In early August, Heineken made a splash in the international beer space, spending $3.1 billion for a 40% stake in China Resources Beer, the top-selling brewery in its namesake country. Such an investment into brands around the world is not out of the ordinary for the conglomerate, which spent $1 billion on Lagunitas and more recently a comparatively scant $53 million for an undisclosed take of Beavertown Brewery.
But the newest sum is large because the reward could be worth it. The transaction comes at a time when China hasn't just set itself apart as the world's biggest market for beer, but tastes are also aligning to favor higher spending on a product once defined in China by Snow, an adjunct Lager whose name is joked as equal to its flavor.
The move by Heineken was just the latest by a growing collection of international brands. Beer lovers and industry insiders around the world look to the U.S. for inspiration, but China is increasingly seen as the next big pay day. This year, AB InBev opened a new facility to make Goose Island brands, as well as those of its Chinese investments, Kaiba and Boxing Cat. Stone Brewing opened a location this summer in Shanghai with plans to hire regional sales representatives in major cities. Spanish companies Mahou San Miguel and Gruppo Damm are also entering the country.
[Disclosure: GBH’s studio side has worked with Goose Island on various projects over the years, has partnered with Beavertown for its annual Extravaganza, and is the Executive Producer of a Condé Nast project, October, in which ZX Ventures is an investor.]
It’s an international land grab for some of the biggest names in beer. With a growing middle class and new ways to spend discretionary income, China represents a Wild West opportunity as companies jockey for position to set the tone of what "craft" could or should be in a country that’s currently figuring it out in real time.
“American breweries have become very interested in exporting to China because it’s a future market for growth, but also because they’ll have far less competition than with local guys at home,” says Maikel Dekker, managing director for Beer Hub, an import company based in Wenzhou. “Many breweries in the U.S. were simply not interested in exporting to China for a long time—anywhere else in the world—but now bigger brands see what they can do and are definitely trying to get early market share to become well-established.”
Current market share of what would qualify as “craft” or “crafty” beer—depending on who you ask or which report you read—is anywhere from around 1% to 5%. At the high end of that range, it would put China at roughly 2010 in U.S. terms, when the Brewers Association tallied 4.97% of market share for its member breweries. The one thing that is widely agreed on is potential for growth. In an interview with the Associated Press, one of the organizers of this year's Craft Beer of China Exhibition predicted that craft beer would become around 11% of total market by 2020, which isn't far off from where the U.S. is today.
That trajectory certainly tracks. Chinese are actually drinking less beer, but spending more on higher-end versions of it, a situation seen in the U.S. as well where higher spending on craft and import products has boosted dollar sales among volume stagnation.
The companies making initial moves into the country are some of the biggest names in U.S. beer, and what’s leading the charge shouldn’t come as a surprise. “Fruit-flavored IPA is very popular in China,” Dekker tells GBH. But from his perspective, IPA anything is a good idea. In the past year, he says brands like Green Flash Soul Style, AleSmith IPA, and Ballast Point Sculpin have been some of the more popular brands he’s imported through Beer Hub. A bottle of Sculpin or Grapefruit Sculpin may go for around $7 to $8 (U.S.) in a bar.
This theme plays perfectly for larger companies with a physical presence in the country. Goose Island IPA or Stone IPA could flood the market to set a foreign standard for what that style is meant to be, and Dekker tells GBH that he’s been waiting for Heineken to make a move with Lagunitas. The company’s deal with China Resources Beer (CR Beer) should be the start of that. Heineken has sold its flagship beer, Tiger, and Sol in China for some time, but its 40% stake will allow for more. Hou Xiaohai, CEO for CR Beer, told Reuters after the sale that his company would use its distribution network for “bringing in other Heineken-owned brands not yet in China.” It would be easy to assume that includes Lagunitas, which was wholly acquired by Heineken last year.
"Only by fully committing to this relationship can [Heineken and Lagunitas] both respond to the historic opportunity that awaits us in all 24 time zones," Lagunitas founder Tony Magee said at the time of his company’s sale. In 2015, Lagunitas was exporting three shipping containers a month, which increased to as much as 60 last year.
The reason that opportunity exists is because of the shifting economic status of China’s population, creating an opportune time to become part of a new consumer preference toward beer that has more flavor—and more cost—than adjunct Lager.
In the past decade, average annual wages have grown by slightly more than 150%, as tracked by China’s Ministry of Human Resources and Social Security. Chinese households with an annual disposable income of more than $35,000 are expected to nearly triple in the next four years, from 12.8 to 32 million.
This has all led to an increased demand for all sorts of luxury goods, including jewelry and clothes, handbags, and more. US News reported in August that luxury goods account for about $73 billion in annual spending, almost a third of the global market. It parallels beer, which is a $28 billion market in China with plenty of room to grow.
With plenty of opportunities to spend money on foreign, luxury goods at home, part of the potential for growth is also tied to increased travel by Chinese.
Domestic travel has spiked in the last 10 years, increasing by almost 200%, but travel outside China’s mainland has also grown considerably. Tourist spending outside the country has gone from $20 to $250 billion in that same decade. That kind of spending can often lead to new experiences and exposure to new products. Hong Kong, one of the most popular travel destinations, offers a unique beer experience with the number of breweries growing from two to almost 40 in the last five years.
This doesn’t discount the influence of American beer brands, however. In 2017, Budweiser became the leading brand for e-commerce sales, an area of strategic importance for AB InBev’s investment arm ZX Ventures, which has bolstered online sales models around the world, from England to Australia and China. In 2015, AB InBev made clear their intentions in the country and region, noting that the “Asia Pacific” area would provide 53% of worldwide volume growth through 2025.
In early 2017, a report by Fortune showed just how important the market could be, highlighting pay-to-play practices that earned Goose Island taps amongst a weak regulatory climate. In the story, Fortune noted that Goose Island earned taps as its parent company supplied flow meters, supported special events and, according to one bar owner, offered straight cash for taps. Each example in the story ended with owners providing handles for Goose products.
“Asia Pacific” has long been a strong location for Brewers Association-defined “craft” beer. In its annual export report for 2017, the trade organization changed its public reporting to show total export percentage to key countries, but in previous years issued stats on volume growth percentage. In the three years leading up to the most recent report, “Asia Pacific” registered 38% growth in 2014, 12.5% in 2015, and 12.9% in 2016. Stone, a prominent representative for the BA and its “small and independent” movement, seems to be leading the charge, with with executive chairman and co-founder Greg Koch sporadically visiting the country since October 2017. If Chinese drinkers are going to spend more on their beer choices, it’s clear U.S. craft brewers are paying attention, with Brooklyn Brewery, Nebraska Brewing Co., and Epic Brewing Co. among American companies sending their beer to China.
And according to Maikel Dekker, the importer in China, the trajectory to get the country’s drinkers is right on track. German beers have long been among the most popular choice for out-of-country brands, historically accounting for more than 50% of China’s import market. But Dekker says the path that so many American drinkers follow in their early years of consumption—Lager to Wit or Stout and finding a way to IPA—is now common for Chinese, too.
“There was no IPA culture five or six years ago, but now IPAs have become popular all over the world due to America,” Dekker says. “In China, like many other countries, they want to do something with that style now.”
This helps to clear the way for more American influence, as it has in so many other places. Quickly, Heineken’s move to invest billions into their presence in China makes all the more sense. If now’s the time when Chinese are going to start considering an IPA, Lagunitas shouldn’t let Goose or Stone set the rules of engagement. And if they have their way, they’ll get America’s #1-selling version of that brand into the hands of lots of new drinkers with fresh disposable income.