China: Japanese breweries to catch up with Anheuser-Busch, InBev, and SABMiller on the Chinese market
Having reached a sales ceiling in their own country, Japanese brewers such as Kirin, Suntory, and Asahi are raising a mug to a thirsty mainland market, The BusinessWeek posed June 20.
With beer sales losing fizz at home, Japan's brewers have tried ineffectually in recent years to reignite sales. Relentless TV advertising hasn't done the trick nor, on the whole, has the introduction of new hybrid drinks, such as cheaper low- or no-malt varieties of beer. And the sales stall looks likely to continue. Nikko Citigroup reckons total beer sales will dip 2.8% from current levels by 2008.
Small wonder then that like so many other consumer product segments, Japanese brewers are looking to China as their salvation. The beer market is booming on the mainland. And Suntory, Asahi Breweries, and Kirin Brewery (KNBWY)—three of Japan's biggest brewers—are all placing major bets in an effort to catch up with international beer giants such as Anheuser-Busch (BUD), InBev, and SABMiller.
Demand for beer in China has never been stronger. Last year, brewers made 30 million kiloliters of beer in China, an increase of 5% over the year-earlier period. That is more than any other country including the U.S., which China toppled as the world's biggest beer-consuming nation in 2004. What's more, unlike Japan, China's thirst for beer is far from quenched.
"China is now the largest beer-consuming country in the world, [but] you will likely see a strong potential for growth," says Yasushiro Matsumoto, an analyst at Shinsei Securities in Tokyo. Indeed, if the average Chinese were to drink as much as the average Japanese or Korean, the market would more than double in size overnight.
Among Japan's brewers, Suntory leads the way. Having entered China in the 1980s, a string of investments has made Suntory the eighth biggest beer maker in China. Most recently, on June 15, privately owned Suntory struck a deal to acquire Australian brewer Foster's Shanghai subsidiary for about $20 million. The deal will increase Suntory's capacity in China by 100,000 kiloliters a year, raising the total to about 800,000 kiloliters.
The move also adds to Suntory's dominance in Shanghai, where its market share has grown from 33% to 54% of the city's beer market in the last two years. The Foster's deal will increase Suntory's share to 60%. Further investment is expected. Company president Nobutada Saji has stated that he wants Suntory "to expand operations to all of China."
Kirin and Asahi are also raising the stakes. Asahi aims to raise production at its four Chinese breweries by 11% this year to 650,000 kiloliters—equal to about 25% of its production in Japan. In May, Asahi, which already has four Chinese brewing partners, said it would build a fifth brewery in Zhejiang province. Asahi CEO Hitoshi Ogita has made it clear that new investments, including those in China, are a priority.
Kirin, while less aggressive than Suntory and Asahi, has bought out its Chinese subsidiary and is building a new 200,000 kiloliter factory in Zhuhai, a southern coastal city in Guangdong Province, in 2007. In February, Kirin's incoming chief Kazuyasu Kato made it clear international investment is one means of improving the company's long-term growth prospects. "I'm taking the baton at a time when the company has laid solid foundations for internationalization and diversification," Kato told reporters.
Still, brewing in China is unlikely to be a panacea for Japanese beer makers' problems any time soon. For one thing, despite a long history in China, Japanese breweries are dwarfed by global rivals. Anheuser-Busch has a 27% stake in Tsingtao, China's biggest brewer, and owns 100% of Harbin Brewery, which ranks fifth.
British-listed SABMiller has a 49% stake in CR Snow Breweries, China's number two brewer, and Belgium giant InBev has stakes in Guangzhou Zhujiang Brewery, Fujian Sedrin Brewery, and Hubei Jinlongquan Brewery—ranked sixth, seventh and tenth by sales. Suntory, ranked eighth, is the only Japanese brewer in the top 10 and, in 2005, had a market share of just 1.8%, according to ABN Amro. (Outside of Shanghai, Suntory isn't much of a factor.)
Catching up won't be easy—or cheap. Most big Chinese brewers already have foreign partners and those that don't will prove expensive buys. Earlier this year, InBev paid $750 million for 100% stake in Sedrin, the biggest beer maker in East China's Fujian Province.
But perhaps of most concern is the difficulty of turning growing Chinese demand into profits. Foster's decision to sell its remaining Chinese arm to Suntory came after 13 straight years of red ink in China. Lion Nathan, another Australian brewer, 46% owned by Kirin, also pulled out of China in 2004, selling a trio of breweries in the Yangtze River delta region for $219 million to a joint venture run by SABMiller.
In April, Merrill Lynch (MER) maintained a "sell" rating on Anheuser-Busch partner Tsingtao, noting that 30% of its 50 breweries in China are loss making. Anheuser-Busch, which brews and sells Budweiser in China, reported profits "declined slightly" in China during the first quarter.
One problem is Chinese drinkers still prefer cheap, local brews to the more profitable, higher-priced foreign-branded beers. Masao Fujimori, a spokesman for Asahi admits in terms of sales Asahi Super Dry, the best- selling beer in Japan, is small beer in China. So Asahi is focused on using its beer know-how to improve local beers brewed in collaboration with partners on the ground. "With the technology we've cultivated in the Japanese market, we'd like to improve the quality of each local brand in each region," says Fujimori.
Small wonder, then, that analysts say brewers looking for short-term gains should go elsewhere. "If you want to make money [quickly], it's not smart to move into China at this stage," says Shinsei's Matsumoto. But with sales slumping at home, Japanese brewers have little choice but to expand their horizons somehow.
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