A Big Player Has Arrived in Craft Beer: How Will AB InBev Shape China's Newest Market?

AB InBev is grabbing China's craft beer market by taking control of its bars. Relations between local craft brewers and the giant are turning tense.

At Goose Island's brewpub in Fengsheng Li, off Nanjing West Road in Shanghai, the queue starts at 6 p.m. On Fridays it often hasn't thinned by 9. Even people hurrying past get pulled in by the outsized, cartoonish goose head above the door — some stop for a photo, others can't help peering inside. But anyone who came for the craft beer itself will probably order a glass of a local specialty: the "Line 12 Witbier" or the "Wujiang Road Porter."

This busy brewpub, born in Chicago, was brought into the Chinese market this February by AB InBev. AB InBev then bought Boxing Cat, a Shanghai craft beer bar; together with Kaiba, which it acquired at the end of last year, that gave it at least eight bars in Shanghai overnight (three Boxing Cat locations plus Liquid Laundry, founded by the same team; three Kaiba locations; and one Goose Island).

Set against AB InBev's size, this may look like nothing. But it is far from simple — the beer giant is seen as a spoiler in China's craft beer market. A Fortune article went so far as to call it “China's New Craft-Beer Bully.”

AB InBev is not the only giant dipping into craft beer. Liu Junjie, founder of Xipishi, a third-party beer promotion and R&D outfit, told QDaily that Tsingtao is developing craft varieties, Yanjing has opened a new production line for craft beer, and an investment arm of China Resources is doing extensive craft beer research and has been in close contact with several independent Chinese craft brands.

But none of them move as aggressively as AB InBev. Two years ago, for this new craft beer market, it set up a unit called ZX Ventures, described as a "Disruptive Growth Organization" — think of it as an incubator plus an investment firm. Its job is to scout, invest in and buy niche craft beer brands for AB InBev worldwide. ZX Ventures' China office sits directly above Goose Island and looks like a startup. It does not report to AB InBev's China company but straight to headquarters in New York, which tells you something about how independent it is and how much power it holds.

QDaily has written before about how craft beer became popular in China. The definition of "craft" and the industry's standards are still fairly vague, but that hasn't stopped some young people from taking it up. One feature of this market is that it has been packaged as a refined way of living — you can feel its "independent spirit" and its distaste for industrial beer in the packaging, the atmosphere of the bars and the overall tone.

According to figures from the China International Craft Beer Expo, as of this May craft beer still held less than 1% of the Chinese beer market, though its share has kept growing in recent years. For comparison, in the more mature US market craft beer already accounts for 12.3% of the total (and 22% of sales revenue).

That expected potential is a big reason AB InBev staked out a position in China's craft beer market so early. At the same time, the overall drop in sales of mass-market beer has made the matter urgent.

In 2014 China's beer sales volume fell for the first time in history, then fell for two more years. According to the market research firm Euromonitor, 2013's 50.58 billion liters was the historic high for Chinese beer; last year the figure was only 45.6 billion liters. Revenue, however, kept rising — average annual growth from 2012 to 2017 reached 8.4% — which means more people chose pricier beer and drank less of it.

The first to take the blow from this shift were the cheap, mild, high-volume "industrial beers." Yanjing's 2016 revenue fell more than 10%, to 6.3 billion yuan, and its profit fell 25%, to 451 million yuan; Tsingtao's revenue fell 8%, to 14.7 billion yuan. AB InBev, whose mass-market brands include Harbin Beer and Sedrin, has now seen its volume decline two years running.

The possible causes: the demographic and distribution-channel dividends have run out; competition has sharpened as drinkers pick from a wider range of other alcoholic and non-alcoholic options; people care more about health; "consumption upgrading" has set in. And the brands themselves have aged. As Gordon Orr, a senior adviser at McKinsey, put it: “These [domestic mass-market beers such as Yanjing, Snow and Tsingtao] don't have a premium image — consumers think of them as what their parents and grandparents drank.”

The result is that more and more young people are going for small local craft beers instead of the classic mass-market brands.

Around 2013, too, many new craft beer brands appeared in China's first- and second-tier cities: in Beijing, Panda, Jing-A, Slow Boat, Great Leap Brewing and NBeer; in Shanghai, Tap House, Boxing Cat, Dr. Beer, Shanghai Brewery and Laibao, among others. Quite a few have opened several bars. Some brands have put out bottled beer as well — products from Panda Craft Beer, Laibao and Master Gao now sit in specialty supermarkets, convenience stores and restaurants.

The importance of the Chinese market needs no explaining. By volume China is the world's largest beer consumer, and yet AB InBev has never got much out of it. The craft beer market may well be its chance to pass local brands such as China Resources Snow and Tsingtao.

Its volume is falling too, but AB InBev has done slightly better in China than the industry as a whole. The figures: in 2016 industry volume fell 3.8% and AB InBev's fell 1.2%; in 2015 industry volume fell 6% and AB InBev's fell 0.4%. That owes more to its premium products in China — Corona, Hoegaarden and Stella Artois. Since 2014 AB InBev has been "bringing premium brands to China's increasingly affluent consumers," in the words of its earnings reports.

AB InBev is in such a hurry to own China's craft market because it does not want the lesson it learned in the United States repeated here.

American craft beer began to take off in the 1980s. At first the big breweries paid the "craft movement" no attention. Budweiser, not yet merged with Belgium's Interbrew, was busy trading blows with another beer giant, Coors. "They all thought craft beer was probably just a fad that would pass quickly," says Steve Hindy, founder of Brooklyn Brewery and author of The Craft Beer Revolution.

By 1995, when Budweiser noticed the trend, the craft beer market had grown 50% in a year. Flustered, Budweiser announced that Samuel Adams — the biggest craft beer brand in America then and now — used the same brewing methods and ingredients as the big breweries and simply charged more. In 2015 it went after craft beer again, in a way people still consider undignified: that year's Super Bowl ad ran the lines "people who drink Budweiser are people who love beer" and "let them sip their pumpkin peach ale." The ad collected more than 10,000 dislikes on YouTube. From 2009 to 2015 the US craft beer market still grew at double-digit rates.

AB InBev's 2011 purchase of the Chicago craft brand Goose Island for $39 million is taken as its real entry into the craft market, and there was no stopping it after that: ZX Ventures took Blue Point, 10 Barrel, Elysian, Breckenridge and Wicked Weed, among others. AB InBev now owns at least 10 craft beer brands in the United States.

Which craft brands has AB InBev bought?

2011

AB InBev bought the American craft brand Goose Island for $38.8 million.

2014

Two more American craft brands went to AB InBev: Blue Point, for $24 million, and 10 Barrel, whose price was never disclosed but which the industry puts at around $25 million.

2015

A busy year. AB InBev bought four American craft brands — Elysian, Golden Road, Breckenridge and Four Peaks — plus the Canadian brand Mill Street, the British craft brand Camden Town, the Mexican brands Cerveceria Mexicana and Cerveceria Tijuana, the Colombian brand Bogota Beer Company, and the Brazilian craft brands Wäls and Colorado.

2016

In September AB InBev paid $225 million for Brouwerij Bosteels, a Belgian beer brand with 225 years of history. In October it bought Northern Brewer, the largest homebrewing and craft-brewing equipment company in the United States.

It also picked up two American craft beers, Devil's Backbone and Karbach; the Italian brand Birra del Borgo; Archibald, from Canada; and La Virgen, from Spain. Very quietly, it bought the Shanghai beer house Kaiba.

2017

So far this year AB InBev has bought the Shanghai craft brand Boxing Cat in China, and the American craft brand Wicked Weed.

In 2016 craft beer accounted for nearly 22% of all US beer sales revenue. Meanwhile the market share of AB InBev's core brands, Budweiser and Bud Light, both fell. According to Euromonitor, the company's overall share fell from 47.8% five years earlier to 44.1% (including the merged SABMiller).

So in China's young craft beer market, AB InBev plainly does not want to repeat that history. Kaiba and Boxing Cat were both founded in 2008, putting them among the first craft brewers in China, and it is exactly the name and reputation they built early that AB InBev wanted. Both bars also had American co-founders, which made them culturally close and easier for AB InBev to take in.

"Having a big group behind you means better resources to grow," Huang Wei, one of Kaiba's co-founders, told QDaily. Six months after the acquisition, Kaiba finally turned from a beer house that brewed nothing of its own into a real "craft brand" — in May it put out four bottled beers under the Kaiba name at once and moved into e-commerce.

“With every big international craft brand itching to get into China, and brands at home scrambling to find a patron to widen their reach, we finally made up our minds: now, not later, was the time to join forces with a beer giant,” said Boxing Cat co-founder Zeng Jianping (Lee Tseng). He mentioned "resources to grow" as well — wholesale distribution systems and cold-chain logistics.

It is exactly AB InBev's size and money that China's craft brewers fear. Small craft brands cannot afford to play its game. Compared with the United States, Chinese policy tilts further toward large producers: a production line for glass-bottled beer, for instance, has to turn out 18,000 bottles an hour. In part, that rule is about food safety.

"No Chinese craft brewer reaches that kind of volume," says Jin Xin (Xiaobianr), founder of Beijing's NBeer. Some craft brands have hired contract factories to make bottled beer; others have refused, because they don't trust someone else's plant. That is also why Panda Craft Beer's first goal, after its latest round of funding, was to build a factory of its own.

What makes the market even touchier is that AB InBev is grabbing China's craft beer market by taking control of its bars. Huang Wei told QDaily that buying Kaiba (and later Boxing Cat) was a strategic move: it let AB InBev enter the craft market and get into retail at the same time, and retail is the more important opening.

Jin Xin told QDaily that AB InBev once came to him and offered to let him sell one of its premium beers for nothing — waiving the wholesale price. He turned it down. According to reporting by the Fortune journalist Scott Cendrowski, AB InBev requires distributors to notify it and get written confirmation before they take on any other premium beer (it has done the same in the United States). It is generous with marketing, too: it will install its own branded light boxes in a restaurant or bar free of charge, never mind the branded glasses and other giveaways.

Reports of AB InBev using such tactics to squeeze rivals surface from time to time — paying exclusivity fees through distributors to lock up a retailer, so that a restaurant can sell only its beer, or quietly fitting meters to competitors' draft taps inside restaurants to keep watch on them.

Carl Setzer, founder of Great Leap Brewing, thinks AB InBev entered craft beer to spoil the game, and that its real aim is to confuse consumers about what craft brands are and what they are worth. "Bud Light is still their most valuable product. The craft brands they have bought don't sell a fraction of what Bud Light sells," Setzer wrote in an email to QDaily.

Chris Herron takes the same view. He founded the American craft brewery Creature Comforts Brewery. Next to pricier craft beer, Budweiser looks like a discount, cheap beer. To protect brand assets worth more than 100 billion yuan — Bud Light, Budweiser, Stella Artois, Corona and Hoegaarden — and to hold on to its "premium" position, AB InBev has to change what consumers think, and closing the distance to craft beer is the strategy it has chosen.

Once it has squeezed into the market by buying craft brands, AB InBev can buy raw materials in bulk and move their prices. It has put out "craft" beers cheaper than most independent craft beer (Goose Island's entry-level products are indeed cheaper right now than the lowest-priced products of many Chinese craft brands). Other brewers then have to cut prices in response.

By Chris Herron's reading, AB InBev both rides craft beer's growth and drags its rivals' prices down — which in the end protects its own brand assets, because being associated with expensive craft beer still makes it look premium.

Liu Junjie of Xipishi, for his part, doesn't think AB InBev's arrival is a bad thing. He believes the big brewers joining in will pull the average price of craft beer down and bring more consumers in. "Craft prices are inflated at the moment, because the audience for craft beer is small, so volumes are small, and that pushes costs up," he says. Chinese craft beer, Liu says, now costs six or seven times as much as ordinary industrial beer, which does not follow market logic; two or three times would be a more sensible gap — the gap you see in the US market.

But most craft brands don't want AB InBev pushing into their community.

"Four years ago, when nobody in China had heard of craft beer, it was independent craft brands like us who promoted the idea and built it up. Even now the big companies haven't contributed much," says Pan Dinghao of Panda Craft Beer. His partner Xia Yulin adds: "The window for craft beer in China is probably only three years wide."

Jin Xin is just as gloomy about where Chinese craft beer is heading: "At some point, local Chinese craft brewers will either be bought, or be knocked out before they have taken root... The business environment ahead is certain to be very narrow. Many styles of beer could disappear altogether."

On June 9 the China Craft Beer Association (CBAC) was formally founded, with members including Master Gao, Slow Boat, Great Leap, Laibao and Shangri-La. Like the American craft brewers' association, it put forward a "standard for craft beer." Notably, its definition of a "craft brand" is stricter than the American one: no shares at all may be held by a non-craft-beer company (in the United States the limit is 25%). They may be warier of the big breweries than their American counterparts are.

After word got out in June that AB InBev had taken a stake in the beer rating site RateBeer, relations between some Chinese craft brands and the company grew tenser still.

Yin Hai, another co-founder of NBeer, announced: "The 32 brands under me — NBeer, Fengshou, Master Gao and others — will sell off every AB InBev-owned product within this month." That includes products from Boxing Cat and Kaiba.

The same thing happens often in American craft beer. The most recent case: after Wicked Weed was bought by AB InBev this May, other craft brands not only stopped selling its beer in their own bars but decided to stay away from Funkitorium, the sour and funky beer festival it holds every year.

Liu Junjie thinks that in China's craft beer market, AB InBev and the local craft brands have not yet come to close quarters; for the group, the plan is to hold on to traditional mass-market beer and craft beer at once.

But it looks as though "the war has already begun."

Graphics: Feng Xiuxia

Cover image from Goose Island's WeChat, Kaiba's Weibo, Boxing Cat's official website and others