Beer Prices Are Rising for the First Time in a Decade. What Changed?

The World Cup is a little over a month away, and beer is getting more expensive.

For the first time in a decade, beer prices are going up. The four biggest brewers in China by market share — China Resources Snow Breweries, Tsingtao Brewery, Anheuser-Busch InBev, and Yanjing Beer — all announced increases at the start of the year, of roughly 5 to 10 percent.

A Budweiser distributor told QDaily that 330ml bottles of Budweiser Classic had gone up about 5 percent. "It's an open secret by now."

You may not have noticed. Prices on Yihaodian and JD.com bounce around, but show no clear climb. It takes time for an increase to travel from brewer to distributor to shelf. And in restaurants and bars, where the menu price sits far above the wholesale price, some vendors may swallow the extra cost for now.

The increase itself, though, is settled. In the future-plans section of its latest financial report, China Resources Snow Breweries wrote that it would "moderately adjust prices for some products in certain regions, to ease the expected pressure from rising costs such as raw materials, packaging, and labor." Tsingtao Brewery said it "plans to raise prices on some products in some regions (not all products), with an average increase of no more than 5 percent for the products in question." Yanjing and AB InBev have issued no formal notice, but memos to their distributors have leaked. The restaurant chains Wang Xiang Yuan and Jinri Niushi confirmed to us that AB InBev's wholesale prices had gone up.

Beer Costs Are Rising, Especially Packaging

Barley, the largest single input in the beer itself, has jumped in price. According to the U.S. Department of Agriculture, surging demand and a smaller crop in North Asia have pushed global barley prices to a three-year high. China's brewers import 85 percent of the barley they use. Australia, their main source, harvested less last year, and Australian barley prices rose with it. Barley in Western Australia costs 22.7 percent more than it did last November.

Hops, the other key ingredient, are less of a worry. In the mild-tasting industrial beer that dominates the market, hops make up a tiny share of cost — about five parts in a thousand — so what happens to hop prices barely registers. Carl Zhuang of YCH, the second-largest hop grower in North America, told QDaily that hop prices have lately been steady or slightly lower.

What really matters is packaging.

Buy a mass-produced bottle of Tsingtao or Budweiser and most of your money goes to the bottle — more than twice what you pay for the beer inside. And packaging materials have grown more expensive too.

On an 8-yuan bottle of beer, roughly 2.4 yuan — about 30 percent — pays for the bottle, cap, and label. The other big line item is distribution and sales, the beer working its way layer by layer from the brewery through distributors to a shop or restaurant in some lower-tier city, which takes about 20 percent. Only 10 to 20 percent of the price buys the ingredients themselves: water, malt, hops, rice.

Packaging eats a bigger share of a beer's price than the roughly 20 percent that domestic cosmetics brands such as Proya and Marubi spend on theirs. It is about level with soft drinks, and still below baijiu.

Baijiu enjoys fat gross margins — around 60 percent, and up to 90 percent at Kweichow Moutai. Beer's are thin, roughly 30 to 40 percent. With packaging costs climbing, that may not leave enough room to absorb them.

Tighter environmental controls and the new environmental protection tax are also squeezing a brewing industry built on wasteful production. The tax's knock-on effects on packaging and transport have pushed beer's costs up further and made profits harder to come by.

Among beer's packaging materials, papermaking felt it first.

From around the start of 2017, paper mills came under steadily stricter environmental monitoring, and corrugated paper rose from 2,000 yuan a ton to 4,500 yuan. When the pollutant discharge fee became an environmental protection tax in 2018, the scope and the rates changed little, but the tax's variable rates, high standards, and strict enforcement handed large companies a wider advantage. Small paper mills have been shut down all over the country. Corrugated paper, the standard material for cardboard boxes, cost 2.2 times more in October 2017 than in October 2016.

Beer bottles come from the everyday-glass industry, which burns a lot of energy and pollutes heavily. Moving, storing, and processing the raw materials throws off dust; the melting furnaces give off smoke, SO2, and NOx. China recycles far fewer beer bottles than developed countries do — the recovery rate for waste glass is only 13 to 15 percent. And 90 percent of the beer sold in China comes in glass.

Brewing itself produces wastewater, exhaust gas, and a great deal of spent grain. "Beer is basically a semi-polluting industry," one distributor told QDaily. Monitoring by the independent group Blue Map found that all five of the biggest brewers — China Resources Snow Breweries, Tsingtao, AB InBev, Yanjing, and Carlsberg — have broken environmental rules or exceeded discharge limits on wastewater or waste to some degree. China Resources, Tsingtao, and Yanjing have all been ordered by the Ministry of Environmental Protection to clean up their operations.

To rein the industry in, the ministry drew up the Technical Policy on Pollution Prevention and Control for the Alcoholic Beverage Manufacturing Industry, which points to beer's poor energy efficiency, heavy pollution, and low economic returns, and calls for research into fast-fermentation techniques that shorten fermentation cycles and cut energy use, and for tracking and accounting of products' carbon footprints. All of it adds to brewers' costs.

Rising packaging costs have in fact spread across nearly the whole soft drink market. Master Kong and Uni-President raised prices earlier this year on cheap products such as iced tea, green tea, and juice drinks; Master Kong's financial report blamed environmental policy and rising costs. According to National Business Daily, Wahaha is about to adjust prices too, on thin-margin products like Nutri Express. Even Coca-Cola, which has barely raised prices in 20 years, may not be able to sit still — it has started adjusting the price of cans sold through restaurants in Beijing. Its Schweppes brand swapped the 500ml bottle for a 400ml one and kept the price, which amounts to the same thing.

The Bigger Problem: Fewer People Are Drinking Beer

If volume were still growing, higher costs would not matter much; brewers could go on building the business on thin margins and high volume.

But Chinese beer sales have fallen every year since they peaked in 2013. Euromonitor expects the slow decline to continue for another three or four years before settling at around 41 to 42 billion liters.

China Resources Snow Breweries is one of the few companies to beat the market. With channel strategies tailored to each region and a wide distributor network, its volume actually edged up in 2016 and 2017, by 0.3 percent and 0.9 percent. That growth came out of competitors' hides.

Tsingtao and Yanjing have lost the most volume, measured in liters: Tsingtao is down 13 percent; Yanjing has been shrinking since 2014, and by 2016 sold only 85 percent of what it did at its peak. (Yanjing had not yet released its 2017 financial report.)

Several things are pulling sales down: consumers trading up, a shrinking core of drinkers, and the end of the demographic dividend. Meanwhile the alternatives to beer keep multiplying — imported spirits, ready-to-drink cocktails, even soft drinks.

For a long time blue-collar workers were beer's core customers. Bain & Company's China Shopper Report 2016 noted that the falling number of workers has steadily accelerated the sales decline in categories that depend on blue-collar consumption, beer and instant noodles among them. Beer's decline tracks the slowdown in construction.

Since 2015, floor area started on Chinese property projects has grown more slowly each year, almost exactly when beer volume peaked. National Bureau of Statistics figures show value added in construction slowing since 2009, and fixed-asset investment growth decelerating along with it.

China is aging, and its natural population growth rate has been low for years — after falling steeply in the 1990s it has sat at around five per thousand for nearly 15 years. That has shrunk the young and middle-aged population at the heart of beer drinking. In the sixth national census, in 2010, 610 million people were between 18 and 44.

By 2017 that group had fallen to 548 million, according to estimates from the Institute of Population and Labor Economics at the Chinese Academy of Social Sciences — more than 60 million fewer young and middle-aged people in seven years. Within it, the share aged 20 to 24 fell from 9.48 percent in 2011 to 7.3 percent in 2015.

There are fewer drinkers, and the top end of the market that remains is drifting elsewhere.

Young people in first- and second-tier cities ought to be, as every generation before them was at that age, the core buyers of mass-produced industrial beer. But where a regional market once carried one or two local brands, they now have far more to choose from. Consumers, the young ones especially, care more about quality than price, which points them toward imported or craft beer.

Craft beer bars began appearing in China's first- and second-tier cities around 2010 — Shanghai Brewery, Great Leap Brewing, Jing-A, NBeer — followed by bottled craft brands built for supermarket shelves, such as Laibao, Master Gao, and Panda Brew. Snow, Budweiser, Tsingtao: the big brewers all make the same thing, American-style lager. Craft beer gave Chinese drinkers their first taste of ales and stouts, and gave a one-note market something else to order.

Craft still accounts for very little of the beer sold in China — under 1 percent, though it is growing fast, at roughly 40 percent a year. The big brands are all moving into premium and craft. Budweiser brought Goose Island to China and bought Kaiba and Boxing Cat, two craft beer bars born in Shanghai. Tsingtao launched an IPA (India Pale Ale); Yanjing's Guilin subsidiary is brewing craft as well. China Resources Snow Breweries, which holds the largest share of the market, released "Black Lion All-Malt Craft Beer" and is in talks with craft brands at home and abroad. Hou Xiaohai, chief executive of China Resources Beer, said: "Right now craft beer is only a small part of China's beer market, but it has a lot of room to grow."

Imported beer has lengthened the market's tail too. Between 2011 and 2016, beer imports rose from 64,203 kiloliters to 646,384 kiloliters, a tenfold jump in six years. Imports remain a small share of total sales, but they have made the market more crowded and more competitive. On promotion, a bottle of imported beer can cost about what a domestic brewer charges for its mid- to high-end product.

At upscale supermarkets like Hema and Ole, imported and craft beer take more than half the shelf space. Some restaurant chains have brought in craft beer to set themselves apart: Ajisen Ramen and Xiao Nan Guo both sell Laibao, and Yang's Hotpot sells Panda Brew.

For more than a decade the big brewers have traded low prices — thin margins and small profits, from the company's side of the ledger — for market share, going so far as to replace pricier malt with rice and starch to keep costs down.

That strategy no longer opens new markets or wins new drinkers.

Chinese beer can hardly get any cheaper. In 2016 the major listed brewers averaged 2,887 yuan a ton, 45 percent of what Western companies (AB InBev, MillerCoors) charge and 16 percent of what Japanese brewers (Asahi and Kirin) do. Even adjusted for purchasing power, using GDP per capita at purchasing power parity, Chinese beer is still cheap.

Chinese brewers' average net margin is around 4 percent, below AB InBev's 10 percent and the 6 percent at Asahi and Kirin.

At the same time, drinkers across the beer market are trading up, and even the companies that used to sell the cheapest beer are following them — though apart from Budweiser and Carlsberg, none of the major brands has done it well. Craft and imported beer cannot yet dent the volume of mass-produced industrial lager. But they have taken the high end away from China Resources, Tsingtao, and Yanjing.

China's big domestic brewers have mostly failed to break into premium beer. Tsingtao is the clearest case: sales of its high-end lines — Augerta, Hongyun Dangtou, Classic 1903, and Draft — have fallen every year since 2015, while its budget brand, Laoshan Beer, has done better. China Resources' best seller is still the mid-priced Yong Chuang Tianya, not the pricier Lianpu series; the company does not disclose figures for its mid- and high-end products, but its Tmall sales tell the story.

When something inevitable finally happens, there is usually an immediate trigger as well. Tsingtao's increase came right after Asahi, its major shareholder, sold its stake. In the two years before that, from 2014 to 2016, the growth rate of Tsingtao's depreciation expense against fixed-asset investment nearly quadrupled, squeezing profits further — odd behavior in an industry as steady as beer. Letting costs rise while holding prices flat may also have been a way to depress margins and push Asahi out.

What Happens Next?

The American beer industry has been through this already.

U.S. beer production grew quickly through the 1960s and 1970s, with the four biggest brewers — Budweiser, Schlitz, Pabst, and Miller — competing hard. In the 1980s, as the baby boomers began to age, American beer consumption per person stalled, and the industry stopped fighting for growth and started fighting over a fixed pie.

According to Bitter Brew, Budweiser launched Bud Light in 1982 aimed at people who had just reached the legal drinking age of 21. A run of effective advertising made it an enormous success, growing against the market: the cartoon dog Spuds McKenzie, and the "Budweiser Frogs" and "Budweiser Lizard" campaigns from the agency DDB, which the public loved and which won a pile of advertising awards. Bud Light is the main reason Budweiser's market share passed 42 percent in 1989, up from 30 percent before 1980.

The American record shows that in a market where volume has stopped growing, Budweiser won share through marketing and advertising wars, and through the efficiency that came with bigger plants.

When sales hit a ceiling, brewers can improve their economics by cutting capacity and running the rest of it harder. China Resources, Budweiser, and Yanjing all started closing plants between 2015 and 2016, either those making low-end products or those running inefficiently.

In a brutal market with no growth left, distribution and production efficiency matter more than ever — and bigger companies usually have the edge on both.

China Resources Snow Breweries, Tsingtao, and Budweiser have broad distributor networks, brand recognition, and clout. Raising prices should not cost them much volume or revenue in the short run; the money from higher prices may well cover what they lose in sales.

Regional brands enjoy less recognition and less loyalty, and they lose either way. Raise prices and they may shed customers and share; hold them and profits suffer, leaving them further behind.

The industry will consolidate further. Euromonitor's data show Yanjing losing share since 2013, its share of industry revenue falling from 6.8 percent to 6.3 percent in 2016.

The Qianzhan Industry Research Institute expects the market to concentrate further still: China's five beer giants could become four, or three. Whether China Resources Snow Breweries, Budweiser, Tsingtao, and Carlsberg will reshuffle their order is hard to say. Reports last month that China Resources Beer planned to buy Heineken's China business have gone quiet since. Others argue that because China's major brewers are controlled either by the state-owned assets commission (SASAC) or by foreign beer giants, further consolidation is unlikely.

However the industry changes, it will have a hard time fighting a change in how people drink.

Data from the research firm IWSR show beer consumption per adult falling worldwide between 1994 and 2016 — in the United States and Germany, and in emerging economies such as China, Brazil, and Russia. Conditions differ from country to country, but the health consciousness that arrives with higher incomes is probably one of the bigger reasons.

Research from KU Leuven in Belgium finds that beer consumption per person rises as a poor country grows richer, then starts to fall once GDP per capita reaches about 27,000 U.S. dollars. China seems to have reached the turn early: GDP per capita was 8,800 dollars in 2017. Then again, China is growing old before it has grown rich.

With no volume growth in sight, raising prices is the fallback the big brewers are using to hold their numbers up.

It will not solve the long-term problem. When a product costs more, people buy less of it — a basic rule of business. Companies may hold revenue steady on higher prices, but countless studies show that consumers notice what everyday goods cost.

They notice disguised increases too. Around 2013 Budweiser reshaped its can to echo the bowtie in its logo, cutting the volume inside. The design did not last: people objected at the time, and in a beer market where packaging is the largest cost, the 10 percent saved on raw material may not have covered what the new can added.

China's problem is that its major brewers all grew up on thin margins and high volume, all sell mild, near-identical beer, and cannot steer their drinkers to their own premium lines. Raising prices is not a real answer, but the brewers have no other move left.

Beer's peak season is about to start, and this year brings the World Cup in Russia. Big sporting events lift beer sales, which is where the brewers' nerve comes from. As the Budweiser distributor put it: "Prices will keep going up through the World Cup."

Charts: Feng Xiuxia

Cover image: VisualHunt, Laibao