The imported and craft beer market in China

Implementing Partners The imported and craft beer market in China 1 A project financed by the European Union

Today s speaker Contact Bio Director of Eibens Consulting Living and working in China since 2005 Strong focus on food and beverage import and distribution processes and trade barriers Pablo Recio Gracia pablo.recio@eibens.com Pablo Recio Gracia www.eibens.com Previously worked for public agencies including ICEX (Spanish Institute for Foreign Trade) and Extenda (Trade Promotion Agency of Andalusia) as well as private companies Bachelor in Business from the University and Granada and Masters in Quality Management and Business Internationalisation 2

3 Agenda The alcoholic drinks market Market segmentation Regulatory environment Retail channels Case studies Opportunities and next steps Market size Geographical distribution Main players Consumer

The Alcoholic Drinks Market

Beer Wine Spirit The alcoholic drinks market Trends The volume of the Chinese beer market is stagnating China s consumption per capita is comparable to the world s average This average and China s enormous population makes it the largest beer market in the world It is twice the size of the US beer market in volume 250 200 150 100 50 bl litres Other - World Spirits - World Wine - World BEER Other 76.1 BEER - Germany 8.4 BEER - Russia 8.6 BEER - Brazil 12.0 BEER - USA 24.1 0 BEER- China 45.7

Million USD Million liters Alcoholic drinks market overview Breakdown Alcohol Market China by Volume 70000 60000 50000 40000 30000 20000 10000 0 2010 2011 2012 2013 2014 2015 2016 2017 Cider, Perry and Rice Wine Wine Spirits Beer Source: Statista, 2018 Breakdown Alcohol Market China by Revenue 300,000 250,000 200,000 150,000 100,000 50,000 0 2010 2011 2012 2013 2014 2015 2016 2017 Cider, Perry and Rice Wine Wine Spirits Beer Source: Statista, 2018 6

Market Segmentation

Market segmentation Instead of the commonly used Standard, Premium and Super-Premium segmentation for beer markets, we have used a different one that represents in a more accurate way the Chinese market. We have divided the market into 3 segments: Mass-consumed Chinese beer Leisure beer Craft beer and foreign brands on tap 8

9 Some example graphics 1 2 3 Mass-consumed Chinese beer Leisure beer Craft beer and foreign brands on tap 1 2 3

Market segmentation Mass-consumed Chinese beer Chinese brands domestically brewed. Low-priced Beginning at circa 1.0 Euro per liter* both in foodservice and retail. 600 ml returnable bottles the most common format in foodservice. 330 ml and 500 ml cans in retail. Consumed by people across all income levels, everywhere in China Homogeneous pale lagers with low alcohol percentage (around 3%) Largest brands: Snow, Tsingtao, Yanjing and Harbin Mature market, decreasing 3% annually for the last 3 years Consumed along with meals *EU SME Centre research 10

Market segmentation Leisure beer Foreign brands, domestically and internationally brewed High-price Price on average 12.6 Euro per litre* in bars Served in 330 ml bottles, or 500 ml if produced abroad (e.g. Franziskaner) Consumed by urban and high-income consumers Consumed mostly in T1 and T2 cities All sorts of beer types Many brands competing in this segment Growing market. Largest part of the import total that grew 38% in 2017 corresponds to this segment. Stand-alone consumption or with finger food, at home and bars *EU SME Centre research 11

Market segmentation Craft and foreign beer on tap Domestically and internationally brewed Very high-prices 13.8 Euro average per litre in bars* Typically served in 400-500 ml glass Consumed by urban, young, high-income consumers Mostly T1, then T2 Many different beer types, though Ales prevail There are few options yet, more widely available beers are acquired and distributed by AB InBev Market is growing exponentially Consumed either with Western-style meals or stand-alone. *EU SME Centre research 12

Market segmentation Craft ~0.1% Leisure ~10% Craft ~0.4% Leisure Mass ~35% Mass ~ 90% ~65% Volume Value 13

Market size

Million liters 15 The beer market trends in China Beer production and import volume in China 52000 10% 50000 48000 46000 44000 5% 0% 8% 8% 64 48350 47 44900 111 47790 184 49830 4% 338 49360 538 47160 646 45060 8% 6% 4% 2% 0% -1% -1% -2% 42000 28 41 41570 41620-4% -4% -4% 40000 2008 2009 2010 2011 2012 2013 2014 2015 2016 Domestic Production Import volume Growth YOY Production Source: National Bureau of Statistics of China, 2016. China Customs, 2018-6%

Imported beer Beer import China volume and value 800 90% 700 600 500 67% 61% 84% 76% 59% 538.3 575.1 646.4 665.7 716.2 750.4 80% 70% 60% 50% 400 407 41% 40% 300 337.8 30% 200 100 183.7 231.5 20% 16% 13% 11% 20% 10% 0 2013 2014 2015 2016 2017 Volume (x1000 hl) Value (millions USD) Growth Volume YOY Growth Value YOY 0% Source: China-customs, 2018

Imported beer by country TOTAL 2203 Imported Beer by country in Value (million USD) in 2017 0.0 50.0 100.0 150.0 200.0 250.0 Germany 209.5 Mexico 110.7 Belgium Netherlands Portugal 69.7 65.9 63.4 Spain Korea, Rep. 51.7 49.8 France 40.7 United Kingdom Russia 12.8 25.8 More than 70% of total import comes from Europe United States 9.2 Others 41.2 Source: China Customs, 2018

Beer imports. Average CIF prices per country TOTAL 2203 Source: China Customs, 2018

19 Craft beer share 35 Craft share of total beer market 0.07% 30 0.06% 25 0.05% 20 0.04% 15 0.03% 10 0.02% 5 0.01% 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 Volume Craft share (%) 0.00% Source:Rabobank Canadean, 2016

Breweries Number of Microbreweries in China Craft is still small Microbreweries and Brewpubs Number of registerd Microbreweries and Brewpubs is circa 80 in 2017 These breweries combined have a beer count of circa 750 Jing-A Brewing Co. Arrow Factory Brewing Great Leap Brewing Co. Boxing Cat Brewery 90 80 70 60 50 40 30 20 10 0 Registered Microbreweries and Brewpubs in China 2010 2011 2012 2013 2014 2015 2016 2017 Registerd Microbreweries Source: Numbers retrieved from Ratebeer, 2018

Geographical distribution

Geographical distribution Geographical distribution of beer production in 2017 by quantity Source: National Bureau of Statistics of China, 2016

Geographical distribution Geographical distribution of imports in 2017 by quantity Source: China Customs, 2017 data, retrieved in 2018

Geographical distribution Geographical distribution of breweries by beer count Source: Ratebeer, 2018

Main players

Main players Source: Euromonitor, 2015

Main brands Franziskaner Corona Hoegaarden Oranjeboom Tagus Estrella damm Cass Brewdog Kronenbourg Baltika KBC Erdinger Leffe La Trappe Superbock Lost coast Brooklyn Wurenbacher Chimay Rogue Oettinger La Chouffe Heineken Tiger Paulaner Budweiser Goose Island Stella Artois Asahi Liefmans Vedett Kronenbourg Carlsberg Duvel Available on Tap Available in Bottle/Can Duvel Moortgat Heineken International AB-Inbev Carlsberg Group

Consumer

Chinese consumer - Foreign or Local brands Consumer trends are fast changing and worth checking in a separate event For beer. The percentage that prefers an imported brand over a domestic brand is in line with the share of Leisure and Craft beer Chinese preference for imported beer is concentrated but expanding Preference local or foreign brands Wine 24% 28% 22% 26% Beer 8% 7% 35% 50% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Prefer Foreign Brands Somewhat prefer local brands Somewhat prefer foreign brands Prefer local brands Source: Mckinsey China 2017 consumer report

Retail Channels

Retail channels Convenience stores They typically cater the mass-consumed and leisure segment. This channel is getting more popular and complements the changing working environment. Beers are often more expensive than in other retail channels and there is a larger proportion of canned beer. Traditional convenience stores Offering only mass-consumed beer, most commonly in 600 ml returnable bottles. Very low price, circa 1 EUR/litre. This channel is quickly disappearing in T1 cities.

Retail channels Supermarkets and Hypermarkets They all have several options in the mass-consumed segment. Variety of their imported beer portfolio depends on their size, prices are standardised. Local Chinese Supermarket Wal-Mart Beijing

Retail channels E-commerce There are several generalist platforms (JD.com, YHD or Tmall) and some vertical platforms (jiuxian, ichinabeer.com, among others) offering a huge selection of beer, both domestic (competing in price) and imported (competing in price and variety).

Retail channels Hotels Chinese hotels tend to have mass-consumed beer since they are served with meals in a Chinese-style restaurant, normally they have no bars. Foreign chains are usually five-star hotels with several restaurants and bars, with a selection of imported beer as good as any from a bar downtown. Restaurants Traditional Chinese restaurants will only serve massconsumed Chinese beer in bottles of 600 ml. Westernstyle restaurants and bars have a wider selection, since they are not as food-centered as Chinese restaurants.

Retail channels Others (Bars, clubs, KTVs) They usually have domestic produced beer and some foreign brands, almost always in bottles. Those located in T1 city will display a wider offer of foreign brands, while those in smaller cities will limit their selection mostly to domestically brewed foreign brands (Budweiser, Carlsberg, Heineken ). Bars with wide selection of beer on tap and Microbreweries Growing exponentially in the last few years, especially in T1 but also in T2. Western-style food is a central part of the offer. There is little perceived difference between bars with a lot of beers on tap and microbreweries from the consumer s point of view.

Case Studies

Case studies Local Craft Pictures Panda brew came from a tiny room in Beijing and now owns 8 fermenters, a terrace and food accompanying the beers. They are even exporting their beer to the UK.

Case Studies import craft Pictures Brewdog the successful craft beer international from the UK. Sold 20.000 hl in China in 2017. Looking for opening a craft beer brewery in China and see it as their most important export market

Case Studies Import leisure Corona is owned by Ab Inbev and brewed in Mexico, from there it is shipped all over the world. Making Mexico the largest beer exporter in the world. The Corona brand is really popular in China.

Opportunities and next steps

Opportunities for EU SME s Narrow product offering among local players More sophisticated consumer, higher income Leads to a gap between the needs of a growing consumer base and the domestic production. This gap is filled by imports and domestically brewed craft beer, that is limited to draft consumption due to stringent requirements to bottle beer in China. Unlike in mature markets such as Europe or USA, the craft segment is still in its early stages. Opportunity for EU SMEs 41

Next steps and key takeaways Beer market in China is targeted worldwide Pictures Exporters normally do not make enough an effort to understand and addapt. Avoid first doing and then evaluating Getting a first sale is easier than establishing long term agreements New technologies complicated multi distributor strategy Simple but effective marketing can make a big difference On the ground support can also be very relevant Different options to find partners in China

Events China Food and Drinks Fair 2018 (2019) March 22-24 th Chengdu Largest food and beverage event http://www.cfdf.org/ SIAL China 2018 May 17-19 th Shanghai http://www.sialchina.com/ Craft Beer China Conference & Exhibition 2018 (CBCE 2018) Shanghai 15-18 th of May Most important event for craft beer http://www.cbcechina.com/en/ China brew and beverage 2018 Oct 23-26 Th Shanghai Focus on Wine, Spirits and Beer http://www.chinabrew-beverage.com/english/

44 Get Ready for China www.eusmecentre.org.cn