China’s New Craft-Beer Bully

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The global giant that owns Budweiser wants to dominate the craft-beer market in China.

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By Scott Cendrowski

In late 2015, Chandler Jurinka realized someone was spying on his beer taps.

Jurinka and a partner own Slow Boat Brewery, a Beijing craft-beer maker that distributes its beers across a dozen cities in China and runs a new three-level brewpub in Beijing’s nightlife district. (Jurinka named the brewery after the 1940s Frank Loesser love song “On a Slow Boat to China.”) The business is driven in part by sales of kegs to restaurants and bars in China’s capital, where good beer isn’t as easy to find as it is in, say, Seattle or Kansas City.

One of those restaurants, a popular spot called Home Plate BBQ, once sold five Slow Boat drafts on its nine taps. Slow Boat sent a technician weekly to take care of the tap lines: “We bought them, installed them, and maintained them,” says Jurinka. But one day the tech was startled to find a device called a flow meter monitoring every line. Flow meters measure the beer passing through the taps, as a way for restaurants to track sales.

Home Plate itself hadn’t installed the meter: The global beer giant AB InBev (BUD, +0.81%) had. The restaurant owners told Jurinka it was a free perk from the brewer of Budweiser, Corona, and Stella Artois. With one move, AB InBev had earned goodwill with the restaurant and got a source of intel on its competition — since the meter could monitor Slow Boat’s sales in real time. Jurinka, a broad-shouldered former U.S. Army sergeant, was incensed, he says, “but other than take our beer off tap, there was little I could do about it.”

Then last summer Home Plate hosted a four-day event for AB InBev — a Beijing unveiling for the craft brand Goose Island that included free beer and selfie opportunities with the goose mascot. China’s news sites covered the event like a fashion show. By autumn the restaurant had replaced all but one of Slow Boat’s taps. Now sitting atop Home Plate’s draft menu: three Goose Island beers.

The flow meter was one of the first salvos in a new marketing war. AB InBev is bulldozing its way into China’s nascent craft-beer market: Since early 2016, the Belgian-Brazilian beer conglomerate has inundated Beijing and Shanghai with Goose Island, the Chicago-based craft brand it acquired in 2011. Goose Island brews exotic beers that it ages in French wine casks and bourbon barrels and has the kind of cute animal logo that can turn heads, and tastes, in China. The campaign is central to AB InBev’s strategy of promoting pricier beer to China’s growing ranks of wealthier young consumers. While competitors — including Heineken and Duvel — are importing their own craft beers, none have moved with the same gusto.

AB InBev is seizing an additional advantage: Thanks to China’s weak regulatory climate, it can muscle into the market in ways that wouldn’t pass muster in the U.S. AB InBev has leaned on distributors to keep them from carrying other craft beers. It has given bars incentives to promote Goose ­Island while shoving other beers off the taps—deals that would be illegal in the States. It’s offering lavish salaries to poach local brewing talent. “AB InBev wants to be a craft-beer brewer,” says Gao Yan (高岩), who owns a Nanjing craft brand called Master Gao. “But they want to act like a big brewer.”

The leviathan is turning to China, the world’s biggest beer market, to compensate for a catastrophic mistake it made in the U.S. — missing out on the craft revolution. Over the past decade, craft brews grabbed 20 percent of the U.S. market in dollar terms, largely at the expense of mass-produced lagers like AB InBev’s Budweiser and Bud Light. In 2016, the company’s U.S. sales fell 2 percent; Budweiser sales have taken the biggest hit, falling 35 percent since 2008. “Craft beer would never have become as big under independent ownership if [AB InBev’s] Anheuser-Busch had not more or less ignored the sector,” Sanford Bernstein analyst Trevor Stirling told the website Just-Drinks in December.

AB InBev has purchased nine craft breweries in the U.S. over the past six years — Goose Island was among the biggest acquisitions, at US­$39 ­million — but they haven’t turned around slowing sales. China’s tiny but booming craft market offers a second chance to capitalize on a global trend.

Brewers endlessly haggle over the definition of craft beer. Generally speaking, it’s beer produced by small breweries that is more flavorful and (usually) higher in alcohol content than what you typically find in the grocery store. (Whether brewers remain small enough to hold the label “craft” after being acquired by giants like ABI is a contentious topic.) However it’s defined, the craft market in the Middle Kingdom is booming. A dozen successful breweries have popped up across Beijing and Shanghai, with more appearing in Chengdu, Nanjing, Shenzhen, Wuhan, and other cities. Beer is the most consumed beverage after tea in China, which now gulps a quarter of global beer output. Retail sales have doubled since 2008, according to Euromonitor, and Chinese consumers spend 550 billion yuan (roughly US$80 billion) annually on beer.

Craft’s share of that total is undoubtedly small, though analysts can only offer guesses. “Right now it might be 0.1 percent,” says Jonny Forsyth, global drinks analyst at Mintel. But he adds that craft beer tends to take off as a market matures, as China’s is. Gary Brown, owner of beer distributor Top Shelf Asia, says AB InBev’s appearance in China is a sign of heady times to come. “It’s like Starbucks: If you see a bunch of their coffee shops going up in an area, you know it’s a pretty good one to be in.”

There’s another reason China is a good market for AB InBev: Regulations disproportionately favor the biggest players. In the U.S., brewers can’t legally own bars or monopolize the beer a bar offers. In China, brewers can and do buy bars, in addition to controlling distributors. Rules around product safety give another edge to the giants. AB InBev imports Goose Island into China from the U.S., where it’s brewed under American regulations. China’s own brewers, however, have to obey more restrictive rules. Regulations require a stamp of quality approval on bottles produced inside China. Those stamps are available only to production lines that generate at least 12,000 bottles an hour — huge multiples of what craft brewers produce. Beer bottled in China also must be pasteurized and filtered, eliminating yeast and sediments that give craft beers character.

In practice, those rules mean microbreweries have to sell their beer in kegs on-site in brewpubs, while “craft” imports can be easily distributed anywhere. The upshot: Beer is the rare market in which China plays favorites with big foreign companies at the expense of local producers. And AB InBev is racing to tap that advantage.

AB InBev began when three Brazilian investors — the founders of the private equity firm now known as 3G Capital — bought a declining brewer called Brahma in the late 1980s. That operation merged with Belgian giant Interbrew in 2004 to create InBev, which then obtained America’s largest brewer, St. Louis’s Anheuser-Busch, in 2008 in a stunning US$52 billion deal. The new AB InBev outdid itself last year by paying US$103 billion for rival SABMiller. It now controls 200 brands and nearly a third of the global beer market. Last quarter, AB InBev sold US$14.2 billion worth of beer.

But diminutive Davids continue to wound this sudsy Goliath. AB InBev has missed analysts’ estimates for seven quarters in a row. Sales have sunk for not just Budweiser but Bud Light, Busch, and other mainstay brands. So, like other multinationals, AB InBev is looking for growth in China, and it’s pulling no punches. The heart of its strategy: Squash — or someday soon acquire — small breweries before they have a chance to capture market share.

AB InBev coordinates its moves through a division called Disruptive Growth; competitors call it the Craft Beer Disruption Unit. The first step: controlling the bars. “This is something that you just don’t see in the U.S.,” says Michael Jordan, the American expat brewmaster at Boxing Cat, a Shanghai brewery that last year won China’s first medal at the World Beer Festival. He argues that the incentives brewers like AB InBev offer in China would run afoul of Western laws. “There’s just no regulation on this side.”

It’s unclear how many deals AB InBev has with bars like Home Plate, but rival brewers say these “tap takeovers” are widespread. One bar owner in Beijing’s Sanlitun nightlife district described a recent deal he says AB InBev proposed to him and his partner. (The owner insisted on anonymity for fear of harming his business prospects.) AB InBev reps approached him last spring and offered to pay 60,000 yuan (about US$8,600) a month — enough to nearly cover about two-thirds of his bar’s rent — if his bar agreed to host its assortment of beers including Goose Island. He said AB InBev told him it was planning to purchase all the outdoor advertising space in the area, which would put his bar on better negotiating terms with local officials. “Often the government official says, ‘If we let you have a big sign, your neighbor restaurant won’t have one, and that will be bad,’ ” he said. “AB InBev will just buy the neighbor a sign!”

Still, he and his partner were uneasy. Would they still be able to show rugby matches sponsored by Heineken? And the craft beers he already offered, from California’s Firestone Walker and Kansas City’s Boulevard? Under the agreement, he couldn’t price those for less than AB InBev’s beers. “So how would that look, those being sold at 25 kuai [yuan] when Goose Island is 20 kuai?” he says. Ultimately, he and his partner didn’t sign: They didn’t want to lose control.

AB InBev’s offer may have been heavy-handed, but in China, it’s legally unproblematic. If it tried a similar takeover in the U.S., it would face antitrust action under laws that have been in place for 80 years. Before Prohibition, the brewers owned the bars. They sold their product cheaply, squeezing the profits out of saloons and tempting bar managers to juice margins by introducing gambling and prostitution. After Prohibition was overturned, a three-tier distribution system — including a middleman distributor to negotiate with bars — became a staple of alcohol regulation, keeping big brewers’ influence at a remove from bars.

On the other side of the world, this system doesn’t exist, and Chinese bars have a tough time turning down the kind of money AB InBev offers. John Guy, a quick-talking Australian whose ­McCawley’s chain of bars in southern China had sales last year topping US$10 million, says he has heard of bar owners being offered 1 million yuan (about US$150,000) to switch all their draft beer to AB InBev brands. Guy prides himself on his range of overseas craft beers and says he would never accept such a deal. But other bar owners don’t have the same choice. “Some bars run at break-even and make money on tap bonuses — US$15,000 a year on some,” he says. For them, AB InBev looks like a lifeline.

AB InBev is also targeting China’s distributors. Fortune has seen a contract between AB InBev and one of the country’s nationwide distributors under which the distributor must report to AB InBev before it signs a craft-beer deal with another brewer. “Dealers and AB InBev should gather statistics and written confirmation regarding the super premium beer products’ brand and sales volume before both sides sign the agreement,” says the contract, issued last year. In essence, AB InBev gets veto power over whether the distributor sells another company’s craft beer.

Previously in China, distributors would sign similar contracts but could carry other beers through side deals. But through contracts like this one, AB InBev has hamstrung distributors. A distributor owner who requested anonymity because he didn’t want to antagonize a powerful player told Fortune he was offered a deal to carry Goose Island, but it would have restricted him from storing competing brands in the same warehouse — effectively keeping his small company from carrying the rivals.

Behavior like this would likely get quashed in the U.S. During AB InBev’s acquisitions of breweries in North America in recent years, craft brewers complained that the beer behemoth was trying to curb competition by striking similar deals with distributors. The Justice Department scrutinized the practice, and in July it announced a settlement with AB InBev curbing such deals and requiring the opportunity for formal DOJ review of future acquisitions. As far as anyone knows, there’s no similar action afoot in China.

Rebecca Kuo, an AB InBev spokesperson, declined to comment on AB InBev’s relationships with China’s bars, calling them “commercially sensitive matters.” She added that InBev had given away flow meters to improve availability and sales promotions of the company’s beers and that “it is ultimately up to the wholesalers as to which beers they choose to carry.” Goose Island president Ken Stout said in a statement that drinkers in China and other non-U.S. markets “have responded really well to our beer.”

In a country where imported beers — even mass-market ones like Budweiser — have a patina of luxury, AB InBev has steadily expanded. The company controlled 15.7 percent of China’s market by volume in 2015, up from 11.7 percent in 2011, according to Euromonitor, trailing only domestic giants China Resources Holdings (which brews the world’s top-selling beer, Snow) and Tsingtao.

AB InBev doesn’t break out craft numbers, but its China sales grew 4 percent, to US$3.4 billion, in the first nine months of 2016, and earnings before taxes and adjustments jumped 19 percent, to US$973 million. That’s a 30 percent profit margin — impressive in a country that ranks dead last among the world’s top beer markets for profitability.

That gives the company piles of cash to throw around. China’s beer veterans say AB InBev has launched a frenzied hiring blitz for its craft unit, offering salaries three to four times what the pros could earn elsewhere. Two salespeople from Slow Boat left last year, Jurinka says, and Gary Brown’s distribution business had two defections. Daniel Dumbrill, owner of Shenzhen microbrewery Taps, was stunned when the AB InBev district manager for all of Asia called one of his staff and demanded, “Why are you not working for us?” The company is even poaching the beer proselytizers who helped build China’s craft scene. Two hip women from Shanghai and their Chihuahua — a team known collectively as BrewGirl — sold homebrewed beer out of their Mini Cooper for two years before joining AB InBev last year.

AB InBev will even hire customers. In September, Goose Island advertised on Chinese social media looking for young people to fill bars: “Do you LOVE drinking Goose Island? Do you think it’s even better when it’s FREE? Or, better yet, getting PAID to attend these events? Join the Goose Family and these dreams really can come true.” The company promised drinkers in Beijing and Shanghai, ages 20 to 40, that they would earn money in addition to “beer and swag.” If AB InBev is going to go to the trouble of controlling China’s bars, they had better be crowded.

The brewer also offers discounted and sometimes free kegs to bars to build Goose Island’s popularity — and that’s the tactic some competitors fear most. Craft brewmasters believe that AB InBev is distorting the market, dragging down prices for craft beer while incurring losses that smaller brewers can’t sustain. Joe Finkenbinder of Bionic Brew in Shenzhen says he has heard of Goose kegs selling for a third of the cost of his kegs. “They’re using that as just the tip of the spear and then driving the prices into the ground,” he says.

Not everyone selling craft beer in China is critical of AB InBev. “I’m actually excited about what they’re doing,” says Dumbrill, the Taps owner. Dumbrill opened a location in Chongqing, in ­Sichuan province, a less affluent city where his staff is constantly explaining to customers why craft beer is more expensive than what’s being sold down the street. He expects that the multi­national’s splashy marketing campaigns will help teach Chinese drinkers about the differences between, say, an IPA and a lager.

Heavy promotions of Goose Island also help bars attract customers who, in theory, will try other beers. Li Wei, a 35-year-old host on CCTV, co-owns a Beijing brewpub called Pei Ping Machine Brewery. He added two Goose Island taps last year. In return, AB InBev last October delivered two free kegs of Goose Island’s Bourbon County Brand Stout, a special-edition beer whose annual short-term release in the States is celebrated among the craft cognoscenti. Li’s tap house sold it in eight-ounce glasses for US$14. He calls AB InBev a partner.

Some of AB InBev’s freebie promotions mirror the way craft beer is sold worldwide. Mass-market brands like Budweiser lend themselves well to conventional advertising, says Anna Ward, drinks analyst at Euromonitor, but “when you advertise craft, you take away from its credentials.” Hollywood doesn’t market an indie film the same way it does the latest "Transformers" blockbuster; the same logic applies to beer. That’s a key distinction because the distaste for “big beer” that fueled the craft boom in the U.S. is bound to migrate to China, if it hasn’t already. Total beer volumes sold in China have declined since 2014. AB InBev has told analysts it plans to boost profits in the country by focusing on premium beers, and it may be working — its China revenue is growing even as sales by volume decline.

For all its recent spending on Goose Island, AB InBev is still waiting for a payoff. After the company blanketed Chinese cities with events and discounts last summer, there were reports of tepid sales. Insiders say at one point Goose Island flooded bars and restaurants with kegs priced at cost, eager to move the beer before it went stale.

The consequences of such hiccups may be tiny in a craft-beer market that’s still tiny itself. Once upon a time, the U.S. craft market was equally microscopic, and AB InBev missed the trend. That’s a misstep it doesn’t want to repeat. And in early March it showed it was serious, acquiring the Boxing Cat brewery for an undisclosed sum. Jordan, the brewmaster, no longer has to worry about competing against the new giant in town. He’s now on the team.

A version of this article appears in the March 15, 2017, issue of Fortune.

© 2017 Time Inc. All rights reserved. Republished from fortune.com and published with permission of Time Inc. Reproduction in any manner in any language in whole or in part without prior written permission is prohibited.

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