2020 was supposed to be a 'big year' for the beer industry: the Champions League, the European Championship, the Olympics, etc., 'but the globalization of the pandemic has brought uncertainty to the beer industry.' At night, the trendy Erma Bar near the 339 complex along the Jinjiang River in Chengdu has regained its former vitality. Although only half the seats are occupied, the beer bottles on the tables signal the official return of nightlife consumption that the beer industry has been hoping for. What cannot be recovered, however, is the consumption revenue lost over the past two months. According to the latest announcements from China Resources Beer and Budweiser APAC, revenue in China in the first two months of this year is expected to decline significantly year-on-year. Public data shows that from January to February 2020, China's beer production by enterprises above designated size was 3.159 million kiloliters, a year-on-year decrease of 40.0%. But with the full resumption of work in the beer industry, several provinces have lowered their prevention and control levels to Level 3, and corresponding consumption scenarios have reopened, triggering a collective rise in beer stocks recently. "The pandemic has caused some decline in sales, but it does not affect the overall situation," beer industry expert Fang Gang told China Business Journal. After the pandemic, China's beer industry will still focus on profits, product structure, and pricing, with the trend towards mid-to-high-end products unchanged. The pattern of the five giants (China Resources Beer, Tsingtao Beer, Budweiser APAC, Yanjing Beer, and Carlsberg Beer) holding a high share remains unchanged. **-01-**Chasing the Dividends of Transformation and Upgrading Among the five giants in the domestic beer market, two have already released their 2019 annual reports. For Budweiser APAC, which was only listed on the Hong Kong Stock Exchange in 2019, its performance was not satisfactory. Its financial report released on March 17 shows that during the 2019 reporting period, the company achieved revenue of $6.546 billion, a decrease of 2.88% from $6.74 billion in the same period last year. In terms of sales volume, Budweiser APAC sold a total of 9,316.8 million liters, a decrease of 3.0% year-on-year; net profit for the year was $908 million, a year-on-year decrease of 5.32%. In Budweiser APAC's view, although the decline in performance was mainly due to the impact of the Chinese and Korean markets, it still benefited from its premiumization strategy. "Despite pressure on our industry in the most relevant markets, we were able to maintain revenue growth in the region through our premiumization strategy," Budweiser APAC stated in its financial report. Although sales volume declined in the second half of 2019 due to continued weakness in the nightlife channel, revenue per hectoliter in China continued to grow due to ongoing premiumization. The reporter noted that in 2019, Budweiser APAC continued to drive premiumization in the Chinese market through product innovation (e.g., Budweiser Pulse), cooperation with other international and local premium brands (e.g., Budweiser x Moschino, Budweiser x Shanghai Tang), and launching innovative products on social media and e-commerce channels. The super-premium portfolio led by Corona, Blue Girl, and Hoegaarden continued to perform well, achieving strong double-digit sales growth. China Resources Beer, on the other hand, achieved growth in both performance metrics by fully focusing on the mid-to-high-end market. On March 20, China Resources Beer's financial report showed that in 2019, its consolidated turnover was approximately RMB 33.19 billion, an increase of 4.2% compared with RMB 31.867 billion in the same period last year; profit attributable to shareholders of the company was approximately RMB 1.312 billion, an increase of about 34% compared with RMB 977 million in 2018. "The company's product structure has improved significantly, with mid-to-high-end product sales volume increasing by 8.8% year-on-year, which also drove China Resources Beer's gross margin up 1.7 percentage points to 36.8%," commented a researcher at investment research institution Gelonghui. In this regard, food industry expert Zhu Danpeng believes that Budweiser has always been positioned in the mid-to-high-end market, but in the past two years, China Resources, Tsingtao, Yanjing, Zhujiang, and others have been continuously building their mid-to-high-end offerings, which has significantly eroded Budweiser APAC's market share. "Therefore, in 2019, domestic beer brands all reaped the dividends of transformation and upgrading, changing the pattern where Budweiser stood alone. Budweiser's decline in performance indicates changes in the brand and overall product line of China's beer market." The reporter noted that on March 24, Zhujiang Beer released its annual report stating that in 2019, it achieved operating revenue of RMB 4.244 billion, a year-on-year increase of 5.06%; net profit attributable to shareholders of the listed company was RMB 497 million, a year-on-year increase of 35.77%. The announcement stated that the company upgraded its beer product structure, with mid-to-high-end beer accounting for 90% of total, and gross profit per ton increased by 19.15% year-on-year. Fang Gang said that 2019 was the best year for China's beer industry in the past five years, with double-digit growth being the norm. As the 2019 financial reports are released one after another, 'other beer companies have scored high, which also reflects Budweiser's decline in scores.' **-02-**Consumption Scenarios Await Full Reopening In Zhu Danpeng's view, 2020 was supposed to be a 'big year' for the beer industry: the Champions League, the European Championship, the Olympics, etc., 'but the globalization of the pandemic has brought uncertainty to the beer industry.' China Resources Beer's announcement shows that as of February 29, its unaudited consolidated turnover and profit before interest and tax for the first two months decreased by approximately 26% and 42%, respectively, compared with the same period in 2019. China Resources Beer CEO Hou Xiaohai frankly stated that the company's short-term production capacity is limited, and inventory in the market remains high. In this regard, Daiwa Securities released a research report stating that during the pandemic, China Resources Beer's industry inventory increased by 20%, and some inventory had to be destroyed due to expiration. Regarding the impact of the pandemic on the company's operations, Budweiser APAC stated that except for the significant acceleration of e-commerce channel growth, its nightlife channel almost stopped, restaurant activities were very limited, and demand from retail channels decreased significantly. As a result, the company expects its revenue in China to naturally decrease by approximately $285 million in the first two months of this year, and normalized EBITDA to decrease by approximately $170 million. Guosheng Securities research report stated that the pandemic has a significant impact on first-quarter sales volume, but the medium- and long-term structural upgrade trend remains unchanged. Affected by the pandemic, it is expected that Zhujiang Beer's sales volume in the first quarter of 2020 will decrease by 30% to 40% year-on-year. Now, as multiple provinces have lowered their pandemic response levels, nightlife consumption in some cities, including bars and KTVs, has begun to resume. For the beer industry, the recovery of consumption scenarios has brought new hope. "Although there are not many customers at night, consumption has begun after all," said a bar owner in Chengdu. "Now, on the one hand, we need to digest the inventory from before the Spring Festival as soon as possible, otherwise there will be expiration issues; on the other hand, we need to consider how to overcome the current difficulties, as it will take time to fully recover to pre-pandemic consumption levels." The reporter noted that during the domestic pandemic, e-commerce undoubtedly became the main consumption channel for the beer industry. According to a person in charge of 1919 Direct Supply, during the pandemic, beer consumption was mainly imported and premium beers, which has also become the main consumption trend after the pandemic, thereby driving the beer industry's recovery as soon as possible. In this regard, the reporter contacted China Resources Beer and Budweiser APAC respectively, but as of press time, they had not responded to questions about marketing strategies and product adjustments after the recovery of consumption scenarios. Zhu Danpeng believes that the beer industry will continue to be sluggish in 2020. "With the globalization of the pandemic and the gloom of the global economy, the Chinese market cannot be immune." This sustained downturn will not see a rebound until at least the third or fourth quarter, when business activities and large banquets can resume. Therefore, even if various places are unsealed, it is difficult to see revenge spending. **-03-**Intensifying Competition in the Mid-to-High-End Market "The company's structure continues to improve, driving profitability. Heineken's contribution to profitability over the next three years is worth looking forward to," said CICC Securities, expecting China Resources Beer's Spring Festival promotions to be postponed to the peak season, and competition in the second half of this year may be more intense. After closing 13 breweries in 2018, China Resources Beer closed another 7 breweries in 2019. At the same time, China Resources Beer completed the acquisition of Heineken in April 2019. In its annual report, China Resources Beer stated that this long-term strategic cooperation will provide the company with an important and strategic opportunity to develop in China's premium beer market. Hou Xiaohai publicly stated that after the catering industry reopens, the beer industry may not see "compensatory consumption," but market sales will return to normal, and the trend towards mid-to-high-end development will not change. The reporter noted that in order to increase its market share in China, Budweiser APAC chose the same acquisition path as China Resources Beer: on May 30, 2019, it completed the acquisition of 65% of the registered capital of Jebsen Beverage (China) Co., Ltd., which is mainly engaged in the manufacturing, distribution, sales, and commercialization of Blue Girl and other beer brands and other malt beverages in mainland China (excluding Hong Kong, Macau, and Taiwan). In Budweiser's official flagship store, the main product is the trendy premium product Pulse. This beer, endorsed by Xiao Zhan, was originally planned to be rolled out nationwide in March, but is now mainly sold online. As to whether this will affect launch promotions and sales, Budweiser has not responded. "Beer companies will increase promotions, which are catch-up moves. By offsetting the industry decline with these factors, annual sales may remain flat," Fang Gang believes. The pandemic will not affect the premiumization trend in the beer industry, and profit growth will continue; in addition, the pattern of the five giants monopolizing 83% to 85% of the market share will not change. In addition, a new round of capacity expansion in the domestic beer industry is still ongoing. Among them, Zhujiang Beer is advancing the construction of a project in Dongguan with an annual brewing capacity of 300,000 tons and a filling capacity of 100,000 tons. Chongqing Beer is building a new beer can production line with a maximum design capacity of 150,000 kiloliters per year. "It is already difficult for enterprises to achieve endogenous growth in the future," Zhu Danpeng said. Basically, they use capital leverage and other means as tools to drive revenue and profits. "China's beer industry has entered a situation of brand solidification. With the acceleration of premiumization, the premium market is a fierce battle." Source: China Business Journal, Author: Dang Peng Tips will be paid 400-2000 yuan once adopted.