On the morning of February 24, beer giant Budweiser APAC (01876.HK) released an annual report showing strong growth. The company achieved revenue of $6.788 billion in 2021, up 14.9% year-on-year, and profit of $980 million, up 84.8% year-on-year. In 2021, the company's product sales volume increased by 8.3%, with particularly good performance in China and South Korea. Under the company's premiumization strategy, revenue per hectoliter of beer increased by 6.1% across major markets. In the Chinese market, under the premiumization strategy across the entire product portfolio, sales volume increased by 9.3%, and revenue per hectoliter increased by 7.9%. The announcement stated that the overall revenue growth last year was driven by packaging and brand portfolio, with premium and above products achieving double-digit growth in all major markets. Premiumization becomes an industry trend In the past, beer was long considered a low-price alcoholic beverage. Why has it now begun to premiumize? One important factor is population aging, with the alcohol consumption group shifting towards younger people. Coupled with the high homogeneity of beer categories, the beer industry needs to use young consumer groups as a breakthrough to create highly differentiated premium products. According to relevant beer industry reports, China's beer consumption began to decline in 2018, and the industry began to encounter growth bottlenecks. At the same time, based on consumption venues, the number of people drinking beer at home has increased significantly, accounting for nearly 80%. In addition, restaurant beer consumption also exceeds half, reaching 56%. Compared to high-end spirits such as baijiu, beer has much lower profit margins. With no hope of sales volume growth, creating differentiation and increasing unit prices through premiumization has become the only way out. Domestic leading beer brands have begun to aggressively enter the premium segment. China Resources Snow started combining Chinese culture with beer products several years ago, launching the "Facial Makeup" series (Huāliǎn, Dànjiǎo), and last year launched the premiumization milestone "Lǐ". At the same time, mid-to-high-end series such as Brave the World SuperX, Snow Mars Green Beer, Ingenuity Brew, and Huāliǎn Beer are also deeply loved by mass consumers. At the "2021 Snow Channel Partners Conference," China Resources Snow CEO Hou Xiaohai revealed that China Resources Beer's current premium and above products account for about 22% to 25% of the Chinese premium beer market. Also developing premium products is Tsingtao Beer. In January this year, Tsingtao Beer launched the ultra-premium new product "Yīshì Chuánqí" priced at 1,399 yuan, emphasizing an artistic style. Since 2018, Tsingtao Beer has repeatedly raised prices on its Pure Draft, Classic 1903, and other products. Combined with Tsingtao Beer's accelerated development of products such as Auguste, IPA, and Amber Lager in recent years, Tsingtao Beer's strategy of premiumization through price increases and product structure upgrades is an open secret. In 2020, Tsingtao Beer achieved operating revenue of 27.76 billion yuan. According to the announcement, cumulative product sales volume reached 7.82 million kiloliters, with the main brand Tsingtao Beer achieving total sales of 3.879 million kiloliters. Among these, premium products such as "Century Journey, Amber Lager, Auguste, Hongyun Head, Classic 1903, and Pure Draft Beer" achieved sales of 1.792 million kiloliters, accounting for nearly half. He Yong, Secretary-General of the China Alcoholic Drinks Association, stated that in the next 3 to 5 years, the proportion of premium beer products will reach 15% to 20%. Consumption upgrading is driving the continuous transformation of the consumption structure, accelerating the transformation of the beer market structure and product structure, and even affecting the transformation of the industrial structure. Finding the growth curve Since premiumization has become a trend in the beer industry, how does Budweiser achieve premiumization? Yang Ke, Co-Chairman and CEO of Budweiser APAC, stated in 2021 that Budweiser has noticed the upgrading of beer consumption structure brought about by the growth of the domestic middle class, and has also keenly detected the drinking trends of women and young people, beginning to focus on low-alcohol beverages. The annual report shows that in 2021, under the premiumization of the entire portfolio, sales volume increased by 9.3%, and revenue per hectoliter increased by 7.9%. The entire premium product matrix includes Budweiser, Budweiser Gold, Harbin Beer, Corona, Blue Girl, and Hoegaarden, covering core products, consumption upgrades, and the ultra-premium market. To cater to category expansion and scenario differentiation, Budweiser insisted on brand innovation in 2021, developing Budweiser Gold for premium Chinese restaurants and celebratory occasions. Driven by Budweiser and Budweiser Gold, the Budweiser brand achieved double-digit growth in both existing and expanding markets. According to statistics, Budweiser Gold's sales volume grew by more than 50% in the 2021 fiscal year. Secondly, Harbin Beer achieved consumption upgrades from core and value brands to core+ brands, bringing high single-digit sales volume growth to the brand. Thirdly, driven by Corona, Blue Girl, and Hoegaarden, Budweiser also achieved strong double-digit growth in the ultra-premium market. In addition, Budweiser began to focus on the "she economy," allowing it to achieve another leap in the ultra-premium market. Targeting the "she economy," Budweiser launched a variety of fruit-flavored beer options, including Hoegaarden fruit beer and Corona Sea Salt Guava fruit beer. In the rapidly growing non-beer categories, Budweiser expanded Red Bull distribution points at a double-digit growth rate. The brand also invested in the rapidly growing low-alcohol brand MissBerry, leveraging emerging industry forces to quickly advance the "she economy" layout. According to official statistics, this combination strategy successfully expanded market share by 0.8%. Budweiser's revenue thus increased by 18%, higher than pre-pandemic levels. Future strategy: Commercial expansion, digitalization, and premiumization The law of the consumer market is: to continue developing in fierce market competition, you must become bigger and stronger. To make market strategies efficient and effective, digitalization is essential. To follow consumption trends, premiumization is the only way out. Yang Ke, Co-Chairman and CEO of Budweiser APAC, stated in an interview at the end of 2021 that Budweiser's strong growth in the Chinese market is inseparable from premiumization, digital transformation, and continuous commercial expansion, and it will continue to focus on these three key areas in the future. According to the analysis of the 2021 beer industry in-depth report, Budweiser faces market competition pressure from brands such as China Resources, Tsingtao, and Yanjing in high beer production markets, and has no advantages except in Fujian and Hubei markets. (Image source: China Merchants Securities 2021 China Beer Industry Report) Coupled with the slowdown in the development of the beer industry and the rise of new beverages such as sparkling water in the market, entering new categories has gradually become Budweiser's expansion direction. At the same time, Budweiser is also accelerating the construction of factories in areas with high consumer demand to improve production capacity and supply efficiency. In December 2020, Budweiser's first "green and smart" beer factory was established in Wenzhou; in July 2021, Budweiser APAC announced that it would continue to increase investment in the Budweiser Putian factory and build a new craft brewery in Putian, making the Budweiser Putian base a world-leading beer base. In recent years, digitalization of offline channels has been a focus of the industry. Digitalization has broken through the limitations of distance and space in the previous ordering and distribution mechanisms, while strengthening brand management of the supply chain, becoming an important cornerstone for stable brand development. In the "14th Five-Year Plan" and the 2035 Vision Goals Outline, digitalization was highlighted. Yang Ke stated that the digital transformation B2B platform BEES, launched by Budweiser in the first quarter of 2021, has achieved excellent results in the test area and will be promoted as a key focus in 2022. In addition, Budweiser has noticed the upgrading of beer consumption structure brought about by the growth of the domestic middle class. He stated that Budweiser will continue to lay out premium categories, providing multi-category premium choices based on different consumer groups and multi-scenario consumption needs. Because the Chinese market is vast, and consumption habits and dietary habits vary greatly among different regions, Budweiser will launch new flavors based on regional differences in the market. Finally, Yang Ke also stated that in the future, Budweiser APAC will not only continue to make efforts in premiumization, digital transformation, and commercial expansion, but will also enhance the high-quality development of the beer field and even the entire beverage industry through its own actions. -END-