When the world's big brewers first ventured into China in the early 1990s,
they saw a vast market waiting to be conquered. It was a conquest, but the
victors were hundreds of local Chinese brands.
Today, Wai Kee Tan, who until earlier this month headed Chinese operations
for Belgian-based Interbrew SA, and is now the company's vice president
for corporate affairs in Asia, sees a much different picture. Surveying a
wall-size map of China, he says, "We want to be in this patch and in this
patch," pointing to two modest red splotches along China's eastern and
Interbrew, which is soon to become the world's largest brewer by volume
after it completes its plan to acquire Brazil's Cia. de Bebidas das
Americas SA, or AmBev, isn't simply rolling out one of its global brands,
such as Stella Artois or Beck's. Instead, it has snapped up local labels,
including KK and Zhujiang, some of which distribute no farther than their
home city's border. After seeing the first big foreign-beer push fail
because of high prices and poor distribution, Mr. Tan has adopted a new
guiding principle: "China is a nation, but not a national market," he
It is a lesson that extends far beyond beer. As the world's consumer-goods
giants charge headlong into China, well-entrenched local brands are
proving to be formidable competitors. And some regions have their own
distinctive tastes and requirements.
Procter & Gamble Co.'s Rejoice shampoo, for example, is far and away the
top-seller in China, with 14.2% of the national market, according to
ACNielsen. But in some provinces, such as Anhui and Hunan, home
collectively to 125 million people, Rejoice dips to 6.8%, almost neck and
neck with a local brand, Lafang, at 6.2%. Lafang's edge is its low price
and its more focused regional distribution.
China is littered with similar brands, which have burrowed deep into local
markets, making it difficult for foreign companies to bust through. In
laundry detergent, big brands such as P&G's Tide and Unilever PLC's Omo,
hold sway only in certain big cities. But in the provinces, they lose out
to a local brand, Diaopai, the country's top seller.
These local brands have an advantage that extends beyond price, says Linda
Kovarik, a planner with Publicis Groupe SA's Leo Burnett ad agency. Their
long history in smaller markets can give them a closer connection to
consumers that multinationals have trouble matching. "It's often word of
mouth. `If my cousin uses it, I will, too,' " she says.
China isn't a battleground that the world's global brewers can afford to
cede. In 2002, China surpassed the U.S. to become the world's largest beer
market by volume, now accounting for 16.9% of world-wide consumption,
according to Impact Databank. With beer consumption flat or on the decline
in other major markets, Chinese consumers now have more power than ever to
determine the industry's global winners and losers.
Still, China's beer market is fragmented, with the top 25 brewers
accounting for less than 50% of the market, according to Euromonitor. Only
one Chinese brewer distributes nationally, Tsingtao Brewing Co., the
market leader, with a 12.1% share in 2002, the most recent year for which
data are available, according to Euromonitor.
In their first foray into China in the early 1990s, the global brewers
thought they would be able to sweep across the country, waving the flags
of their well-known brands, such as Budweiser, Foster's or Beck's. China
was awash in beer, with more than 800 breweries, many of them built by
local governments as a way to soak up unemployment. But few had modern
technology; most were churning out rivers of bad beer at unprofitable
prices. As had happened in other markets, including the U.S. decades ago,
the big brewing companies figured their standardized products would
eventually drive out the local competition.
What followed was one of the worst debacles foreign companies have ever
experienced in China. By 1997, there were more than 40 beer ventures
involving international brewers, including Ireland's Guinness, now owned
by Diageo PLC, Asahi Breweries Ltd. of Japan and Group Danone SA of
France. Most were trying to sell premium beer at a price that was out of
reach to all but a few Chinese. And they had no clue about how to
transport it across a country of rutted roads and treacherous terrain. The
cases of beer piled up and the losses mounted.
"There seemed to be no end to the red ink," says Rick Scully, who heads
the international beer unit of Australia's Foster's Group Ltd. After
incurring an average loss of $15 million a year throughout the mid-to-late
1990s on its joint venture, Foster's took a $126 million charge at current
exchange rates on its investment in two of its three breweries in China.
England's Bass Brewers Ltd., now a part of Interbrew, sold out of a
state-of-the-art brewery it built in the northern Jilin province and left
the country in 2000. Before it was picked up by Interbrew, Beck's had a
strong presence in China, but it too fell on hard times.
The brewers' mistake, says Glen Steinman, a Hong Kong-based consultant to
international brewers, is that they "so thoroughly underestimated the
competition from the locals." The tiny Chinese brewers had something the
giants couldn't match: the loyalty of local beer drinkers. As the
foreigners piled in, the Chinese brands kept their prices low and made
sure their beer was available in every corner shop and roadside stand.
Now, however, big international brewers are learning from their early
mistakes. In the past two years, they have returned to China in force,
buying up local brewers and pushing local brands.
Last year, Interbrew paid more than $166.5 million for stakes in two local
Chinese brewers and now has a portfolio of more than 30 local brands,
including Double Deer, Santai and Jinlongquan. It plans to reintroduce its
Beck's brand this spring, using its local distribution network to sell it
locally as well as in several large cities.
London-based SABMiller PLC is also taking an entirely local approach to
China for now. In June, the world's second-largest brewer said it had
acquired a 29.6% stake in Harbin Brewery, China's fourth-largest beer
company. SAB also has a partnership with China Resources Ltd., controlled
by China's foreign-trade ministry, which holds more than 30 local brands.
The only company that hasn't retrenched is Anheuser-Busch Cos. In 1993,
the world's biggest brewer purchased a small stake in Tsingtao, which it
will increase to 27% by 2010 as part of a mandatory bond conversion. It
has also spent half a billion dollars and 10 years to brew, market and
distribute its flagship Budweiser in a bid to go after the elusive
upper-echelon of Chinese beer drinkers. In 1995, it began brewing
Budweiser in the centrally located city of Wuhan. Today, Anheuser-Busch's
bet seems to be paying off. The company's operation reached profitability
in 2001. Premium-priced beers count for only 2% of the market, but
Budweiser now controls more than half of that.
Interbrew got its first real taste of China in 1997, when it acquired two
small brewers in Nanjing, a city of more than five million along the
eastern seaboard. It purchased one of the breweries, Jinling, from Mr.
Tan, who took early retirement after the purchase. Three years after
Interbrew took it over, the venture was teetering on the verge of
collapse. Production volume had dropped by 40%. Morale at the brewery,
which previously had been operating at full capacity, was low, as workers
who had depended on overtime to make ends meet now stood idle.
Interbrew's strategy had been to gild Jinling's image. It crafted a
Jinling Web site and rolled out advertising that made Jinling appear
elegant, the beer for special occasions. Meanwhile, other local breweries,
some in even worse shape than Jinling, had flooded the market with "value"
beer, a brew that, while foul tasting, is dirt cheap -- sometimes selling
for less than 12 U.S. cents for a 600-gram bottle.
By 2001, Interbrew's senior executives, concerned that they were missing
out on a huge opportunity in China, reassigned Patrice Thys to head its
Asian operations. One of his first acts was hiring back Mr. Tan. After a
four-year hiatus, Mr. Tan, a 55-year-old Singaporean and onetime
accountant, was shocked at what had become of his former brewery. He felt
that Interbrew's stab at making Jinling into "classical music" was a
disaster. "How many farmers listen to classical music?" He changed the
beer's slogan from "happiness" to "the natural flavor of Jinling," which
is also Nanjing's historic name. "We said, `We're not this snooty stuff.
We're you,' " Mr. Tan says.
Whereas Interbrew had looked at the value-beer market with disdain, Mr.
Tan began to devote the brewery's extra capacity to churning out its own
value brand. The value beer was no money-earner, explains Mr. Tan, but it
kept the brewery at full capacity, helping to amortize operating costs.
But a larger problem loomed: Interbrew still had no broad strategy for
China, and corporate headquarters in Brussels was getting impatient. Part
of the problem was that the company brass was asking for something Mr. Tan
couldn't provide. "Interbrew wanted a national brand, a national
strategy," he says.
While Mr. Tan knew that was the wrong course, he wasn't sure what the
right one was. "My business strategies were changing every day. It was
tumultuous. You saw big international boys" building breweries from
scratch, he says. "I thought that's what we should be doing," he adds.
"Then I thought we should wait for them to fold and pick up after them."
Mr. Tan, along with Mr. Thys, began to push for a strategy that might have
seemed excessively modest for one of the world's biggest brewers. "Forget
about national, forget about regional, even," Mr. Tan told the board
members. "Build a patchwork." It was a tough sell. Interbrew's board made
three trips to China in 2001 and 2002, visiting big cities such as
Shanghai and Guangzhou, and smaller ones, including Nanjing. They began to
realize that China would require a radically different approach. "One by
one," says Mr. Tan, "the hands on the board rose."
With the board's blessing, Messrs. Tan and Thys began aggressively
scouting for local acquisitions in the two areas they had decided to
target: the Pearl River Delta in the south, and the area below the
Yangtze, along the eastern coast. Both areas were relatively prosperous
and, more importantly, no other international brewer had yet to move in.
In November 2002, Interbrew paid $19.5 million for a 24% stake in Zhujiang
Brewery, the biggest brewer in the southern province of Guangdong. In
April 2003, it bought 70% of KK Brewery in Ningbo for $35 million. Then,
in September, it beat out other international bidders to acquire half of
the Lion Group breweries for $131.5 million, a deal that more than doubled
its presence in China and solidified its dominance in its two strongholds.
Combined, Interbrew's local holdings make it the No. 3 brewer in the
country, with 9% of the market, according to the company.
But on its home turf, it often dominates the competition. In Ningbo, a
prosperous city of five million along China's eastern coast, its KK brand
controls 90% of the market, a result of its deep roots with the locals. At
one fluorescent-lit Ningbo cafeteria, where diners load their trays with
food from steam tables, Zheng Miaofeng cracked open a tall green bottle of
KK before sitting down to a plate of steaming dumplings with his family.
"I've tried others," said the employee of a local clothing company, "but
this is what I drink."
At a broom-closet-size corner shop located in a dense warren of apartment
blocks, crates of KK, and the lower-price value beer known as K, were
piled high, chilled by the cold night air. Wang Jinbao, bundled in layers
of clothing against the cold, said KK sells for two yuan (24 U.S. cents),
less than a bottle of Coca-Cola, at 4.8 yuan. In the winter, the shop
sells two KK cases a week, five in the summertime. Each bottle brings a
profit of 20 fen to Mr. Wang. When the shop runs out, he can get new
24-bottle cases in 20 minutes from a nearby warehouse. The other beers on
the shelf, including smaller cans of Bud, at 5.5 yuan, and Tsingtao, at
3.5 yuan, barely sell, Mr. Wang said. One of the Tsingtao cans expired
five months ago.
Many shoppers prefer these corner shops to the newer supermarkets because
they can buy on credit. There are 6,000 shops like this in the Ningbo
area, accounting for 90% of beer distribution. But keeping them fully
stocked requires an immense local network, one in which many bit players
shave a small profit off each bottle sold.
At the loading docks of Interbrew's brewery in Ningbo, workers rush to
unload cases of empty green bottles from arriving trucks, before reloading
them with fresh beer. Chinese brewers depend on recyclable bottles --
sometimes churning the same bottle as many as eight times -- in order to
keep their prices low. But the dependence on recyclable bottles also means
that brewers are linked by necessity to their local turf. Because all the
bottles must make a round trip, distributing beyond a 200-kilometer radius
becomes prohibitively expensive.
That only intensifies the local brewers' focus on their immediate
surroundings. Zhou Junping has been a local distributor for KK for 12
years and now supplies 50 small shops, all within walking distance from
his dirt-floor warehouse. When he started, the gray-haired Mr. Zhou sold
only 2,000 cases a year, making deliveries with a rusty wheelbarrow. He
now uses a truck to deliver 20,000 cases, making a profit of one yuan on
each. "This has made me a rich man," he says, revealing a toothless grin.
Part of what makes this crude supply-chain work is that Mr. Zhou knows it
is in his interest to make sure the shops on his route sell more beer.
When one of them sells more than usual, "I go there and congratulate
them," he says. "If their sales drop, I come to ask why."