Global hop marketA local alternative to mass beer suggested by independent brewers has been successful and is now altering the global market. Beer is becoming more diversified, so transnational companies have to accept the new game rules and to switch focus to young and fast growing markets. All these processes increased the demand for aroma and bitter hop as well as their acreage expansion on two continents. However now there appeared a downward trend of alcohol consumption in the world, so even special sorts can soon turn to be sufficient. In this connection the dynamic American hop market is already facing some problems. EU hop producers have become more cautious, they are not racing to exceed the demand and look forward with more confidence, judging by the contract terms.
Hop Market in RussiaGermany still dominates the Russian market, yet over the recent two years one has been able observe a continuous success of Czech hop suppliers. Their expansion and growing popularity of hops from the United States became the drivers of supplies growth in 2016 despite the preceding modest harvest crop in the EU, as well as the factor of relative stability in 2017. In this connection, in 2017, the ratio of the varieties continued to shift towards the aroma ones, and the supplies of Magnum hop and other alpha varieties were reduced. However, the import of bitter hop pellets is partially replaced by extracts, especially from the major beer manufacturers. Total volumes of alpha acid supplies, according to our estimation, decreased by approximately 5% and returned to the level of 2015. Barth Haas Group continues dominating the hop products market; HVG also increased its weight. At the same time, Morris Hanbury significantly reduced the supplies in 2017.
10+1 trends of Russian beer market 2015-2017Despite of the moderately negative prognoses for 2017, the beer market can be stabilized soon. Yet the years of the negative dynamics have resulted in marketing being limited just to “optimization” and the art of balancing between price and volumes. Bigger supermarkets share means stronger trade marketing. These processes are connected to the majority of the described trends. At the same time, the federal brands inflation leads to searching for new tastes, sales channels and contact formats that expand the product range and diversify the beer market, but do not imply a substantial volume increase. Let us enumerate and further discuss the ten trends of the beer market we can see in 2015-2017 as well as the major event of 2017.
Beer market of Ukraine 2017In the first half of 2017, the Ukrainian beer market goes on decreasing slowly. Yet, the companies manage to compensate their lost volumes by raising prices and improving the sales structures. This results in the mid price market segment reduction while the sales of premium brands are rising. These processes are connected to position strengthening of companies Carlsberg Group and Oasis and the market share reduction of Obolon. Most of the novelties by the market leaders belong to craft or hard lemon categories.
Beer market of Russia 2016: PET goes to draftThe beer market of Russia was warmed up by the hot summer, but the preparation for large volume PET prohibition has already impacted it negatively. The year was successful for Efes, MBC and regional producers; Carlsberg’s positions were virtually stable but AB InBev and Heineken lost a part of market share having focused on the sales profitability. The dynamics of big brands was determined by how much the companies were willing to keep the prices down or by their promotional activity. In this context the economy segment of the beer market and sales of inexpensive draft beer were increasing. The premium segment started shrinking due to license brands migrating to the mainstream segment.
In 2015, the national sales of the company reduced by 2% and in our view amount to 21 mln hl. And in the first half of 2016, Carlsberg Group volumes reduced by 3% that is two times better than the industry. Adjusting for the brewery closures, volumes would have declined by an estimated 1%.
Volumes decline is in the first place connected to the company’s efforts to raise profitability by closing a host of ineffective breweries and improving products’ mix. That is why Carlsberg Group strategy includes revision of production effectiveness and SKU profitability of several dozens of regional brands. The comparatively good performance is associated with a dynamic growth of Tuborg brand sales.
History of acquisitions
Carlsberg Group’s focusing on the West China markets though being the choice of the company’s management, also resulted from a number of problems which are already described in management textbooks. Originally East and West coast of China was the top priority for Carlsberg Group.
The company commenced an active expansion as early in 1981 as it launched Carlsberg Brewery Hong Kong and started a licensed production there, including beer manufacturing for export to mainland China. In 1995, the company entered the major markets of China, having acquired Huizhou Brewery in Guangdong Province and invested around US$30 mln Shanghai Brewery, which started production in 1998.
In 2000 Carlsberg Group diverged from the steady development way. The company sold out nearly 75% of Shanghai Brewery stake to its competitor Tsingtao and went in for a big deal which brought the company to the markets of the key countries in the region.
In 2001 most of Carlsberg Breweries’ activities in Asia have been transferred to the joint-venture Carlsberg Asia Holding Ltd. (CAL), of which 50% is held by Carlsberg Group and 50% is held by the Asian Chang Beverage Company (future ThaiBev).
Yet, it was not an easy win. Simultaneously with Carlsberg Group, by complete or partial purchase of local manufacturers (such as for example Guangzhou Zhuajiang Brewery) the southern market got into the focus of other national and transnational companies which were not willing to give it up to competitors.
Unimplemented plans contributed much into disappointment in the partnership and mutual claims between companies. In 2003, CAL business was agreed to divide. However, Carlsberg Group lost $120 mln, which had to be paid off as compensation.
Probably, Carlsberg Group management estimated the competition degree on the coastal markets and considered the entrance fee to be unfairly high. At the same time, very low beer consumption and “catching up” economy development in the West of China made that region very promising for investors. The financially exhausted company also needed the low price of the local assets and hoped for their rapid rate of return due to the virtually monopoly position on the western market.
That started the massive aquisition of breweries. In 2003, Carlsberg acquired the Kunming and Dali breweries in Yunnan province. In 2004, Carlsberg 1) became major shareholder in Lhasa Brewery in Tibet, 2) became major shareholder in Lanzhou Huanghe (Yellow River Brewery) with three breweries and a malthouse in Gansu, 3) acquires 34.5% shareholding in Wusu Brewery (Xinjiang) and 4) together with local partners invests in greenfield brewery in Qinghai.
In several years, Carlsberg Group co-owned Chongqing Brewery, which currently sells nearly a half on the company’s beer volumes on the Chinese markets. Chongqing Brewery has nearly 20 trade and production subsidiaries located in Chongqing, Sichuan, Hunan, Guangxi, Guizhou, Zhejiang, and Anhui. In 2011 Carlsberg increased its share to 30% and to 60% in 2016. Other shares belong to small shareholders with less than 3% stake.
Performance of branches
Though in the report for 2015, Carlsberg Group announced sales rise in city of Chongqing, beer production by Chongqing Brewery was on the contrary cut down. According to the report, in 2015 Chongqing Brewery reduced its output by 6% to 9.895 mln hl. Meanwhile, in 2015, the company increased the revenue by 5% to 3.324 bln yuan.
Despite the decline, year 2015 can be called a transition period from decline to stabilization as in 2014 the output dynamics of Chongqing Brewery was much worse (-12.85%). Such performance made Carlsberg Group take decisive steps.
In 2016 number of SKU was cut and 6 beer breweries, half of which belonged to Chongqing Brewery, were closed. There was a shutdown of unprofitable breweries located close to each other, and operating on old equipment. By the way, in 2016 two half-completed production sites were sold off.
Another big brewery of the company, Lanzhou Huanghe (Yellow River Brewery) in Gansu showed not a particular good performance by the end of 2015. Revenues from beer production fell by 15.6% to 0.44 billion yuan. Given this figure and the regional statistics, the volumes were also decreasing by double-digit rates, having went lower than 4 mln hl. The revenues from malt sales fell by 26.3% to 0.11 billion yuan due to higher prices for raw materials.
Wusu Brewery (Urumqi, Xinjiang) is a joint venture between Carlsberg Group and Xinjiang Hops Company. Recently, the company has been faced with fierce competition from international companies. However, Xinjiang Hops Company informed of sales rise in 2015 by 7.2% to 3.251 mln hl, and the beer sales revenues increased by 8% to 1.131 bln yuan.
Besides, judging by the regional statistics data, sales of Carlsberg Group in Yunnan province could have experienced some growth.
During conference call on the performance of 1H2016 Carlsberg President and CEO, Cees 't Hart said: “We remain optimistic on the value opportunities as mix premiumization continues fast, particularly as a growing middle class starts trading up into international premium brands. These now deliver one-third of our China revenues, led by Tuborg. It is now a clear number two international premium brand, more than twice the size of the next competitor. Super premium specialty sales also increased at over 50%, led by 1664 Blanc. The cost reductions and premium growth led to a strong GPaL margin improvement that, we believe, we can continue”.
Like many other companies, Carlsberg Group gets more than half of its sales volumes from economy regional brands, though the average price per beer liter is higher compared to competitors’. Here remoteness of the western markets and domination on them come into play.
Big regional brands, namely, ChongQing and Shancheng 1958 are popular mainly in Chongqing and its neighboring areas. Recently both of them have changed the names and package, and by essence we can say that Shancheng is a subbrand of ChongQing. Probably for this reason, Chongqing Brewery report for 2015 cites a 363% volume growth of ChongQing to 4.68 mln hl. and Shancheng volumes decline by 63% to 2.59 mln hl. Their net volume fell by 13% to 7.37 mln hl.
Premium brand Carlsberg has been brewed in China for 20 years. Its sorts, despite the localization were never able to secure the output volumes stability and improve the price mix of the company. For example, Chongqing Brewery according to the report cut the sales of Carlsberg brand. The decline amounted to 13% to 0.173 mln hl. Such dynamics can result from reallocation of output depending on the place of consumption, or from the competition growth.
Carlsberg Group attributes the decrease in volumes of the regional brands to the sharp increase of brand Tuborg. Chongqing Brewery increased its sales by 65% to 1.479 mln hl. As we can see, this figure coincides with the results cited at conference call of Carlsberg Group. Though the 20%* share in the sales structure was obviously achieved in 2016.
* According to 1Q2016 conference call
Tuborg was launched into the Chinese market in spring 2012. In accordance to the global positioning strategy, this brand targets youth audience. The package design also completely corresponds to the international image, that is, inclines round logo, and unusual for the Chinese market “ring-pull” cap. The distribution and the market support of the brand is provided by Chongqing Brewery according to the report.
Carlsberg Group remoteness from other outlet markets, that is, big cities in the east of China, has probably deterred the brand from getting a fast start due to high costs of transport and problems in organizing distribution. Whereas, as far as we know, the main sales channel for Tuborg was the network retail. Essentially, the fast sales growth did not start before 2014.
One of the key growth drivers for Tuborg is price positioning on the border between mainstream and premium segment. For example, at supermarkets, a 0.5 l. can of Budweiser costs about 9 yuan and the same volume of Tuborg costs 6.8 yuan. Thus, keeping attributes of international beer Tuborg distances itself from Carlsberg brand, which is also comparatively democratic in China.
The strategy of the lower segment border blurring made it possible for the brand to grow rapidly in the Eastern Europe 10 years ago or in India 5 years ago competing with license international brands. In China the main target of Tuborg’s price attack will in our opinion be Budweiser, as the premium market leader, as well as national brands with youth positioning. Tuborg promotion is mostly based on supporting youth music events, club parties, and festivals.
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21 Sep. 2016