The Chinese Beer War

As early spring warms up, beer begins to heat up with the gradually warmer weather. Recently, thousand-yuan beers have been pushed to the forefront multiple times. Starting from last year when China Resources Snow launched the ultra-high-end series beer 'Li' priced at 999 yuan, the concept of high-end beer has been implanted in consumers' minds. Subsequently, Budweiser and Tsingtao Beer also launched ultra-high-end products that broke through the price ceiling, which is no longer surprising. In China, although beer is undergoing an upgrade from 3-4 yuan per bottle to 10-15 yuan per bottle, the emergence of products priced over a thousand yuan has refreshed consumers' understanding of beer. On major social platforms, voices about thousand-yuan beer being 'IQ tax' or 'gimmick' are not uncommon. However, despite the controversy, major manufacturers seem unwilling to change their strategies. In the view of many beer companies, such ultra-high prices do not care about sales volume, but rather to make a splash, showing that beer can also be sold at high prices and can go high-end, with a relatively large promotional intent. In fact, the repeated launch of high-end products in the beer industry has been 'premeditated' for a long time. Compared with foreign countries, China's beer industry started relatively late. Beginning in the 1980s and 1990s, the market expansion of beer merchants mainly relied on crude 'enclosure movement', fighting naked price wars for more than a decade. 'Small profits but quick turnover' became the long-term profit strategy of the beer industry, and 'low-end' also became a synonym for beer. This also led to severe overcapacity in the beer industry in the past decade, with sales declining and falling into a deadlock of profitability difficulties. But now the barbaric era no longer exists. Due to the dual pressure of rising upstream costs and changes in the structure of end consumers, the path of 'small profits but quick turnover' is difficult to adapt to industry development. The inflection point of high-endization in China's beer industry has arrived. This is not only an inevitable stage in the development of the beer industry but also the consistent result of repeated games among leading beer companies. The battle in the mid-to-high-end beer market has officially begun. How can beer, which has long been labeled as 'low-end' and 'industrial beer water', carve out a path in the high-end market? ****Beer was once a 'luxury' Speaking of beer, its history is not shorter than that of baijiu. From its birth, it has been strongly associated with the general public and is at the bottom of the alcohol hierarchy. There is a joke online about how foodies across the country express disappointment: Shandong people say, 'You drink beer.' So, wine and baijiu can raise prices and go high-end, but only beer going high-end sounds somewhat surprising. According to archaeological surveys, beer was first born in the Middle East 6,000 years ago. The industrious Sumerians used barley malt to brew the most primitive beer, with simple and crude brewing techniques. Later, beer became popular among the ancient Babylonians and spread to Europe. But at that time, the Romans fed barley used for brewing beer to livestock, naturally considering beer an unrefined drink. They regarded wine made from grapes grown in mild sunlight as a noble drink. In northern Europe, where grapes were scarce, barley beer was loved by the Celts and Germanic peoples who now live in Britain, Belgium, Switzerland, the Netherlands, Germany, etc. They were also considered barbarians by the Romans. During that period, Europe was divided into wine Europe and beer Europe. What you drank also reflected one's stance, taste, and class. In Europe, beer was long suppressed by wine and became a popular drink. In China, beer has also been long regarded as a mid-to-low-end alcoholic beverage, while the noble genes belong to baijiu like Moutai and Wuliangye. Beer came to China very late. In 1900, when Russia invaded Northeast China, a Russian businessman named Ulublevsky, dressed in a suit, set foot on Chinese soil and decided to supply Russian soldiers with beer similar to that of his hometown. So he built a brewery in Harbin, which was the predecessor of Harbin Beer. This 'seed' drifting from Europe quickly sprouted in the Northeast. Under the guidance of foreign investment, Harbin, Qingdao, and other places established the initial beer foundation, which later radiated to Beijing, Yantai, Guangzhou, and other places. These breweries became the ancestors that local beers later vied to trace back to. Although beer is a popular drink, in an era when Chinese people could not get enough to eat, beer produced with large amounts of grain was not accessible to the masses and almost lost its market channel. After the founding of New China in 1949, there were only 7 breweries in the vast China, with a total annual output of 7,000 tons. This situation continued until the reform and opening up. In the early 1980s, a US media outlet published a news photo with a strong visual impact: some people were queuing in long lines, carrying thermos bottles, aluminum pots, or even holding plastic bags, waiting to fill 'something'. Those who did not know might think it was a community with water cut off, and residents were queuing for water. At that time, China's food crisis had been lifted, and people's 'beverage needs' were somewhat satisfied to a certain extent. In the hot summer, a bottle of ice-cold beer was the first choice for many to cool off. But at this time, China's beer production was still unable to keep up. Statistics show that in the 1980s, China's annual beer output was just over 400,000 tons, less than 1/70 of today's. At that time, bottled beer was rare, refrigerators were not popularized, and bulk beer (draught beer) became a relatively popular sales model. Therefore, the famous scene of 'queuing to fetch beer' was not uncommon. Around 1987, Guo Guangchang, a 'poor student' only 20 years old and still studying at Fudan University, rode a bicycle all the way from Shanghai to Beijing for research. After selling the bicycle for return funds, he passed by Qingdao for the first time and decided to taste Tsingtao Beer, but he was short of money. After counting his remaining travel funds, Guo Guangchang could only choose between eating and drinking. He finally decided to skip two meals to finally drink Tsingtao Beer, which was a 'luxury' at the time. Guo Guangchang, who later became the boss of Fosun, never forgot this story. In 2017, he bought the shares of Tsingtao Beer held by Japan's Asahi Beer and became the second largest shareholder of Tsingtao Beer. What Guo Guangchang did not know at the time was that starting two years earlier, in order to achieve 'local beer production', China implemented a 'special beer project'. The China Construction Bank invested 800 million yuan, local governments raised 2.6 billion yuan, plus 20 million US dollars from the state to purchase advanced production lines. From then on, local beers blossomed everywhere, and the number of beer brands reached as many as 813. Beijing had Five Star, Shanghai had Guangming, Chongqing had Shancheng, Guangdong had Zhujiang... and almost every county had its own brewery. Therefore, a very interesting saying emerged: To understand various places, rather than studying various theories, it is better to taste the beers of the world. This is the true geography. At the same time, Bass, Foster's, Budweiser, San Miguel, Carlsberg, etc. successively entered the Chinese market. The beer world ushered in an era of the survival of the fittest. ****The Great Beer World War In various gangster movies, the essential item for fighting is the beer bottle. Picking up a bottle and hitting someone on the head can both intimidate the 'enemy' and assert sovereignty. In fact, the market competition among early local beers was as chaotic and brutal as in movies. This all starts with localism. Because beer itself requires freshness and the bottles are heavy, the transportation range of beer must be controlled within about 200 kilometers. Therefore, building a brewery locally is the best choice. This leads to the fact that although both are alcohol, baijiu is easy to make, but beer is difficult. As long as the channel is laid down, a baijiu factory can sell all over the country, while beer can only be 'one factory per place'. If a local beer wants to capture the territory of a neighboring county, it has to build a new factory, and the entry cost is obviously higher. To spread the cost, it must increase volume. Therefore, in the beer world, once a factory is invested, it is a declaration of war, and one must be prepared to fight to the death with the incumbent in that market. This kind of brutal fight is hard to feel in the baijiu market, where seniority is respected and manners are observed. In the beer world, no one is nobler than another; it is a real battle on the battlefield. Before the reform of income tax sharing in 2001, corporate income tax was paid according to administrative subordination: central enterprises paid to the central government, and local enterprises paid to local governments. Naturally, local governments had the incentive to establish enterprises with high prices and high profits, such as cigarette factories and breweries, which were major tax contributors. So in the 1990s, cigarette and brewery factories were increasingly established everywhere, and many places only smoked local cigarettes and drank local beer. To protect their own interests, local governments would set various tangible or intangible barriers to entry, such as quality inspection standards and various taxes and fees, increasing the sales costs of foreign beer companies, and even explicitly prohibiting the sale of foreign beer locally, restricting foreign brands from seizing the local market. This kind of local protectionism was repeatedly banned in the beer industry. Typical cases include: In 2001, the Wuxue City government in Hubei, in order to 'cultivate local industries', directly ordered citizens to drink locally produced Jinlongquan Beer; The Shucheng County government in Anhui forced urban and rural residents to only buy locally produced cement and beer. In addition to the business wars between beer companies and governments, folk distributors and promoters also staged various spectacular scenes in many places. The low-price promotions in supermarkets, which are 'killing a thousand enemies at the cost of eight hundred', are small scenes. The real 'real swords and spears' were the games between local beer tyrants and foreign distributors. At that time, beer distribution was not a 'comfortable' profession. If a beer distributor was beaten and hospitalized in a foreign place, do not be surprised; it was probably the local beer tyrant. In 2001, the 'beer tyrant' in Wuchang City, Heilongjiang, blocked the local beer market and injured foreign beer distributors, once forcing Harbin Beer to insure its distributors. Similar 'beer violence' was repeatedly banned among beer brands that invested in factories everywhere, such as Qingdao,金星, and Chongqing. Channel violence once became a 'roadblock' for beer companies expanding to other places. Struggling in such thorny sales channels, every brewery that survived had to have some skills. Zooming out to the national landscape, beer companies at this stage basically evolved into three levels: The first level was the nationally renowned Qingdao, Yanjing, and Zhujiang groups; The second level was local famous beer companies, such as Shenyang China Resources Snow Beer, Chongqing Beer, Henan金星 Beer, Harbin Beer, Qianjiang Beer, Shengquan Beer, etc.; The third level was other municipal beer companies. It is worth noting that the industrial concentration of the beer industry was still low. By the end of 1997, among more than 500 beer companies nationwide, none had an annual output exceeding 1 million tons. Even the largest, Yanjing and Tsingtao, together accounted for only about 5% of national output. The national beer market was still in a state of fragmented competition among many players, with fierce market battles making the beer industry one of the most competitive industries after color TVs and VCDs. ****The M&A Battle of Giants and Foreign Capital The change in the landscape began in 2001 when China joined the WTO. The Chinese market suddenly opened up. Stimulated by fresh foreign capital, some local beer companies began to expand outward, with fierce battles. To what extent? Many foreign brands took advantage of China's 'WTO entry' to come in, but when they saw it was not working, they left. For example, Germany's Beck's Beer tried to enter China twice but left hastily both times because they did not understand Chinese tastes; International beer brands such as Blue Ribbon, Asahi, Silver Bullet, and Heineken could only gain some familiarity in the fierce Chinese market without making much of a splash. Although foreign beers suffered setbacks, the foreign capital attracted by the WTO was conquering the Chinese beer industry. First were Budweiser and InBev. After entering China, InBev's sphere of influence was mainly in the eastern coastal areas. Over 10 years, it successively acquired Santai and Jinling in Jiangsu, Shuanglu, Shiliang, and Zhedong in Zhejiang, as well as Jinlongquan in Hubei and Changsha in Hunan. After Budweiser acquired Harbin Beer, its main business was in the Northeast. In 2008, InBev and Budweiser merged to form Anheuser-Busch InBev. The two beer giants combined forces in China and entered the top five in the Chinese beer market. Carlsberg entered the Chinese market by acquiring Huizhou Brewery, then fully acquired Yunnan's Huashi Beer and Dali Beer. In the following years, it focused on joint ventures, successively investing in Lhasa Beer in Tibet, Xinjiang Beer and Wusu Beer in Xinjiang, Lanzhou Yellow River Beer, and finally taking control of Chongqing Beer, basically occupying the western part of China's beer map. Turning back to local Chinese beer brands, since the 1990s, the beer industry has faced the problem of too many players. On one hand, severe overcapacity was piled up; on the other hand, the management level and product quality of enterprises began to diverge significantly. The vigorous industry consolidation was put on the agenda. China Resources Snow Beer, which was relatively late to the game, developed during this era of rapid growth. In 1993, Tsingtao Beer, which had just turned 90, became the leader of Chinese beer by acquiring a series of beer brands such as Laoshan Beer, Hans Beer, and Shanshui Beer, and was listed on both A-shares and H-shares that year, enjoying unprecedented popularity. At that time, Ning Gaoning, the head of Hong Kong China Resources Group, felt envious and thought beer was a good business. The next year, China Resources decisively acquired the Snow Beer factory from the Shenyang government and began to expand its territory. Relying on the wealthy China Resources Group, China Resources Snow defeated many local veterans in Liaoning in its early years. After consolidating the market in the three northeastern provinces, China Resources Snow moved from south to north along China's coastline, successively swallowing 'small fish and shrimp' in coastal provinces such as Tianjin, Zhejiang, and Jiangsu. In 2012, China Resources Snow and Yanjing Beer clashed in the Guangdong market, both setting their sights on local Kingway Beer. Yanjing Beer emerged in Beijing in 1980 and quickly stood out in competition with local Beijing beer brands such as 'Five Star Beer', 'Beijing Beer', and 'Tiantan Beer', ranking among the top in the beer world. Later, it acquired local brands such as Guilin Liquan Beer, Quanzhou Huiquan Beer, and Baotou Xuelu Beer. At that time, it was thriving in Guangxi and had long harbored ambitions to annex the neighboring Pearl River Delta. The two were evenly matched in the 'Kingway Beer bidding war'. After competitors Tsingtao and InBev were eliminated, Kingway Beer entered a second round of bidding. In the end, China Resources Snow won Kingway Beer with a bid of 5.384 billion yuan, higher than Yanjing's less than 5 billion. After acquiring Kingway Beer, China Resources Snow also triggered fierce competition in markets such as Sichuan and Anhui. When the major local market holders refused to cooperate with China Resources Snow, it invested a lot of resources to besiege them, eventually forcing competitors to surrender. The most influential was the cooperation with Lanjian Group in the Sichuan market. After China Resources Snow took over Lanjian with a huge investment of hundreds of millions, it replaced all channels with the 'Snow' brand. Since then, Lanjian Beer gradually disappeared. Now China Resources Snow's market share in Sichuan has reached over 75%. With huge financial support and channel advantages, China Resources Snow came from behind, defeating Tsingtao, frustrating Yanjing, and beating foreign entrants Carlsberg and AB InBev. It is worth mentioning that during years of mergers and acquisitions, China Resources Snow has always adopted a single-brand strategy. According to data, China Resources Snow has more than 30 regional beer brands, but most of these brands have been replaced by 'Snow' and then become different series under 'Snow'. China's beer industry was also rapidly consolidated under the promotion of several giants. In 1999, there were 474 beer companies in China; by 2008, it had decreased to 249; in 2012, the number was about 210, with industry resources concentrated in advantageous enterprises and major brands. With strong capital advantages, the five major beer groups—Tsingtao Beer, China Resources Beer, Carlsberg Beer, Budweiser Beer, and Yanjing Beer—each occupied their own territory, and their combined market share accounted for nearly 80% of the domestic beer industry. From then on, the pattern of five powers standing tall was formed. ****Beer Companies Trapped in Low Prices Every year around June, it is the good season for drinking beer to relieve heat. Some beer manufacturers' salespeople go out in full force, and some beer manufacturers are busy recruiting beer distributors all year round. Major beer manufacturers will usher in the annual beer promotion war. At the beginning of this century, beer was selling the hottest. In the beer sales areas of Beijing Carrefour, Walmart, Yonghui, and other supermarkets, promotional posters from various companies were particularly eye-catching. For example, Tsingtao Beer's regular packaging offered a free can for every three purchased; Yanjing Beer, originally priced at 5 yuan, was sold for only 3 yuan per bottle; promotional information such as 'prize in every bottle' and 'return three bottles for one free' was visible upon entry, with a variety of promotional methods. Beer was selling well, but beer manufacturers were not so happy because they were facing an endless 'price war'. Generally speaking, beer is 'produced according to sales volume', that is, production is determined by market demand. But China's beer production rules are just the opposite. In order to compete for the beer market, major manufacturers blindly built new factories in other places, causing capacity growth to far exceed demand growth. From the 'enclosure movement' in the mid-1980s to the basic completion of consolidation and mergers in 2011, over more than 30 years, China's beer industry capacity expanded more than 30 times. During this period, competition among beer companies continued to intensify. As the most direct and 'lethal' expansion strategy, price wars became the trump card for companies to expand their territory. For example, when expanding southward from Shenyang in 1994, China Resources Snow adopted a 'mushroom' tactic: first form a factory in one area, use lower prices to seize local share; then plant another mushroom 150 kilometers away, using the same strategy to grow stronger; when connected into a piece, it became a 'giant mushroom', and market share unknowingly expanded. Later, to create a unified Snow brand, in 2005 China Resources Snow adopted a mid-to-low-end strategy nationwide, launching a price war with local beer companies for low-end groups. This battle truly made the public know and remember 'Snow Beer', but at the cost of sacrificing profits. The seed of the problem was planted from the moment of low-price expansion. For a long time, repeated price wars squeezed China Resources Snow Beer's profits to extremely low levels. According to public data, in 2011, China Resources Snow's single-product sales reached 9.17 million kiloliters, but its net profit margin was only 2.94%, far lower than Tsingtao Beer's 7.50% and Yanjing Beer's 6.7%. If large enterprises that already occupied most of the market share were like this, small enterprises struggling to survive in the cracks were a hundred times harder. The low-price competition in the beer industry was already very fierce. The price of an ordinary bottle of mineral water is about one yuan, but some beers cannot even sell for one yuan per bottle. The ex-factory price of a 640ML bottled beer was about 2 yuan for some high-priced companies, and 0.7 to 0.8 yuan for low-priced ones, with an average of about one yuan, cheaper than an ordinary bottle of mineral water. At the hardest time for beer companies, an ordinary bottle of beer had only about 2 cents of profit. How did beer companies with such low profits make money? Only by greatly increasing sales volume. Thus, 'only sales volume makes heroes' became an unwritten rule in the beer industry. Whether it was collecting caps for free beer or buy-one-get-one-free, all beer distributors tried every means to expand sales. In some places, various price wars and promotional wars derived from competing for market share and controlling terminals continued to escalate. The fancy promotions in large supermarkets like Walmart and Carrefour were considered fair and square, but in many small places, there were even vicious competitions such as smearing opponents and violent promotions. Take 2009 as an example: in April, it was reported that Horqin District in Tongliao City, Inner Mongolia, banned all merchants in the 'Commercial Pedestrian Street' from selling Snow and other brands of beer under the name of 'image project'; in June, a beer salesman in Beihai, Guangxi, posted big-character posters attacking Zhujiang Beer; and in markets such as Sichuan and Xiangfan, violent promotions also occurred... The beer industry long fell into vicious competition with almost no winners, leading to a significant decline in corporate profits. In contrast, domestic baijiu has frequently raised prices in recent years, with substantial profit margins. In addition, the prices of raw materials related to beer, such as barley, glass, cartons, and aluminum cans, continued to rise. Various manufacturers were tightening their belts, eagerly hoping that beer prices would rise to add some 'oil and water' to their enterprises. If prices did not rise, it meant that continuously rising costs might eat into their limited profit margins. But in this market vortex of low prices and vicious competition, whoever raised prices first would lose some market share first. Should they protect their market share or raise prices for profit? Between seeking death and dragging on, many manufacturers did not dare to act rashly. When the 2008 Beijing Olympics was held, beer sales were bound to be huge. A few companies 'quietly' raised prices amid hesitation and hesitation, with increases only daring to be within 0.5 yuan. In the following decade, everything went up in price, including malt and hops used to produce beer, but the beer industry, still in the aftermath of the 'price war', remained 'motionless'. To support profits, many companies sought survival through 'improved formulas', resulting in beer tastes becoming lighter and rice starch entering ingredients, which was widely criticized by consumers. Now, with the stable competitive landscape of the five powers, the consumer market has begun to undergo structural changes. Making extremely thin profits through volume sales, or even the low-price competition of 'beer cheaper than water', is not a long-term solution. Beer companies should also enter an era of hard work and value enhancement. ****The High-End Beer Battle Begins In May last year, China Resources Beer launched the high-end series beer 'Li', priced at 999 yuan per box (2 bottles), triggering a wave of 'high-priced beer'. On January 9 this year, Tsingtao Beer also followed suit, releasing the ultra-high-end new product 'Legend of a Lifetime', with a single bottle priced at 1399 yuan per bottle (1.5 liters) and a two-bottle set priced at 2698 yuan. Subsequently, Budweiser also launched the 'Master Legend' Tiger Year limited edition gift box, priced at 1588 yuan per bottle (798 ml), surpassing the official price of Moutai Feitian baijiu. Before the concept of 'high-end beer' was popularized, consumers were confused, and netizens exclaimed whether 'thousand-yuan beer' had a 'Moutai disease'? In the view of many beer companies, such ultra-high prices do not care about sales volume, but rather to make a splash, showing that beer can also be sold at high prices and can go high-end, with a relatively large promotional intent. Along with the advent of high-priced beer, major beer leading companies have made price adjustments to their basic products to varying degrees at the end of last year. In fact, the signs of competitive price increases in the beer industry appeared as early as 2018. Going back to 2017, due to reduced barley production in Australia and the EU, import barley prices rose. Starting in March, the increase reached 20% that year, and by the end of 2018, it achieved a 47.8% increase. The substantial rise in costs directly promoted the first beer price increase since 2008. But the price increase caused by cost pressure was only a direct trigger. The deeper reason lies in the disconnect between the product structure of beer companies and the structure of the consumer population. From the demand side, on one hand, the main consumers of beer are young and middle-aged people, but the gradual aging of the population means that the proportion of young people is decreasing, which means the base of beer consumers is not what it used to be. Since reaching its peak in 2013, China's beer consumption has been on a downward trend, and now it inevitably enters an era of stock. On the other hand, the increase in residents' income has made people pay more attention to improving the quality of life. In the 2.0 era of beer, a large number of people will pursue good taste, fun, and good drinking. Fewer and fewer people will drink low-end beer, and the proportion of mid-to-high-end beer sales will gradually increase. This also means that the idea of attracting consumers with good quality and low prices in the previous era is no longer effective, and the product itself should be given more attention. But more than a decade of homogenized, low-end marketing wars and price wars have left most beer companies with little breakthrough or upgrade in product quality aspects such as formula and taste. Compared with fashionable new categories such as low-alcohol drinks and fruit wines, beer does not have a great advantage in attracting young people in terms of product. Starting in 2015, the strategy of continuous expansion was completely abandoned. Major beer companies stopped expanding capacity and successively closed small-scale, inefficient factories. The five major giants began to work on high-end products one after another. The earliest transformation to mid-to-high-end was Chongqing Beer. As early as 2010, after Carlsberg became the largest shareholder, Chongqing Beer took the lead in focusing on high-end products. After Carlsberg took over, the company promised to solve the issue of horizontal competition with Chongqing Beer through asset restructuring. Over the next decade, it gradually added a series of internationally renowned brands such as Carlsberg, Tuborg, and Kronenbourg 1664. The commonly seen 'Deadly Big Wusu' is also under Chongqing Beer. With the product line above 10 yuan running smoothly, Chongqing Beer's high-end transformation has achieved initial results, and the overall profit margin has further improved. In 2020, the gross profit margin of its high-end beer reached 67.7%, far higher than the 37.93% of low-end beer. In addition to foreign-controlled beers, China Resources Snow, Tsingtao, Yanjing, etc. have also successively laid out high-end products. Looking at the current situation, AB InBev has been leading the high-end market with relatively mature and rich high-end product categories, while Tsingtao, Carlsberg, China Resources, and Yanjing follow closely. The starting gun has been fired, but the high-endization of beer is not achieved overnight. For enterprises, the high-endization of beer is not only about price increases and the launch of high-end products, nor is it only about fancy packaging and carefully crafted marketing plans. More importantly, it is about how to break consumers' inherent perception that 'beer should sell for 5 yuan', improve product quality, and give products true value. This requires beer manufacturers to settle down and accumulate. For consumers, whether high-end or high-priced, quality and taste are the most loyal choices. Source: Shangyin Society (ID: shangyinshecj) Author: Lingzhu -END-