---
title: "Fang Gang: Witnessing a New Turning Point for Chinese Beer"
description: "The following content is compiled from the recording of Mr. Fang Gang's report at the Shanghai Zhongtai Food Mid-term Investment Strategy Summit. First, we review the historical turning points of Chinese beer. Chinese beer's history dates back 6,000 years, not as the commonly believed industrial import; there was a gap in between; until 1900, Russians built the first brewery in Harbin, making 1900 the first year of Chinese beer industrialization; 1987 was the blowout era, with nearly 2,000 breweries; in 1994, Snow Beer was born, and the total volume was less than 18 million tons, with growth starting to be single-digit; in 2002, China became the world's largest beer market; in 2013, it peaked at over 50 million tons; from 2014, there were 3-4 consecutive years of decline, even 30 consecutive months; today, the scale is 45 million tons, with 2.1% growth in Q1 2018 and 6.4% in April."
author: "方刚"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
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published: "2018-06-08"
language: "en"
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---

# Fang Gang: Witnessing a New Turning Point for Chinese Beer

> The following content is compiled from the recording of Mr. Fang Gang's report at the Shanghai Zhongtai Food Mid-term Investment Strategy Summit. First, we review the historical turning points of Chinese beer. Chinese beer's history dates back 6,000 years, not as the commonly believed industrial import; there was a gap in between; until 1900, Russians built the first brewery in Harbin, making 1900 the first year of Chinese beer industrialization; 1987 was the blowout era, with nearly 2,000 breweries; in 1994, Snow Beer was born, and the total volume was less than 18 million tons, with growth starting to be single-digit; in 2002, China became the world's largest beer market; in 2013, it peaked at over 50 million tons; from 2014, there were 3-4 consecutive years of decline, even 30 consecutive months; today, the scale is 45 million tons, with 2.1% growth in Q1 2018 and 6.4% in April.

The following content is compiled from the recording of Mr. Fang Gang's report at the Shanghai Zhongtai Food Mid-term Investment Strategy Summit.
First, we review the historical turning points of Chinese beer.
Chinese beer's history dates back 6,000 years, not as the commonly believed industrial import;
**There was a gap in between;**
Until 1900, Russians built the first brewery in Harbin, making 1900 the first year of Chinese beer industrialization;
1987 was the blowout era, with nearly 2,000 breweries; before that, growth was maintained at 20%-30%;
**In 1994, Snow Beer was born, and the total volume was less than 18 million tons, with growth starting to be single-digit;**
In 2002, China became the world's largest beer market; in 2013, it peaked at over 50 million tons;
From 2014, there were 3-4 consecutive years of decline, even 30 consecutive months of decline;
**Today, the scale is 45 million tons, with 2.1% growth in Q1 2018 and 6.4% in April.**
Before answering the new turning point, I have compiled 7 thought-provoking questions from recent discussions with friends. Let's discuss them together; these questions may not have standard answers.
**1. Will Chinese beer evolve toward the patterns of the US, Germany, or Japan?**
Three countries have distinctive beer industries:
The US beer industry is relatively highly monopolized;
Japan has four giants, each holding a share;
Germany's beer industry is a niche, small and beautiful market with nearly 2,000 breweries.
Currently, China has 380 companies, with CR5 holding 80% market share. China is vast, and a single province's population can rival Japan, so it's hard to generalize.
At the micro level, we can treat each province as a country. We find many provinces have developed into a US-like model, such as Shandong, Sichuan, and Anhui, where a single brand holds over 70%-80% share. That's the US model.
Meanwhile, provinces like Zhejiang show a two-way or three-way battle, with Snow, Budweiser, and Tsingtao all strong. From this perspective, it has multi-country characteristics.
**2. Has low-price competition in Chinese beer ended?**
We often see media say that Chinese beer has relatively full pricing competition. So after entering the new turning point, has low-price competition ended?
**3. Will the Chinese beer landscape change?**
The current landscape is five large companies plus over 300 small breweries, with CR5 holding 80% market share. It seems like five, but in detail, it's two teams: the national team and the foreign team led by Budweiser. These two teams are competing. Will any member of the Chinese team be eliminated, affecting the future landscape?
**4. Is this price increase justified?**
From late 2017 to early 2018, hot topics in the beer industry included:
First, price increases;
Second, collective price increases;
Third, varying increases by region.
Our question is whether this price increase is justified, whether it's purely due to inflation or raw material cost increases, and whether it will offset cost pressures.
We believe the five giants' common action is raising prices, indicating it has begun. Future increases are not ruled out. The window for price increases is open, not just for a few months, but possibly for the next three years.
**5. Can Chinese beer compete with baijiu?**
First, Moutai has risen tenfold in the past five years, with annual profits of 26.4 billion RMB, more than half of the entire Chinese beer industry's annual profits. Beer's volume is five times that of baijiu (10 million tons vs. 45-50 million tons), but beer's sales are only one-third of baijiu's. We find the two industries are not comparable.
Second, beer has more beverage attributes than alcohol. Beer is the third-largest beverage by consumption after water and soft drinks, with alcohol content around 5% or less.
Many in the baijiu industry do not consider baijiu an FMCG; they think taking the FMCG route is a dead end for baijiu.
The differences between baijiu and beer are obvious.
Comparing Chinese beer to baijiu is unfair to beer. Beer only faces this unique challenge in China. In front of baijiu, beer has no say. It's like the sun and the moon: baijiu's heat and beer's gentleness are unique to China. In any other Western country, it's hard to see a market like Chinese baijiu.
**6. Will imported and craft beers disrupt the current landscape?**
From 2011-2017, imported beer grew from 67,000 tons to 700,000 tons, accounting for 1.82% of Chinese beer. Craft beer accounts for only a few thousandths. Both shares are small.
**7. Will Chinese beer's scale grow or decline in the future?**
Chinese beer will not see a cliff-like decline because conditions don't support it. Nor will there be explosive growth factors. Neither extreme will happen.
I believe the future state is sideways movement with fluctuations. The long-term trend is unclear, but sideways is an appropriate description.
**Next, before describing the new turning point, let's look at some key numbers:**
$100 billion,
49%, 19.9%, 80%,
123, 235, 358, 5810.
**$100 billion:** To judge an industry's health, speed isn't key; it's the attention or asset allocation of leading companies.
Budweiser, the global leader, holds nearly 30% of global share and acquired SAB for $100 billion in 2016. This means beer isn't a bad industry. For a bad industry, the first to short it wouldn't be consumers or investors but the leading companies. Budweiser's $100 billion investment shows that globally, beer isn't declining or sunset.
We also see that this investment changed the industry leaders' expectations. The $100 billion was raised through financing, requiring future profits. We find Budweiser's global expansion appetite isn't strong recently, but profit growth, including in China, is much better.
**49%:** Snow Beer, the Chinese market leader, was founded in 1994, making it the youngest among the top five. Among the top ten domestic companies, none is younger. During Budweiser's acquisition of SAB, Snow redeemed SAB's 49% stake, showing Snow is optimistic about Chinese beer. We see Snow's recent activity is high, with clear signals. Behind the 49% figure, many related phenomena can be observed.
**19.9%:** Asahi sold its 19.9% stake in Tsingtao Beer at 27 yuan. Why did Snow take back 49%, and why did Tsingtao push out 19.9%? This is interesting. If industry leaders don't see a bright future, why make these moves?
**80%:** The top five hold 80% market share, which is high even in the US.
123, 235, 358, 5810: These numbers describe price changes in Chinese beer consumption upgrades.
When I entered the industry, main prices were 1, 2, 3 yuan;
Around 2000, prices were 2, 3, 5 yuan;
**After the upgrade, from 2010, prices became 3, 5, 8 yuan;**
Today, giants are fighting over 5, 8, 10 yuan (these are foodservice or on-trade prices, not retail).
This describes the consumption upgrade over decades. We might think prices are only a few yuan, far from Moutai, but it's not Moutai's product attribute.
Three worlds of Chinese beer: I split Chinese beer into three worlds: mainstream, imported, and craft. Without this split, Chinese beer wouldn't be as exciting.
**In the past 30 or 20 years, beer tasted the same from south to north, east to west. Even removing labels, you couldn't tell which brand it was. That was 20 years ago.**
But today is different. There are all kinds of beers, with mainstream, imported, and craft gradually appearing.
Some use "industrial beer" for mainstream, but I think "industrial" is insufficient. Without industrialization, beer wouldn't be as widespread. So I use "mainstream."
**Mainstream beer holds 98% share, imported only 1.8%, and craft only a few tenths of a percent.**
Currently, these three worlds coexist peacefully, like elephants and ants, not yet elephant vs. elephant.
World beer production: China is the largest beer market. A single province's sales can rival a country. For example, Shandong's sales exceed many countries' total beer sales.
With a large population, leading in China could also lead globally. We often say Chinese beer is large but not strong, with low profits. That's normal. **Chinese beer's annual profits are less than half of Moutai's. For Tsingtao to surpass that, the road is long.**
Per capita consumption: China's per capita is neither high nor low, and it's hard to reach levels like Germany or Czech Republic.
Because Chinese beer has a natural enemy—baijiu. Baijiu is highly prevalent. To reach German or Czech levels, beer would have to defeat baijiu, which is a long road.
**Key factors affecting per capita consumption include weather, population, economy, and law.**
First, weather directly affects beer sales; hot and cold have significant impacts.
Second, population changes are moderate overall, not cliff-like.
Third, the economy won't change drastically.
Fourth, if laws loosen, that could be a key factor.
From these four factors, we find no reason for explosive growth or cliff-like decline, so we believe the industry will be sideways for a long time.
Domestic beer production distribution: Is Chinese beer like the US, Germany, or Japan?
It's hard to answer uniformly because China is too big. Each province can be considered a country. We find many provinces have developed into a US-like model, such as Shandong, Sichuan, and Anhui, with high monopoly and single brands holding over 70%-80%. That's the US model.
**Of course, places like Zhejiang show a two-way or three-way battle, with Snow, Budweiser, and Tsingtao all strong.**
Overall, analyzing which track Chinese beer fits may not be easy, but by province, it has multi-country characteristics.
Next, we find a major difference between beer and baijiu. Beer follows a territory logic: the bigger the territory, the bigger the brand, the higher the profit. Baijiu doesn't; it follows a price-band logic. For example, Moutai's Feitian accounts for 80%, but we never say Moutai occupies a territory.
**The new turning point requires attention to three parts.**
The new turning point may not be about scale but value. That's our understanding.
We find the five giants have taken the same actions:
**First, price increases:** They have begun, and future increases are not ruled out. The window is open, not just for a few months, but possibly for the next three years.
**Second, optimization:** Giants are not only closing plants but also building new ones. They close outdated capacity and build efficient capacity. At least 30%, even 50%, of Chinese beer capacity needs optimization.
**Third, adjustment:** It's clear that mid-to-high-end product lines are emerging. Snow, Budweiser, and Tsingtao are all adjusting. Note: the global leader is Budweiser, and the domestic leader is Snow, but neither is listed on the mainland stock market. The one leading the Chinese capital market is Chongqing Brewery, due to industry history.
So, identifying the industry leader is key. Carlsberg is a top-three global giant. Budweiser and Snow are not on the A-share market. The third player has become the leader. That's interesting!
**To summarize the new turning point for Chinese beer:**
From drinking enough to drinking well, from tasting good to having fun,
From offline to online, from channels to users,
From territory to brand, from scale to value.
Source: New Beer
-END-


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