquisition of Sischuan Blue Sword, China’s government has lifted a policy, implemented selective investment controls, and increased encouragement on domestic brewery to acquits with province brewery. These activities are still on-going that the clearest signal was the market expending by both foreign breweries and domestic breweries.
Growth in consumption of alcoholic beverage has substantially in response to these GDP measures. Consumer Price Index (“CPI”) inflection has been growing strongly; it is being driven by increases in income and urban population. It is probably this indicator more than others, which the private consumption has been growing in the past and will be continuing in the future.
According to ACNelson statistical report, 70% of alcoholic consumption in China occurs at mealtimes, indicators suggests that alcoholic beverages are identified as basic goods, the profit margin of breweries are low, because of weakness in demand and overcapacity puts pressure on price. Beer demand is growing of 6% per annual, which has benefited from China’s government low-alcohol-beer promotion and it has been the most favorite alcoholic beverage in China.
High-alcohol-content consumption continues to decline, It is being driven by the China’s government discourages the consumption of high-alcohol-beverages and encourages consumption of low-alcohol-beverages.
In the past few years, the sales volume of high-alcohol-beverages (baijiu, a inexpensive traditional rice-based alcoholic beverage) is declining by more than 10% annually. The major of such alcoholic beverage are local products. The foreign high-alcohol-beverages, such as whisky, brandy and cognac, represents only 0.1% demand of total consumption of high-alcohol-beverages market. Sales of foreign high-alcohol-beverages have declined by advertising and pricing from high quality domestic products, which dampened their popularity.
M&A Activities
The data for the transactions shown above those international breweries invested in the Chinese beer market. Although there are several international brewers that are profitable in the region, foreign brewers still sold their breweries. Foster sold two of its breweries in 1999. Carlsberg returned to the market and bought three breweries in the southwest region, but it sold its Shanghai brewery in 2001. In the past year, there has been a rising trend in the transactions value from Q2 2002 to Q3 2005.
Activities are being driven by continued restructuring and privatization from both foreign brewers and domestic brewers. China’s largest brewers continue to expand its market share. The past few years have seen new government policies to facilitate M&A by domestic brewers. The Ministry of Commerce announced in October 2004 that it had simplified approval procedures for investments by domestic brewers. The most significant acquisition recently was Beijing YingJing Brewery acquisition of a 52.3724% stake in Huangling Brewery Company. Driven by its desire to reduce production cost of its existing breweries and regional market access, Beijing YingJing become China’s first brewer to take control of southeast region.
Another emerging trend is the rapid increase in international brewer acquisitions activity in Mainland China. The first half of 2005 has seen a number of successful private equity exists, and an increase in investment activitiy. SABMiller accepts an offer of HK$5.58 that Anheuser-Busch made for shares in Harbin Brewery.
Brewing industry is beginning to experience consolidation. Particularly in those brewers deregulated where regional participation was previously to joint ventures. These brewers have experienced an on-going trend for mult-regional corporations to consolidate multiple joint ventures.
Outlook
In the medium term, it is likely that M&A activities will increase. As more and more of the economy is in industrial restructuring from the fragmented regional brewers will be consolidated. Overseas brewers M&A activity by domestic cooperation will continue to be driven by the search for resources, technology and market access.
Privatization is now bullish in China and has a rapidly growing of successful beer brewers. The growing participation of oversea brewers, the emergence of increasingly powerful and capital rich foreign corporation and domestic brewers are seeking aggressive growth targets in China suggests that it will remain a active market.
