Anheuser-Busch InBev may have to sell SABMiller's stake in the maker of China's best-selling beer to secure the nation's approval for its record $110 billion takeover. That's an offer that the likely buyer, local partner China Resources Beer, can't refuse. The trouble is, it's an industry that's rapidly going flat.
CR Beer is looking into hiring bankers to advise on a buyout of SABMiller's 49 percent of China Resources Snow Breweries, Bloomberg News reported on Monday. The stake could be worth $5 billion, according to Nomura.
State-controlled CR Beer has right of first refusal should SABMiller sell, and the purchase would give it sole control of Snow, a brand that had 23 percent of China's beer market last year, ahead of Tsingtao with 18 percent, according to Euromonitor data.
AB InBev may be resigned to losing Snow. The company already is contemplating disposing of the Peroni and Grolsch brands to gain regulatory clearance to combine the world's biggest brewers. Considering that the post-acquisition company would have almost 40 percent of China's beer market, authorities there are likely to require a sale.
CR Beer, meanwhile, has bet its future on the fizzy stuff. Until a few months ago, the Hong Kong-traded company went by the name of China Resources Enterprise. The company sold its real estate and retail assets back to its state-owned parent earlier this year, including an unprofitable venture with the British supermarket chain Tesco, leaving beer as the sole business of the publicly traded rump.
Having put all its chips on the beer market, it would make no sense for CR Beer to pass on the Snow acquisition. Rivals are also consolidating. Earlier this year, Tsingtao bought out its own partner of three years in China, Japan's Suntory. While their venture was unprofitable, the alliance raised Tsingtao's market share and gave the Chinese brewer access to more Suntory premium brands.
All this jostling for position can't conceal the fact that China's beer market remains fragmented and a tough place to make money. Intense competition eats away at margins, which are below global levels. Low-end beer is cheap -- 3 yuan (47 cents) a bottle is the norm -- so profits are low. Tsingtao reported a 15 percent drop in first-half profit, citing ``huge pressure" from the country's slowing economy and competition.
Razor-thin margins are one thing when sales are exploding. However, beer volumes in China have been falling, after decades of growth. Moreover, the hope that China's middle-class consumers will switch to higher-priced and more profitable premium beers as incomes rise may turn out to have been over-optimistic: Analysts see wine consumption growing this year, even amid an anti-corruption campaign that has hit high-end alcohol spending.
CR Beer also faces stiffer competition from overseas brands. AB Inbev started selling Stella Artois in China four years ago, and its Budweiser brand, positioned as a premium product, has seen sales growth in double-digit percentages. CR Beer's high-end Opera Face offering (it even has Snow Opera Lady aimed at women, with a lower alcohol content) has yet to make the same kind of headway as the standard Snow label.
To win the premium brand game, CR Beer will need to expand Snow's dominance beyond a handful of provinces: the company has a 50 percent market share in only seven provinces, including Sichuan and Jiangsu. Without nationwide recognition, the brewer is unlikely to achieve the kind of pricing power that would help it to improve margins significantly.
In China, as Suntory found, the long game doesn't always work. The Japanese drinks company went into China in 1981. By the end of last year, its market share was a paltry 1.4 percent, according to Euromonitor. Contemplating figures like that, China Resources executives may feel the need of a stiff drink.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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