## Budweiser APAC’s Profit Plunges as China’s Beer Market Fizzles
The celebratory mood of 2023, marking the end of the pandemic, has given way to a more sobering reality for Budweiser Brewing Co. APAC Ltd. (BDWBF), the Asian arm of one of the world’s top beer makers. After a booming 2023, the company’s fortunes have reversed in 2024, primarily due to a slump in its largest market: China.
Budweiser APAC’s third-quarter business review revealed a stark picture. The company sold 7.12 billion liters of beer in the first nine months of the year, representing an 8.1% year-on-year decrease. Revenue dipped by 6.1% to $5.1 billion, while profit fell by a more significant 15% to $780 million. China’s economic slowdown is the primary culprit, although strong performance in South Korea provided some offsetting gains.
Budweiser APAC operates across East and South Asia, with a presence in South Korea, Japan, China, India, Southeast Asia, and New Zealand. While the company didn’t disclose specific revenue figures for China within the nine-month report, the market dominates its West APAC region, accounting for almost 90% of overall sales.
## China’s Sliding Beer Business
Budweiser APAC’s Chinese operations have been in decline since the end of 2023, with sales volume dropping 3.1% in the fourth quarter of last year. This downward trend accelerated in the first quarter of 2024, with a 6.2% volume decline and a 2.7% revenue decrease. The second quarter witnessed further deterioration, with sales volume plunging 10.3% and revenue plummeting by 15.2% year-on-year. The third quarter saw a continuation of this trend, with sales volume falling 14.2% and revenue taking an even bigger hit at 16.1%.
The company attributes these drastic declines to weakened consumer sentiment, primarily driven by a decrease in dining and drinking out. These downward trends reflect a broader shift in China’s beer market, which has been in a state of constant evolution since Western brands entered the scene in the 1980s and 1990s.
During the early stages of China’s economic takeoff in the Reform Era (starting in 1978), beer sales soared. An emerging middle class with increased spending power fueled this boom, propelling China to surpass the U.S. as the world’s largest beer market. However, market saturation set in as companies established more breweries and consumers with discretionary income diversified their beverage choices.
Demographic changes also played a role, particularly among the 26- to 35-year-old demographic, which represents 40% of China’s total beer consumption. This age group is shrinking due to an aging population and declining birth rates, directly impacting beer sales. Beyond demographics, changing lifestyles and rising living standards are also contributing to a decline in beer consumption. Consumers are increasingly opting for healthier diets and avoiding less healthy foods and beverages like beer. The rise of alternative alcoholic drinks with unique ingredients and flavors further adds to beer’s challenges.
These factors culminated in a turning point for China’s beer production in 2013. Production, which had been steadily rising, peaked at 50 million kiloliters in 2013, but has been declining ever since.
## High-End Strategy Faces Headwinds
Leading beer makers in China have not remained idle as their market shifts, and adopting an upscale strategy has become a common tactic to retain consumers. Lee Chee Kong, president of Carlsberg China, has pointed out that this upmarket movement aligns with a broader industry trend seen in the West over the past three decades, where pricier micro-brewery beers have gained popularity. In China, this strategy involves introducing new products, improving existing ones, and emphasizing luxurious packaging to enhance the consumer experience.
However, this strategy may be facing challenges in the current market, where a sluggish Chinese economy has prompted consumers to cut back on non-essential spending, including premium beverages like beer. Following a period of significant consolidation in the 1990s and early 2000s, China’s beer market is now dominated by five major companies: China Resources Beer (0291.HK), Tsingtao Brewery (168.HK), Budweiser, Yanjing, and Carlsberg. This group accounts for 92% of the market share, with Budweiser holding the third position with roughly 20%.
The challenging market environment leaves Budweiser and its peers with limited options other than vying for market share in a shrinking market. Despite its struggles, Budweiser APAC remains ahead of most of its publicly traded peers with a trailing price-to-earnings (P/E) ratio of nearly 19 times, surpassing China Resources Beer at 17 and Tsingtao Brewery at 14.
Investment banks have also expressed their concerns about Budweiser APAC’s performance. Morgan Stanley highlighted the company’s weaker-than-expected China sales and lowered its full-year sales forecast by 2% following the latest update. Goldman Sachs also reduced its sales forecast for the company from 2024 to 2026 by 1% to 3%. While maintaining a “buy” rating, Goldman Sachs lowered its target price by 8.2% to HK$10.10. UBS echoed this sentiment, maintaining its “buy” rating but reducing its target price from HK$13.78 to HK$11.72.
As Budweiser APAC navigates the changing landscape of China’s beer market, the company’s ability to adapt and find new avenues for growth will be critical to its future success.
