Big Brewers Pour Into Emerging Markets

Global players scramble for a foothold in these up-and-coming regions as growth slows in developed countries

by Jean C. Stout

Opportunities abound for brewers in developing markets, where consumption rates are significantly lower than the more mature markets. The global average per capita consumption of beer is 22 liters per person, far below the European average of 78 liters. Sustained economic growth, with rising disposable income levels that foster greater consumer confidence, is and will remain the primary factor for emerging markets to continue to increase consumption levels. Latin America currently is a fast-growing market with exceptional potential, thanks to it young age median, and good cultural acceptance of beer.

As a result of heightened emerging-market growth, multinational investment remains strong, as the leading global players look to build considerable portfolios in less-developed markets of Asia Pacific, Central and Eastern Europe, and Latin America. Still, in such markets, governments may regard alcohol consumption as a public health issue and abruptly decide to increase duty levels to curb consumption or the pace of its growth. Such an effort is currently taking place in the Russian Federation, where we expect duties on beer to double in 2007. However, the increased level, at about 5% of the average consumer price, will still remain well below the typical level for mature markets (e.g., 32% in the Britain).

Not all have low beer duties: Turkey's duty rate is in line with the harsher European regimes, such as Norway or Sweden, where duty accounts for more than 50% of the consumer price of beer. Turkey's tax rate also increased abruptly, doubling within the three years ended in 2006, slowing the growth of the market. Nevertheless, taxes on beer typically are only a fraction of those on distilled spirits in any given market. Changes in the tax environment are most likely, in the long run, to affect certain South American markets (especially Colombia, Peru, and Panama) as they benefit from more modest duty levels than Mexico or Brazil, although their tax environments currently are stable.

Asia Pacific

Demand is rising, but pricing is an issue. According to Euromonitor, the region's emerging markets experienced steady growth in beer volume driven largely by China, even though two of the three largest markets, Japan and South Korea, remained weak. Volume growth reflected the continued expansion in beer consumption in the region's less-developed sales areas. The continued expansion and increasingly influential Chinese economy was central to this growth. Rising demand for premium and imported lager can be linked directly to the generally upbeat financial environment, with consumers increasingly willing to trade up. Economy lager also performed well, highlighting the price sensitivity of the emerging Asia market.

China: China is the largest beer market in the world. However, it is complex and can be described as a collection of regional markets. Despite a wave of consolidation in recent years, the market remains highly fragmented with more than 500 breweries across the country. The Chinese beer market has grown tremendously in recent years on a combination of factors, including a huge amount of foreign investment in the market, an increased level of consumer spending, and government economic reforms. China's beer market grew nearly 15% in 2006, the third consecutive year of double-digit growth. While beer production in China has expanded over the past few years, the lack of a marketing and promotional culture and inadequate distribution systems have made it difficult for brewers to exploit the potentially vast market of new consumers and still fairly low per capita beer consumption.

Most international beer companies—including Anheuser Busch (BUD; S&P credit rating, A)—have invested in the Chinese beer market during the past few years, with the goal of building a national brand and distribution network. Still, the price of beer remains low, although the relatively affluent urban consumers are becoming more aware of brands, because the country's populous rural poor are extremely price-conscious. This will make the goal of building a national brand more difficult to fund internally given the expected significant amount of marketing investments needed. Although China holds boundless potential, foreign brands need to find the right strategy to be successful in this challenging domestic beer market. We expect further investments in China and that multinational beer companies will continue to focus on improving mix, specifically the premium beer category, which is expected to continue to grow faster than cheaper beers as consumers trade up to branded offerings.