China's changing tastes to boost premium beer segment
China's 1.4 billion consumers are increasingly demanding more tailored and individual products, a trend that could help global brewers boost their profits by readjusting strategies, moving away from producing cheaper mass-market beers and focusing on those at the higher-end. Encouragingly, the premium beer segment is forecast to make up over a third of the $80bn Chinese market, the largest beer market in the world, by the end of the decade compared with under 10% in 2010; imported high-end beers saw a 60% increase in sales in 2015.

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SMALL-SCALE brewers from Brooklyn to Beijing are tapping growing demand from cosmopolitan Chinese consumers for high-end beers, a trend which could also help global brewing giants finally unlock frothier profits in the world’s largest beer market.

China is key for the biggest international beer brands as growth elsewhere stalls, accounting for half of the industry’s global volume increase last year.

But while China drinks a quarter of the world’s beer, it accounts for only 3 percent of brewers’ profits, Deutsche Bank analysts estimate.

“The premium segment will be an important battle ground for brewers going forward because it will be the main growth driver,” said Shanghai-based Rabobank analyst Katharine Song.

“Brewers are adjusting their strategy to focus more on high-end products.”

Until recently, volume and distribution networks have been the name of the game, driving global industry consolidation through ever larger deals and crushing margins.

In 2004, about half the world market by volume was controlled by the biggest 10 brewers, according to industry data. By 2014, 47 percent of volumes and three quarters of profits were controlled by just four brewers — AB InBev, SABMiller, Heineken and Carlsberg.

That number is soon to drop to three, with the planned US$100 billion-plus takeover of SABMiller by AB Inbev.

Follow the money

Last week’s sale by AB InBev of SABMiller’s 49 percent stake in China’s top selling brand Snow to China Resources Beer for an unexpectedly low US$1.6 billion was primarily aimed at satisfying regulators and wrapping up the merger.

Critically, it also freed up SABMiller to focus on more lucrative bets in the Chinese market than a beer which sells at 50 US cents a bottle, or less.

The focus on premium products reflects a shift in China’s 1.4 billion consumers, who now want more tailored and individual products from fast food to travel — a headache for firms from KFC-owner Yum Brands Inc to luxury goods maker Prada SpA.

Premium beers are expected to make up over a third of the US$80 billion Chinese market by the end of the decade — compared with under 10 percent in 2010.

Imported high-end beers saw a 60 percent jump last year as consumers splashed out on brews such as “Hop Zombie” and “Armageddon IPA.”

Think different

For drinkers like bar owner Chen Jiaqi, who flew over 640 kilometers to Shanghai from the central Chinese city of Wuhan to sample a New Zealand craft ale, it is about individuality.

“I think more and more Chinese customers are about the flavor of the beer itself, and if the beer is unique and rare then they will choose it,” said Chen.

That comes at a cost.

A bottle of craft ale costs around 30 yuan (US$4.60) in Shanghai, around 10 times more than the cheapest mass-market beers from Tsingtao Brewery Co or CR Beer.

“It is rare and unique, and the flavors are better,” said Hao Xiaowei, a 33-year-old nurse, while she drank a Bavarian wheat beer at a craft bar in downtown Shanghai. “It’s worth spending the extra money.”

That willingness to splash out has attracted a host of small craft brewers such as Scotland BrewDog and New York’s Brooklyn Brewery, which have started actively targeting China.

“China’s on the hit list to tackle in the near future,” said Luke Raven, director at Ilkley Brewery in northern England which has craft beers with names like “Hanging Stone” and “Holy Cow.”

Craft beers won’t appeal to all, but a willingness to spend more to stand out from the crowd will also support mainstream imported brands like Budweiser, Heineken or Japan’s Asahi.

Premium beer sales grew just under 25 percent last year versus 7.5 percent growth in the overall market, Euromonitor data show.

“Sometimes people choose premium beers — Heineken or Carlsberg for example — because it has a marketing angle or image, a certain attraction like going for a coffee to Starbucks,” said Michael Jordan, brewmaster for Boxing Cat Brewery in Shanghai.

“It’s a kind of status symbol.”