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Produced by | MiaoTou APP

Author | Li Yujia

Header image | Visual China

"With such major sporting events as the European Cup and the Olympic Games, why has there been no movement in beer stocks so far?" This is the question my members have asked me most recently.

The answer is actually very simple. The high-end beer market has collectively failed, and the sector lacks the main logic for growth.

From the first foreign-controlled brewery in the late Qing Dynasty, to the rapid rise of industrial beer in the 1990s, to the world's largest beer market today, my country's beer industry has long been a mature fast-moving consumer goods industry.

One of the most obvious characteristics of a mature industry is market shrinkage.

2013 was the peak year for many fast-moving consumer goods, including beer. That year, my country's beer production reached 50.62 million kiloliters, and sales also peaked. In the past three years, the total beer production has remained at around 35.6 million kiloliters, which has shrunk by 30% compared with 2013.

(Data source: public information)

As the market continues to shrink, the development of China's beer industry is left with only three options: closing factories, raising prices and upgrading structures.

Among them, closing factories has limited room for improving profitability, and price increases are effective in the short term but unsustainable, so structural upgrades have become the core development theme. However, the sluggish consumption after the epidemic has caused the structural upgrade of beer to stop at the mid- to high-end level.

1. Why is it necessary to go high-end?

Although on the surface, the improvement in living standards has prompted consumers to demand higher quality beer, in fact, the supply side's desire for high-end products is much more urgent than the demand side, because beer companies only have this fork in the road to maintain performance growth.

(1) The most optimistic forecast is that future sales can be maintained

The beer industry in Japan and the United States developed faster than ours. They entered the mature stage around 1990, and the subsequent development trend of the industry has been a fluctuating decline in output.

Referring to the experience of Japan and the United States, the production and sales volume of industrial beer are mainly affected by the industrial cycle, population structure, per capita consumption, and weather, especially the population structure, which has the greatest impact on the development trend of the industry.

Judging from the population structure, the number of core beer consumers in my country will remain roughly stable in the next five years, and will then decline sharply. It will be somewhat difficult to maintain production and sales at 35 million kiloliters.

Generally speaking, people aged 20 to 50 are the main consumers of beer. Based on this, the current main beer customers are people born between 1974 and 2004. After that, from 1984 to 1987, my country's birth rate rose slightly from 19.9‰ to 23.3‰, and has been declining since then.

(Image source: Baidu)

We estimate the total number of main beer customers in 2023 based on the most optimistic forecast: the age of the main beer consumers is extended from 20 to 60 years old, that is, the main beer customers aged 20 to 60 in 2023 were born between 1963 and 2003. The average annual number of births from 1963 to 2003 was 20 million, 20 million * 40 years = 800 million.

By the same token, the total number of beer customers in the next 40 years will decrease by about 150 million in the next 10 years, a decrease of 18.75% from 2023, and by about 480 million in the next 40 years, a decrease of 60% from 2023.

(Data source: compiled from public information)

In fact, consumers are already intentionally reducing their alcohol intake out of health awareness, and young people aged 20-35 have a richer range of alcoholic beverages than before, with cocktails being a strong substitute for beer.

Therefore, even if the number of core beer consumers aged 20 to 50 remains the same in the next five years and the per capita drinking volume does not decrease, the total beer production will be maintained at a maximum of 35 million kiloliters.

The market share is getting smaller and smaller. How can beer manufacturers support the growth of revenue and net profit?

Going overseas? The global beer market has been determined, and it is not a good idea for China's leading beer companies to go overseas. Raising prices (directly)? It is contrary to the actual conditions. Closing factories? Although it will take effect quickly, there is little room for optimization.

(2) Limited room for further factory closures

The transportation radius of industrial beer requires beer manufacturers to "sell local products" as much as possible to control costs. Therefore, during the period of rapid sales growth in the industry before 2011, in order to grab market share at low prices, domestic leading beer companies have been expanding their production capacity on a large scale.

In 2013, sales growth came to an abrupt halt, and the problem of overcapacity in beer companies gradually became exposed.

Excess production capacity not only affects the production efficiency of beer companies, but also significantly increases the company's depreciation expense rate, dragging down profits.

After 2015, beer companies with strong management capabilities and advanced awareness began to close factories on a large scale to optimize production capacity.

Chongqing Beer was the first Chinese beer company to start optimizing its production capacity, closing eight factories between 2015 and 2018. China Resources followed closely behind, closing 33 factories in the five years starting in 2016. Tsingtao Brewery only started adjusting its production capacity in 2018, closing five factories between 2018 and 2019. Yanjing Beer was the latest, starting to optimize its production capacity in 2021.

Usually, we use "Capital expenditures/depreciation and amortization"Indicator is used to measure the investment level and trend of enterprises for long-term development. A lower and lower ratio means that the enterprise is becoming more conservative, and vice versa.

By comparing the two figures below, it can be found that through factory closures between 2016 and 2020, the capital expenditure/depreciation and amortization ratios of the five major beer companies have declined, while the return on net assets has continued to rise, indicating that factory closures and optimization of production capacity directly improved the profitability of the companies.

(Data source: choice data)

However, after continuous capacity optimization, the five major beer companies will have less and less room to continue closing factories in the future, and the impact on profits will also become smaller and smaller.

In 2023, among the top five beer companies, Tsingtao Brewery and China Resources Beer have the highest total number of factories and the lowest capacity utilization, so there is relatively large room for further factory closures. Chongqing Beer has only 10 factories left, and its capacity utilization rate has reached 89.76%, leaving little room for optimization.

(Data source: Annual reports of various companies. Yanjing Beer and Budweiser have more than 30 factories in Asia Pacific, but the exact number is not disclosed)

(3) Direct price increase is contrary to reality

Today, the top five beer companies in China have a total market share of about 92%, and the competition landscape is stable, with the leading companies having pricing power. However, this year and even in the next one or two years, there is no realistic basis for beer to directly raise prices, whether on the cost side or the demand side.

First of all, looking at the cost structure of beer at the factory, raw materials account for the highest proportion. For example, the cost of food raw materials such as barley and rice accounts for approximately 14% and 8% respectively, and the cost of raw materials for packaging materials such as glass bottles, cans, and cartons accounts for a total of approximately 50%.

In 2024, the supply of Australian barley increased after the deregulation. The price of imported barley in March was 273 US dollars per ton, down 1.4% from the previous month and 26.9% from the previous year. The price is expected to continue to fall. In terms of packaging materials, the aluminum futures price in April 2024 was 20,341 yuan per ton, up 8.7% year-on-year, the glass price was 1,536 yuan per ton, down 15% year-on-year, and the corrugated paper price was 2,723 yuan per ton, down 4.8% year-on-year.

Generally speaking, the prices of major raw materials for beer are on a downward trend, so it makes no sense for beer companies to raise prices directly.

Secondly, judging from historical data, the increase in beer price per ton is most strongly correlated with the inflation level, and is also positively correlated with per capita GDP and per capita disposable income.

In 2023, the CPI growth rate will be only 0.2%, and in May 2024, the CPI growth rate will be about 0.3%.

In 2023, the per capita disposable income of the national residents was 39,218 yuan, an actual year-on-year increase of 6.1% after deducting the price factor. The per capita consumption expenditure was 26,796 yuan, an actual increase of 9.0% after deducting the price factor.

Among them, the per capita consumption expenditure on food, tobacco and alcohol of the national residents was 7,983 yuan, an increase of 6.7%, accounting for 29.8% of per capita consumption expenditure. In 2022, this expenditure accounted for 30.5%, an increase of 4.2%.

This shows that although the growth rate of tobacco and alcohol consumption has increased, their share in per capita consumer expenditure has been shrinking. Therefore, with the shrinking demand, it is also difficult to directly raise the price of beer.

(Data source: Wind)

Through analysis, it can be found that the market is shrinking continuously, and closing factories and directly raising prices have limited effects. Beer companies have no choice but to promote structural upgrades and use high-end products to drive the industry forward and boost performance.

The first half of the high-end beer market started in 2017 and is now coming to an end. Due to the downward trend in the consumption environment, the industry may have to build up momentum for a long time before starting the second half of the high-end beer market.

2. Why has high-end development failed?

The high-endization of beer refers to the upgrade from the low price range of 2 yuan to the ultra-high-end price range of 4-6 yuan, 6-8 yuan and above 10 yuan.

Since 2017, the first half of the high-end beer industry has been upgrading from the 2 yuan "green stick era" to the 4-6 yuan mainstream price range. It is an internal product structure upgrade within the brand, carried out within the existing channels in the respective base markets. In essence, it is still the logic of fast-moving consumer goods of "large market, large wholesale, large circulation, and large share", so the upgrade resistance in the first half is small and the effect is great.

Taking Tsingtao Beer as an example, its current product strategy includes two aspects. First, the internal product upgrades of the brand have been gradually upgraded from the initial refreshing to classic, white beer and pure draft, pushing the price range from 3 yuan to more than 8 yuan. Second, some small brands and small categories have been integrated into the mainstream brand, replacing them with Qingdao refreshing and Laoshan brands, so as to enhance the company's mid-to-high-end brand product matrix image.

Chongqing Beer upgraded its Wusu brand from Green Wusu to Red Wusu, China Resources upgraded its Snow brand from Yongchuang to Super Yongchuang to Pure Draft, and Yanjing Beer launched mid- to high-end products U8 and V10 within its brand.

Therefore, compared with brand power and product power, internal structural upgrading is more of a test of the "capital" of beer companies, that is, the scope and number of base markets determine the progress and effectiveness of beer companies' structural upgrading. This is because:

1) The base market has stronger control over dealers. It only needs to use mid-to-high-end products to drive the simultaneous replacement and upgrade of low-end products to cater to consumption trends, and there is little market resistance. 2) The brand awareness and loyalty in the base market are high, the required investment costs are low, and the consumer education cost is low. An upgrade of 1 yuan is almost a pure profit increase for the company. 3) Only a single brand in the base market has an absolute market share and competitive advantage. Other brands are unlikely to actively initiate price wars, so the channel acceptance is high.

This is equivalent to optimizing the internal structure in a monopoly market. Stronger channel push corresponds to better price increase and cost investment rights. The more base markets there are, the stronger the voice in the base markets, and the smoother the internal structure upgrade, thus forming a clearly layered main brand product matrix and contributing to the profit source.

(Data source: choice data)

The second half of the high-end development is at the end of the internal structure upgrade, and it will continue to upgrade from the 6 yuan price range to the high-end price range of 8 yuan and above, in order to seize the consumer groups at the top of the pyramid with higher-end products.

There are three main logics for the second half of high-end development:

1) Under the wave of consumption upgrading, high-end beer has gradually been favored by the public due to its improvements in raw materials, production technology, and flavor richness compared to economy beer, and its market share continues to increase; 2) The main consumer group of beer is getting younger, and Generation Z is gradually becoming the mainstream consumer of the high-end beer industry in the future, willing to pay for new categories and high premiums; 3) The on-site drinking scene is being restored, and the business of mid-to-high-end beer consumption places such as bars, KTVs, and high-end restaurants is improving, which drives the increase in demand for mid-to-high-end beer products.

The reason why the high-endization of beer is stuck at the second half is that these three main logics are no longer viable.

First, without the promotion of the wave of consumption upgrading, even if the quality of high-end beer is better than that of traditional industrial beer, its high price is still not cost-effective in the environment of consumption downgrade, and the customer base that spontaneously chooses and is willing to pay for it is limited.

Secondly, among the customers who are willing to pay for high-quality beer, young consumers under the age of 35 account for more than 70%. Young consumers have diverse needs, drinking scenarios and value demands. Although beer leaders have launched beer with diversified flavors and functional features such as low alcohol, no alcohol, and no sugar, their products are still "industrialized", with many SKUs and small quantities, and cannot be scaled up.

Finally, comparing the beer channel structures in China and Japan, Japan's beer consumption is mainly through non-ready-to-drink channels, with ready-to-drink channels accounting for less than 20% of sales, while China's beer ready-to-drink channels account for about 50%. The rise and fall of this industry determines half of the high-end beer market.

However, since 2024, beer sales in nightclub channels across the country have dropped by about 12% compared with the same period in 2021, and sales in catering channels have only reached 96%~97% of the same period in 2021.

Have you discovered? In the second half of the high-end trend, the consumption of high-end beer is no longer for "getting drunk at a low cost", but emotional consumption. Channel push is no longer the dominant factor, and the emotional value of the brand and product is the key.

To resonate with consumers' emotional values, not only does it rely on differentiated product marketing, but it also relies on the recovery and creation of ready-to-drink consumption scenarios. Brands are destined to go through a new round of marketing and channel competition. The required investment costs will inevitably offset part of the high ton price and high gross profit characteristics of high-end products, and will have limited effect on improving the company's overall ton price and profit margin.

Currently, China Resources Beer and Tsingtao Brewery, which have a high proportion of low-end products, have a large room for upgrading and optimizing their internal structure. On the contrary, their future performance will have a relatively good growth rate. However, the performance of Budweiser Asia Pacific and Chongqing Beer, which have a high proportion of high-end products, may continue to be under pressure.

(Data source: compiled from public information)

Therefore, before the wave of consumption upgrading comes, products in the mainstream price range of 4-6 yuan will still be the main source of revenue and profits for beer companies for a long time.

Unexpectedly, within just a few years, the beer industry has fallen into a collective deadlock where it can neither move up nor down.

Disclaimer: The content of this article is for reference only. The information or opinions expressed in this article do not constitute any investment advice. Please make investment decisions with caution. ❥Thank you for your likes, collections and encouragement!