China’s Craft Beer Revolution is Under Way

The time is ripe to invest in China’s growing market.

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By:  Conner Murphy, Lynx Global Intelligence

 

Background

The craft beer market is going to get a lot bigger as small and medium sized competitors gain traction across China. The time is ripe for China’s craft beer revolution.

According to a recently released report from Drink Sector[2], a beverage industry research organization, China’s beer market is set to become the world’s largest in value by 2018. This shouldn’t come as much of a surprise – China is, after all, a very big country, and has long been the world’s largest consumer of alcoholic beverages (China surpassed the United States in 2011).  However, tastes have been shifting across the country. Traditional liquors such as baijiu, a sorghum based liquor, have dwindled in popularity, while red wine and beer are becoming increasingly popular alternatives. Though beer has always been readily available in China, traditional options such as Tsingtao and Budweiser do not quite appeal to the young, internationally minded, growing middle-class. For a generation raised on designer brands and the newest iPhone, domestic beer just doesn’t make the cut. Drinking cultures and tastes are changing. As put by a local beer representative in a recent CCTV report[3], younger generations prefer to drink until you are satisfied, not drink until you are full (ie. drunk). Enter craft beer.

China’s Beer Market at a Glance

Beer is not new to China – domestic names such as Tsingtao (青岛啤酒), Harbin 哈尔滨啤酒, and Snow雪花啤酒) have long dominated the market, and remain favorites from restaurant goers to the bar crowd. Large international breweries also have a strong presence in the country, with Budweiser and Heineken readily available from Shanghai to Chongqing.  However, while beer production is at an all-time high, revenues have been on the decline since 2013[4]. The market is changing, and consumers are demanding something different from the watered–down lagers of the past century. Small breweries in Beijing and Shanghai that were once exclusively frequented by expats are now full of locals looking to experience the craft beer craze that has exploded across the US and Europe.

Big breweries, wary of the competition they are facing abroad, are hoping to take advantage of the changing demands as quickly as possible. Tsingtao has been rebranding itself across wealthier cities, spreading its Tsingtao 1903 brand as a premium alternative to its typical party-go happy image. Small taprooms have sprung up in Beijing and Shanghai, serving beers such as Tsingtao IPA and Tsingtao Stout.

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[5] Tap options at Beijing’s Tsingtao 1903 SoHo Taproom.  The Beijinger

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[5] Tsingtao Standard with Tsingtao Stout. The Beijinger

Meanwhile, AB-InBev has increased imports of it’s The High End line of beers into China. Beers such as Goose Island IPA and Elysian Jasmine IPA are readily available across Beijing taprooms, and continue to increase their foothold as premium beer staples. Meanwhile, AB has begun targeting local operations, and in March acquired Boxing Cat Brewery[6], one of Shanghai’s most well-known craft breweries.  These trends signal two things: First, opportunities in China’s craft beer market are readily available. Second, it is crucial to enter the craft beer market before large brewing companies gain a stronger foothold.

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At Beijing’s Home Plate BBQ, AB InBev’s Goose Island now tops the draft beer list. Photograph by Mark Leong, Fortune[7]

Opportunities

Partnering With a Local Craft Brewery

This is by far the most direct method of entering China’s craft beer market. Partnering with a local startup is a great way to make your brand known, develop a robust local market, distribute directly to the customer, and maintain a strong understanding of your business operations. Small craft breweries are popping up across China, and while capital is readily available, know-how is in short supply. Entrepreneurs are seeking foreign partnerships and brew masters to assist in creating strong competitors, premium internationally supported brands, and sound business strategies.

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The Next Generation of Chinese Brew masters – Graduates from the China National Research Institute of Food & Fermentation Industries. Photo provided by Jeff Li, Graduate

Collaboration Projects

Less direct than a direct partnership, opportunities exist for collaboration projects in beer production. For example, a brew master guest-training program could be arranged between US and China partners; a US brewery provides the knowhow and helps to create a collaborative collection of beers. While this option provides less control over ground operations, it does represent a chance to make strong connections on the ground, gain a better understanding of the market, and help make your brand known in specific locales. This would also open the door for future opportunities, and provide an opportunity to test the waters of a future partnership with local breweries.

Import

Finally, exporting to China remains an option. The current trade climate appears positive, with the government steadily removing trade barriers on everything from agricultural goods to natural resources[8].This means the cost of exporting to China will go down. However, while this represents an easy inroad, it is also the least likely to bring future success. The trick is not to sell beer in China, it is to spread brand awareness and become a leading presence in the future beer market. This is both incredibly difficult and risky without a local presence.

Risks and Hurdles

As with any business practice, risks exist. Foreign and domestic competition will only continue to grow, highlighting the importance of early entry into the market. Marketing and branding strategies need to be adjusted on a locality-by-locality basis – what works in Shanghai may not work in Beijing. Open and frequent communication with local partnerships will help to ease the localization of your brand. Government regulations concerning the production and distribution of alcohol are constantly changing, and differ from city to city. Local partnerships again represent the best method for overcoming regulatory hurdles, as partners have the know-how necessary for meeting local compliance standards. Finally, intellectual property rights infringement represents a leading risk across China. Recipes and trade secrets should be kept secret unless absolutely necessary, and an on-the-ground presence is essential.  Distribution channels and retailers must also be monitored, and supply chain disruptions cannot go unnoticed. These risks, while prevalent, represent hurdles, not barriers. With an on-the-ground presence and a strong understanding of Chinese business practices, success in China’s craft beer revolution is possible.

 

 

[1] China’s taste for craft offers fizz for global brewers. Reuters. March 7, 2017. http://www.reuters.com/article/us-china-beer-idUSKCN0W813B

[2] China Craft Beer Market Report 2017. Drink Sector. January 2017. http://www.drinksector.com/reports/china-craft-beer-market-report-2017

[3]央视关注精酿啤酒啦!好消息?坏消息?。 爱啤酒。September 17, 2015. http://mp.weixin.qq.com/s/rFk4C6dCn–fxMy6JpdFYw

[4]Annual Report, 2016. Tsingtao Brewing CO., LTD. December 2016.  http://quote.morningstar.com/stock-filing/Annual-Report/2016/12/31/t.aspx?t=:TSGTF&ft=&d=475f0936590f75fc5557807a2271822e

[5] Tsingtao Opens Its Own Bar in Galaxy Soho With IPA (Occasionally) on Tap and Export Quality Bottles. The Beijinger.  https://www.thebeijinger.com/blog/2016/07/20/tsingtao-opens-its-own-bar-galaxy-soho

[6] China’s taste for craft offers fizz for global brewers. Reuters. March 7, 2017. http://www.reuters.com/article/us-china-beer-idUSKCN0W813B

[7] China’s New Craft-Beer Bully. Fortune. Mar 16, 2017.  http://fortune.com/2017/03/16/china-craft-beer-ab-inbev/

[8] Cheniere Circles China After Trade Deal Portends Gas Export Boost. The Wall Street Journal. May 12, 2017. https://www.wsj.com/articles/cheneire-circles-china-after-trade-deal-portends-gas-export-boost-1494619903?mod=e2fb