Heineken Chases Wider Profit Margin in China by Focusing on Premium Beer

Heineken NV (HEIA), the world’s third- biggest brewer by volume, and partner Asia Pacific Breweries Ltd. plan to boost profitability in China by focusing on premium beer in the world’s fastest-growing major economy.

Premium beer is 10 times more profitable than mass market tipple prompting the two partners to focus on the segment, Theo de Rond, president of Heineken’s Asia Pacific region, said in an interview in Singapore yesterday. Premium beer sells for about four times more than the regular brew in China, Chief Executive Officer Jean Francois van Boxmeer said in Singapore.

Heineken, struggling with declining beer sales in western Europe, is competing with companies such as Anheuser-Busch InBev NV (ABI), Kirin Corp. and Tsingtao Brewery Co. in the world’s biggest beer market by volume. Heineken and its Singapore-based partner, which sell the Heineken and Tiger beers in the world’s most- populous nation, sold the stakes held by their joint venture in China in some breweries to focus on the high-end market.

“You have population growth and you have economic growth,” said Boxmeer. “We’re not operating in the mainstream market in China, we’re operating in the premium market.”

While China accounted for 71 percent of the whole beer market in the Asia-Pacific region last year, it contributed 16 percent of the profit, Van Boxmeer said. That’s because the average price of beer in China is about 25 euros ($33) per 100 liters, compared with 51 euros in India, 60 euros in Vietnam and 182 euros in Australia, he said.

China Beer Consumption

In 2010, China consumed 44.8 billion liters of beer, 6.3 percent more than the year earlier, according to a statement from Asia Pacific Breweries (APB) in July.

Consumption of premium beer in China is estimated by Asia Pacific Breweries to grow 12 percent annually through 2020 to 2.1 billion liters, Asia Pacific Breweries said yesterday.

“Focusing on the premium side of the market is the approach foreign brands should take,” said Olive Xia, an analyst at Core Pacific-Yamaichi International Ltd. in Shanghai, who has a “buy” rating on Tsingtao. Local brands dominate the non-premium market, she said.

China’s gross domestic product has grown 11.2 percent on average over the past five years. Societe Generale SA expects expansion of 9.2 percent this year and 8.1 percent in 2012.

Exiting Some Segments

Heineken-APB (China) Pte agreed to sell a 21.4 percent stake in Kingway Brewery Holdings Ltd. (124), a Chinese beermaker, for 1.08 billion yuan ($170 million) in March.

The joint venture agreed in July to sell stakes in Jiangsu Dafuhao Breweries Co. and Shanghai Asia Pacific Brewery Co. to the maker of Snow beer, a joint venture of SABMiller Plc (SAB) and state-owned China Resources Enterprise Ltd. (291)

China Resources Enterprise had the biggest share of China’s beer market last year with 21 percent, followed by Tsingtao Brewery Co. at 14 percent and Anheuser-Busch InBev NV’s 11 percent, according to Asia Pacific Breweries.

Heineken and Asia Pacific Brewery make Heineken and Tiger brand beer at plants in Guangzhou and Hainan for the Chinese market.

Heineken in October reported so-called organic revenue growth of 3 percent in the third quarter, beating estimates, as ad campaigns helped curb a decline in sales in western Europe. It’s among brewers suffering as consumer confidence wanes in western Europe, where it made almost half its revenue last year.

To contact the reporters on this story: Kyunghee Park in Singapore at kpark3@bloomberg.net; Clementine Fletcher in London at cfletcher5@bloomberg.net

To contact the editors responsible for this story: Frank Longid at flongid@bloomberg.net; Stephanie Wong at swong139@bloomberg.net

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