How do you feel about losing the fight for Harbin Brewery?
Parker: Obviously not to too happy, although the $124 million profit from the sale helps! And we still have our 49% JV with China Resources Enterprise, China Resources Brewery, with whom we've been allied for ten years. It's not always an easy relationship as we have to take decisions based on a consensus. But their chairman sits on our board in London and we've built up a very strong working relationship and more than enough volume - 11% market share - for further expansion. HB would have been nice, but we're still looking at further acquisitions.
We're also shifting towards improving our sales and distribution, training up management, working at efficiency and building up our brands. Investing in brands takes time and money. There's still one or two acquisitions in the north-east to be had.
But we are also building up our operations in Anhui, Wuhan and not too far from Shanghai. We are looking at entering the super premium market (foreign brands) such as Miller. We're looking at moving away from the second-tier cities and moving into the more sophisticated first-tier cities where the uptake of our brands will be better. We are looking for top-end growth in the super premium brand market. It's the only area where profitability is up to international standards!
What do you think of the price Anheuser paid?
Well, it's pretty high at $55 per hectoliter. Over the past ten years, our price per hectoliter has been $25 to $35. Paying such a high price makes it much harder to get a good return on your investment.
How do you intend to use the $124 million gain from your sale, as a war chest?
Not specifically. We'll use it prudently and not necessarily reserve it for China. Certainly we'll use some money to help our brands and invest ahead
Do you feel you missed out on an opportunity to snap up Harbin Brewery earlier? For example when you bought the 29% in June last year, it was just under the level which would have triggered a general offer.
Hindsight is always 20-20! There was an occasion when we could have done the deal. But at that stage the first tranche was all that was on offer. But in hingsight when the second tranche came up we could have closed it at a decent price.
It sounds like you're drifting into the first-tier cities. Isn't that a reversal of your current slow-but-sure policy of building up a patchwork of regional breweries?
We've made the decision to introduce international brands and the early adopters are all in the first-tier cities. But it's not really a reversal. We are also building up CRB's brand Snowflake, previously a regional brand in the north-east, into a national brand. You need both. For example, ee have until now been shipping produce from Tianjin to Shenzhen, but the supply is too long. It's better to source locally. Outside Shanghai we have bought a local brand within striking distance of Shanghai where we can produce international brands, as we can in Tianjin where we acquired the Foster's facility. We still need to do some work in the south of the country.
You seem to be going back to the strategy of the 1990s when brewers tried to introduce foreign brands nationally and largely failed. Do you think the market is now ripe for that?
Beer is the fastest growing segment in the consumer market. The foreign premium beer market is only 2% of the market but it's growing faster than the overall beer market.
Had you been successful in acquiring Harbin Brewery, how would it have fitted into your national brand strategy?
Harbin was a regional play, not a national one. There was overlap between Harbin Brewery and CRB so an acquisition made sense. Snowflake is being produced at all our breweries and we're now looking at rolling it out nationally. But we saw Harbin Brewery's brand Hapi as more of a local play. However, we do look to expand our regional foot print in certain areas, such as our Blue Sword acquisition in Sichuan and the recent acquisition of two breweries in Anhui. We're certainly not giving up on strengthening our regional beers. We can't survive on just the foreign brands, so we need the top-end, mainstream brands like Snowflake.
Our costs in China are pretty well controlled, although we could still work on productivity. The big challenge in China is to give consumers a reason to pay more for your brand. But we'd still like to access national TV and national promotions to build up Snowflake above the other mainstream local brewers.
Getting decent margins is what's really difficult. This also hasn't been helped by a couple of years of deflation. The concept of prices going up every year due to inflation doesn't exit here.
It's rumoured you've invested $170 million in China.
I won't confirm the number, but it's not far from the truth. We are cash positive. We reinvest quite a lot of our profits. The business largely funds itself. Our rate of return is little lower than our cost of capital, but not far off, excluding Harbin Brewery. By that mean, say the weighted average cost of capital is 10%, we would be positive, but not 10% positive.
Our existing business is pretty close to giving us a commercial rate of return.
Return on equity in China is said to be around 6%, which is low by international standards. Do you see any prospect of this improving?
Yes, it is a low rate of return. But we're seeing a boom in the range of consumer goods in supermarkets, for example. It's tough. You have to make your own luck. But that's why it's so important to keep down acquisition costs, otherwise it's so much harder to make a decent return. Just to say something is a strategic asset is too risky. We are preparing ourselves for a hard slog. It's not going to happen next year. Even today we see many of our competitors who are government-owned and lacking a profit motive. So you have to be really careful about your quality, in terms of packaging, promotions etc.
Do you have a rule of thumb, relating per capita GDP to a takeoff in beer consumption?
Not really. Europe is obviously very wealthy (and drinks a lot of beer), but the Czech Republic isn't but still has very high beer consumption. It's complex. But in the last 20 years we have seen a strong shift in China from grain spirits to beer, as there has been in Russia. But when incomes go up, people don't necessarily drink more beer. Mobile phones and other items compete for discretionary spending.
