Source: 创业最前线 (ID: chuangyezuiqianxian) Author: 付艳翠 Undoubtedly, craft beer is now winning over more and more consumers with its flavor advantages and social momentum. Amid the wave of beer premiumization, craft beer is becoming a promising breakthrough. With industrial beer brands such as Budweiser, Chongqing Beer, Tsingtao, and China Resources, as well as catering brands like Haidilao, entering the market, the craft beer track is sparking a new round of beer wars. "Every year, a batch of craft beer entrepreneurs emerge, and every year a batch die," one entrepreneur said bluntly. "The mortality rate in this industry is high, with as many as one-third failing to survive a year." This is undoubtedly a brutal industry, but it hasn't stopped later entrants who are optimistic about the industry from forging ahead. Some entrepreneurs believe that craft beer, with its varied flavors, rich taste, and strong hop aroma, is gaining popularity among young people. Moreover, the influx of entrepreneurs presents a good opportunity for the industry to achieve scale and significantly boost sales. It's undeniable that with the rise of craft beer bars across the country, some restaurants have also begun selling craft beer, making more consumers willing to enjoy craft beer with their meals. The industry is constantly brewing new possibilities. **The Pandemic Besieges Beer Entrepreneurs In early 2019, Li Wei happily agreed with his comrade-in-arms that he would start a craft beer brand, with his comrade providing investment. In July, his brand successfully landed in the Tianchang High-tech Industrial Development Zone in Anhui Province, after nearly half a year of approvals and preparations. By early 2020, after completing a series of procedures, Li Wei was confident and ready to make a big push. But the sudden pandemic pressed the pause button on Li Wei's enthusiasm. Image / Photo by Shetu.com, based on VRF agreement Li Wei still remembers that during the sensitive period of the pandemic, his comrade couldn't invest as promised due to the pandemic. "Around that time, a friend in Qingdao recommended that I meet with a potential investor. I decided to risk returning to Qingdao, but I was turned back at the provincial border." Li Wei recalled that during that period, he was constantly busy raising funds, but due to lockdowns in some cities, his financing was not smooth. With monthly rent of 20,000 yuan and the project in its early stages requiring decoration and equipment procurement, the original plan to complete trial production by the end of April 2020 was gradually delayed. "I was already out of working capital, and with this situation, it's impossible not to be anxious." At that time, everyone was transforming to fight the pandemic, but the project was just starting, and without products, the company had no chance of profitability. "Maybe I still need to improve my personal abilities." A few months later, Li Wei's entrepreneurial attempt ended in failure. Similarly, last year, the pandemic also led Liu Liang, another entrepreneur who had been ready to make a big push, to abandon his craft beer brand that he had been building for over a year. At that time, Liu Liang's company had just completed a million-yuan financing round in 2019. After spending a year streamlining the supply chain, he also marketed through self-media, and online sales reached several thousand bottles within two days of launch. At the time, craft beer was generating considerable discussion and popularity. Pan Dinghao, founder of Panda Craft Beer, had told the media that Panda Craft Beer developed early, and when it emerged as a new lifestyle, it immediately attracted a lot of media attention and was reported on multiple times. This shows that before the pandemic, the market prospects for craft beer were bright. But Liu Liang didn't expect the pandemic to last this long. Craft beer heavily relies on offline channels, especially bars and restaurants. However, with the pandemic, entertainment venues like bars closed, and the closure rate in the restaurant industry rose, inevitably affecting sales of non-essential products like craft beer. "I was ready to make another push, but the pandemic came, and shareholders considered the risks too high, thinking it safer to give up." Liu Liang, who had run a factory and had years of internet and industrial experience, familiar with supply chain management, chose to stop investing in the company after assessing market trends. In reality, a batch of startups in the market also couldn't withstand the pandemic's devastation. "The mortality rate in this industry is high, with an annualized rate as high as 36%, and even one-third failing to survive a year," Shen Kai, founder of Dream Brewing, revealed to "创业最前线". Some early-stage craft beer brands with incomplete offline channels, coupled with the massive closure of restaurants and bars, had to shift online, "finding influencers to distribute, opening Tmall or Taobao stores, with no other way." In such circumstances, without capital backing, craft beer brands find it hard to survive. A qualified brewery requires 20-30 million yuan for bottling equipment and nearly 30 million yuan for brewing equipment. Adding working capital, entrepreneurs need at least 100 million yuan in total to invest in building a factory. As a result, most entrepreneurs chose the OEM model. The reduction in orders also led to a large number of factory closures on the supply side. "Of the 10 factories I've seen, 3 or 4 have been transferred this year; they simply can't continue," Shen Kai added, noting that no one is even willing to take them over. "Even if they pivot to low-alcohol drinks, sales only reach 20-30 million yuan, which still isn't enough to survive." This made Liu Liang, who had already exited the track, lament, "Financing in this track was hot in the past two years, feeling like standing at the forefront, and then suddenly it went quiet." With the fall of some early-stage brands, the craft beer industry seems to have been forced to 'keep a low profile.' Beer is also Involved in Involution On one hand, craft beer entrepreneurs continue to flood in; on the other, the bad news of industry pioneers falling one after another continues. Data from Qichacha shows that the number of brands dying in the industry is increasing year by year. From 2016 to December 2, 2021, the number of craft beer-related companies that were deregistered or revoked was 11, 40, 116, 278, 414, and 506 respectively. But people continue to enter the industry, with the registration volume of craft beer-related companies growing rapidly in the past three years: 172, 399, 617, 1258, 1683, and 2450 respectively. Allen Lueth, CEO of Great Leap Brewing, is one of those who chose to join the craft beer ranks in early 2021. "Great Leap Brewing was established in early 2010 and has laid a solid foundation in the craft beer industry," Allen Lueth believes that now is the time for the company to scale operations and significantly increase sales. Moreover, compared to industrial beer, craft beer mainly uses the Ale process (top fermentation)**, with varied flavors, rich taste, and strong hop aroma, gradually gaining popularity among young people. A testament to this is that domestic giants and liquor magnates are also laying out plans for craft beer. At the beginning of this year, listed company Lehui International announced an investment of 30 million yuan to create three craft beer-related companies. In July, Budweiser announced continued investment in its Putian factory and the construction of a new craft beer brewery in Putian. Haidilao, which had already entered craft beer in the second half of 2017, has already reaped some benefits. Public data shows that in 2020 alone, Haidilao's own-brand craft beer sales revenue reached 250 million yuan, totaling 24.68 million bottles. In addition, some popular fast-food brands and niche themed restaurants, such as BBQ joints and Japanese restaurants, are also offering craft beer. Public data shows that in 2019, among the distribution of craft beer sales outlets in Beijing's major dining categories, bars, hotpot, cuisine, and Western restaurants had the highest number of restaurants selling craft beer, exceeding 70% of restaurants in those categories. The second tier was tea restaurants and BBQ, at around 60%. The large number of entrants has also meant that the craft beer war has never ceased. "The market share in this industry has reached 10 billion yuan, and competition has always been fierce," Shen Kai revealed. For example, there are as many as 60-70 OEM factories domestically, and the market concentration in craft beer has always been high. According to data from Guanyan Report Network, the CR4 (market share concentration index for the top 4) in the craft beer market is about 47%, with foreign giants Budweiser and Carlsberg holding the highest share thanks to some mature craft beer bestsellers. Some independent craft brewers have shown potential for national expansion, such as Ubrew and Panda Craft Beer. However, their research data shows that these brands have annual sales below 50,000 tons, and some sales come from OEM for non-owned brands. More regional independent craft brewers find it hard to break 1,000 tons in annual sales, with a highly fragmented landscape. "These beer brands all have their own factories, which means these 60-70 factories have to divide up an already small market share," Shen Kai said bluntly, noting that survival for craft beer brands is truly difficult. Besides competing for market share, flavor is also a key battleground. To 'optimize' craft beer, brands differentiate flavors, either by adding honey, ginger, or multifloral honey, or by crafting fruit-flavored beers that appeal more to women. Allen Lueth revealed that Great Leap has released over 200 different flavors of beer and alcoholic beverages to date. "This includes the Fu Zi beer developed in 2010, which was the first domestic brand to use Sichuan pepper and honey. Recently, we also developed a champagne-style beer, fermented with champagne yeast, with natural fruits, low fat, low sugar, low calories, and a strong 'bite'." He added. Image / Great Leap Brewing and Perfect World's "Warriors of the Ruins" co-branded "Banana Wheat" Dream Brewing, on the other hand, has been launching fruit beers since 2017. Because there are many women who don't drink alcohol and people who can't handle the bitterness of craft beer, Shen Kai made some flavor experiments. To this day, half of the company's flavors are fruit and cocktail-style, "ensuring that consumers trying each craft beer can experience a new taste from the unique flavors." Image / Dream Brewing's fruit-flavored craft beers Brands not only need to keep flavors fresh, but the craft beer track seems ultimately unable to escape price wars. For raw materials like malt, hops, and yeast, domestic self-sufficiency is limited, and there is heavy reliance on imports. Under the pandemic, raw material costs for domestic craft beer manufacturers naturally rose. "Costs have risen by more than 10% from the original," Shen Kai added, but the increase in raw materials hasn't led to higher craft beer prices. "Because competition is fierce, there's a trend toward price wars. After prices drop, gross margins have fallen from 55% to around 45%." Clearly, it's not easy for craft beers to carve out a share of the beer market, and for a long time to come, the craft beer industry may be in a process of reshuffling. Craft Beer Trapped in Scenarios However, the difficult times for entrepreneurs don't mean the craft beer industry is full of only bad news. Data shows that during the 2021 Double 11 shopping festival, the top 10 beer brands on Tmall by sales were Budweiser, Tsingtao, Harbin, Yanjing, Hoegaarden, 1664, Asahi, Corona, Heineken, and Wusu. Among them, traditional strong brands Budweiser, Tsingtao, and Harbin took the top three spots, while recently popular brands like Wusu and 1664 also made the list. Craft beer is booming, with growth exceeding 30%, over 7 brands with sales over one million yuan, and domestic craft beer growth nearing 250%. Related research institutions also predict that by 2025, the domestic craft beer market size will reach approximately 87.5 billion yuan (12.5 billion USD), with penetration reaching 11%, and a 5-year CAGR of about 22%. "The overall craft beer market has been growing, with annualized growth of 25% in recent years," Shen Kai said. From a macro perspective, craft beer may harbor a market size of tens of billions of yuan. Therefore, in the craft beer field, although there haven't been large financing rounds, capital has maintained keen interest in the industry. "We received our first investment four years ago, and now investors still contact us regularly because they see the industry as highly attractive," Allen Lueth revealed to "创业最前线". In the past two weeks, after connecting with over a dozen investment institutions, Shen Kai felt that the industry has shifted from the 'mass entrepreneurship and innovation' phase where money sought projects, to now where good projects seek money, and many investors are quite cautious. "Craft beer isn't as hot in the capital market as before 2017, but it has warmed up compared to the previous two years." Qichacha data shows that since 2018, there have been 18 financing events in craft beer. Among them, 11 occurred in 2021 alone. However, despite the promising prospects, the development speed of craft beer is very slow, due to both market environment factors and the category's own characteristics. The domestic craft beer scene began in 2012 when Gao Yan (author of "Drink Your Own Brewed Beer," a mentor to many craft beer enthusiasts), Yin Hai, Xiaobian'er, Pan Dinghao, and others discussed and decided to uniformly translate "Craft beer" as "精酿啤酒". At that time, the industry was in its infancy, and very few brands had gained widespread market recognition. Compared to industrial beer, craft beer has richer flavors, but a deep-rooted perception among the public is that beer is generally cheaper than wine and spirits, and craft beer's price, four to five times higher than regular beer, undoubtedly deters many consumers. "I went to a hotpot restaurant a few days ago, and they had craft beer. I ordered it, and it was really good. But it was a bit pricey, 18 yuan per glass," one consumer told "创业最前线", expressing love for the flavor while also complaining about the price. "I feel it's hard for the industry to achieve the same penetration as industrial beer." Image / Outside Dream Brewing's beer restaurant Good wine also fears deep alleys. As American marketing strategist Jack Trout proposed: The basic method of positioning is not to create something new and different, but to manipulate existing perceptions in the mind, to reorganize existing associations, and to make these new organizations occupy a place in the customer's mind. "Craft beer lacks scenario education, which is a consensus among all brands, because craft beer still doesn't have an inherent consumption scenario," Shen Kai said. To this end, entrepreneurs are targeting channels like bars, restaurants, supermarkets, and convenience stores to increase supply, and the now-popular beer restaurants and taverns have also become key focuses for craft beer brands. "Once the pandemic hits, craft beer piles up in warehouses with nowhere to go; that's the biggest risk," Shen Kai said. Traditional channels can't consume all production capacity, so brands with excess capacity choose to open their own beer restaurants, which not only helps clear inventory but also helps create more scenarios for craft beer brands. Image / Great Leap Brewing products This way, beer restaurants not only bring "fans" to the industry but also generate profits for the company, killing two birds with one stone. "Our stores release new beers every month, and our members consume over 250 cups of beer per person per year on average, surpassing the Czech Republic, the world's most beer-drinking country," Allen Lueth revealed. Shen Kai also said that the company has opened 13 beer restaurants in Shanghai, all of which are profitable. Shen Kai plans to continue opening stores in Shanghai in the future based on financing conditions. Undoubtedly, craft beer is now winning over more and more consumers with its flavor advantages and social momentum. *The cover image in this article is from Shetu.com, based on the VRF agreement. Are you "watching" me?