It seems that many beer companies rely on subsidies and financing to "get by." Recently, several beer companies have released impressive interim results. However, behind the rosy performance reports across the beer market, there is no substantial profit growth to support them. For example, the non-recurring gains and losses net profit of Guangzhou Zhujiang Brewery Group Co., Ltd. (hereinafter referred to as "Zhujiang Brewery") basically comes from government subsidies and investment income, with the main business accounting for a relatively small proportion. Industry insiders point out that the overall performance of the beer industry is improving, but the amount of subsidies behind it is relatively high. Some local governments subsidize beer companies in various ways to support them. However, a balance should be maintained between the "hematopoietic" ability of enterprise development and policy "blood transfusion" support, and the primary and secondary roles should not be reversed.

"Profit" Relies on Subsidies When reviewing the financial reports of various beer companies, a Beijing Business Today reporter found that many beer companies have received relatively high subsidies and additional income such as investment interest in their non-recurring gains and losses. Among them, Zhujiang Brewery's latest financial report shows that in the first half of 2018, other items meeting the definition of non-recurring gains and losses amounted to 72.4601 million yuan, which was interest on the 4.295787 billion yuan raised funds. In the 2017 financial report, Zhujiang Brewery's net profit of 185 million yuan, a high growth of 62.75%, included subsidies of up to 85 million yuan, nearly half of the net profit. The net profit attributable to shareholders of the parent company after deducting non-recurring gains and losses was only 34.0156 million yuan. In fiscal year 2017, the company received a total of 86 government subsidy projects.

In fact, many beer companies rely on subsidies and financing to "get by." Besides Zhujiang Brewery, both Tsingtao Brewery and Yanjing Brewery have received subsidies of over 100 million yuan. Even China Resources Beer, the leading company in the Chinese beer market, has experienced the dilemma of relying on subsidies to "support" its performance. After reviewing a large amount of data, a Beijing Business Today reporter found that China Resources Beer's net profits for the three fiscal years 2014-2016 were 578 million yuan, 667 million yuan, and 629 million yuan respectively, while the subsidies received by the company during the same period were 412 million yuan, 292 million yuan, and 462 million yuan respectively. It can be seen that nearly 60% of China Resources Beer's net profit in the past three years came from subsidies.

In this regard, Zhu Danpeng, an analyst at China Food Industry, said in an interview with a Beijing Business Today reporter that government subsidies play a role in helping and supporting enterprises or industries. For companies like Zhujiang Brewery, having such subsidies to a certain extent makes up for the shortcomings in business operations. However, for the long-term development of enterprises, high subsidies may pose certain risks. Currently, many enterprises adopt a dual-profit model of "government blood transfusion and enterprise hematopoiesis," relying heavily on government subsidies. In the future, such enterprises, especially listed companies, should shift to a model that prioritizes "enterprise hematopoiesis" with "government blood transfusion" as a supplement, so that the company's operations and risk resistance capabilities can be enhanced.

Insufficient "Hematopoiesis" of Enterprises In recent years, with the promotion of domestic consumption upgrading, the level of beer consumption in China has also improved. At the same time, the younger drinking population has laid a foundation for the growth of beer consumption. However, due to differences in drinking habits among countries, Chinese liquor (baijiu) consumption still occupies a mainstream position. Wine industry expert Cai Xuefei pointed out that, therefore, considering comprehensively, the space for further improvement in China's beer industry is relatively limited.

In Zhu Danpeng's view, in fact, many domestic beer enterprises have been making efforts to operate their main business, but the results are not good. "China has only been in a market economy for 40 years, and the degree of industrialization is still in a transitional period from the primary to the intermediate stage. At this stage, enterprise development should not be rushed but should proceed step by step." Chinese beer enterprises basically expand their sphere of influence through mergers and acquisitions, which is related to the sales radius of beer. However, with the improvement of consumers' consumption level and demand, in the face of more distinctive and richer-flavored products, many factories previously acquired through mergers and acquisitions have now become a disadvantage for enterprises to innovate.

In addition, with the decline in gross margins in the Chinese beer market, the profitability of beer enterprises is also declining. Due to prominent overcapacity contradictions in the industry, the continuous rise in raw material prices and labor costs has put greater pressure on the production and operation costs of beer enterprises. It is generally believed in the industry that when multiple beer enterprises are in fierce competition, many local brands, especially regional brands, face further intensified survival pressure. Many regional small and medium-sized beer enterprises with insufficient brand power have even fallen into negative growth and loss states. A Beijing Business Today reporter learned that subsidiaries of companies such as Zhujiang Brewery and Heineken are facing problems such as losses and high debt ratios.

Regarding the above industry status, an industry expert who declined to be named said that in fact, enterprises that receive subsidies are mostly state-owned enterprises. Government subsidies are a way to help and support an enterprise or an industry. From the perspective of the enterprise itself, it makes up for shortcomings in operations to a certain extent; from the perspective of industry development, it is to enhance the operational capability and risk resistance of the entire market; from the perspective of the regional economy, the policy level will consider the importance of the industry in the national economy.

Zhu Danpeng said that the beer industry is a heavy-asset investment, and the industry characteristics lead to a long investment cycle, large fixed asset investment, and a relatively slow output cycle. Therefore, the policy level provides certain subsidy support to beer industry enterprises to support the stable development of the industry.

Pressure on Main Business Premiumization As the brand value of the beer industry becomes increasingly prominent, many domestic enterprises have shifted their strategic plans, launching high-end brand products to seize the high-end market. Among them, Tsingtao Brewery has launched high-end products such as August, Hongyun Dangtou, Classic 1903, and Pure Draft Beer; Zhujiang Brewery has launched the high-end brand Xuebao series craft beer; Yanjing Brewery mainly uses original pulp white beer and pure draft to attack the high-end market; and China Resources Snow, which has always won with low-end and mid-end beer, has also formed an alliance with Heineken to make a big step into the high-end beer market.

Hou Xiaohai, general manager of China Resources Snow Breweries (China) Co., Ltd., once publicly stated that for Chinese beer giants, there is pressure to further enhance brand value, not only for Snow but also for Yanjing Brewery and Tsingtao Brewery. In the international market, compared with world brands such as AB InBev, Chinese beer brands still have a considerable gap in both market share and influence. With the accelerating pace of product premiumization, "as manufacturers, we are all launching high-end products and personalized beers. But the pace of consumer upgrading is faster. Often we think that high-end beer should be like this, but in the eyes of consumers, it is still only mid-range."

In addition, it is worth mentioning that in addition to domestic beer enterprises, foreign beer brands such as AB InBev and Carlsberg are also raising prices in stages to increase product distribution prices. The most fundamental reason for price increases in the beer industry is still pressure from costs and operations.

Industry insiders point out that currently, beer enterprises mainly adopt the principle of seeking profits in advantageous regions and focusing on investment in disadvantaged regions. Especially in disadvantaged regions, due to severe overcapacity, a large amount of unsaturated capacity cannot be released.

Beer marketing expert Fang Gang believes that both domestic and international beer enterprises are gathering in the high-end market, adjusting product structures, and improving capacity efficiency. However, there are also views that for domestic beer enterprises, future development still faces certain challenges. On the one hand, due to the invasion of foreign beer enterprises, market share has been impacted to a certain extent. On the other hand, the implementation of high-end strategies requires time to gain consumer recognition.

Source: Beijing Business Today -END-