By Gordon Orr
Board Member at Lenovo, Swire Pacific
China’s beer market may be a leading indicator of where other consumer markets in China may be headed.
For the last three years, beer volumes have been declining, roughly 5% year on year. By value, the market has been growing slightly as younger consumers shift upmarket, with the premium and super premium segments expanding around 10%.
The biggest driver of market change is demographic. The age cohort of heavy drinking males is getting old and reaching a point where their individual consumption has peaked. Younger cohorts are smaller in total size. And yes, they tend to be broader in their consumption of alcohol, wine not just beer and, premium not just mass beer. This isn’t a market where the “growing middle class” story has any impact. Everyone who wants to drink beer in China has had access to the product for a long time.
This is an enormous challenge for the three largest domestic brewers: CR Snow, Qingdao and Yanjing. However much they try, their brands are just not premiumizing well. Consumers view them as the cheap brew that their parents and grandparents turned to. They want something different.
Moreover, the core skills of these brewers is pushing volume into the channel, not–despite their “throw money at it” attitude to advertising–in creating pull from consumers. Yanjing in particular is financially stressed: In their most recent half year results, sales fell over 10% and profits were down by a quarter from the year earlier. Their balance sheet is heavily indebted and the market believes they are looking for a strategic investor to bail them out.
However at the same time, Qingdao is about to lose its strategic investor as Asahi looks to offload its 20% stake in the brewer, regarding its 2009 purchase as a triumph of the possible over the practical. A 20% stake into a Chinese company is rarely going to deliver much in the way of influence. A 20% stake in a company with as long and proudly independent a history as Qingdao is never going to be a meeting of minds. Asahi’s premium beer – Super Dry – never made it into Qingdao’s distribution channels despite Qingdao’s need for more premium product.
For much of the last 20 years, consumer companies have largely ridden the waves of urbanization and an expanding middle class, combined with a demographic bulge of people coming into the workforce. Today those forces are much weaker. The demographic bulge is aging out of its period of peak consumption, being replaced by fewer people in younger age cohorts.
Younger people, while born urban and middle class, are finding they have to spend a much higher proportion of their income on mortgages to get on the property ladder than their parents did at the same age. The absolute number of migrants to cities is falling, and those that do move are having a tougher time breaking into the middle class.
Companies that sell basic consumption products – beer, bottled water, noodles, frozen dumplings and the like may find that their volume growth now depends more on gaining market share than growing with the market. And their revenue growth depends on successfully sustaining share in the mass segment while growing in more premium segments.
This will require new marketing and channel skills to build pull from consumers, rather than managing distributors and retailers well, as many have, to ensure the channels are always full. These are skills that multinationals should possess in their global organization, but will they be able to deploy them successfully in China before local competition adapts?