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InBev's bid brews consolidation in China

(China Daily/Agencies)
Updated: 2008-06-13 09:56

Bottles of Stella Artois, brewed by InBev NV, are displayed on the shelf at a supermarket in Shanghai. InBev launched a $46.3 billion bid to buy Anheuser-Busch on Wednesday. [Agencies]

InBev's $46.3 billion bid for Anheuser-Busch could not only create the largest brewer in China, it could also raise profit margins for all players in the world's biggest beer market.

The Belgian brewer said on Wednesday it was offering $65 per share for Anheuser, the largest US brewer and maker of Budweiser and Michelob beers.

Analysts say acquiring Anheuser's China assets would give InBev two advantages: The scale to challenge market leader CR Snow, which dominates the mass market with a 16 percent share; and a leading role in healing a fragmented industry of roughly 400 brewers in need of better marketing and distribution.

"InBev is involved with a number of smaller breweries all across the country, and so a combination of InBev plus AB would serve the market well, in the way that consolidation can move forward sooner rather than later," said Selina Sia, an analyst at JP Morgan.

Buying Anheuser would hand Inbev a coveted 27 percent stake in Tsingtao, China's No 2 brewer, ownership of the Harbin Brewery Group's 13 breweries, and the No 1 spot enjoyed by Budweiser in the country's most expensive "super-premium" beer segment.

The importance of China's beer market was underlined by Jin Zhiguo, Tsingtao's president, when he said earlier this year that beer demand is expected to grow up to 10 percent per year in the next five to 10 years, as the country's huge rural population shifts to beer from hard alcohol.

In contrast, Anheuser-Busch's sales volume in its core US market grew just 2 percent last year.

InBev, brewer of Beck's and currently No 3 in China, already has partnerships with smaller Chinese players including Zhejiang Shiliang Brewery, and owns 100 percent of Fujian Sedrin Brewery.

But unlike international competitors Anheuser-Busch and SABMiller, InBev lacks a super-premium or national brand in China, which is crimping its expansion in the world's fastest growing major economy.

"In comparison to SABMiller and Anheuser-Busch, InBev's future gave us the most concern versus the other two and we were left to wonder if InBev's weak China footprint simply provides another compelling reason to merge with AB," Credit Suisse said in a research note.

With Anheuser-Busch's assets, however, the firm's direct control of the mass market would grow to 13 percent, excluding a stake in Tsingtao, which controls 10 percent of the popular segment.

Profitability concerns

But while ecstatic predictions of volume growth in China abound, making money is more problematic. Brewers face rising costs, but struggle to raise prices in a crowded market with fragmented distribution systems where retailers hold the most power.

Soaring barley prices are squeezing all players, including CR Snow - a joint venture between SABMiller and China Resources Enterprise - and Heineken, Carlsberg, Yanjing Brewery, and Kingway Brewery.

Global barley prices rose 13 percent in the first quarter versus a year ago, according to ABN AMRO. The bank predicted Tsingtao's average barley costs will rise 50 percent this year.

The Chinese beer industry produces less than $600 million in annual operating profit on 390 million hectoliters, says Credit Suisse, or around 1.5 US cents a liter. That compares to Miller's $477 million of profit in SABMiller's 2008 financial year on 48 million hectoliters, or nearly 10 US cents a liter.

For Tsingtao, which claims 35 percent of the premium market, a deal would not likely change its shareholding structure, analysts say.

"Tsingtao does not care who the shareholder is, AB or InBev - it makes no difference to them," said Lei Yang, an analyst for ABN AMRO based in Shanghai, adding that Tsingtao's foreign partner doesn't play a big role in its decision-making and strategy.

"The China part is much stronger, for the board and for daily operations," Lei said.

The US brewer has two members on Tsingtao's board, a small staff at its headquarters, and jointly holds a vice-chairmanship. The government of Qingdao owns just over 30 percent of the city's famous brewer.