With beer sales losing fizz at home, Japan’s brewers have tried futilely in recent years to reignite sales. Relentless TV advertising hasn’t done the trick nor, on the whole, has the introduction of new hybrid drinks, such as cheaper low- or no-malt varieties of beer (see BusinessWeek.com, 4/25/06, “Kirin Out-Chugs the Competition on Taste Tax”). And the sales stall looks likely to continue. Nikko Citigroup reckons total beer sales will dip 2.8% from current levels by 2008.

Small wonder then that like so many other consumer product segments, Japanese brewers are looking to China as their salvation. The beer market is booming on the mainland. And Suntory, Asahi Breweries, and Kirin Brewery (KNBWY)—three of Japan’s biggest brewers—are all placing major bets in an effort to catch up with international beer giants such as Anheuser-Busch (BUD), InBev, and SABMiller.

Demand for beer in China has never been stronger. Last year, brewers made 30 million kiloliters of beer in China, an increase of 5% over the year-earlier period. That is more than any other country including the U.S., which China toppled as the world’s biggest beer-consuming nation in 2004. What’s more, unlike Japan, China’s thirst for beer is far from quenched.

CHINESE FOR BEER. “China is now the largest beer-consuming country in the world, [but] you will likely see a strong potential for growth,” says Yasushiro Matsumoto, an analyst at Shinsei Securities in Tokyo. Indeed, if the average Chinese were to drink as much as the average Japanese or Korean, the market would more than double in size overnight.

Among Japan’s brewers, Suntory leads the way. Having entered China in the 1980s, a string of investments has made Suntory the eighth biggest beer maker in China. Most recently, on June 15, privately owned Suntory struck a deal to acquire Australian brewer Foster’s Shanghai subsidiary for about $20 million. The deal will increase Suntory’s capacity in China by 100,000 kiloliters a year, raising the total to about 800,000 kiloliters.

The move also adds to Suntory’s dominance in Shanghai, where its market share has grown from 33% to 54% of the city’s beer market in the last two years. The Foster’s deal will increase Suntory’s share to 60%. Further investment is expected. Company president Nobutada Saji has stated that he wants Suntory “to expand operations to all of China.”

NEW BREWERIES. Kirin and Asahi are also raising the stakes. Asahi aims to raise production at its four Chinese breweries by 11% this year to 650,000 kiloliters—equal to about 25% of its production in Japan. In May, Asahi, which already has four Chinese brewing partners, said it would build a fifth brewery in Zhejiang province. Asahi CEO Hitoshi Ogita has made it clear that new investments, including those in China, are a priority.

Kirin, while less aggressive than Suntory and Asahi, has bought out its Chinese subsidiary and is building a new 200,000 kiloliter factory in Zhuhai, a southern coastal city in Guangdong Province, in 2007. In February, Kirin’s incoming chief Kazuyasu Kato made it clear international investment is one means of improving the company’s long-term growth prospects. “I’m taking the baton at a time when the company has laid solid foundations for internationalization and diversification,” Kato told reporters.

Still, brewing in China is unlikely to be a panacea for Japanese beer makers’ problems any time soon. For one thing, despite a long history in China, Japanese breweries are dwarfed by global rivals. Anheuser-Busch has a 27% stake in Tsingtao, China’s biggest brewer, and owns 100% of Harbin Brewery, which ranks fifth.

HIGH-PRICED PARTNERS. British-listed SABMiller has a 49% stake in CR Snow Breweries, China’s number two brewer, and Belgium giant InBev has stakes in Guangzhou Zhujiang Brewery, Fujian Sedrin Brewery, and Hubei Jinlongquan Brewery—ranked sixth, seventh and tenth by sales. Suntory, ranked eighth, is the only Japanese brewer in the top 10 and, in 2005, had a market share of just 1.8%, according to ABN Amro. (Outside of Shanghai, Suntory isn’t much of a factor.)

Catching up won’t be easy—or cheap. Most big Chinese brewers already have foreign partners and those that don’t will prove expensive buys. Earlier this year, InBev paid $750 million for 100% stake in Sedrin, the biggest beer maker in East China’s Fujian Province.

But perhaps of most concern is the difficulty of turning growing Chinese demand into profits. Foster’s decision to sell its remaining Chinese arm to Suntory came after 13 straight years of red ink in China. Lion Nathan, another Australian brewer, 46% owned by Kirin, also pulled out of China in 2004, selling a trio of breweries in the Yangtze River delta region for $219 million to a joint venture run by SABMiller.

LOYAL TO LOCAL BREW. In April, Merrill Lynch (MER) maintained a “sell” rating on Anheuser-Busch partner Tsingtao, noting that 30% of its 50 breweries in China are loss making. Anheuser-Busch, which brews and sells Budweiser in China, reported profits “declined slightly” in China during the first quarter.

One problem is Chinese drinkers still prefer cheap, local brews to the more profitable, higher-priced foreign-branded beers. Masao Fujimori, a spokesman for Asahi admits in terms of sales Asahi Super Dry, the best- selling beer in Japan, is small beer in China. So Asahi is focused on using its beer know-how to improve local beers brewed in collaboration with partners on the ground. “With the technology we’ve cultivated in the Japanese market, we’d like to improve the quality of each local brand in each region,” says Fujimori.

Small wonder, then, that analysts say brewers looking for short-term gains should go elsewhere. “If you want to make money [quickly], it’s not smart to move into China at this stage,” says Shinsei’s Matsumoto. But with sales slumping at home, Japanese brewers have little choice but to expand their horizons somehow.

Rowley is a correspondent in BusinessWeek’s Tokyo bureau. With Hiroko Tashiro in Tokyo

After SABMiller lost a bidding war for China’s Harbin Brewery Group to Anheuser-Busch (BUD ) Cos. two years ago, it looked as if America’s King of Beers would reign over the Middle Kingdom as well. Anheuser-Busch, after all, had already sealed a deal with China’s leading brewery, Tsingtao, and with Harbin in its stable it looked unbeatable.

But SABMiller had a Plan B that could well give it the throne after all. Since losing Harbin, London-based SAB has focused its energies on a 12-year-old joint venture, China Resources Snow Breweries Ltd., that is now thriving. In June, CR Snow, which includes 46 breweries across the country, surpassed longtime leader Tsingtao for the No. 1 spot. For the 12 months through June, CR Snow produced nearly 40 million barrels, vs. 37 million for Tsingtao. As a result, CR Snow boasts 14.9% of the Chinese market, compared with Tsingtao’s 13.9%. “Our growth has been on the back of a very consistent and targeted strategy,”says Wayne Hall, SABMiller’s finance director in China.

Both companies want to be the toast of China. As beer sales in the U.S. and Western Europe have lost their fizz, they’re growing at 8%-plus annually in China. That has helped China overtake the U.S. as the world’s top beer market.

SAB was early to see the promise of China, where it has been brewing since 1994. Yet instead of targeting big cities such as Shanghai and Beijing, as its competitors did, SABMiller scooped up breweries in less affluent areas, including the northeastern rust belt and the populous inland province of Sichuan. This contrarian strategy has allowed SABMiller to build up a national footprint at bargain prices. While Anheuser ponied up $700 million–as much as $62 per barrel of annual brewing capacity–for Harbin, SABMiller has typically paid $30-$40 per barrel for its breweries. “SABMiller has made a mint by purposely buying cheaper assets,” says Bear, Stearns & Co. (BS ) analyst Anthony Bucalo.

SABMiller has been smart in its positioning of the flagship Snow brand. To appeal to upwardly mobile youth, it slapped a shiny, modern label on the 50-year-old brew and launched a national ad campaign emphasizing the beer’s freshness, complete with sweepstakes that reward winners with outdoorsy vacations. The marketing push is paying off as it presses into the big cities. China now accounts for nearly 20% of SABMiller’s total beer volumes, and Snow has become China’s No. 1 brand. Soon, it will probably surpass Miller Lite as the biggest seller in the company’s cooler.

BUD’S COMEBACK
Anheuser remains a formidable foe. If you factor in Harbin and its own Budweiser, the brewer remains bigger than CR Snow in China. Its century-old Tsingtao is a big player in the premium segment, where profits are plumper, and it plans to go national with Harbin, currently concentrated in the northeast. “We have more of a premium portfolio, which at the end of the day is how you’re going to make it in China,” says Stephen J. Burrows, CEO of Anheuser-Busch International.

Both companies, meanwhile, could be tripped up by China’s fragmented market, where restaurants, not supermarkets or liquor stores, account for the lion’s share of beer sales. A byzantine distribution system pinches profits and makes it tough even for international heavyweights to dictate pricing and influence how their beers are displayed.

May 5, 2004 – SABMiller is launching a takeover bid for a Chinese brewer that could open up a battle with U.S. giant Anheuser-Busch. SABMiller’s offer for the Harbin Brewery is $551 million.

London-based SABMiller, which sells Miller beers in the United States and many others around the world, already holds a 29.6% stake in Harbin. Under Honk Kong’s stock market rules, if it owned 30% then a takeover bid would be required. Anheuser-Busch just purchased its own 29% share of Harbin. Harbin is the fourth-largest brewer in China and dominates the northeast China market.

Anheuser-Busch could raise its stake in Harbin to prevent SABMiller from gaining control, setting off a bidding war. Anheuser-Busch also owns a 10% stake in Chinese market leader Tsingtao Brewery, which it will raise to 27% by 2010 as part of a mandatory bond conversion.

In 2002, China surpassed the U.S. to become the world’s biggest beer market by volume, and the country accounts for 16.9% of world-wide consumption. With beer sales growth in Western Europe and the U.S. is flat, the fast-growing Chinese market has become more important.

Chinese beer (Traditional Chinese: 中國啤酒; Simplified Chinese: 中国啤酒; pinyin: Zhōnggúo píjǐu), mostly made in imitation of Western pilsner varieties, has become increasingly popular, first in China in the last century, and then internationally in the last few decades.

Tsingtao is one of the more famous brands of beer made in China, and the most exported to other countries followed by Zhujiang and Yanjing.It is brewed in the city of Qingdao (formerly spelled Tsingtao) which was a German base in the time of inequal treaties and late-colonial western influence in China. The Germans needed beer for their sailors, soldiers and traders and the production remained after they did lose the city to the Japanese in World War I The major Chinese brewing groups include Tsingtao, China Blue Ribbon, Yanjing, Sie-Tang Lio and Zhujiang. Only a few brewpubs exist in China, primarily in major cities, such as Shanghai and Beijing, with western business travelers. The most well-known craft brewer in China is Kaiwei Beer House, a brewpub chain based in Wuhan.

Chinese media report that as much as 95% of all Chinese beer contains formaldehyde, to prevent sedimentation in bottles and cans while in storage. [1] South Korea and Japan are now testing beer imported from China and will ban it if formaldehyde is discovered.

Chinese often use rice in addition to rye or barley in their beers.

China’s beer industry, the most prolific in the world, yesterday struck back at reports that 95 per cent of domestically bottled beer contains formaldehyde.

The chemical, famously used to preserve Damian Hirst’s controversial dead cows and known to cause cancer, does play a part in the brewing process, but does not pose a threat to public safety, Xiao Derun, director of the beer branch of the China Alcoholic Drinks Industry Association, told China Daily yesterday.

A supermarket in Shanghai promotes the sales of bottled beer July 13, 2005. China’s beer industry claims that formaldehyde content is within the standards.

“Consumers need to know that the formaldehyde in beer is a different type from that in household chemicals, and this confusion has scared people greatly,” he said.

Trouble began on July 5, when Beijing newspaper The Global Times printed a letter claiming to be from a beer inspector working for an unnamed company.

The letter said many Chinese breweries were using formaldehyde as an additive, and the anonymous inspector wanted the public to know.

Accompanying the letter was an investigative report that quoted Du Lujun, secretary of the beer branch of the China Alcoholic Drinks Industry Association, as saying 95 per cent of the country’s beer contains the chemical.

According to Du, breweries use formaldehyde because it is a cheap way of preventing sediment from forming during storage.

Many other Chinese newspapers quoted the report, to the alarm of beer-drinkers across the country.

And the reports have also set alarm bells ringing overseas. On Monday the Korea Food and Drug Administration said it had decided to test Chinese beer imports for formaldehyde before allowing them to clear customs, and Japanese food authorities are reportedly following suit.

But, speaking to China Daily yesterday, Xiao branded the formaldehyde reports irresponsible. “It is utterly groundless to say this without explaining the facts clearly,” he said.

According to Chinese law, the amount of formaldehyde in common beer may not exceed 2 milligrams per litre, and in “organic” beer it may not exceed 0.2 milligrams per litre.

There is no law banning beer from containing formaldehyde, Xiao said. Its use is allowed, and the association’s annual nationwide survey found no domestic beer that exceeded the set limits, he added.

According to a China Business Times report, a 2002 survey of 19 domestic brands conducted by the National Food Quality Supervision and Inspection Centre found the average formaldehyde content to be 0.31 milligrams per litre.

Xiao conceded that some Chinese breweries still use formaldehyde, but insisted most of the chemical added during production was no longer in the drink by the time it reached consumers. A certain amount of formaldehyde is produced during the process of fermentation itself, he said.

Big beer companies accounting for the majority of the Chinese market, including Tsingtao and Yanjing, have stopped using formaldehyde in favour of other additives to ensure the quality of the beer.

Xiao also pointed out that a market survey has shown the formaldehyde content of imported beer to be similar to that of the domestically produced beverage.

(China Daily 07/14/2005 page1)

Mar 27, 2000 – A Chinese official predicts that his country will pass the United States as the world’s biggest producer of beer in the next two or three years. Sun Jie, an official at the State Administration of Light Industry, indicated that Chinese production has been growing at an annual rate of 25% in the past decade.

He also noted that Chinese per capita beer consuption is below the world’s average, suggesting huge potential for growth.