From China, a New Challenger to the King of Beers

http://online.wsj.com/article/SB122107266854220265.html?mod=hps_asia_inside_today 

Little-Known Snow Aims at Bud Light As Top-Selling Brew

By SKY CANAVES
September 11, 2008

SANHE, China -- Without leaving home, an obscure Chinese beer is challenging Bud Light's position as the world's top-selling brand of suds.

Market watchers say Snow Beer, the product of a joint venture between London-based SABMiller PLC and China Resources Enterprise Ltd., will overtake or has already overtaken Anheuser-Busch Co.'s Bud Light in terms of consumption, depending on how the numbers are crunched.

Imaginechina

Snow Beer for sale at a supermarket in Nanjing, east Chinas Jiangsu province 5 August 2007.

"I can confirm that the Chinese brand Snow is now the largest beer brand in the world," says Kevin Baker, account director for alcoholic beverages at the U.K.-based market-research firm Canadean Ltd. About 51.2 million hectoliters, or about 1.35 billion gallons, of Snow were consumed last year, compared with 48.4 million for Bud Light as a stand-alone brand, the firm says.

Another research firm in the U.K., Plato Logic, says Bud Light remained the top brand in 2007, with 51.8 million hectoliters consumed to Snow's 51.2 million. But that slim lead faces a challenge: China Resources said last week that the Snow brand's sales volume jumped 22% in the first half of this year compared with a year earlier, putting it on pace to unseat Bud Light, which is consumed mostly in the slower-growing U.S. market.

"I think it's inevitable in certain respects that Snow will become the largest beer brand in the world," says Paul Curran, an alcoholic-drink analyst at another research firm, Euromonitor International.

St. Louis-based Anheuser, soon to be acquired by InBev NV, of Belgium, isn't giving up Bud Light's crown easily. A spokesman said Bud Light remains the top brand when sales of its Budweiser brand are included. Plato Logic, which, like other research firms and analysts, considers the two brands separate, says 44.2 million hectoliters of Budweiser were consumed last year, down 2.2% from 2006.

Snow's production was less than one-tenth of its current level six years ago, when the regional brewer started developing a now-extensive national distribution network and began buying competing brewers in the fragmented Chinese market. That helped it tap China's growing ranks of beer drinkers. "Success has largely been driven by the supply side," says Ari Mervis, managing director for SABMiller's Asian and African operations.

Though the Chinese drink less beer per person than Americans or Europeans, China's beer market has been the world's largest for the past six years and is growing 10% a year, according to Euromonitor. Snow's rapid growth illustrates the promise of China's vast consumer base.

But China's price-sensitive mass market produces thin profit margins compared with many other countries. Chinese beer makers have profit margins of roughly $2 per hectoliter, compared with $50 to $80 in Europe and the U.S., according to Mr. Mervis, who says beer prices have barely moved over the past five years. SABMiller says that while Snow accounts for 30% of the brewing giant's global sales volume, it contributes less than 5% to overall profits.

SABMiller and China Resources are now pushing a more upscale image and putting an emphasis on quality to appeal to more-affluent consumers, a potentially big growth area that both domestic and foreign brewers are chasing. In 2007, premium beer accounted for only 2% of total China sales volume, well below the global average of 12.7%, according to Plato Logic.

Snow's parents are promoting higher-end offerings such as Snow Draft, Snow Super Premium and a beer marketed as "The Great Expedition," which is linked to an advertising campaign focused on outdoor adventure sports such as whitewater rafting and mountaineering and which targets younger, higher-income customers. They are pushing for more urban consumers in places like Beijing and are updating the look of the product with smaller bottles similar to the kinds imported beers come in. "We are moving from a supply-driven focus to more of a demand focus," says Mr. Mervis.

Other mass-market companies are making a similar push toward more-affluent customers. Last week, Coca-Cola Co. offered to buy China Huiyuan Juice Group Ltd. for $2.4 billion, in an effort to move into juice products that fetch higher prices than the carbonated soft drinks and juice drinks Coke already sells in China.

Snow is competing against savvy rivals such as Tsingtao, which benefits from partial ownership by marketing juggernaut Anheuser, says Shaun Rein, managing director of Shanghai-based China Market Research Group. "Tsingtao already has great brand recognition," says Mr. Rein. He adds that Snow's "countrywide marketing campaigns also need a lot of work."

Bud Light could also fight back for the global title, says Mr. Curran of Euromonitor, as Anheuser's combination with InBev will give it greater distribution outside North America. While Snow has ambitions to expand outside China, its parents don't yet have concrete plans.

The Snow joint venture got its start when South African Breweries, the forerunner to SABMiller, struck up a partnership with domestic conglomerate China Resources in 1994, after the two companies were introduced by a Hong Kong businessman who wanted to spread SAB's Appletiser-brand carbonated juice beverages to mainland China. Appletiser never got very far beyond Hong Kong, where it is still sold at local Starbucks, but the beer venture flourished.

In 2002, the brewer expanded from its northeastern China base of Shenyang. It built breweries and bought competitors that were converted to producing Snow. Currently, there are 58 breweries producing Snow Beer across the country. The May earthquake damaged facilities in Sichuan, but investments in trucks and added capacity, thanks to a new Beijing-area brewery about 900 miles away, have maintained deliveries to the province.

SABMiller is importing its premium-beer expertise to help Snow move up the value chain. The new brewery about 20 miles from Beijing, in Sanhe, positions Snow to push sales in the capital. SABMiller has also brought in experts to verify that the day's beer batches are up to snuff. "You can say it's similar to wine tasting," says Jack Knight, a brewmaster from SABMiller who has spent 10 years in China.

Write to Sky Canaves at sky.canaves@wsj.com