Source: Kuaidao Finance (ID: kuaidaocaijing) Author: Gawaine Compared to the two booming super categories of coffee and tea, the craft beer route for beer is more like a besieged city. Once you enter craft beer, it's as deep as the sea; from then on, industrial beer is a stranger. Even those who aren't fans of the craft beer circle have probably heard this joke. Indeed, in recent years, the craft beer trend has blown over strongly. Besides the proliferation of craft beer specialty stores, the number of craft beers in the wine coolers of restaurants, bars, pubs, and even dessert shops far exceeds the usual Tsingtao or Snow. For a moment, it seemed the best fate for the big green bottles was only convenience stores and street-side stalls. Since 2013, the growth rate of the entire domestic beer industry has been in a sideways phase. During the four years when overall sales declined, the number of domestic craft beer enterprises grew from 17 to 293; by 2021, the number of individual workshops or enterprises related to craft beer had reached over 5,000. But this momentum does not represent a good ending. According to data from Aiqicha, since 2016, more than 1,000 related enterprises have been in a state of cancellation, revocation, or suspension, and the number of brands falling in the craft beer industry is increasing year by year. In 2021 alone, 506 craft beer enterprises closed down. Although beer is one of the six bottles of the drink of the gods, along with coffee and tea, the craft beer route, compared to the other two glamorous super categories, seems more like a besieged city. Craft beer riding the capital wave Craft beer is a borrowed term, from the English "craft beer," meaning handmade beer, and it initially became popular among returning overseas consumers. The Brewers Association in the United States defines craft beer as: 1. Non-industrial production volume: Annual production of less than 6 million barrels (953,880 tons). For a direct comparison, Yanjing Beer's annual production is around several million tons. 2. Craft breweries have greater say: In terms of equity, non-craft brewers or institutions cannot hold more than 25% of shares. 3. Stricter rules on adjuncts: The beer flavor of most brewed beers must come solely from malt ingredients or fermentation processes, without adding other cost-reducing adjuncts. From being drinkable to being good-tasting, and from merely differences in alcohol content and color to various flavors and mouthfeels, beer is also undergoing consumption upgrades. Abandoning grains and corn used to cut costs, switching to higher-quality malt and yeast, using more complex fermentation processes, and extending fermentation time to pursue a better drinking experience are the highlights that distinguish craft beer from bland industrial beer. If drinking ordinary industrial beer is like eating canned fruit, then drinking craft beer is like hugging a fruit tree in an orchard and biting directly into the fruit. And the fruit from this tree not only sells at a good price but also yields much higher profits than canned fruit. In the "nighttime Starbucks" Helen's Pub, which was drunk to listing by young consumers who love to get tipsy, its own craft beer products contributed nearly 70% of performance and up to nearly 80% of gross profit. Although Helen's drinks all follow a low-price strategy, in the general retail market, craft beer typically sells for around 20 yuan per bottle, several times higher than traditional industrial beer. According to a research report from Chongqing Brewery, the gross margin for its low-priced beer is only 37.93%, while for mid-priced beer it is 46.57%. The higher the positioning and price, the higher the gross margin. With such considerable profits in craft beer, the five major domestic beer companies naturally wouldn't let this good fruit tree go. Tsingtao Brewery, Chongqing Brewery, Yanjing Beer, Zhujiang Brewery, and others have simultaneously increased their craft beer offerings, launching series like Tsingtao IPA Craft Beer, Yanjing Craft White Beer, and Zhujiang Xuebao Craft White Beer. Not only traditional breweries, but even herbal tea seller Wanglaoji and cross-industry enthusiast Haidilao have also taken a seat at the craft beer table. Wanglaoji launched its "Bihibi" craft beer in July last year, selling 16.28 million cans on the first day, with total retail sales reaching 147 million yuan. According to a research report on Haidilao by China Securities, Haidilao, with its own beer brand Haidilao Craft Beer, has annual beer sales exceeding 432 million yuan, making it comparable in scale to a small beer company. After all, listed beer company Lanzhou Yellow River (000929.SZ) had revenue of only 455 million yuan in the same year. (Haidilao's own craft beer) On the other hand, rough statistics show that in the first three quarters of this year, nine craft beer brands received ten rounds of financing totaling over one billion yuan. Capital's rush to enter and various manufacturers' successive increases have pushed craft beer to the forefront. Craft beer trapped in scenarios In European and American countries, the craft beer market can capture a quarter of the entire beer market's sales with a 15% sales share. But in China's beer market, the vast majority of consumers' awareness is almost limited to baijiu and industrial beer, with craft beer penetration only at 2.4%. Although the craft beer trend is hot, it hasn't truly carved out a path yet. The retreat of thousands of enterprises indirectly confirms the heat of the track while also highlighting the industry's pain points. Although China has a good base of beer consumers, the consumer base and sales channels for craft beer are hard to compete with traditional industrial beer. The continuous pandemic caused a cliff-like drop in customer traffic for the catering industry, which was the main trigger for the first batch of craft beer companies to fail. Beer consumption is highly scenario-based and relies heavily on offline channel distribution. When bars, nightclubs, and catering venues lose customer traffic, the consumption channels for craft beer are effectively halved. According to professional data from Frost & Sullivan, the number of small pubs in China reached 42,000 in 2019, but in 2020, due to the pandemic, the number dropped to about 35,000. Small pubs are important offline beer consumption channels, and the raw materials for craft beer, such as malt, yeast, and hops, heavily depend on imports. Under the pandemic's impact, the raw material costs for domestic craft beer manufacturers almost universally increased by more than 10%. The biggest problems facing surviving craft beer brands remain brand awareness and sales channels. Traditional beer sales channels are already controlled by the five major manufacturers, which have divided up over 80% of the market share. Craft beer, which focuses on being small and beautiful, finds it hard to overcome the challenge of being in a deep alley even with good aroma. Craft beer is ultimately a niche product, with few well-known brands and lacking consumer awareness, so it hardly benefits from traffic. Traditional distribution channels not only fail to highlight the advantages of craft beer but also face price wars with traditional beer. Small craft beer enterprises not only lack the funds to expand new sales channels but also lack sufficient investment in market education to build brands and educate consumer awareness. Although e-commerce provides a stable sales channel for craft beer, beer, like tea drinks, is an immediate-consumption product, and its main channel must still rely on offline consumption scenarios. The production process of craft beer, which does not undergo filtration and sterilization, results in short shelf life and low output, and these attributes also limit its expansion beyond bars and catering channels. According to survey statistics from CBCE 2020, nearly 70% of craft beer manufacturers have over 50% of their sales from catering channels, and 73% have less than 20% of sales from retail channels. Other consumer products can be moved online to drive secondary growth, but beer leaving offline is equivalent to self-destruction. The path for craft beer is narrower than for other categories. Sample reference for breaking out of scenarios Currently, there are two main business models for craft beer in China. One is the front-store-back-factory model of craft beer specialty stores, which applies for catering permits and uses 500-2,000 liter equipment in the store to produce fresh beer for sale. The second is "pre-packaged products through commissioned processing," which involves commissioning a brewery with a production license (SC) to process and produce pre-packaged products for circulation in retail and catering channels. The distribution channels of these two mainstream models are highly overlapping and their drawbacks are already evident. To break through the bottleneck, craft beer brands need to consider new scenarios. Shift from the consumption scenario of small pubs to retail scenarios such as supermarkets and community convenience stores, bringing the occasional consumption habit of drinking only in stores to the family dining table. After all, compared to the mere 35,000 small pubs, there are over 6 million small supermarkets, convenience stores, and other terminal retail stores nationwide, which are important channels for household beer consumption. However, due to the relatively high pricing of craft beer itself, it cannot penetrate household consumption as deeply as traditional industrial beer. The household consumption market it can cover is basically locked to first- and second-tier cities, where young consumers gather and have higher spending power. For lower-tier cities, the potential share of the household consumption market is much smaller than the dining and drinking market. The older generation of consumers is used to lagers, and switching to expensive and bitter ales is not something that happens overnight. After all, if prices don't come down, no matter how good the beer tastes, it's hard to open up sales. In terms of channel coverage for the household market, higher-priced craft beer finds it difficult to adapt to the retail system of small supermarkets in lower-tier cities in the short term, and needs to break out through other entry points. There is a thriving craft beer brand that operates community-based store retail, which is worth analyzing. This brand's market goal is to become the "Starbucks of craft beer," using ubiquitous close-range terminal stores to cover the household beer consumption market within communities, mainly targeting C-end retail, radiating to consumers within 2-3 kilometers, with takeout or delivery as the main modes. In terms of pricing, it starts at 8 yuan per 500 ml, and even in first-tier cities like Beijing and Shanghai, where costs have risen and prices must be raised, it is controlled within 15 yuan per 500 ml, fitting household consumption. Compared to the mainstream pre-packaged products, the characteristic of community self-brewing stores is freshness. The beer is brewed directly in the store, and from the fermentation tank to the family table, it doesn't exceed the best drinking period of 4 hours for fresh beer. Community stores not only do the business of home-drinking craft beer but also cover surrounding restaurants. In 2018, this brand opened a direct delivery service for takeout, targeting B-end craft beer direct supply for dining scenarios, using mini-programs and official accounts as service platforms, cooperating with late-night snack shops and chain restaurants. In addition to directly selling beer, this brand also provides free equipment and beer to stores, sharing revenue with stores that have higher pricing. To date, this brand has franchised 220 stores, and among the many craft beer brands in the small circle, it has already gained a firm foothold. Although the industry reshuffle in craft beer is intensifying and more and more craft beer enterprises are exiting, the reshuffle during the integration period does not represent a decline or halt of the industry. The day when craft beer is massively moved from store tables to family dining tables is when craft beer truly ushers in its market trend. -END-