Major indices finish lower amid GE earnings disappointment >>> READ MORE

Budweiser: The Wrong Tool for Anheuser’s China Job

The 'bowtie' is foolishly ignoring its best Chinese assets


At one point not so long ago, Budweiser was the name in domestic beer consumption, with the namesake brand and its little brother Bud Light controlling much more of the market than nearest rivals Coors (TAP) and Miller (SBMRY).

In 2002, for instance, the two Anheuser-Busch InBev (BUD) brands combined to control 26% of the domestic market; the next-nearest brand was Miller, with a market share of only 7%. However, by 2011, Coors Light had replaced Budweiser in the No. 2 spot, and it currently owns 9% of the market versus Budweiser’s 8%.

Bud Light is still the nation’s top dog, driving about half of all domestic beer sales, but with overall beer sales still rapidly dropping in the United States (and Bud Light helping to lead that charge), critics could argue that Anheuser-Busch simply owns the biggest part of a sinking ship.

To combat evaporating domestic sales, Anheuser-Busch has been expanding overseas, and it has hitched its wagon to the Budweiser name to do so.

Big mistake.

Right Idea, Wrong Approach

Perhaps taking a cue from the success that American fast-food companies like KFC and McDonald’s (MCD) have found in China, Anheuser-Busch InBev has spent the past two years (and $1.4 billion) working to improve the distribution of Budweiser-branded beer in China.

It’s not done trying to promote the name, either. The owner of the Bud brand aims to establish several more breweries in the country in the foreseeable future, adding to the six it has already established since 2008.

The focus on China as Anheuser-Busch’s proverbial “next big thing” makes sense on the surface. The country drinks one-fourth of the world’s annual beer production, and industry experts say China is going to be responsible for 40% of the beer industry’s growth over the next several years.

As the company might or might not have figured out yet, however, selling Budweiser in China is nothing like selling it in the United States. Despite plunking down $1.4 billion to gain traction with the brand name, as of the end of 2012, Budweiser still only commanded a slim 1.7% of China’s beer market.

As for the reasons Anheuser-Busch is struggling — and will struggle — to gain traction in China, there are a few, some of which seemingly conflict with one another. They’re all impasses that point to a tough road ahead for the beer company.

  • Consumers (still) prefer locally made brands. Granted, “locally made” is a relative term in China — a country that spans 3.75 million square miles — but Chinese beers still are a first choice for Chinese consumers. The packaging, marketing and flavors for China’s brews have become part of the culture, much like Budweiser, Coors and Miller have become a piece of Americana. That’s a bond Anheuser-Busch won’t easily break. Ironically, Anheuser-Busch owns several Chinese brands it could use to gain market share in China, but it’s insisting on doing it with Bud.
  • Logistics will remain a headache. While a fine wine may improve with age, beer is only good if it’s fresh. That means quick deliveries from breweries, which is tough to do when there are only eight Budweiser breweries trying to cover China’s nearly 4 million square miles. Add in the fact that more than 30 of China’s cities are limiting the number of delivery trucks they allow on their crowded streets, and the deck is neatly stacked against the Bud brand. The planned doubling in the number of Chinese Budweiser breweries won’t make much of a dent on this front.
  • In China, Budweiser is a perceived as a premium brand, and commands a premium price. In times of strong economic growth, when the so-called “wealth effect” is running rampant, being positioned as a premium name is good news for a company. But when the pace of economic growth slows — as appears to be happening in China now — being perceived as a premium brand means Budweiser sales could slow as cheaper, locally brewed beers fall back into favor.

The Bottom Line

Kudos to any company that’s willing to take a swing on a market that holds enormous potential. But shame on the organization that refuses to listen to and observe what that market’s consumers say, and instead assumes it knows what those consumers will want.

Of the 10 top-selling beers in China, none of them own more than 20% of the market. That doesn’t imply it’s a market that lends itself to domination. Also, of the 10 top-selling beers in China, none of them are American names.

Ironically, though, two of the top 10 beers in China are brands owned by Anheuser-Busch InBev: Harbin and Sedrin. But for some reason, Anheuser-Busch refuses to make either of them the centerpiece of a major push into China. That’s why the push won’t work.

Between what’s becoming a fairly expensive struggle in China and deteriorating market share in North America, Anheuser-Busch InBev continues to be a tough stock to justify owning.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

©2017 InvestorPlace Media, LLC