China’s brewers face an unfamiliar challenge — sinking sales

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After years of steady growth, China’s beer market is losing its fizz as the economy slows and consumers turn to other types of alcohol. To stay afloat, the country’s brewers are looking to reduce overcapacity and otherwise downsize their operations.

Chongqing Brewery, owned by Denmark’s Carlsberg, has started shutting down production facilities and liquidating subsidiaries. The largest brewer in China, China Resources Beer is slashing its advertising budget.

In Chongqing, an inland industrial city, Chongqing Brewery has decided to close two sales and production sites. The sites account for around 3% of its total sales. Decrepit facilities have made them money losers.

The company has also stopped production at a wholly owned brewer in Anhui Province. Anhui Jiuhuashan will continue to make its beer at another brewery.

Chongqing Brewery expects to log a net loss of 58 million yuan ($8.82 million) for fiscal 2015, which ended Dec. 31.

Meanwhile, both CR Beer and Anheuser-Busch InBev, the Belgian beverage giant that controls the third-largest share of the Chinese market, are trimming ad spending. The two companies have decided against taking part in annual auctions for commercial slots in popular programs aired by state-run China Central Television, known as CCTV.

Ad slots during CCTV’s high-rated shows cost around 100 million yuan, on average. Fees can run as high as 370 million yuan. CR Beer and Inbev used to be regular advertisers on the network.

Tsingtao Brewery, the No. 2 player in the Chinese beer market, has slashed its spending on CCTV ads to 42 million yuan, down from 185 million yuan last year.

After the binge

For many brewers in China, this is the first time they have had to worry about sagging sales. For decades, the market expanded steadily – often briskly – powered by the country’s economic growth.

To capitalize on the surging demand, big players swallowed up small ones. At one time, China was crowded with some 800 brewers; today, the top five companies control more than 70% of the market.

But the flagging economy is taking a toll, as is President Xi Jinping’s crackdown on corruption and official extravagance. Then there is the evolution of Chinese consumer preferences: Young people increasingly prefer other alcoholic beverages like wine and cocktails.

Overall beer sales dropped for the first time in 2014. The downtrend continued into 2015, with sales in the first nine months falling by 7.3% on the year.

After the acquisition binge, large companies are stuck with local breweries that are too old and inefficient to make profitable beer in today’s supercompetitive market. Many production lines at these small breweries are idle. CR Beer, for instance, is using only half of its overall capacity.

Brewers are under heavy pressure to scrap unprofitable breweries and scale down their workforces. When major players announce their full-year earnings in March, the figures could trigger a round of serious cost-slashing.