Fermentation-in-the-China-Beer-Industry

1FermentationintheChinaBeerIndustryJOHNW.SLOCUMJR.WENDYCONDERELTHONCORRADINIROYFOSTERROBYNFRAZERDAVIDLEIMIKEMCGUIREJOHNROSSSTANSCOTTINTRODUCTIONThisarticleexaminesthefast-evolvingcompetitivedynamicsthatarenowredefiningthebrewingindustryinoneoftheworld’slargestmarkets—China.ByexaminingthestrategicapproachesofdomesticandmultinationalfirmsjockeyingformarketpositioninChina,managerscanbetterunderstandandactonsomeoftheemergingcriticalsuccessfactorsthatsurroundmarketentryintoafast-developingcountry.AstheChineseeconomycontinuesitsmeteoricrisetowardbecominganothereconomicsuper-power,bothdomesticandmultinationalcompaniesarediscoveringthatcompetinginChinaisadouble-edgedsword.Ontheonehand,thereisthepromiseofmorethanabillionconsumerswhoareincreasinglywealthyandcravenewproducts.Accordingtosomeestimates,tensofmillionsofChineseenterthemiddleclasseachyear.Thismeansanenormousamountofpurchasingpowerthatwell-positioneddomesticandmultinationalfirmshopetocapture.Ontheotherhand,theeconomic,regulatory,andeventhegeographicallandscapeofthecountryplaceanenormousburdenonmultinationalfirmsseekingtobuilduptheiroperationsandsupportinginfrastructure.AlthoughtherearemanycitiesinChinathatarebeginningtodisplayultra-moderncharacteristics,vastportionsofthecountryareleftbehindbecauseofuneveneconomicdevelopment.Thelackoftransportationandcommunicationsystemscomplicatesoperationalissuesrangingfromthesupply-chainmanagementtolocallaborpools.ThebrewingindustryinChinacrystallizesmanyoftheparadoxesofcompetinginthisenormousnation.Large,globalplayerssuchasAnheuser-BuschCo.,Heineken,SABMiller,andInterbrewhavebeguntoinvestheavilyintheChinesemarketinthepastseveralyears.ThesecompaniesseeChinaasthenextfrontierofrisingper-capitabeerconsumption,whichhasleveledofforevendeclinedinmoretraditional,maturemarkets,suchastheU.S.,Europe,andCanada.Yet,formanyofthesecompanies,entryintotheChinesemarkethasprovendifficult.Learninghowtonavigatethemacroeconomiclabyrinthofintricatedistributionchannels,poortransportationinfrastructures,complexgovernmentregulations,andtheseeminglyendlessnumberofdomesticcompetitorsofallsizesineveryprovinceandcityhasbeenanoneroustask.Allthesecompanieshavediscoveredthattheymustadapttheirproductandmarketstrategiestoaccommodatetheeconomicrealitythatthereareindeed‘‘manydifferentChinas’’whenservingthemainland‘‘Chinese’’market.GeographicSpreadandFragmentationUntilveryrecently,China’svastanddiversesetofregionalmarketsweregeographicallyfragmented,especiallyinthelargelyagricultural,ruralprovinceslocatedinCentralandWesternChina(e.g.,Sichuan,Shanxi,Henan,Yunnan).Themajordomesticbrandsstillgenerallydominatedintheirlocalareas.Poor2infrastructure,returnablebottles,andtraditionlimitedmostbrands’geographicreach.In1995,therewereover800breweriesinChina.Recently,thistotalhasbeenreducedto300brewers,resultinginasubstantialrationalizationoftotalbrewingcapacity.Traditionally,allbrandshadverylocalizedsales.Itwasdifficultandexpensivetoshipbeeracrossregionalbordersandbreakintoprotectionistregionalmarkets.Inthebrewingindustry,onlyTsingtaoisavailablealmostnationally.Transportationbetweenmanyprovincesremainsslowandunreliable,althoughitisimprovingsomewhat.Forexample,betweenShanghaiandBeijing,adistanceofaround1,000kilometers(621miles),ittookmorethan31hourstodriveasrecentlyas1990,beforemodernhighwayswereconstructed.Today,drivingtimeisaround14hours.By2008,China’sgoalistohavemorethan82,000kilometers(51,000miles)ofInter-statehighways,comparedwithroughly74,830kilometers(46,500miles)intheU.S.,thusendowingChinawithoneoftheworld’slargestandmostmodernroadnetwork.Totheextentthatmodernhighwaysarebeginningtoconnectmajorcitiesandspandeepintothecountryside,theyarecostlytouse,sincealmostallofthemaretollroads.DrivingbycarfromBeijingtoShanghaicancostasmuchas500Rmb(RmbisshorthandforRenminbi,thenationalcurrencyofChina.OneU.S.dollarisapproximatelyequalto8.12Rmb).Similarly,Chinaexpectstospend$242billion(USD)inrepairingitsrailroadsystemby2020.Thisisimportant,becauseifbeerisexposedtoextremetemperatures,itsqualitymaybedegraded.Specifically,verycoldtemperaturescancausebeertobecomecloudy.Ontheotherhand,exposuretosun-lightcanacceleratetheagingprocessandmaycausethebeertotaste‘‘stale.’’FastGrowthandMultinationalEntrySincethelate1990s,numerousmultinationalbrewingcompanieshaveenteredtheChinesemarket,seekingtoridethecoattailsoffastgrowthandtherisingprosperityofmanylargeChinesecities.Duringthe1990s,China’sbeeroutputgrewfasterthananywhereelseintheworld.Itreachedmorethan185millionhectolitersin1997(49millionhectogallons),secondonlytotheUnitedStates.ThisrepresentedaroundhalfthebeerdrunkinallofAsiaatthattime.DomesticandinternationalpredictionsindicatedthatthecountrywassettoovertaketheUnitedStatesastheworld’sbiggestbeerconsumerbytheyear2000.Yetconsumptionpercapitaremainedlow–in1997itwasstillnotevenhalftheworldaver-age–indicatingthathugepotentialforgrowthintheindustrystillexisted,especiallyifalargeproportionoftheChinesepopulationcontinuedtodevelopatasteforbeer.3Table1ChinesebeermarketforecastTABLE1CHINABEERMARKETPROJE