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1 Yesterday (August 3), Heineken N.V. issued an announcement stating that China Resources Enterprise, Limited and China Resources Beer (Holdings) Company Limited have agreed to subscribe for a 40% stake in Heineken for a total cash consideration of approximately HK$24.35 billion, signing a non-binding agreement to initiate a long-term strategic partnership in mainland China, Hong Kong, and Macau.

At the same time, China Resources Beer also announced that China Resources Enterprise will purchase approximately 5.2 million treasury shares of Heineken for a total cash consideration of approximately €463 million, equivalent to a 0.9% stake in Heineken. As part of the strategic cooperation, Heineken's current operations in China will be merged with China Resources Beer's business, and Heineken will license the Heineken® brand to China Resources Beer for long-term use in China through a brand licensing agreement.

2 Heineken, founded in Amsterdam, the Netherlands, is currently the world's second-largest brewer, holding about 10% of the global beer market share. Its top competitor, AB InBev, currently holds about 20% of the global market share.

Heineken entered the Chinese market in 1983, a full 12 years earlier than its global rival AB InBev. However, unlike its success globally, where it competes head-to-head with AB InBev, the rapidly growing Chinese market seems to have little to do with Heineken.

According to its 2017 financial report, Heineken's annual revenue reached €21.908 billion, a year-on-year increase of 5.4%. However, Heineken's total sales volume in the Asia-Pacific region last year was only 630,000 tons, 30,000 tons less than in 2016, making it the only region in the world with negative growth. Moreover, its market share in China is currently less than 1%... while its global rival AB InBev currently holds more than 20% of the Chinese market.

As the world's largest beer market, China Resources Beer currently holds about 26% of the market share in China, making it the largest brewer in the country. In terms of volume, Snow, under China Resources Beer, is one of the best-selling beers globally.

However, under the competitive strategy that overemphasized "winning by volume" and capturing market share through price wars, Snow's product structure has been too low-end. Despite its large sales volume, it has the lowest profit margin among the five major beer giants in China.

Although Snow is actively seeking to restructure its product chain, it is an indisputable fact that after years of price wars, Snow has not made significant progress in the premium beer segment.

In stark contrast, AB InBev, seeing the huge potential of consumption upgrading in the Chinese market, has already laid out about 20 premium international brands in China in advance. This poses a significant strategic threat to Snow's future development in China.

Famous beer marketing expert Mr. Fang Gang pointed out: Whether it is Heineken or Snow, from a competitive perspective, their global competitor is AB InBev. The enemy of my enemy is my friend. Moreover, China Resources Beer lacks ultra-premium brands, while Heineken has them, but Heineken lacks scale in China. Therefore, the cooperation between the two forms a certain complementarity. It is natural for the two brands to come together.

3 Regarding this merger, Mr. Fang Gang told New Beer: From an industry perspective, China Resources Beer, as China's largest beer company, must position itself in the premium segment and optimize its product line. From a consumer perspective, Chinese consumers, especially the younger generation, are very receptive to high-quality, high-priced products.

Therefore, for China Resources Beer, there is both an industrial need and a consumer need, which has prompted China Resources Beer to increase its presence in the mid-to-high-end beer market, including the launch of Brave the World SuperX in the first quarter of this year, and now the acquisition of Heineken's China business.

From a negative perspective: AB InBev and Tsingtao's ultra-premium, premium, and mid-range products, coupled with imported beers and craft beers, are encircling, robbing, and eroding the market, leaving China Resources Beer, which lacks major brands and trendy brands, unable to rely solely on Snow to dominate.

Heineken has been weak in China for years, with rampant parallel imports and a collapsed price system, and its share of the premium market in China lags far behind AB InBev. This time, leveraging China Resources Beer to start anew is also a move of necessity.

Therefore, China Resources Beer selling a 40% stake to Heineken and absorbing Heineken's China business is a highly complementary investment. For China Resources Beer, it solves the problem of weak premium offerings (lack of support in the double-digit price band) and the issue of internationalization (the final battle). For Heineken, its long-term non-mainstream status in China may be reversed, and cooperation with China Resources Beer is also a wise move. The strong Snow acquiring the "weak" Heineken in the Chinese market has long-term significance for Heineken's business expansion in China.

An industry executive who declined to be named believes: The Heineken + China Resources strategy is very visionary! In the domestic market, China Resources' only rival is AB InBev; Tsingtao is just a temporary competitor, and China Resources has already left Tsingtao behind. The only brand that is more premium than AB InBev and has global reach is Heineken. Once this strategic alignment is achieved, the decisive battle in the coming years will be over.

4 Of course, the current team at China Resources Beer has no experience operating international premium brands, which is a considerable challenge for China Resources as it takes over Heineken.

A marriage contract is signed, but only the wearer knows if the shoe fits. The curtain on this eagerly anticipated beer war has just been lifted...

The beer industry landscape is undergoing subtle changes, and the acquisition window has opened again! The future competition in China's beer market is no longer about big fish eating small fish, but a game between big fish and big fish! In the future, it is not impossible for the five giants to become two, with a duel between AB InBev and Snow.

The partnership between China Resources Beer and Heineken—one wants to enhance its brand positioning through the merger, the other is trading for market share—but the outcome will not be achieved overnight through a few premium price wars.

Let us wait and see.

Source: New Beer -END-