China’s market is very competitive. A wave of consolidation has reduced the number of breweries from 800 in the mid-1990s (when having their own local brewery was a matter of prestige for local party officials) to today’s 300 foreign and domestic brands. As a result, the top five breweries – China Resources Enterprise (whose popular Snow beer is a joint-venture with multinational SABMiller), Tsingtao Brewery, Belgium-headquartered Anheuser-Busch InBev (which makes Budweiser), Beijing Yanjing Brewery and Danish Carlsberg – increased their share of total volume from 55% in 2008 to 70%. The resulting cut-throat competition has slimmed down operating margins across the board to less than 10% in some cases.
In such growing but competitive market, generating profitable growth becomes an imperative. It often implies going on the offensive, it being looking for new markets, inventing new products, teaming up with adversaries, innovating or investing to connect with customers while closely managing the cost base. Faced with normalising growth, one of China’s top five beer makers, Tsingtao Brewery Co. Ltd (pronounced ‘Ching Dow’) is trying to move beyond its traditional low-cost provider play, and presents a good example of a profitable growth strategy:
- Looking for new markets. For Tsingtao, this means moving in the fast-growing premium market (currently only 5% of the market versus 30% in the US, but it offers bigger margins despite higher costs of production) with high-end products such as Tsingtao Gold beer or Tsingtao Pure Draft beer, aimed at satisfying demand from city dwellers (and their ability to pay and willingness to trade up) for taste, quality and freshness, as well as for dining out and night-clubbing.
Overseas, where it has been available since the 1950s in the UK and 1972 in the US, Tsingtao is now trying to move beyond Chinatowns and into downtown areas with its lighter products, to be enjoyed either with Asia-inspired foods, or even without food. It has also signed a multi-year agreement with the Cleveland Cavaliers basketball team, the first such agreement signed by a Chinese beer brand in the USA.
- Inventing new products. For a single product company, this can represent a challenge but it often takes the form of product extension such as fruit-enhanced, low-calorie or non-alcoholic brews to respond to customers’ quest for healthy living, or of diversification into beers that match Chinese regional tastes e.g. a roundly type of beer in the north, a gentler taste for the South, and higher alcohol content and a bitter taste for the Guangdong and Fujian coastal areas. It is also experimenting with event-related designs, such as a canned beer and aluminium-bottled beer with a football theme for the FIFA World Cup, an aluminium-bottled beer designed after its beer festival, or a “Tsingtao Beer Classic 1903”.
- Teaming up with adversaries. Tsingtao’s part Japanese-ownership through Asahi Breweries’ 19.9% stake has brought best-in-class practices such as stock management. Its joint-venture with Suntory to produce and distribute beer in Shanghai and Jiangsu province will give it access to new markets. In Mexico, it has signed a distribution contract with Grupo Modelo, the country’s largest brewer and producer of Corona.
- Innovating – in the case of Tsingtao, towards more environmentally responsive brewing. Through a partnership with a local university in Qingdao, it explores ways to re-use brewery wastewater and other waste through techniques such as bio-contact oxidation. It not only treats high volumes of bio-solids efficiently by adding live cultures to the wastewater, but also allows methane generated in the process to be piped to households for cooking, while the remaining waste is used in fertilizers and animal feed. Tsingtao beer topped its rival on the 2014 list of top 100 China Green companies.
- Investing to connect with customers. Access to different markets, it being on-trade channels (such as hotels, restaurants, etc) or off-trade channels (supermarkets, malls, convenience stores, etc) is dependent on distributors who often put the their own interests above those of the beer companies’. Tsingtao is the first brewer to reduce this reliance and to develop its online sales channels including with branded flagship stores on third-party e-commerce platforms such as Jingdong, Amazon, or WeChat. Being perceived as a Northern beer, Tsingtao has also developed a social network strategy to communicate frequently and directly with its customers, taking the opportunity to educate them about its products e.g. offering advice for food pairing with regional cuisine.
It is also investing to optimise and consolidate its portfolio of brands, using its strong national brand image as a quality beer (Tsingtao beer) to supplement the regional brand’s perceived value brands including Laoshan, Hans, Shanshui and Yinmai.
- Managing a lean cost base. As raw materials such as barley are mostly imported, Tsingtao tries to forge long-term strategic partnerships with local barley producers. It invites them to its annual global suppliers’ conference and has named Mogao Industrial Development Company as its sole strategic malt supplier in Gansu Province.