Budweiser turns to sparkling water to stay relevant in China

Beer giant Budweiser Brewing APAC (Asia-Pacific) is accelerating testing for new products in China as it works to keep up with rapidly shifting tastes in the world’s largest consumer market.

Spirits and beverages low in alcohol — or free of it altogether — are in the testing pipeline for the Chinese market in 2021, CEO Jan Craps said on Thursday. The company also wants to answer demand from increasingly health-aware consumers, he said.

“There are some consumer occasions and functional needs that we can answer with beer, but others we can better suit with other products,” Craps said. “Chinese consumers are spoilt with choices, so we want to give more choices.”

The move by Anheuser-Busch InBev’s (AB InBev’s) Asia-Pacific unit reflects a global strategy of diversifying out of beer, after Covid-19 slashed overall consumption at restaurants, bars and sporting venues. About 90 of AB InBev’s brands are now making non-beer options in 40 countries, mainly in Europe and North America.

AB InBev saw a 40% jump in sales from new businesses in 2020 to $1.2bn overall, while beer revenue fell 10%. Still, it remains heavily reliant on beer sales, with the newer drinks accounting for less than 3% of its total revenue of $47bn in 2020.

Budweiser APAC is among the foreign brands facing pressure to stay relevant in China, where shoppers are constantly bombarded with new brands and products and beer sales growth is stagnant. Consumer weakness in the country is showing across the board, mainly due to ongoing Covid-19 flare-ups. Starbucks shares slipped this week after China same-store sales came in significantly below estimates and average customer spending there declined in its last quarter, while Yum China Holdings missed expectations.

Budweiser APAC posted earnings growth of 19% in the second quarter on Thursday, missing analyst estimates.

Craps attributed the miss to a volatile currency rate and a difficult comparison to the same period in 2020, when China had just started to recover from the pandemic. He said in a media release targeted to the earnings that the company was still maintaining “healthy momentum”.

While overall beer sales aren’t growing in China, premium brews — Budweiser’s mainstay — are booming, as well as demand for beverages from energy drinks to packaged coffee and fruit tea, data from Euromonitor International shows.

Budweiser APAC’s quarterly sales, boosted by premium brands, rose 14% to $1.85bn — almost in line with pre-pandemic levels in the same period in 2019 — but were still weaker than expected. Its premium and super premium brands posted accelerated sales growth compared with the first three months of the year, while overall revenue growth dropped as lower-priced brands saw sales declines.

Stiff competition

Budweiser APAC faces a crowded field as it expands its repertoire in China. Shenzhen-based tea chain Nayuki Holdings more than doubled its sales in 2019 and grew another 22% in 2020, raising $656m in its Hong Kong debut lin June. Sparkling water and milk tea have led Warburg Pincus-backed healthy beverage maker Genki Forest to a valuation of $6bn. Nongfu Spring — China’s bottled water king, owned by the country’s richest man, Zhong Shanshan — is promoting its vitamin drinks and soda.

Other beermakers including Carlsberg and China Resources Beer Holdings are also diversifying.

“The beverage market in China is highly competitive with very low consumer loyalty,” said Jason Yu, MD of research firm Kantar Worldpanel Greater China. “Even the traditional giants have to start from the very beginning to build consumer trust and brand recognition with continuous innovation.”

Craps said his company maintains an advantage over younger start-ups that largely rely on online channels to distribute their wares, with a widespread sales network and mature supply chain. It plans to boost premium beer sales in 2021 by partnering with younger Chinese celebrities and launching fruity flavours intended to lure female consumers, he said.

China’s e-commerce platforms have also hastened the company’s testing process, Craps said, allowing products to be trialled solely online or in one city before an official launch. In the past, products rolled out nationwide without much time to adjust to consumer preference.

“We are much faster than we were five years ago to launch new innovation. The development cycle is shorter,” Craps said. “To predict which segments work, the answer in China is to trial. Consumers are very different here and move quickly.”

Budweiser APAC began testing two new, China-only non-beer brands in May, selling lychee-flavoured sugar-free sparkling water and peach energy drinks on Tmall.

The company in April also signed distribution agreements with Red Bull and Sazerac’s Fireball Cinnamon Whisky to sell online and in venues including nightclubs and bars.

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