This Bud's For Wu

Anheuser-Busch is making a big push in China, betting that growing prosperity will mean a taste for premium brews, says CEO Patrick Stokes

After more than 30 years with St. Louis-based brewer Anheuser-Busch (BUD ), President and CEO Patrick Stokes is paying a lot of attention to China these days. Last year his company purchased Harbin Brewery in Harbin, China. The producer of Harbin Beer, which boasts annual revenues of some $200 million, filled out Anheuser-Busch's growing Middle Kingdom portfolio, which consists of a Budweiser brewery in Central China and a stake in Tsingtao.

BusinessWeek's Beijing Bureau Chief Dexter Roberts spoke with Stokes in the far northeastern city of Harbin, Heilongjiang, on an icy-cold January day. Edited excerpts of their conversation follow:

Q: How important is China for the growth of your business?


China will help Anheuser-Busch realize its potential. That will take in excess of 10 years. That's the time frame necessary for the market to grow and evolve. Now, [China] accounts for about half of our operating profits [excluding any profits from Anheuser-Busch's partnership with Mexican brewer Grupo Modelo].

[The China market] has been growing at double-digit rates for years and is projected to continue to do so. It's certainly the largest growth market in the world.

Q: What are the different ways your company does business in China?


We do business three different ways in China. Our Wuhan, Hubei, brewery [in central China] is producing Budweiser, and we are No. 1 in the international-beer category, which is still small in China. A number of years ago, we took a 5% stake in Tsingtao. In 2002, we expanded that relationship, so we'll eventually go to a 27% equity position. In that way, we ventured into the mainline Chinese business, with a beer that is arguably the only national Chinese brand. We're looking to develop their brands and have an exchange of best practices between our companies.

We had an opportunity to buy the city's share in Harbin Brewery and then that led eventually buying 100% of the company. That puts us in a position where we own a brewery with a very strong position in northeast China, where Tsingtao is not as much of a factor. Our future plan is to develop so that we are able to participate in all the profitable segments of the industry.

Q: Are you considering future acquisitions?


There's the potential, but it's not necessary. If you have a significant position with the No. 1 brewery -- Tsingtsao -- and if you yourself are No.1 in the international segment, and if you own the No. 4 brewer, which we do in Harbin, acquisitions are always a possibility, but they aren't necessary. The platform we have is strong enough and broad enough for us to grow without necessarily adding different planks.

Q: How will you help Harbin improve its operations in China?


Harbin is somewhat unique -- it's the oldest brewer in China. It was founded 105 years ago. So there is a heritage here and uniqueness in terms of the position of their brands in Harbin. The areas we've set up in terms of offering best practices are in sales and marketing, brewing technology, and production. There's also finance and controls. We have a group of nine people from Anheuser-Busch who are residents here in Harbin, who are working and coordinating in all of these areas.

You have to remember we're in distinctly different business segments. Budweiser, because it's an international brand, is a relatively high-priced, high-image brand, and it competes in that particular category. Tsingtao is mainline and really it competes in different segments, the popular-beer segment as well as the premium.

Harbin is about the same in terms of its brand portfolio, but it's heavily concentrated in the northeast. But the formula for growth is really the same. It is going to be good brand development and building the imagery of the brands.

Q: How is the market broken up in China?


Right now, 90% of the market is in the popular segment. It is low-margin, low-price, and low-image. The premium segment is 8% and is higher-margin, higher-priced, and higher-image. And then you have [the highest-profit, highest-margin] 2%, which is either international or imported. The bet is that as living conditions improve in China, and as people have more disposable income, they are going to move from the popular brands to the premium brands And that is really what all the investors in the Chinese beer industry are expecting and looking for.

Q: What are some of the challenges that are particular to the China market?


The challenges China presents are very similar to the situation in the U.S. in the 1960s. You have an industry that is consolidating, but has not consolidated fully yet. You have an industry where the wholesale-distribution system is very fragmented and is probably not adding as much value to the retail system and to the consumer. Brand development hasn't moved along [as well as it could have]. There's a lot of opportunity to develop the imagery of brands.

We just brought out a new brand here in Harbin aimed at the popular segment, Harbin 1900. This is an attempt to go back to the brand's heritage -- go back and say we are the oldest brewery in China, and here's a beer that commemorates the origins of this brewery. That's something that I don't think a lot of Chinese brands would have thought about because it's not their normal way of developing a brand.

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