Domestic beer seems to be recovering. Recently, industry giants including China Resources Beer, Tsingtao Brewery, and Yanjing Beer released their first-half 2017 results, achieving varying degrees of growth in revenue, profit, and sales volume. A reporter from China Business Journal learned that to reverse the industry downturn, domestic beer companies have been transforming around 'premiumization and capacity reduction,' including phasing out low-end capacity plants, launching various mid-to-high-end craft beers, and combining beer culture to further appeal to young consumers. However, He Yong, executive deputy secretary-general of the China Alcoholic Drinks Association, said, "Because China's beer industry is still in a structural adjustment period, which may last 2-3 years, it is not yet certain whether the industry is truly recovering." During this process, beer companies are upgrading their product structures, and the future will see beer enter a fragmented, personalized consumption stage. Market Bottoming Out and Recovering From the first-half financial reports, China Resources Beer's sales volume was 6.306 million kiloliters, up 2.9% year-on-year, with revenue of 15.774 billion yuan, up 3.7%; Tsingtao Brewery's sales volume increased 2% to 4.53 million kiloliters, revenue reached 15.063 billion yuan, up 2.15%, and net profit increased 14% to 1.225 billion yuan. Additionally, Yanjing Beer and Zhujiang Beer also achieved double growth in revenue and profit. Data from the National Bureau of Statistics indicates that from January to July this year, China's cumulative beer output was 27.817 million kiloliters, up 0.8% year-on-year. The overall beer industry has temporarily bid farewell to its downturn. The downturn began in 2015. Data from consulting firm Roland Berger shows that from 2010 to 2014, the compound growth rate of traditional beer sales was only 3%, and in 2015, it even declined 3% compared to 2014. That year, almost all major Chinese beer giants experienced a turning point decline in sales. In the same year, domestic beer also hit a five-year low in production, with a reduction of 2.5141 million kiloliters, down 5.06% year-on-year. In an interview, Hu Zicong, partner at Roland Berger, said the decline in the domestic beer industry over the past period was due to several reasons. "First, the beer industry is in a state of overcapacity. Producers were optimistic about the market but ignored that China's per capita beer consumption is already high, similar to a mature market in terms of volume. Second, from the distributor's perspective, rising logistics costs over the past few years meant they couldn't get more benefits from beer manufacturers, so they had to find other profit channels. For example, they imported German and Dutch beers, so they were not as aggressive in growing the volume of industrial beer. Additionally, there were factors like weather and consumption upgrades." Facing the industry downturn, domestic beer companies have been transforming and adjusting around 'premiumization and capacity reduction.' Zhujiang Beer launched a craft beer series for the high-end market in 2015 and invested 250 million yuan to build four craft beer production lines in Guangxi, Dongguan, Zhanjiang, and Hunan. In a written response to reporters, Zhujiang Beer also said: "We are currently building a craft beer experience center, planned to open within the year, and will launch new craft products such as the developed Xuebao Yellow Beer and Cranberry Beer." China Resources Beer also stated in its interim report that the group is optimizing product structure, carefully implementing production and sales plans, and expanding mid-to-high-end and canned beer to meet consumer demand for high-quality beer. A Tsingtao Brewery spokesperson told reporters that the first-half performance benefited from continuous development and launch of mid-to-high-end products, which increased market share and gross margin of mid-to-high-end products. During the period, the main brand achieved sales of 2.12 million kiloliters, of which high-end products such as 'Augustus, Hongyun Dangtou, Classic 1903, and Pure Draft Beer' achieved sales of 900,000 kiloliters. The company will accelerate the transformation and upgrade to high value-added products represented by canned beer and craft products. In this regard, Zhu Danpeng, a commentator on China's food industry, concluded that the recovery of the domestic beer industry is inseparable from industrial structure adjustment and product upgrades. Hu Zicong said: "Local beer giants have already begun to change their product structure, developing more high-margin mid-to-high-end products. Originally, beer products might only be divided into high-end and low-end, but now they are subdivided into five or six tiers. Beer companies with a complete product matrix will have a greater advantage in the future." "In fact, after three consecutive years of decline in beer production, the room for decline is limited, and the slight rebound in the first half of 2017 was expected. In the future, beer will enter a fragmented, personalized consumption stage, so beer companies are laying out product structure upgrades. It can be said that product diversification is an inevitable result of industrial structure maturity," He Yong said. Industry Challenges Remain However, industry insiders seem pessimistic about whether the domestic beer industry is truly recovering. He Yong told reporters that because China's beer industry is still in a structural adjustment period, which may last 2-3 years. Wen Yusheng, a distributor for a beer brand, told reporters: "The current recovery is a reflection of economic growth in volume, with an increase in mid-to-high-end beer products. But industrial beer hasn't increased much, so future sales may not be optimistic." Lin Tianfeng, a beer distributor in Guangzhou, believed: "In 2016, the comprehensive capacity utilization rate of China's beer industry was only 59%, and industrial beer still accounts for the majority, so its future performance remains to be seen." Regarding low-priced, light-tasting industrial beer, McKinsey senior analyst Gordon Orr once wrote that domestic mass-market beers like Yanjing and Snow have a low-end brand image, and consumers consider them drinks for their parents and grandparents. "With the fading demographic dividend, increasing health awareness, more alternative beverages, and brand aging, the future for domestic beer companies will not be easy," Lin Tianfeng said. In fact, domestic beer giants have not been without efforts to improve their image and sales through beer culture and marketing activities. Tsingtao Brewery told reporters that the company conducts festival-themed promotions and roadshows around business districts, supermarkets, and communities, and increases fan interaction through sponsoring concerts, music festivals, and sports events. For example, at the 2017 AFC Champions League, Tsingtao Brewery used AR technology to launch an 'AR Shooting Challenge.' Zhujiang Beer mentioned that in 2016, the company held 81 large events including international beer festivals, food festivals, concerts, and various art exhibitions. During the recent National Day holiday, Zhujiang Beer held a series of beer culture festival activities at the Guangzhou Zhujiang·Party Pier Beer Culture Creative Park. However, Wang Yancai, chairman of the China Alcoholic Drinks Association, mentioned in a public interview: "China's beer industry has a cultural shortcoming. The current beer culture is almost entirely copied and imitated from Western countries, without our own Chinese-style beer culture." Additionally, the impact of imported beer persists. Public data shows that from 2011 to 2016, China's beer imports continued to grow, from 64,203 kiloliters to 646,384 kiloliters, an increase of nearly 9 times. Meanwhile, the rise of the post-80s and post-90s generation of consumers has increased the pursuit of personalized beer, and craft beer is gradually becoming an unignorable part of the beer market. For example, beer giant Budweiser is seen as a disruptor in China's craft beer market, seizing market share by acquiring small craft brands and craft bars. Lawson, who operates three Beer Hardcore beer stores in Guangzhou, told reporters that the stores mainly sell imported craft beer, with domestic craft beer accounting for only 5% to 10% of sales. "Domestic beer giants are just starting to make efforts in craft beer. The industry is actually happy to see them invest seriously in craft beer production, but I personally have reservations about whether their future production lines can maintain the current high level." It is worth noting that e-commerce platforms are becoming a booster for personalized beer sales, including craft beer. Data from CBNData in 2016 shows that craft beers like Hoegaarden, Valentin, and Paulaner have surpassed traditional brands like Zhujiang and Yanjing to become bestsellers online. Hu Zicong told reporters: "Online mid-to-high-end beer accounts for 30% to 40% more than offline, because due to profit and logistics distribution costs, it is difficult to promote industrial beer online, and domestic brands that focus on industrial beer do not have an advantage online." Source: China Business Journal The 3rd (CFIC) China FMCG + Internet Conference will be held in Chongqing in November 2017. The conference will closely focus on the theme 'New Forces, New Ecology' and invite 1000+ distributors, 500+ brand owners, 200+ B2B platform founders, and 100+ investment and financing institutions to explore a new chapter of cross-border integration! November 8-9, 2017 Chongqing Yuelai International Conference Center, Xinyue Hall Registration is now open. Long press the QR code below or click 'Read Original' to register. Add friend and note 'Conference Registration' Click the link below to review the highlights of the 1st and 2nd FMCG + Internet Conferences: 2016 'FMCG + Internet' Summit Forum -END-