Source: Capital Planet (ID: zibenxingqiu) What do Eason Chan, Nicholas Tse, William Chan, Li Yifeng, Xiao Zhan, and Ming Xi have in common? The answer is beer – Budweiser. The endorsements of several handsome male celebrities, coupled with the "Victoria's Secret Angel" boost, helped Budweiser's brand owner, Budweiser APAC, quickly open up the Chinese market. On September 30, 2019, it successfully listed on the Hong Kong Stock Exchange, surging 4.44% on the first day to close at HKD 28.2 per share, with a market value of approximately HKD 373.46 billion. Now, more than two years have passed since Budweiser APAC's listing. During this period, Budweiser faced the sudden impact of the pandemic, launched energy drinks and sparkling water to drive transformation, and announced price increases for its products in August. After all these moves, how has Budweiser APAC's recent performance been? We can glean some insights from the third-quarter report. The Traffic Password of Young Idols Since some point, "young idols" have become the first choice for beer product endorsements. Besides Budweiser, other brands also favor this approach. Snow Beer chose Wang Yibo to endorse Brave the World SuperX, and Gong Jun for Mars Green; Harbin Beer partnered with Zhang Yixing; Yanjing U8 and V10 White Beer series featured Cai Xukun's ads across major platforms. Despite relying on top-tier celebrities, sales for various brands seem insufficiently supported. China Resources Beer (Snow) sold approximately 6.337 million kiloliters in the first half, barely recovering to levels from two years ago; during the same period, Yanjing Beer sold 2.1316 million kiloliters, about 30% of China Resources, still lagging behind the 2.5785 million kiloliters sold in the same period of 2019. In contrast, Budweiser's spokesperson Xiao Zhan brought relatively considerable benefits to the brand. In this year's interim report, Budweiser APAC mentioned that in the first half, it launched Budweiser Mix fruit beer on e-commerce channels and successfully attracted consumers by inviting brand spokesperson Xiao Zhan to participate in targeted high-end marketing activities. During the 618 e-commerce shopping festival, Budweiser Mix fruit beer ranked first in the food and beverage category. In the first nine months of 2021, Budweiser's total sales volume was 7.174 million kiloliters, a year-on-year increase of 8.2%, with revenue per hectoliter rising 5.6%. The company's overall revenue also grew 14.3% to USD 5.359 billion. So, how much did Budweiser APAC pay for these "young idols"? In the first half of this year, Budweiser APAC's selling and marketing expenses were approximately USD 671 million, a significant year-on-year increase of 16.7%. In the third quarter, selling, general, and administrative expenses were USD 619 million, up about 3% from USD 610 million in the same period last year. In the FMCG industry, heavy marketing and capturing consumer mindshare are routine actions, but how to strike the right balance is crucial. Budweiser APAC received a fine this year for suspected false advertising. In September, an administrative penalty disclosed on the National Enterprise Credit Information Publicity System website showed that Budweiser (China) Sales Co., Ltd. Shanghai Branch was fined RMB 200,000 by the Shanghai Huangpu District Market Supervision Administration for promoting on its official website that "Budweiser always spares no expense to select the highest quality all-natural ingredients," constituting false advertising that deceived and misled consumers with false product ingredients. The Shanghai Huangpu District Market Supervision Administration stated that the ingredients in the beer sold by Budweiser Shanghai are water, rice, malt, hops, and yeast. Among them, water is mainly tap water or underground well water, treated by the factory's water treatment system to meet production water standards. The yeast is expanded through artificial culture of purchased yeast, not natural yeast. Based on the above, the water and yeast in the beer sold by Budweiser China have undergone artificial intervention or treatment, inconsistent with its "all-natural ingredients" claim. Additionally, the administration found that Budweiser Shanghai published the relevant promotional information on its official website to boost beer sales. Therefore, it was penalized according to relevant regulations. Earlier in May, an administrative penalty decision from the Shanghai Huangpu District Market Supervision Administration showed that Budweiser Investment (China) Co., Ltd. was fined RMB 600,000 for publishing advertisements containing bloody and violent content and advertisements containing drinking actions. So endorsement marketing is a double-edged sword. While using advertising to promote products, one must never cross legal red lines, otherwise the brand image will be greatly damaged.
Market Value Evaporates by 100 Billion
Compared to the market value shrinking by 100 billion, receiving a fine seems like a minor issue. When Budweiser APAC listed on the Hong Kong Stock Exchange on September 30, 2019, its market value exceeded HKD 373.4 billion. However, as of the close on October 27 this year, its market value had fallen to only HKD 251.9 billion, evaporating over HKD 120 billion in two years. Why has the capital market reacted this way? Perhaps we need to understand the overall development trend of the domestic beer market first. Image source: Euromonitor Euromonitor data shows that China's total beer production and sales have shown significant growth since 2005, peaking in 2013 with both exceeding 50 million kiloliters, then entering a decline. In 2020, the pandemic-induced restrictions on dining and reduced gatherings further exacerbated this decline. At the same time, the slowdown in the growth of the main beer-consuming population aged 20-50 and the increase in per capita consumption are compressing future beer sales growth space. Data shows that China's current per capita beer consumption is 36.2 liters per year, not much different from Japan (43.8 liters) and South Korea (37.2 liters), which have similar consumption habits, leaving limited room for improvement. Euromonitor predicts that China's beer sales will remain relatively stable over the next four years, meaning beer brands will engage in fierce competition in this stagnant market. As more domestic brands embark on the path to "premiumization," the high-end beer market where Budweiser APAC excels is facing fragmentation. Data shows that in 2018, Budweiser held a 46% share of China's high-end and super-premium beer market, far ahead of competitors. In 2019, Budweiser remained the market share leader but saw a 4% decline from the previous year; in 2020, its market share further shrank by nearly 5%. During this period, China Resources Snow's SuperX and Mars Green, Tsingtao Beer's August, and Carlsberg's special brew have carved up the market share left by Budweiser, expanding their influence. After losing ground in the "high-end" market, Budweiser APAC launched two new beverage products this year in an attempt to "overtake on curves." The two products are the energy drink Heike and the sparkling water Zhiyu, both featuring zero calories as a distinctive label. However, sales of the two products are currently unsatisfactory. Data from Tmall's Budweiser InBev Beverage flagship store shows that in the four-plus months since their launch in June, Heike (white peach and grapefruit) has monthly sales of only 300+ units with 318 cumulative reviews; Zhiyu (white peach, citrus, and lychee) has monthly sales of only 500+ units. Image source: Tmall Budweiser InBev Beverage flagship store With the beer core business continuing to decline and new businesses not performing well, it's no wonder investors are pessimistic about Budweiser APAC's prospects, reflected in falling stock prices and market value. Since entering 2021, Budweiser APAC's stock price briefly touched a high of HKD 27.781 per share at the end of January, but closed at HKD 19.02 yesterday, a drop of nearly 30% in about nine months. Besides investors, some brokerage institutions have also lowered their expectations for Budweiser APAC. At the end of September, Daiwa released a research report cutting Budweiser APAC's revenue forecast for 2021-2023 by 2% and net profit forecast by 9%-10%. Almost simultaneously, Morgan Stanley lowered its target price for Budweiser APAC from HKD 32 to HKD 29 and cut its 2021 revenue forecast by 3% and net profit forecast by 11%. Zhu Danpeng, an analyst at China Food Industry, also pointed out that because the capital market looks at future expectations and current profits, Budweiser needs to boost its super-premium performance as much as possible, otherwise its market value will continue to shrink. External competition is already troubling, and internally, Budweiser APAC is not peaceful either. On February 19 this year, Budweiser APAC announced in a Hong Kong Stock Exchange filing that CFO Guilherme Strano Castellan would step down, and co-secretary Wang Renrong also resigned from his positions as co-company secretary, authorized representative, and legal process agent. With external troubles and internal concerns, coupled with the counterattack of local brands, Budweiser's pressure in the Chinese market is likely to only increase. Warlords Divide the Beer Market Overall, after more than 20 years of development, with regional brands gradually being acquired and integrated by national giants, the structure of China's beer market has transitioned from highly fragmented to gradually stable. Currently, the CR5 (top five) in China's beer industry are China Resources Beer, Tsingtao Beer, Budweiser, Yanjing Beer, and Carlsberg, with each brand's market share basically stable and fluctuations minimal. However, as mentioned earlier, China's total beer sales have been slowly declining in recent years, and expected growth is not high. With little hope of increasing sales volume, how can companies increase revenue and profits? The answer is to produce higher-margin products or directly raise prices. Budweiser has been known for its high-end and high prices since entering China, and it has always had a unique voice in the high-end market. Its brands Corona and Hoegaarden are priced above RMB 8 (500-550mL cans), and Budweiser Classic's terminal price is also RMB 6-8 (500-550mL cans), already at a high level. In the second quarter of this year, Budweiser APAC's gross margin reached 54.01%, higher than Chongqing Beer (52.13%), Tsingtao Beer (44.40%), China Resources Beer (42.2%), and Yanjing Beer (40.33%), ranking first among comparable peers. Therefore, the path of producing higher-margin products may not be suitable. That leaves only the option of raising prices. On May 13 this year, Budweiser APAC CEO Jan Craps stated at an earnings briefing that the company's multiple brands, including Budweiser, had already raised prices, including Budweiser and core and affordable brands nationwide. Image source: Financial report But "highbrow songs find few singers," and price increases quickly led to a "volume contraction." In the second quarter of this year, Budweiser APAC's sales volume was 2.5094 million kiloliters, down about 3.34% from 2.5961 million kiloliters in the second quarter of 2020. In the third quarter, total sales further fell to 2.5862 million kiloliters, down 6.1% from the third quarter of 2020. The decline in sales volume led to a 3.7% decrease in the company's third-quarter 2021 revenue compared to the third quarter of 2020. Budweiser's current predicament illustrates two issues: first, as a non-essential consumer product, it is already difficult to raise prices on the existing price basis; second, the high-end market has become a bloody red ocean, and domestic brands entering the "high-end game" have intensified industry involution, making the next stage of competition even more brutal. What's more, Budweiser's rapid construction of factories nationwide to reduce logistics costs and cover more consumers seems to be not going smoothly. Overall, Budweiser's factory capacity utilization is not high. In 2018, Budweiser APAC (West) had a capacity utilization rate of less than 60%, while Budweiser APAC (East), Budweiser InBev Latin America, and EMEA (Europe, Middle East, Africa) all had rates between 70%-80%, especially Budweiser InBev North America, representing mature high-end markets, with over 85%. Therefore, there is significant room for improvement in Budweiser APAC's capacity utilization. Given the current inflection point in beer industry growth, it is urgent to close redundant breweries and production lines to optimize capacity. From an investment perspective, compared to baijiu, beer has stronger consumer attributes, and beer sales have always been high-volume, low-margin, winning by volume. The capital market would naturally like to see Budweiser raise prices and maintain high gross margins, but combined with Budweiser APAC's stock price performance in the secondary market, compared to product price increases, the market might prefer to see better sales volume performance from Budweiser. References: [1] "Beer Investment Logic: Will Premiumization Bring Market Opportunities?", Suning Financial Research Institute [2] "Budweiser APAC: Leader in Asia-Pacific High-End Beer Market", Guosheng Securities [3] "Prices That Can't Be Raised, Budweiser You Can't Afford", Zhitong Finance [4] "Can Beer Stocks Still Be Bought?", Market Value Watch Are you "watching" me?