In recent years, more and more industries have discovered that the road to lower-tier markets is no longer smooth, and to survive and thrive, they must take the high-end route. Among them, major domestic beer industry leaders, in order to break through growth bottlenecks, have been laying out premiumization strategies, striving to capture market share in the mid-to-high-end segment. Under fierce market competition, Budweiser APAC, which has long held half of China's premium beer market, is clearly feeling the pressure. At the same time, what worries Budweiser even more is that, according to the latest unaudited semi-annual financial report, across the entire Asia-Pacific region, it still clearly exhibits the phenomenon of increasing revenue without increasing profit. Facing multiple difficulties, how will Budweiser break the deadlock to maintain its leading position in premium beer?
The premium market is being lost
Zhang Ailing once said, "To be famous, one must be early." For a company, to capture the market, one must act quickly and accurately. As early as 1995, Budweiser's parent company, Anheuser-Busch, formally entered the Chinese market by investing in a foreign-invested beer brewery in Wuhan, establishing Budweiser Beer. Over the next nearly thirty years, Budweiser grew rapidly through continuous mergers and acquisitions, successfully capturing half of China's premium beer market. It owns multiple beer brands including Budweiser, Corona, Hoegaarden, Cass, and Harbin. If it weren't for the restrictions on acquisitions due to its foreign ownership, Budweiser could have become the undisputed leader in China's beer industry. As Budweiser's momentum in China grew stronger, in 2019, Anheuser-Busch InBev spun off its Asian operations into a separate entity, "Budweiser APAC," and listed it on the Hong Kong Stock Exchange the same year, becoming a standout in the premium beer battlefield.
However, the business world is like a battlefield, never smooth sailing; blood and storms are the norm. Since 2014, the domestic beer industry's market share has gradually become saturated, and the industry has entered a stage of stock competition. At the same time, with the introduction of various policies requiring the elimination of inefficient and low-capacity production lines, domestic leading beer brands have been forced to move towards premiumization. During this process, domestic leading beer brands gradually carved out a place in the premium market, while Budweiser's market share was significantly eroded. According to Euromonitor data, Budweiser APAC's share of China's premium beer market was nearly 50% in 2015, but by 2020 it had fallen to around 42%, and the downward trend continues. Budweiser APAC's financial reports directly expose the hidden worry of "falling behind."
Recently, Budweiser APAC announced its unaudited results for the first half of 2023. The financial data shows that during the reporting period, the company's revenue was $3.666 billion, a year-on-year increase of 14%; normalized profit before interest and tax was $850 million, up 15.9% year-on-year. Although revenue achieved positive growth, its profit side was clearly not as expected, and even showed the situation of increasing revenue without increasing profit. During the reporting period, Budweiser APAC achieved normalized profit before interest, tax, depreciation, and amortization of $1.173 billion; profit attributable to equity holders was $575 million, a year-on-year decrease of 8%. In contrast, domestic beer companies such as Tsingtao Beer, China Resources Beer, and Yanjing Beer are all rising rapidly, threatening Budweiser's industry leadership. For example, Tsingtao Beer's financial report shows that in the first half of 2023, the net profit attributable to shareholders of the listed company, excluding non-recurring gains and losses, was approximately 3.228 billion yuan, a year-on-year increase of 24.61%; Yanjing Beer's financial report shows that the company achieved a net profit attributable to the parent company of 514 million yuan in the first half of the year, a year-on-year increase of 46.57%;珠江啤酒's financial report shows that in the first half of the year, the net profit attributable to the parent company, excluding non-recurring gains and losses, was 335 million yuan, an increase of 17.36% compared to the same period last year. Although domestic beer giants have not yet threatened Budweiser's market position, their profit growth is clearly superior to Budweiser's, which is a significant threat to Budweiser.
Where is Budweiser's problem?
Undoubtedly, 2023 is generally considered a "big year for beer" in the industry, and the favorable performance of major domestic beer brands confirms this. So why hasn't Budweiser APAC, which has long dominated the domestic premium beer industry, delivered profits that meet expectations? In fact, benefiting from the strong recovery of the Chinese market, Budweiser APAC's performance in China was significantly stronger than last year. According to Budweiser APAC's 2022 performance report, during the reporting period, Budweiser achieved revenue of $6.478 billion, a year-on-year decrease of 4.57%, and profit attributable to equity holders was $913 million, a year-on-year decrease of 4.57%. In particular, the company's premium and super-premium categories saw a double-digit decline in revenue in the fourth quarter of 2022. However, in the first half of this year, Budweiser APAC's sales in China grew by 9.4%, revenue and revenue per hectoliter increased by 15.4% and 5.5% respectively, and normalized profit before interest, tax, depreciation, and amortization increased by 17.2%, with both revenue and profit showing increases. At the same time, sales of Budweiser and super-premium brands also achieved double-digit growth, a very impressive performance.
However, the reason for Budweiser's increasing revenue without increasing profit can be attributed on the one hand to the drag from the Asia-Pacific East region, including South Korea, and on the other hand to the significant increase in costs due to rising raw material prices. Budweiser APAC stated in its financial report that in the first half of the year, the company's sales volume in the Asia-Pacific East region increased by 3%, but revenue per hectoliter decreased by 1.1%, and total revenue only slightly increased by 1.9%. Especially in South Korea, sales volume and revenue increased by low single digits in the first half of the year, while revenue per hectoliter slightly decreased due to a high base and excise tax increases. To a certain extent, these factors have clearly interfered with the company's profitability. At the same time, the continuous rise in raw material prices is also a hidden difficulty for Budweiser. For example, barley, the main raw material for beer, has seen reduced production and rising prices in recent years. Due to high requirements for barley cultivation in China, continuous adjustment of domestic planting structure, declining economic benefits of barley, and few related subsidy policies, farmers' enthusiasm for planting is low, so large-scale planting has not been achieved, and production is very unstable. Data from the China Agricultural Information Network shows that in 2022, China's barley planting area was 517,000 hectares, a year-on-year decrease of 3.13%; production was 2.068 million tons, a year-on-year decrease of 0.10%. Due to unstable domestic barley production, most of the demand relies on imports, leading to a continuous rise in the price of imported barley, which has long been higher than the international market. According to data from Shenwan Hongyuan Securities, the average import price of barley increased from $233 per ton in 2020 to $356 per ton in 2022, and even in December 2022, the average import unit price hit a historical high of $410.42 per ton. In 2022, the gap between China's barley import price and the global price was as high as $231 per ton, the highest since 2009. Such high import costs for barley naturally lead to rising raw material costs for beer manufacturers, compressing profit margins. However, with the Ministry of Commerce announcing in August the termination of anti-dumping and countervailing duties ("double reverse") policies on Australian barley, barley costs are gradually falling, and the profit elasticity of beer companies is expected to recover. For Budweiser, this is undoubtedly good news, making it easier to improve profits.
Stabilize the basic market
According to Euromonitor data, in recent years, the market share of low-end light beer in China has been declining year by year, the market share of mid-end light beer has increased slightly, and the market share of high-end light beer has grown very rapidly. From 2011 to 2018, the market share of low-end light beer in China fell from 61.60% to 35.50%, while the market share of high-end light beer increased from 11.20% to 34.85%. Clearly, premium beer is becoming the mainstream direction of the industry. The China Alcoholic Drinks Association Beer Branch report shows that in 2022, the production of mid-to-high-end beer in China increased by more than 10% compared to 2021. It can be said that both market trends and actual sales growth indicate that the future of the beer market remains in the mid-to-high-end segment. Therefore, while other beer companies are busy entering the "premiumization" beer market, Budweiser needs to continue to work hard to stabilize its basic market.
Undoubtedly, Budweiser's ability to maintain its leading position in the domestic mid-to-high-end beer market for many years is due to its outstanding quality advantages. Its premium brands such as Corona, Blue Girl, and Hoegaarden have successfully captured consumer minds and have a large number of loyal consumers. However, Budweiser APAC has obvious deficiencies in expanding new market channels. Beer marketing expert and Chairman of Wuhan Jingkui Technology Co., Ltd., Xiao Zhuqing, believes that Budweiser's main sales channel advantage has always been the nightlife channel, with very complete direct supply in nightclubs and large restaurants, but its online distribution is weak, which is particularly disadvantageous in today's online shopping era. Another industry insider quoted by China Entrepreneur Magazine also said that Budweiser's channel network is insufficient, especially in lower-tier third- and fourth-tier markets, where the gap compared to domestic leading beer brands such as China Resources and Tsingtao is very obvious. If Budweiser does not expand its channels and only relies on first- and second-tier cities and regional operations, it will be difficult to achieve market monopoly. However, in recent years, due to the rectification of entertainment venues, the pandemic, and other reasons, after Budweiser's performance suffered setbacks, it began to realize that it cannot put all its eggs in one basket and has started to accelerate its expansion. Budweiser APAC CEO Yang Ke stated that the company is still relatively backward in comprehensive distribution, so it will continue to expand the geographical distribution of premium and super-premium products, and plans to have 250 distribution prefecture-level cities and 80 super-premium distribution prefecture-level cities by 2025. In terms of sales and distribution, Budweiser has also significantly increased expenses in the past two years. According to Wind data, from the first half of 2020 to the first half of 2023, Budweiser APAC's sales costs were $1.248 billion, $1.599 billion, $1.701 billion, and $1.799 billion, respectively. In this era of involution, competition in the beer market will become even more intense in the future. In the fierce competition, how Budweiser can maintain its advantages and expand its market share still needs time to provide an answer.