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Beer talk

Interbrew’s top man in China talks about recent acquisitions and why the company is so optimistic about China’s beer market.

Tan Wai Kee is the country manager of Nanjing Interbrew Brewery. Last year Interbrew made significant investments in two regional Chinese brewers and it will by no means be the last. Here he talks about the Belgian multinational’s thirst for China.

- What is Interbrew’s broad strategy in China?
- Tan: To answer that question I need to talk a bit about Interbrew’s history and its broad strategy around the world. We call ourselves the world’s local brewer. Each word in that slogan has a significance for us.

Our history dates back to the 14th century. But in the 1990s, the two leading brewing families merged in Belgium and in listed. The ambition was to be a world player. We determined that we were a brewer. So we gave up the Coca-cola franchise.

In 1990, if you looked at a map of Interbrew’s presence we were very much a European company, with a presence in Africa. If you fast forward to today, we operate in all time zones across the world and have become a world player. We did this because we recognized the beer industry was going through a rapid global consolidation.

We decided we wanted to be a leader. So since 1991, we have made 36 acquisitions across the world.

The third part of the slogan is the word ’local’. Our local strategy is to promote local brands. Interbrew is not about a single brand, unlike some of our competitors. We are a portfolio of brands. So we operate strong local platforms. We brew beer in 21 countries and sell beer in 120 countries. We have over 200 brands in our portfolio, with the more famous being names such as Stella Artois, and Becks.

In China we focus on Jinling beer or Zhujiang beer. These are the brands we focus on first and foremost. And it is only after we have established our position at the local level that we think about launching other beers from the portfolio onto the marketplace.

We now have three operations in China. We made our first two acquisitions in 1997 in Nanjing. And last year we made two more. We made a minority acquisition in Zhujiang, which is one of the larger beer companies in China, and plans a domestic IPO. Then we made an acquisition in Ningbo. It’s a strong, profitable local company, with absolute domination of the local market.

The Chinese strategy has one other element. We are focusing on capturing regional posititions. China is so large. A city in China is sometimes as large as a country in Europe, so we have to divide the country in regions where we can achieve excellence. We have identified the Pearl Delta and the Yangtze Delta as key regional centres; and we will be growing in these two areas.

- So you plan to make more acquisitions?
- Our intention is to be an endgame player in China. The Chinese beer industry is embryonic but it is going through a very fast consolidation phase. If you went back 10 years there were about 800 breweries in China. Today there are about 400. I suspect that number will come down. Half the breweries are not profitable. Many of the stronger breweries are looking for strategic alliances. So there is also consolidation, both internally-driven as well as from international players coming into the fold.

- Obviously, Interbrew has been quite high profile. So too has been Anheiser Busch.
- Yes, Anheiser Busch has become high profile through the Tsingdao deal. CRE [China Resources] and South African Breweries is high profile. A couple of other international firms are high profile for the wrong reasons.

We all go through a learning phase. China is a difficult market. It is very competitive.

- How many of the indigenous Chinese brewers do you predict will remain after this consolidation process is over?
- There is already the emergence of a number of clear leaders. Tsingdao, Yanjing, the CRE group, the Zhujiang Brewery, and the Harbin Brewery in the North is immensely powerful where they operate. In Central China there are a couple more. So I’d say there are 10-15 breweries that have the chance to reach the top.

Interbrew has made 36 acquisitions since the early 90s and that would suggest Interbrew is quite good at doing acquisitions.

- In terms of valuing brewing acquisitions, is it different in China?
- The methodologies are the same. But there is perhaps a different strategic overlay. We are focused on strong, well managed and profitable breweries. We prefer this to simply buying assets because they are cheap.

You can buy a lot for relatively little cash, but you have to be prepared to salvage lossmaking brewers. That is not our route.

- What is the valuation methodology for buying a brewery?
- There are quite a few. We would look at valuation on a per tonne basis. We also do through research on the brand position. We look very closely at management capabilities because we cannot stretch ourselves too thin.

Perhaps we are a little more cautious in China than we might be in other places.

- The acquisitions you made last year, how do they compare to deals done outside China? Were the Chinese deals more expensive?
- Actually, no. In Zhujiang, I would say we have a pretty good deal. We are going in as a pre-IPO investor. If we achieve the profits that we forecast for this year I’d be rather happy. Indeed, we will have done a better deal than in some other places around the world.

The Ningbo deal also compares very well to our international acquisitions.

- So the IPO will be an A share?
- Yes, and hopefully we can get it done by next year.

- In terms of further acquisitions, you are looking at profitable brewers. Given that Harbin Brewery is controlled by a Hong Kong private equity firm, would that be a potential candidate?
- We are looking at strategic propositions. Our focus is on the two deltas, but that doesn’t rule out other opportunities of a significant size in another location. The coastal region is favourable. But I can’t comment on potential individual acquisitions.

- Is your business in China profitable, or are you growing it today to reap the benefits later?
- We are seeing numbers that are satisfying to head office. Nanjing’s volume growth last year was about 40%. Zhujiang had about 50% volume growth in a very big market.

So the growth numbers are impressive. Ningbo we are forecasting modest growth - I haven’t yet taken over the management completely.

In terms of numbers. Ningbo is very profitable, Zhujiang is extremely profitable - indeed it was the most profitable brewery in China last year on a per tonne basis.

We have 24% if Zhujiang. We can’t go beyond 25% as it then becomes a foreign joint venture and that will cause problems for the A share listing. We can buy stock in the aftermarket to increase our IPO and we have structured it so that we won’t be diluted post-IPO.

We are very committed to the development of Zhujiang. We have known the people at Zhujiang since 1984. We helped them construct the brewery and trained the top managers and sent them to university. The rewarding thing is that three of those managers are now in the top management.

- Over time you would hope to take a bigger stake?
- As opportunity would allow. Yes, we would be interested because we have the confidence that this is a very good brewery.

- And Nanjing, is that profitable?
- That situation is a bit different. We bought two breweries in 1997. One was in the city and was small and profitable. The other was a larger brewery outside the city that wasn’t profitable.

In the beer sense, we own [the area of] Nanjing. But by acquiring the larger, unprofitable brewer we dragged the average down. So for the past three years we worked to get the two to integrate.

We are seeing the results today. Last year both the breweries were profitable at an EBITDA level. Our next move to enhance profitability is to merge the small brewery into the large one. That will immediately cut a lot of overheads.

- So that will create a single brand, rather than two?
- We had merged the managements, which was an achievement, because back in the old days they were deadly competitors. We learned some very valuable lessons. The integration of breweries is a more difficult task than the acquisition of breweries. The Nanjing experience will be valuable for us down the road.

We do have two brands. The primary brand is Jinling beer, which is the profitable city brand. The Yali brand is the part that we sell to the other parts of Jiangsu province. That is a less profitable brand. But we need both brands to give us volumes and market share.

- Do the beers taste very similar?
- The two beers taste different. The prices are different. The market segmentation in China is as follows. There is an internationally imported premium segment, and the domestic premium segment. These are not significant for us. The largest volume is the ’core’ segment and that is also the most profitable segment. That is where my Jinling brand resides. Then below that is so called value beer. It serves the rural market.

Jinling retails at Rmb3 for a 630ml bottle. Yali sells for Rmb1.60. I have competitors who sell for Rmb0.90. Nanjing borders on Anhui province and it is relatively poor, But they are able to produce beer - that tastes like dishwater - for Rmb0.90.

Migrant labour - that build roads etc - is one source of demand for this cheap beer.

- It is fair to say that the profitable segment of the market is the ’core’? The premium area is very competitive, and less profitable?
- When you are in a bar and promo girls come towards you dressed in uniforms for a beer company, you are already talking about the premium segment. It is fiercely competitive. The core market is when a guy pedals his bicycle to the mom and pop and buys a case of 12 and takes it home, and drinks a bottle a day in the Summer months, then returns the bottles. Those were traditionally the true consumers.

We are now seeing drinking occurring on-premises like restaurants and it is growing fast. This is good because it flattens out the seasonality curve - because in Nanjing the Chinese did not tend to drink beer in Winter, and volumes drop to below profitable levels.

On-premise drinking is less seasonal, but it is also very competitive. That area is less profitable. Value beer is even less profitable, but is important for defensive reasons and market share reasons.

- How much is the core segment growing per year?
- I’d say about 6%.

- Do you use mostly local banks in China?
- The local operations use local banks, and we can get financing from them. Our assets are clean. Plus Zhujiang has strong governmental ties.

The gearing levels are acceptable. We are in the process of getting standby facilities in Nanjing of Rmb10 million and no one bats an eyelid at that.

- Have you kept money in China or taken it out?
- Brewing is so capital-intensive, and we are in the process of building so we are not in a hurry to repatriate money. But at the end of this year there should be some dividend flowback to headquarters.

Steven Irvine

Finance Asia - 27 April 2004
 
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