---
title: "Beer Business Model: A Game Theory Perspective in FMCG"
description: "The beer industry, with its long supply chain and complex channel and terminal systems, exemplifies game theory in the consumer goods sector through interactions among producers, distributors, and terminals. This article analyzes the beer business model from three dimensions: regional market structure, price band structure, and channel structure, highlighting the importance of profit pool markets, the trend of premiumization, and the bargaining power dynamics in distribution channels."
author: "New Distribution"
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published: "2018-11-19"
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# Beer Business Model: A Game Theory Perspective in FMCG

> The beer industry, with its long supply chain and complex channel and terminal systems, exemplifies game theory in the consumer goods sector through interactions among producers, distributors, and terminals. This article analyzes the beer business model from three dimensions: regional market structure, price band structure, and channel structure, highlighting the importance of profit pool markets, the trend of premiumization, and the bargaining power dynamics in distribution channels.

The beer industry, due to its long supply chain and complex channel and terminal systems, showcases the most comprehensive application of game theory in the consumer goods industry, as seen in the competition and cooperation among producers, between producers and channels, and between producers and terminals.

****************▌************** Analyzing the Beer Business Model from Industry Participants**

**Game Among Beer Producers**
From the Spring and Autumn period to the Warring States period. China's beer industry has developed for over 30 years since the 1980s. Initially, producers rapidly expanded volume, and from 1995 onwards, numerous mergers and acquisitions occurred. Before 2005, it could be called the "Spring and Autumn" period, forming several dominant players. From 2005 to the present, it can be called the "Warring States" period, with a five-strong oligopoly: China Resources, Budweiser, Tsingtao, Yanjing, and Carlsberg. These five powers continuously compete and tug-of-war, each establishing base markets, advantageous channels, and core price bands.

**Game Between Producers and Distributors**
Channel leverage, mutual symbiosis, and turnover as king. The beer industry is a fast-moving consumer goods (FMCG) industry, where rapid turnover is the core of the business model. Beer producers use channel leverage to jointly develop various channels, and each major producer's channel system model differs.

Snow adopts a typical deep distribution model, directly controlling second-tier distributors; Tsingtao uses a large distributor model in the southern market, while in the northern market it more often adopts deep distribution, currently adapting to local conditions; Budweiser and Carlsberg, as foreign representatives, have varying operation models across regions and channels, using both deep distribution and large distributor models, with market development led by distributors; Yanjing continues its deep distribution model that it started and grew with.

Of course, distributors pose a risk of being flipped by competitors, and the core of long-term stable cooperation between producers and distributors lies in smooth turnover and mutual symbiosis.

**Game Among Producers, Distributors, and Terminals**
Frontline battle, step by step. Beer has high dependence on dining terminals in the on-premise channel. The bargaining power between producers-distributors and terminals is firmly held by the latter. In addition to high price differentials for the dining channel, methods such as store locking (exclusive sales) and cap fees are high-investment ways for beer producers to compete for terminals, and the off-premise channel also sees fierce terminal competition. As the most micro operational frontline for each producer, terminals are fought for step by step, relying on continuous accumulation to build market foundation.

****************▌************** Three Dimensions of Beer Business Model Analysis**

The beer industry has distinct characteristics in regional markets, price band structure, and channel systems. The three dimensions for analyzing the beer industry are: regional market structure, price band structure, and channel structure.

During analysis, the three dimensions are interlocked and need to be considered together. Additionally, from a full industry chain perspective, production-side cost structure and capacity efficiency are also points to note.

**Dimension 1: Regional Market Division, Profit Pool Markets Are Crucial**
China's beer industry has obvious regional market division characteristics. Each enterprise has an advantageous base market, and from a national perspective, the industry shows a pattern of regional market segmentation. The reason is that beer is currently limited by transportation distance.

This is partly due to heavy packaging (glass), causing high unit transportation costs, and with low selling price bands, there is also the issue of bottle returns, creating a bottleneck in sales radius. On the other hand, freshness requirements limit the transportation radius of draft beer (shelf life within 7 days), while pasteurized beer generally has a shelf life of 6-12 months. Additionally, pure draft beer extends shelf life while maintaining taste, but the industry still has a 1-month freshness indicator, which is an important factor affecting transportation distance.

Base markets contribute major profits and are crucial to overall corporate profits. China Resources Beer has over 60% market share in Sichuan, Liaoning, and Anhui, serving as its profit pool markets; Tsingtao in Shandong and Shaanxi; Budweiser in Fujian and Heilongjiang; Yanjing in Beijing, Inner Mongolia, and Guangxi; Carlsberg in Xinjiang, Ningxia, Chongqing, and Yunnan.

**Two conditions for forming a profit pool market:** First, the market capacity is large enough (over 1 million kiloliters); second, the regional market leader's market share is high enough (at least 40%).

Shandong, with the largest national production and sales, is Tsingtao's most typical profit pool market. It is estimated that Shandong's market size is over 3 million kiloliters, with Tsingtao's market share exceeding 75%, contributing major profits to Tsingtao. Similarly, Sichuan is for China Resources, with an estimated sales market size of 1.7 million kiloliters and Snow's market share over 60%. However, China Resources Beer's Tianjin market share exceeds 40%, but the local market capacity is only 300,000 kiloliters, making it difficult to form profit support.

**Dimension 2: Price Band Shows "Christmas Tree" Shape, Upgrade Trend Emerging**
Price band is another important dimension for analyzing beer patterns. Currently, China's beer price bands basically show a Christmas tree structure.

Based on extensive grassroots research, the current high-end and super-premium products (terminal price above 10 yuan) account for only 10%, mid-to-high-end products (terminal price band 6-10 yuan) account for 20%, mainstream price band (terminal price 3-5 yuan) accounts for 55-60%, and basic low-end products (price band below 3 yuan) account for 10-15%.

**High-end and super-premium (above 10 yuan):** This price band is firmly controlled by foreign brands under AB InBev, Carlsberg, and Heineken.

Domestic companies like China Resources have recently launched Face Painting, Tsingtao launched Auguster and Hongyun Dangtou, targeting this price band, but foreign companies are more mature in high-end brand and channel system operations, and domestic brands still need refinement.

**Mid-to-high-end (6-10 yuan): Future main upgrade price band.**
Currently, domestic beer producers are jointly promoting mid-to-high-end industry trends, with the 6-10 yuan price band as the main direction. In detail, 6-8 yuan is the mid-end price band, with main participating brands including China Resources' Brave the World, Tsingtao's Classic, Yanjing's Qing Shuang and Fresh Beer, and Carlsberg's Tuborg; while 8-10 yuan serves as the head of mid-to-high-end, as a key positioning price band. Besides pure draft products launched by various producers (some terminal prices positioned above 10 yuan), China Resources strongly launched Brave the World SuperX in 2018, Tsingtao's Classic 1903, Yanjing's Didiao and Lijiang 1998, and Harbin Beer Ice Pure under AB InBev, all reflecting the importance each company places on this price band and indicating the main future upgrade direction.

**Mainstream price band (3-5 yuan): Current main price band, replacing most low-end products.**
As the current main price band, products like Harbin Beer Qing Shuang under AB InBev, China Resources' Qing Shuang, Tsingtao Dayou, Chongqing Beer 88 and Chongqing Beer 66 are in this band. Producers will continue to push product price bands upward, and the future industry structure is expected to form an olive shape.

**Low-end (below 3 yuan): Largely replaced, currently small share.**
Low-end products are mainly regional low-end brands, which have been continuously upgraded and replaced by the mainstream price band, and their share is now very small.

**From brewing process to beer price band: German style vs. American style.** In terms of industrial beer product processes, German style, due to longer fermentation time, higher hops and malt concentration, has correspondingly higher costs and corresponds to higher-end product price bands. Tsingtao Beer is a typical representative of German style, while American style has shorter fermentation time, lighter taste, and more widespread consumption; Yanjing Beer is a typical representative of American style.

**Dimension 3: Sales Channel System Reflects Industry Bargaining Power**
Since the beer industry involves both circulation and direct consumption, with high dependence on channels and terminals, the first major dimension for analyzing the beer business model is an in-depth analysis of its channel structure system.

**Industry Channel Structure**
On-premise and off-premise channels each account for half. The beer industry involves both on-premise (dining and entertainment) and off-premise (modern and traditional circulation) channels, making its sales channel system the most complex in the food and beverage and even the entire FMCG industry.

Combining the channel structures of major producers, the industry's dining channel accounts for about 40%, entertainment and other on-premise channels about 10%, totaling about 50% for on-premise; off-premise channels account for the remaining 50%, with KA channels about 10% and traditional channels about 40%.

**Value Distribution in the Industry Chain: High Terminal Profits**
High dependence on dining terminals determines that terminals obtain high profits in the industry chain, capturing more than half of the profits. Since terminal competition in on-premise channels (dining, KTV, nightclubs) is the frontline for beer producers, the bargaining power among producers, channels, and terminals in the dining channel is basically dominated by terminals. Besides lock-store fees paid by producers and distributors, terminals can obtain more than half of the industry chain's profits.

In off-premise channels, terminal markup rates are around 30%. Generally, distributor-level gross margins are 10-15% (may vary by producer and product), and the business model relies mainly on turnover efficiency.

Summary: The market structure, product structure, and channel structure mentioned above are the three most important dimensions for analyzing the beer industry's business model and are also indicators for analyzing profit margin improvement for each company. We believe industry profit margins are a systematic result of three aspects: stable profit pool markets, premiumized product structure, and rational channel development and investment (where producers have some bargaining power).

**Other Key Points: Packaging Costs High, Capacity Utilization Affects Profitability**
Beer packaging costs account for a high proportion; Tsingtao's packaging accounts for half.

In the cost structure of the beer industry, taking Tsingtao as an example, packaging materials account for about half, raw materials such as barley, hops, rice, and water account for about 20%, manufacturing costs also account for about 20%, and labor and other costs account for 10%.

Compared to Tsingtao, Yanjing's packaging costs are estimated at 1/3, because Yanjing's product structure has a higher proportion of low-end products, with bottle and plastic crate recycling, while high-end boxed beer does not require bottle and box returns. Since packaging materials account for a high proportion of costs, changes in packaging material costs impact the beer industry's cost pressure. In recent years, packaging materials, fuel, and barley have generally risen, becoming the direct trigger for this round of industry price increases.

Improving capacity utilization is a key to industry profit improvement.

Beer is limited by transportation radius, making it necessary to build production capacity near markets, and it is a capital-intensive industry. Capacity utilization affects depreciation and labor cost amortization. Generally, a single 300,000-400,000 ton capacity has fixed costs as high as 80-100 million yuan. Industry capacity utilization has declined continuously since 2011, currently only around 60%.

Due to factors such as employee resettlement and taxes, closing plants is not easy. In previous years, major beer producers did not implement significant plant closures (China Resources integrated 7 plants in 2017), only Carlsberg, with a market-oriented mechanism, closed capacity continuously in previous years. If capacity optimization can be promoted in the future, improved capacity utilization will bring profit enhancement (though there may be short-term one-time costs).

Future industry capacity optimization progress is expected to advance. Additionally, it is worth noting that as the proportion of mid-to-high-end beer increases, constraints such as freight and bottle return costs decrease, and million-ton-level large plants radiating nationwide are expected to be continuously put into operation. The capacity integration from closing nearby small plants is also expected to bring production efficiency improvements. Moreover, high-end products have relatively smaller differences between peak and off-peak seasons, which promotes overall capacity utilization improvement.

Source: Leqing Think Tank Selection (ID: lqzk767)
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