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China's beer industry: Breaking the growth bottleneck

Chinese beer companies need to strengthen their brand positioning, distribution and cost control.

Overview

China’s beer industry has enjoyed impressive growth over the past three decades—ranking first in the world in terms of output in 2010. But despite its achievements, the industry now faces serious challenges, including slowing growth rates and slim profit margins. To break the bottleneck, the industry must look to new growth sources.

Promising strategies to move forward could include introducing high-end products in China’s urban markets and launching low-cost but still high-quality products in rural areas. To make these strategies work, Chinese beer companies will need to strengthen their operations on three fronts: brand positioning, distribution and cost control.

Background
Since 1980, the Chinese beer industry has seen steady escalations in production as well as consumption. Despite its achievements, the industry has encountered several obstacles. For one thing, spectacular growth rates from earlier decades have recently lost steam.

The industry also has meager profit margins, in part because low-end products account for 85 percent of the domestic market. Fluctuations in prices for critical raw materials such as barley and hops; soaring promotion costs aimed at launching higher-end offerings; and relentless price wars have whittled margins to 6.4 percent—3.9 percentage points lower than the industry average. How might Chinese beer companies surmount the obstacles confronting them?

Key Findings

In China’s urban areas, the beer market is mature and saturated, and competition is stiff. Thus, beer makers cannot hope to boost sales to dramatic new levels. However, they may be able to enhance profits by developing high-end products for city dwellers. Urban areas offer unique advantages that make them ripe for this strategy. These advantages include rising disposable incomes that have sparked demand (and ability to pay) for taste, quality and freshness as well as for dining out and nightclubbing.

In addition, urban Chinese are showing more interest in healthy living. Beer makers can cater to these preferences by introducing the kinds of high-end, specialty products that people look for in quality restaurants and clubs as well as health-conscious “craft” offerings such as fruit-enhanced, low-calorie or non-alcoholic brews.

Analysis

To catalyze fresh growth, companies in the Chinese beer industry will need to look beyond traditional strategies, such as being the lowest-cost provider. Adapting their approaches to the unique characteristics defining China’s diverse markets can open up new and better opportunities for growth.

We believe that introducing high-end products to urban consumers and low-cost but still quality beers in rural markets can help beer companies break the growth bottleneck. But delivering on these two strategies will require excellence in brand positioning, distribution and cost control.

How to deliver these premium products to urban Chinese? Simply refreshing product packaging and raising prices will not be enough. Companies will need to research and clarify urban consumers’ changing preferences and priorities regarding beer. They will also need to educate consumers about their new products and intrigue them—for example, by using social media sites to describe their offerings and explain how to pair beers with different foods.

Authors
Cherry Lu Cui, Mickey Fang Xu and Jeff Kao