China groups thirsty for Heineken asset

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By putting its Kingway Brewery stake on the block, Heineken is not just streamlining its own strategy but raising the prospect of a scramble for an asset that could accelerate consolidation in the $13bn China market.
“There’s going to be consolidation, but on a smaller scale,” says Jeremy Cunnington, drinks analyst at Euromonitor, the data consultancy.
He points to this week’s acquisition of Wei Xue Beer by Anheuser-Busch InBev, the largest brewer.
“It is a case of as many feet on the ground as possible to capitalise on growth,” Mr Cunnington says.
Despite years of consolidation, China’s industry is fragmented compared with the rest of the world, which is dominated by groups such as ABI, SABMiller, Heineken and Carlsberg.
CR Snow Breweries, China’s biggest brewer, which is jointly owned by China Resources and UK-listed SABMiller, controls about a fifth of the market.
Together, the top four brewers control more than half the market.
The next five have a combined 16 per cent, but there remains a tail of up to 300 bit players, not all of them profitable.
Kingway, which Heineken and its partner Fraser and Neave of Singapore are quitting, is the eighth biggest with a 2 per cent share.
The Rmb1.08bn ($164m) sale of the 21 per cent stake is acknowledgement of Heineken “throwing in the towel” in China, says Ian Shackleton, a Nomura analyst.
The fact that the Dutch brewer failed to parlay its holding up to a controlling stake does not bode well for CR Snow, the putative buyer, he says.
However, it is far from a done deal.
GDH, Kingway’s government-controlling shareholder, has pre-emptive rights.
One theory is that it might exercise these and prevail over an auction, although other analysts remain sceptical and point out that GDH could have done this before CR Snow was brought in.
Any consolidation that occurs will have socialist characteristics.
As Humor Wang, general manager of CR Snow, puts it: “The Chinese consolidation methods are different from other countries. Brewery closures do not always follow acquisitions, even when they are badly located or inefficient.”
Mr Wang offers two reasons: the government’s eagerness to preserve local jobs – “That’s a benefit we can provide to the economy,” he says – and tax receipts for local governments.
His growth strategy is hinged on greenfields expansion.
This means that, unlike the legacy plants that come with acquisitions, the brewer can choose its own sites and build according to its own standards.
This strategy, Mr Wang says, does not go down well with all board members.
He says SABMiller “was very doubtful about the idea of greenfields in China”, in part due to fears over existing competitors operating in the chosen area.
He disputes this on the basis that the Chinese beer drinker is fickle and happy to switch from their traditional brew.
Even where there is overcapacity, a new participant can carve out market share, he says.
“In China everything is changing so rapidly. Everything. The history of drinking beer is no more than 30 years old.
“Minds are changing all the time, on everything. People may want a Japanese car today and an American one tomorrow.”
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