Consumer

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

China's brewers have a problem: The country is losing its appetite for beer.

Since peaking in the 12 months through April 2013, the volume of amber nectar produced in the country has slipped 12 percent. Combine that with low prices, fierce competition and a population that could peak as soon as 2020, and it's little surprise that SABMiller discarded its stake in the country's biggest beermaker like a bad keg the minute AB InBev came calling.

Born Slippy
China's trailing 12-month production of beer has been on the slide since 2013
Source: National Bureau of Statistics of China, Bloomberg

That doesn't mean there's no hope. U.S. beer consumption has never recovered the levels it reached in calendar 2002, but shares in Samuel Adams-maker Boston Beer have climbed more than 1,000 percent since, comfortably outstripping local competitor Molson Coors and even leaving the industry's biggest players in the dust.

A Crafty One
Boston Beer's premium positioning has helped it outperform other major brewers over the past decade
Source: Bloomberg
Note: Rebased. Jan 3, 2003=100

Instead of broadening its market to encompass an ever larger share of the world's population, as AB InBev and SABMiller have done, Boston Beer focused on driving existing drinkers toward more upmarket brews. Compared to the massive volume increases achieved by bigger competitors over the past decade, its output has barely moved -- but investors have had an unquenchable thirst for the results.

Drink in Moderation
Change in beer volumes vs. 2006 at major breweries
Source: Bloomberg
Note: SABMiller fiscal year ends in March. Figures have been backdated one quarter for consistency. All other fiscal years end in December.

That helps explain the interest China Resources Beer is said to be showing in SABMiller's central and eastern European assets, which include labels such as Pilsner Urquell and Tyskie. The Chinese company, whose Snow brand is the world's biggest-selling beer by volume, is considering an offer for assets valued at as much as $6 billion, people familiar with the matter told Bloomberg's Ruth David and Vinicy Chan.

Gadfly has previously argued that Asahi -- which is also said to be looking at a bid -- would be making a mistake if it bought this SABMiller business, located in one of the few regions whose demographic profile for beermakers is even worse than Japan's. So why would China Resources Beer do any better?

The key for the Chinese would be to treat the assets as import brands, rather than a foothold in a new country. Japan's beer market is relatively mature, but China's is in a state of flux as incomes rise and the growth of outbound tourism and emigration stimulates more cosmopolitan tastes.

The Parts Other Beers Cannot Reach
China's domestic beer production has been falling, but imports are rising from a low base
Source: Bloomberg Intelligence

In the three years through July, trailing 12-month beer imports have risen from the equivalent of 0.27 percent of domestic beer production to 1.25 percent -- a 355 percent increase that shows little sign of leveling off.

There's money to be made in this taste for trendier foreign drinks. Premium brands make up about 6 percent of China's beer volumes but 32.5 percent of profits, Rabobank analyst Francois Sonneville wrote in January. Super-premium ones have 27 percent of profits despite a scant 3 percent of volumes. That leaves mainstream and discount brands with just 40.5 percent of profits from a 91 percent market share.

Buying some storied overseas brands -- Pilsner Urquell was founded in 1842 -- and distributing them to a curious domestic market seems a sensible strategy. But price is an issue that cuts multiple ways.

Other Fish in the Sea
You can buy some decent beer brands for much less than SABMiller's asking price for its European assets
Source: Bloomberg
Note: Shows market cap figure for the six listed companies. Figure for SABMiller East & Central Europe is price quoted by people familiar with the matter.

China Resources Beer got SABMiller's 49 percent stake in Snow for just $1.6 billion, and Asahi bought its Peroni and Grolsch brands in Western Europe for $2.9 billion. Sapporo, Denmark's Royal Unibrew and Boston Beer itself could all be had for far less than the $6 billion SABMiller wants for its European assets. Distribution and licensing deals would cost even less.

China Resources Beer would do well to start pitching to more upmarket customers. That doesn't mean it has to pay premium prices to get there.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net