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Asia’s Beverage Sector Fizzes Despite Downturn

20 July, 2009

The crowds drinking beer in the bustling bars of Mumbai and Shanghai underscore the motive behind a flurry of recent merger and acquisition activity in Asia, with forecasts of strong growth for beer and spirits in years to come.

 
In China and India, as well as smaller markets in Southeast Asia such as Singapore, Thailand and Vietnam, beer drinking is becoming a popular past time due to rising disposable income and relatively young populations who are embracing the party scene.
 
“I’m a firm believer in the Asia growth story and when there’s growth there’s going to be increased consumption,” said Edward Chia, managing director of Singapore’s Timbre bars.
 
“My analysis of trends is that people tend to start drinking beer as the first form of alcohol, then move to wines and spirits. That (applies) to both age and maturity of industry.”
 
Market research firm Euromonitor International says Asia is the most dynamic region globally in volume for beer, with average annual growth of 8 percent between 2003 and 2008. China is the world’s biggest beer market and India’s $12 billion alcohol market has been enjoying 12-15 percent annual growth.
 
So it’s no surprise that beverage firms, facing slowing sales in mature markets in Europe, Japan and the United States, have heightened M&A activity in the past few month. Analysts suggest there will be more to come given the outlook for rising alcohol consumption across Asia.
 
In China, per capita consumption of alcoholic drinks is expected to rise to 53.4 litres by 2013 from 37.8 litres in 2008, according to Euromonitor. It sees consumption in Singapore and Thailand rising to 23.1 and 61.4 litres respectively by 2013 from 21.1 and 48.4 litres last year.
 
“Expect more activity in the years to come as the major brewers establish or reinforce existing operations in the region, in particular outside the mature markets of South Korea and Japan,” said Euromonitor’s Marlous Kuiper.
 
Beverage firms are focusing closely on China and India as growth is expected to be rapid due to rising disposable incomes in the world’s third and twelfth largest economies, dented by the downturn but still holding up with forecasts for annual GDP growth of 8 and 6.3 percent respectively.
 
“The beer market (in China) is set for double digit (revenue) growth in coming years. Its growth will be much stronger than other liquor or wine,” said Jiang Guo-Qiang, general manager and director of Chinese brewer Kingway Brewery.
 
In line with this sentiment, shares in China’s Tsingtao Brewery have soared 65 percent this year, outpacing a 29 percent gain in Hong Kong’s main index.
 
China’s beer market was valued at almost $30 billion in 2007 compared with about $17 billion in 2001. Japan’s mature beer market is valued at about $42.5 billion, but its size has been steadily declining from about $51 billion in 2004.

ECONOMIC RECOVERY
 
Big names such as Diageo, the world’s biggest spirits group, and Japan’s Kirin Holdings are adopting multi-pronged strategies that include mergers and acquisitions and also partnerships with local firms for footholds in markets in India and China which are dominated by domestic firms.
 
Diageo said in June it had teamed up with Chinese white spirit producer Shui Jing Fang to make a premium vodka in China. It is also in talks to pick up a stake in India’s United Spirits.
 
Meanwhile, Heineken, the world’s third-largest brewer, in May reached a deal with India’s largest brewer, United Breweries, to bottle and distribute its brands in India.
 
In fact, eight out of the top 10 brewers in China have some level of foreign ownership, according to Euromonitor.
 
Analysts say there is a strong correlation between alcohol consumption and industrial output growth, boding well for brewers as the economy recovers.
 
China’s Snow beer is now the world’s second-biggest beer brand by volume, replacing Anheuser-Busch brands, Bud Light and Budweiser. It is brewed by SABMiller and its Chinese partner China Resources Enterprises Ltd.
 
“China and India will take the lion share of volume due to huge population growth but opportunities exist in other markets like Vietnam and Thailand,” added Kuiper.
 
The Philippines, Singapore, Thailand and Vietnam all saw buoyant beer sales in 2008.
 
Singapore, said analysts, has single-handedly defied the gloomy environment of mature markets such as the UK and United States with drinkers drawn to outlets such as microbreweries.
 
Despite Singapore’s worst ever recession, foreign beer companies are still moving in.
 
“People will drink anyway if you offer the right beer,” said Romtham Setthasit, the director of Thailand Tawandang Microbrewery’s Singapore operation, which opened this month.
 
Volume growth in Asia-Pacific beer markets is expected to outstrip growth in world markets in coming years, with forecasts for annual growth of 7.5 percent in 2009-10 compared with 4.1 percent growth globally, according to Euromonitor.
 
 
ON THE PROWL
 
Japan’s Kirin, the maker of Lager Beer, eyes the ASEAN region for future growth and is in talks with the Philippines’ San Miguel Brewery’s (SMB) parent company to buy its overseas beer business.
 
Kirin bought a 48 percent stake in SMB earlier this year and snapped up Lion Nathan, Australia’s second biggest brewer, for $2.5 billion.
 
“We have made good progress in Oceania, so the next is ASEAN and mainland China,” said Makoto Ando, head of Kirin’s investor relations. “ASEAN has a big growth potential,” he said.
 
Japanese brewer Suntory Holdings, maker of the popular “Premium Malt” beer, says it is mulling a merger with Kirin, a deal that would create one of the world’s largest beverage firms.
 
In Australia, North America’s Molson Brewing Co last year took a five percent interest in Foster’s Group Ltd, Australia’s largest brewer.
 
There is talk that Foster’s may separate its struggling wine business from the beer unit, valued at more than $10 billion, in a move that could signal a possible split when market conditions improve and wine earnings recover.
 
“It is more likely a when, not an if,” said Kristan Walker, retail and beverages analyst at Deutsche Bank. “You are probably looking at two scenarios, either a trade sale or a demerger.”
 
If there was a split, Foster’s beer operations would likely appeal to brewers such as Molson and Asahi, drawn by a market with healthy margins due to its domination by two big players.
 
BRANDING
 
As Asia’s market gains momentum, local brand names may have an edge over imported brands because they can sell at lower price points and have more efficient distribution networks.
 
In India, rationalisation of import duties has brought down prices of imported alcoholic drinks brands, while a move in 2005 to allow beer and wine to be sold at supermarkets has encouraged demand for liquor and global brands.
 
India is now the second-biggest market for Ciroc, Diageo’s “superluxury” vodka. Its Black Label whiskey is an “iconic brand” in India, said Diageo’s Asia-Pacific President John Pollaers.
 
United Spirits Managing Director Vijay Rekhi says Indian consumers have only recently embraced “labels” and per capita consumption has risen. It stood at 2.3 litres in 2008 versus 0.3 litres in 2003 according to the World Health Organisation.
 
“Brand consciousness amongst consumers has finally permeated into the spirits category as well,” Rekhi said.
 
It’s being felt elsewhere in Asia, a region where people are so conscious about brands that they pay huge amounts for designer bags, clothes and even alcohol bearing high-end labels.
 
Singapore’s national beer Tiger is losing popularity among young drinkers who opt for imported beer with brand cachet.
 
“Younger Singaporeans don’t drink that much Tiger Beer and go for imported beers like Heineken, Erdinger and Kilkenny,” said Tibre’s Chia.

 


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Asia’s Beverage Sector Fizzes Despite Downturn

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