When will the craft beer trend sweep across the country?
Many regular beer drinkers may not know that China's beer production is gradually declining. According to the National Bureau of Statistics, the steady rise in China's beer production came to an abrupt halt in 2013. From 2013 to 2020, the compound annual growth rate of China's beer production was -5.27%. A regional sales manager at a major international beer company told Hedgehog Commune (ID: ciweigongshe) that people's beer consumption is becoming more rational, with a preference for "drinking less but drinking better." Correspondingly, data from HuaJing Industry Research Institute shows that the share of mid-to-high-end beer in China has rapidly increased from 22.4% in 2015 to 39.7% in 2020. Undoubtedly, one of the most watched categories in mid-to-high-end beer is craft beer:
- On the demand side, from 2013 to 2020, the compound annual growth rate of craft beer consumption in China reached 35.58%.
- On the supply side, since 2015, the average annual growth rate of newly registered craft beer-related enterprises has been 95%, with over 1,200 new enterprises added in 2021 alone.
- On the capital side, since 2021, there have been over 20 transactions in China's craft beer sector. Strong growth is the A-side of craft beer, but its B-side is a small market base. In 2020, China's craft beer consumption was 829,000 kiloliters, accounting for only 1.9% of total beer consumption—if the entire beer market were an ocean, craft beer might just be a wave. But small waves may not necessarily fail to build up a mighty force: after all, in the U.S. market, craft beer accounts for 13.6% of total beer consumption, and in Japan, it's as high as 14.8%. Zhu Danpeng, a Chinese food industry analyst, believes that from a macro market perspective, the development of domestic craft beer is still in its early stages, and the market will remain in a window period for the next 3-5 years, with significant dividends still available. During this window period, can craft beer grow from a small wave into a giant wave? How can craft beer break out from niche to mainstream? 01
Freedom and Money: The Taste and Essence of Craft Beer
Admittedly, the term "craft beer" itself carries a sense of sophistication. But what exactly makes it "superior" to industrial beer? To answer this, we need to look at the brewing process. The three most important dimensions are: ingredients, process, and fermentation time. First, in terms of ingredients, craft beer uses only water, malt, yeast, and hops, with no artificial additives. Industrial beer, on the other hand, adds rice, corn, starch, and other ingredients to replace some of the malt, thereby reducing costs. Second, in terms of process, craft beer mostly uses the ale method, where yeast works at the top of the fermentation tank, floating above the liquid, with fermentation temperatures typically controlled at 10-20°C, and fermentation tanks are usually smaller. Industrial beer mostly uses the lager method, where yeast works at the bottom of the tank, sinking below the liquid, with fermentation temperatures typically below 10°C, and tanks are larger. Currently, 90% of beer worldwide uses the lager method. The image on the left shows the ale method, with yeast floating on top and higher fermentation temperatures; the right shows the lager method, with yeast sinking to the bottom and lower temperatures. Finally, in terms of fermentation time, craft beer can ferment for up to about 2 months, while industrial beer typically only needs 7 days. The differences in the brewing process ultimately manifest in taste: Craft beer has a richer, more varied flavor, higher wort concentration, and a fresher taste. Hou Yizhao, board secretary of Lehui International, China's largest beer equipment manufacturer, said that the ale process is more complex than the lager process, and this complexity brings variability to craft beer, which can meet consumers' increasingly segmented demands. Craft beer has more varieties, richer flavors, and more layers of taste, which aligns well with current consumer preferences for beer. From this perspective, the "major trend" that craft beer is riding is actually consumption upgrading. In 2008, Gao Yan, the pioneer of China's craft beer circle, founded Master Gao, marking the formal beginning of China's craft beer industry. He once described his first taste of craft beer: "The first sip felt like a grand celebration in my mouth; taste buds I didn't know existed all came alive." Under the wave of beer upgrading toward "drinking less but drinking better," it's no surprise that craft beer has won many hearts. This explains the spread of the craft beer trend from a demand perspective, but from a supply perspective, we believe two logics are driving its growth: cultural logic and commercial logic. Alcohol has never been just a beverage. The spirit of wildness and passion symbolized by Dionysus fascinates many, and the cultural atmosphere behind craft beer is equally grand. In early 20th-century America, Puritans viewed an obsession with alcohol as a typical moral failing. They opposed luxury and indulgence, and since people become unruly when drunk, they saw alcohol as akin to a flood or beast. So on January 2, 1920, the Volstead Act, which prohibited the brewing and sale of alcohol, took effect in the U.S.—it made manufacturing, selling, or transporting beverages with more than 0.5% alcohol illegal. By 1932, all breweries in the U.S. had disappeared. But Prohibition underestimated people's obsession with alcohol. Many secretly brewed at home, and smuggling and illegal production flourished. In 1978, the U.S. legalized homebrewing, and craft culture has since risen, with hippies being the main drivers of this trend. Over-industrialization was one of the many social realities that hippies disliked. They believed industrial society stifled humanity and damaged the environment, so they advocated a return to nature and tradition, opposed excessive commercialization, emphasized DIY, freedom, and spontaneity—remember, craft beer in English is "craft beer," and "craft" literally means "handmade." Thus, the cultural trait of craft beer is opposition to monolithic industrialization, emphasizing diversity, individuality, and niche appeal. Therefore, many people passionate about craft beer culture started independent breweries out of interest, and they have become an important force in today's craft beer market. In addition, there are three other major types of craft beer players: traditional beer giants (like AB InBev), restaurant chains (like Haidilao), and retail platforms (like Hema). They mostly follow commercial logic: riding the wave of consumption upgrading, meeting market demand, and validating market opportunities. 02
The Popularization of Craft Beer Is Bound to Be Arduous
As mentioned above, the core of craft beer culture is niche, but business always pursues scale. This inherent contradiction makes the popularization of craft beer a difficult path. We believe that the obstacles on the road to craft beer popularization mainly come from the traditional 4Ps: price, place, product, and promotion. First, in terms of price, according to CICC, local niche craft beers and imported craft beers are mainly priced above 25 yuan, while products from leading companies are relatively cheaper due to economies of scale, mainly in the 15 yuan price band. However, the unit price of general industrial beer is below 5 yuan. (Author's note: compared on a per-500ml basis) According to Statista, in 2019, over 50% of Chinese consumers said they were unwilling to pay more than a 25% premium for craft beer over industrial beer. This means that even the relatively cheaper craft beers from giants struggle to attract the majority of consumers. High prices don't necessarily mean high profits. Hou Yizhao told us that the raw material cost of Lehui International's craft beer products is equivalent to the ex-factory price of some leading brands' industrial beer. In his view, an important meaning of "craft" in craft beer is using better raw materials to brew better beer. In addition to higher raw material costs, on the channel side, due to lower bargaining power, independent craft breweries need to offer higher margins to ensure the same sell-through efficiency. The result is that some manufacturers face high costs and low gross margins. Independent manufacturers' gross margins for craft beer are nearly 20 percentage points lower than high-end industrial beer | Source: CICC In fact, high channel margins are a later story; the prerequisite is that craft beer can enter mainstream channels. For small breweries with low output and weak brand power, the barriers to entering traditional foodservice channels are still high. But it's important to note that craft beer consumers value the drinking experience and environment more, so on-premise consumption of craft beer is much higher than off-premise, especially in foodservice channels. Of course, as more giants and restaurant chains enter the market, channel coverage for craft beer has improved. Secondly, in terms of product, craft beer often uses more malt and hops in brewing, resulting in a rich and bitter taste. According to Beeriety data, the bitterness of most craft beer categories is higher than that of industrial beer. However, Chinese consumers have a low tolerance for bitterness, which is not conducive to expanding the consumer base. For example, when eating spicy crayfish, barbecue, and other heavy-flavored foods, people need beer to cleanse the palate, not to savor it. In such cases, a light industrial beer is a good choice. Additionally, craft beer itself has many styles, and the diversity of types and flavors dilutes the audience for any single beer, making it difficult to create a blockbuster product that breaks out. Beer type spectrum Finally, in terms of promotion, for a considerable number of beer drinkers, craft beer is still a new term. Moreover, unlike new categories like sugar-free beverages, craft beer carries a heavy cultural imprint. Many craft beer brands like to talk about "promoting craft beer culture," but this cannot be achieved simply by spending money on advertising. Furthermore, for smaller independent breweries, the funds available for brand promotion are limited. Having said that, while we fully acknowledge the value of small independent breweries—they are a haven for many craft beer enthusiasts—we must admit that to truly achieve category breakout, it will likely depend on companies with stronger overall economic strength. 03
The Code for Craft Beer's Breakout Is Not Just One
So what are the breakthrough dimensions for achieving breakout? The simplest approach is "precision strike"—wherever there's a problem, solve it there. Among the specific practices of various craft beer brands, we selected the cases of Hema Craft Beer and Lehui International's "Fresh Beer 30 Kilometers" to try to find the code for craft beer's breakout. In 2018, Hema caught the beer upgrading trend early and entered the craft beer field as a "price dark horse." Today, Hema's private-label craft beer series consistently ranks in the top 10 of beer categories in Hema's overall sales. In May of this year, Hema craft beer sales grew 369% year-on-year. "Fresh Beer 30 Kilometers," backed by the listed beer equipment manufacturer Lehui International, has launched several craft fresh beers. It is reported that since launch, its sales have maintained rapid growth. At the same time, Lehui International is also the OEM for Hema's craft beer. We believe that the core reason Hema and Fresh Beer 30 Kilometers have achieved impressive results is their resolution of the industry pain points mentioned above. First, product dimension: enter with more mainstream flavors and expand the audience through product innovation. Xu Jun, head of beer procurement for Hema's private label, told Hedgehog Commune that there are over 100 styles of craft beer, and a single brand cannot cover all of them, so they start with types that consumers are familiar with. "We position some familiar craft styles, like wheat white, based on the benchmark of being fresher and tastier than others. At the same time, we look for other different types of craft beer to build a basic product matrix from white beer to yellow beer to black beer," Xu Jun explained. Additionally, according to a survey by "Jiu Hua Er," 22% of Chinese craft beer consumers are women, which is about half of the female share in online alcohol consumption. To address this, Hema has introduced fruit-flavored fresh beers to encourage more women to accept and enjoy craft beer. Hema fruit-flavored craft beer Second, channel dimension: enter from consumption scenarios to find innovative channels and actively cooperate with traditional channels. This year, Hema launched the "Hema Night Market" project. From 5 PM to 10 PM every day, Hema Fresh stores transform into a "night market" offering nearly 100 types of food, creating a new consumption scenario for craft beer. It is understood that driven by the online-offline integrated "Hema Night Market," Hema's overall craft beer sales in July were 1.5 times those of last year. Hema Night Market scene To facilitate fresh beer entering restaurants, supermarkets, and communities, Lehui International, with its strong supply chain genes, has launched a fresh beer vending machine that is compact and efficient. This machine can deliver craft beer brewed in workshops or from other brands to consumers quickly under cold, sterile conditions. In addition to self-developed equipment and expanding scenarios, Lehui International's "Fresh Beer 30 Kilometers" has partnered with well-known chain restaurants such as Shu Daxia Hotpot, Fengmao Skewers, and Buerjun, and has achieved good results. Third, promotion dimension: start with youthful approaches, find new communication methods, and stimulate social fission. In May of this year, Fresh Beer 30 Kilometers collaborated with Metro to launch a co-branded product, the 1L Fresh Beer Bear Can. At Metro's Beijing Sijiqing membership store, Fresh Beer 30 Kilometers appeared in the form of a "fresh beer truck," offering product tastings and setting up roadside signs, tasting stations, and Maibear drunk performances for consumers to check in and take photos, attracting many internet influencers to visit and post about it. Fourth, actively seek industry-side cooperation to form breakout momentum and jointly expand the market. As mentioned above, craft beer breakout is not easy; it requires full resource coordination. If a single company finds it difficult, cooperation becomes key. Cooperation takes various forms, including "production-sales" cooperation between brand side Fresh Beer 30 Kilometers and channel sides Hema and Metro, as well as product cooperation between OEM Lehui International and brand side Hema—Hema captures market trends and develops new products, while Lehui International provides production capacity. Of course, cooperation forms are not limited to these two; they also include cross-industry brand co-branding, supply-side capacity cooperation, and more. It is foreseeable that in the next 3-5 years, China's craft beer market will see fierce competition. Hou Yizhao believes that the future battlefield for craft beer has two fronts: one is the existing market, and the other is the incremental market. "There will definitely be competition in the existing market, and competition in this dimension is just about each player using their own tricks, leveraging their understanding of products and users to grab market share. More critically, we need to break the ceiling of consumer spending, grow and cultivate the market together with competitors, and form a larger market." The problem remains that although there are many angles for craft beer's breakout code, it also means that every aspect of the craft beer market faces issues that need improvement, bringing multiple challenges to companies. Of course, it's normal for such a situation to occur when an industry is in its early stages, but the problem is that the industry window period is fleeting. To grow into an industry giant, one needs solid foundational strength, precise strategic vision, and long-term business perspective, as well as a bit of "timing, location, and harmony" luck. When craft beer will break out to become a beer category with over 10% share, and which companies will truly emerge, are questions that remain to be observed over the long term. Source: Hedgehog Commune (ID: ciweigongshe) -END-