As summer approaches, it's time to enjoy beer. When you're toasting at barbecue joints or crayfish restaurants, you may notice that local beers have upgraded their image. The old "big green bottles" you used to drink by the case are gone, replaced by a variety of pure draft, original pulp, craft, and fresh beers, with prices that are quite "impressive."

Foreign beers, which once held their noses high, are now bowing their heads. Corona, which appears in every Fast & Furious movie, used to sell for over a dozen yuan in import supermarkets, but now you can easily buy two bottles for 10 yuan on e-commerce channels.

This price shift at the terminal market is a microcosm of the changing dynamics in China's beer market.

In recent years, foreign beer brands have shown a clear decline in the Chinese market. AB InBev's sales have fallen, and its affiliated company Zhujiang Beer has also seen performance drops. Carlsberg China's growth rate is far lower than that of the other five major players—China Resources Beer, Tsingtao Beer, and Yanjing Beer—and it may also be dragged down by partner companies like Lanzhou Huanghe and Tibet Development.

How is the increasingly clear story of domestic substitution in China's beer industry unfolding?

The Decline of Foreign Beer

Beer is the third most consumed beverage in the world after water and tea. In China, unlike baijiu and huangjiu, beer is a standard "imported product."

In 1903, a German businessman and a British businessman jointly established the German Beer Company Qingdao Co., Ltd. in Qingdao, marking the beginning of China's beer industry.

Around the 1980s, international beer manufacturers such as AB InBev, Carlsberg, and Heineken entered the Chinese market one after another, leveraging their high-end brand positioning to deliver a crushing blow to the then-fledgling Chinese beer industry. Subsequently, they activated their leverage machines and made large-scale deployments in the Chinese market.

The low-level equilibrium of "one city, one beer" among local breweries was defenseless against the carrot-and-stick approach of foreign beer companies. At that time, many local beer brands faced only two outcomes: being acquired by foreign companies, or being acquired after being defeated.

After years of aggressive expansion, foreign beer companies gradually formed their stable spheres of influence: AB InBev, together with brands like Harbin Beer, Xuejin, and Shuanglu, maintained strong market positions in the Northeast and Central China, with its strategic investment in Zhujiang Beer focusing on the Pearl River Delta; Carlsberg, along with a host of smaller brands such as Chongqing Beer, Shancheng, Wusu, Dali, and Xixia, as well as invested brands like Huanghe and Lhasa, secured the Southwest and Northwest markets.

Especially in the high-end beer market, which was firmly controlled by Budweiser, Carlsberg, and Heineken for years, these foreign manufacturers reaped huge profits, leaving little room for brands like Snow and Yanjing.

However, in recent years, the situation has begun to change. In 2022, Budweiser China's sales fell by 3.0%, leading to a 44 basis point decline in market share. This loss in its core market caused a 3.9% drop in the performance of listed company Budweiser APAC, which had not recovered by Q1 2023.

Zhujiang Beer, an affiliated company nurtured by AB InBev with a 29.99% stake, also saw its performance decline by 2.11% in 2022.

Carlsberg China's core business platform, Chongqing Beer, reported revenue of 14.039 billion yuan and net profit attributable to the parent of 1.264 billion yuan in 2022, up 7.01% and 8.35% year-on-year respectively. This was better than Budweiser APAC overall, but the growth rate was far lower than that of China Resources Beer, Tsingtao Beer, and Yanjing Beer.

Beyond Chongqing Beer, Carlsberg China also has joint ventures with Lanzhou Huanghe, Tibet Development, and Yuxin Industrial for brands like Huanghe, Lhasa, and Shancheng.

In recent years, these brands have been sluggish, with both Lanzhou Huanghe and Tibet Development falling into losses in 2022. Consequently, Lanzhou Huanghe has become obsessed with stock trading, Tibet Development is embroiled in loan disputes, and Carlsberg has even taken Yuxin Industrial to court over dividend issues related to Shancheng Beer.

More surprisingly, Heineken China, due to business losses, was acquired by China Resources Beer for HK$2.354 billion in 2018. The Heineken beer you now drink in the Chinese market is actually produced by China Resources Snow Breweries.

The Rise of Local Beer

China Resources Beer's acquisition of Heineken China is a landmark event in the resurgence of local Chinese beer.

After all, Heineken, founded in the Netherlands in 1863, is one of the top beer companies, with over a hundred breweries and a consistent presence in the Fortune Global 500. The acquirer, China Resources Beer, is only about 30 years old.

At the end of 1993, China Resources Enterprise acquired Shenyang Brewery, securing the Snow brand and officially entering the beer market. At that time, Tsingtao Beer, already 90 years old, was listed on both the Shanghai and Hong Kong stock exchanges, becoming the first mainland company to be dual-listed.

Subsequently, backed by China Resources, China Resources Beer took AB InBev and Carlsberg's M&A strategy to the extreme, acquiring dozens of local beer brands, including Xuebao in Jilin, Dalian and Daxue in Liaoning, Lanpai in Henan, Qianjiang in Zhejiang, Xingyinge in Hubei, Lanjian and Jinwei in Sichuan, and the "Seven Little Giants" in Anhui: Tianzhu, Shengquan, Xiangwang, Xuedi, Shengli, Longjin, and Wanpi.

After restructuring, China Resources Beer leveraged aggressive ground promotion and became China's beer sales champion in 2006, creating the world's largest beer brand by volume—China Resources Snow.

In 2022, China Resources Beer's revenue was 35.263 billion yuan, up 5.6% year-on-year, with net profit of 4.344 billion yuan, up 32.8% excluding demolition compensation factors.

During the same period, Tsingtao Beer's revenue was 32.172 billion yuan, up 6.65% year-on-year, with net profit attributable to the parent of 3.711 billion yuan, up 17.59%, and non-GAAP net profit growth as high as 45.43%.

Even more surprising is Yanjing Beer, which was previously stuck in a business bottleneck but suddenly exploded last year, with revenue growing 10.38% to 13.202 billion yuan and net profit attributable to the parent of 352 million yuan, a growth rate of 54.51%.

Even Huiquan Beer, Yanjing's "smaller version" that focuses on Fujian and has little influence nationwide, achieved comprehensive growth in scale and performance, with business profits nearly doubling.

In 2022, despite overall sluggish consumption and restricted beer consumption scenarios, local beer brands still achieved such performance growth, which is quite commendable.

In 2023, as the consumer market recovers, beer companies' performance is generally improving, but foreign-affiliated beer companies like Budweiser APAC, Lanzhou Huanghe, and Tibet Development are still facing declining performance or losses, making the divergence between the two camps more pronounced.

Comprehensive Improvement in Product, Channel, and Brand

The secret to Yanjing Beer's breakthrough in growth bottleneck is the successful marketing of its high-end new product Yanjing U8 and the establishment of new retail formats like its Yanjing Jiùhào community taverns.

Yanjing U8, endorsed by Cai Xukun, is the core of Yanjing Beer's high-end strategy. In 2022, sales of this high-end series grew by over 50%, driving revenue from mid-to-high-end products to 7.658 billion yuan, up 13.77% year-on-year.

Currently, the number of Yanjing Jiùhào community taverns has exceeded 300, and the company has launched differentiated Yanjing Lion King craft beer stores based on its Lion King craft brand.

With product and channel innovation, Yanjing Beer's sales volume grew by 4.12% year-on-year, far above the industry average; with prominent high-end products, revenue increased significantly, gross margins remained stable, and performance growth became a natural outcome.

In contrast, Budweiser's key reliance on the nightlife channel has suffered a major blow in recent years. According to the 2022 annual report of its affiliated company Zhujiang Beer, the company saw growth in distribution, supermarket, and e-commerce channels, but revenue from the nightlife channel alone fell by over 10%.

Foreign beer companies, based on their advantageous market positions and strong high-end presence, have made quick money and formed path dependence. Local beer manufacturers, in a catching-up posture, are not only full of momentum in product high-endization but also bold and innovative in channel innovation and cross-industry ventures. Yanjing Beer, which had lagged slightly in previous years, fought with its back against the wall and finally saw the light of dawn.

Of course, beyond product and channel innovation, after nearly a decade of continuous high-endization, the gap in brand perception between local and foreign beers is rapidly narrowing. High-endization, performance improvement, and enhanced brand value have formed a positive cycle, and the invisible brand snobbery chain in the beer industry has completely disappeared.

After China's beer production peaked in 2013, the industry entered an era of stock competition. As market concentration continues to rise, the shift between players has intensified, leading to the current situation of "foreign beer declining, local beer rising."