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Carlsberg, an international beer giant that has gradually established a foothold in the Chinese market through mergers and acquisitions, is facing challenges.

Recently, Chongqing Jiawei Brewery Co., Ltd. ("Chongqing Jiawei"), a subsidiary of Chongqing Beer acquired by Carlsberg, issued a statement accusing Carlsberg of suppressing "Mountain City" beer. Chongqing Beer responded that the content of Chongqing Jiawei was untrue and Chongqing Beer owned the "Mountain City" brand.

In fact, in addition to the dispute with Shancheng Beer, Carlsberg also has litigation disputes with Lhasa Beer. In the view of industry insiders, the reason behind these disputes is the unsatisfactory performance of Shancheng and Lhasa Beer. For foreign brands, as Chinese local beer brands gradually grow, how to consolidate the existing consumer market and further cater to local consumer demand to open up new markets is a difficult problem.

The dispute between Chongqing Jiawei and Chongqing Beer

Following the release of the "Solemn Letter on Defending the "Mountain City" National Brand and Condemning Carlsberg and Chongqing Beer Co., Ltd. for Maliciously Killing and Destroying the "Mountain City" Brand" on June 14, Chongqing Jiawei spoke again on August 2.

Chongqing Jiawei said in its latest statement that since Carlsberg acquired Chongqing Beer in 2013, it has carried out a comprehensive ban and systematic crackdown on the "Shancheng" beer brand based on maximizing its own interests, causing the annual production and sales of "Shancheng" beer to drop from 1 million tons to 98,000 tons. The brand value of "Shancheng" beer has dropped from 6 billion yuan to the current book value of all 199 local brand trademarks including the "Shancheng" beer brand is less than 16 million yuan, resulting in a cliff-like drop in the sales of "Shancheng" beer and a serious shrinkage of its brand value.

Regarding Chongqing Jiawei's statement, Chongqing Beer responded to the Beijing News reporter on August 3rd, saying that Chongqing Jiawei only produces "Shancheng" and other brand beers for Chongqing Beer through an underwriting agreement with Chongqing Beer, and is only one of Chongqing Beer's OEM factories. As a beer company with "local brands + international brands", Chongqing Beer's local brands account for more than 70% of its sales nationwide. In the Chongqing market, the two local brands "Chongqing" and "Shancheng" account for nearly 80%.

In fact, the dispute between the two parties has already begun. In October 2023, Chongqing Jiawei sued Chongqing Beer for a contract dispute, claiming that it failed to include the relevant products in the underwriting scope as agreed in the "Product Underwriting Framework Agreement", causing losses. This 20-year "Product Underwriting Framework Agreement" was signed in 2009, stipulating that only "Mountain City" brand beer was allowed to be produced during the underwriting period, and all beer produced should be handed over to Chongqing Beer for underwriting.

According to the announcement released by Chongqing Beer on August 3, the above-mentioned contract dispute lawsuit between it and Chongqing Jiawei has been accepted by the Fifth Intermediate People's Court of Chongqing and will be heard on August 1. The amount of Chongqing Jiawei's lawsuit is temporarily calculated to be 631.68 million yuan. Chongqing Beer filed a counterclaim, requesting the court to terminate the "Memorandum of Understanding (III)" signed between the company and Chongqing Jiawei on March 15, 2019, claiming that Chongqing Jiawei failed to fulfill its payment obligations, constituting a breach of contract, and the company has the right to terminate the contract.

Chongqing Beer also believes that the performance of Chongqing Beer in the past 10 years has proved the correctness of the local brand development strategy. In 2020, Chongqing Beer and Carlsberg completed a major asset reorganization, expanded the sales network, and the "Chongqing" brand was able to go nationwide, with good market feedback. At the same time, the "Mountain City" brand also achieved healthy growth. Against the background of an overall industry decline of 5.6%, sales in 2023 increased by 16% compared with 2019. Regarding Chongqing Jiawei's allegations, Chongqing Beer reserves the right to take further legal measures to safeguard its legitimate rights and interests.

Disputes continue or due to unsatisfactory performance

Gaining the right to speak through acquisitions was previously the main approach taken by international brands.

Since 2003, the international beer giant Carlsberg has successively acquired Yunnan Huasheng Beer, Dali Beer, Chongqing Beer, etc., and has also extended its tentacles to beer brands such as Lhasa Beer and Yellow River Beer, and has a say in the beer industry in the western region.

However, the development of some regional brands after the acquisition was not satisfactory. Take Lhasa Beer as an example. In 2004, Carlsberg China invested in Lhasa Beer and held 50% of the shares with Tibet Development, another shareholder of Lhasa Beer. In 2023, Tibet Development's beer business (main brand is Lhasa Beer) had a revenue of 337 million yuan, accounting for 99.75%, and turned a profit in the first half of this year.

However, the scale of Lhasa Beer is still relatively small, and Carlsberg, which is considering withdrawing, wants to transfer its shares. According to an announcement by Tibet Development on June 8, 2023, Daohe Company and Carlsberg signed an equity transfer agreement, agreeing to transfer Carlsberg's 50% equity in Lhasa Beer to Tibet Daohe Industrial Co., Ltd., and the dispute between Tibet Development and Carlsberg arose from this. First, Tibet Development sued Carlsberg for violating relevant laws, regulations and agreements in its equity transfer, which was invalid or should be revoked, and constituted an infringement on its equity interests in Lhasa Beer Company. Subsequently, Carlsberg countersued, demanding the return of 95 million yuan in funds distributed according to the 2018 dividend resolution. The latest judgment shows that all of Carlsberg's claims have been dismissed.

In addition, although Carlsberg did not actually acquire Lanzhou Yellow River, the beer business of Lanzhou Yellow River is mainly completed by four subsidiaries: Qinghai Yellow River Jiajiu, Lanzhou Yellow River Jiajiu, Jiuquan Western Beer, and Tianshui Yellow River Jiajiu. Carlsberg holds shares in each company. According to the 2024 semi-annual performance forecast of Lanzhou Yellow River, a listed company, the net profit after deducting non-recurring items is expected to be a loss of 15.2 million to 16.8 million yuan, an increase of about 5 million yuan from the same period last year. Obviously, Carlsberg is under great pressure for this investment.

Wine industry analyst Cai Xuefei analyzed to the Beijing News reporter that the dispute between Carlsberg and Chongqing Jiawei and Tibet Development, on the surface, is a legal dispute caused by equity division, performance dividends and other reasons. In fact, it is due to the poor performance of Shancheng Beer and Lhasa Beer, which has led to serious differences in Carlsberg's market investment and future development of the company, and has not achieved Carlsberg's strategic goal of investing in the Chinese market.

The rise of local brands has intensified competition

The top five brands in the beer industry include China Resources Beer, Tsingtao Beer, Budweiser Asia Pacific, Carlsberg China and Yanjing Beer, also known as the "Chinese Beer T5". Since 2016, beer companies have gradually upgraded beer prices from the 2 yuan era to the mainstream price range of 4 to 8 yuan through internal structural upgrades. Local beer manufacturers have seized the strategic opportunities of high-endization and de-capacity and have risen rapidly. The Chinese beer market has shown a very obvious trend of "local beer rising and foreign beer falling".

Data shows that Tsingtao Brewery will achieve operating revenue of 33.94 billion yuan in 2023, a year-on-year increase of 5.5%; net profit of 4.27 billion yuan, a year-on-year increase of 15%. In the first half of this year, Yanjing Beer expects its net profit to increase by 40% to 55% year-on-year, and Zhujiang Beer expects its net profit to increase by 30% to 45% year-on-year.

As the industry focuses on high-end products, the growth of Chongqing Beer's high-end products has slowed down. The financial report shows that the sales growth rate of Chongqing Beer's high-end products has dropped sharply from 43.47% in 2021 to 5.67% in 2022. In 2023, Chongqing Beer's high-end product sales revenue will be about 8.855 billion yuan, and the growth rate will drop to 5.18%.

Cai Xuefei believes that with the return of domestic consumption rationality and the continuous expansion of consumer horizons, especially the rising demand for quality and personalization of beer consumption by the younger generation of consumers, the appeal of international high-end beers such as Carlsberg is fading. Domestic beer brands such as China Resources, Tsingtao, and Yanjing have also been working hard in the high-end market for many years. Relying on their own channels and quality advantages, they have begun to exert their strength and gradually eroded Carlsberg's high-end beer market. In addition, the continued downturn in the domestic night market economy and high-end catering consumption has further worsened Carlsberg's high-end market development prospects.

Carlsberg China President Li Zhigang said at the "2024 China Beer T5 Summit" that the high-end development of the beer industry is still an inevitable trend and there is still room for improvement. High-end development is not just about raising prices, but also about improving product quality to meet consumers' demand for high-quality beer.

In Cai Xuefei's view, China's beer market has completed scale expansion and technological upgrades, upgrading from pure price competition to quality competition, and industrial light beer has upgraded to high-quality categories such as craft beer and original puree. This requires foreign beer companies to stop being arrogant and truly understand the economic and cultural life of Chinese consumers, assist Chinese wine merchants in developing the market, and launch more targeted products to meet consumers' different drinking needs, so as to maintain the sustainable development of enterprises in the Chinese market.

Beijing News reporter Wang Ziyang

Editor: Qin Shengnan

Proofread by Zhao Lin