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Beverage industry comes of age amid consolidation
By Gabriel Wong |
August 20, 2012, Monday
|
Print Edition
Print Edition
The food and beverage industry is a key component of the Chinese economy.
Its development and growth in recent years is a reflection of increased consumer buying power brought about by economic reform. The scale of this development is significant on a global scale and has been for some considerable time. For example, for the last 10 years China has been the world's Number 1 brewer.
The rapid development and growth in this sector has brought with it an increase in merger and acquisition activity.
In the initial phase of post-reform development, foreign capital flowed into China and was matched to a large degree by domestic investment in the sector. This led to a considerable number of transactions. In some sector segments, including those that are capital intensive, mergers and acquisitions have become the dominant force of competition. The liquor and soft drinks segments are good examples of this trend.
Stage 1: 'Mom-and-pop' operations
In the early 1980s, the development of the sector typically involved importing foreign machinery and technologies. Compared with other economies around the world, development in China's food and beverage sector came later than many and, consequently, the sector was comprised of many more smaller businesses than there are today - the "mom-and-pop" operations. During this period Coca-Cola and Pepsi had only two bottling plants in China and nearly all available beverages were local brands.
By the 1990s, the market was entering its first merger and acquisition stage. This stage saw the arrival of foreign parties in limited numbers, looking to test the waters of the marketplace. These transactions were typically joint ventures, not particularly large in scale nor featuring many of the global players at the time.
Some notable transactions did take place. In 1993, Anheuser-Busch acquired a 5 percent stake in Tsingtao beer as a means of accessing the high-growth market. Anheuser-Busch was not simply a provider of capital. As a participating shareholder with expert industry knowledge, the US brewer gave Tsingtao the benefit of its experience and strategic advice. This paved the way for further cooperation.
The following year, Anheuser-Busch purchased an 80 percent holding in Zhongde Brewery and established Budweiser Wuhan.
Stage 2: A trillion dollar powerhouse
The turn of the century saw the arrival of large international players, including Starbucks, Coca-Cola and Budweiser. Their brand names are now well represented throughout China. This period was accompanied by significant foreign direct investment and a significant increase in the scale and competence of domestic beverage producers.
Many foreign players entered the Chinese market through mergers and acquisitions. The predominant strategy was to partner and recapitalize a large domestic player to create synergies between the two businesses. At the same time, domestic regional magnates were beginning to appear on the scene as they consolidated fragmented domestic positions.
Between 2001 and 2005 there were at least 16 significant beer-related mergers and acquisitions involving big names such as InBev, Anheuser-Busch, Heineken, Interbrew, Carlsberg, Scottish & Newcastle, Miller and SAB.
Stage 3: Surge in M&A activity
This phase ushered in the rise of fierce competition.
Large players in the market started to look toward securing a position where a few dominant players would have significant control and influence over their markets. In order to achieve this, they needed to expand market share. The fastest way to do this was through mergers and acquisitions - the equivalent of a land grab that saw the demise of smaller businesses and widespread rebranding.
This frenetic period saw profits drop dramatically. Inevitably, there were exits from the market, including many regional mid-sized brewers.
A typical example was the 2006 sale of Fujian Sedrin to Anheuser-Busch. Sedrin was the largest brewer in the southeastern province. Whilst the net assets of the business were only 500 million yuan (US$78 milion), the price paid for a 100 percent interest was 5.9 billion yuan.
Of course, the whole story isn't told by simply considering net assets. However, even on a per-capacity unit basis, the price was high - more than double what Anheuser-Busch had offered to acquire Harbin beer.
The soft drinks industry has shown similar trends to those seen in the brewing segment. In 2008, Coca-Cola made a cash offer for Huiyuan, China's largest fruit juice maker, of HK$17.9 billion (US$2.3 billion). Ultimately, the transaction failed after the industry regulator invoked anti-monopoly laws.
Present and future trends
Consolidation within the food and beverage sector is very much a present feature of mergers and acquisitions. And we believe it will continue to be.
However, there are some new trends emerging. In addition to the continuing takeovers by large players of smaller competitors, we believe there also will be consolidation among the larger players.
One example is the recent joint venture between Suntory and Tsingtao that has created a local market share in Shanghai and Jiangsu. The alliance will account for more than 30 percent of East China's production capacity.
As the frenetic period of competition abates, profits are normalizing and the market outlook is becoming clearer. Large names that were able to sustain the market pain and invest at the same time will now reap their rewards.
Another feature of the M&A market going forward is Chinese outbound investment.
There is no reason to believe this will not extend in time to the food and beverage sector. Arguably, it has already begun as Chinese investors pursue dairy and wine assets abroad.
Its development and growth in recent years is a reflection of increased consumer buying power brought about by economic reform. The scale of this development is significant on a global scale and has been for some considerable time. For example, for the last 10 years China has been the world's Number 1 brewer.
The rapid development and growth in this sector has brought with it an increase in merger and acquisition activity.
In the initial phase of post-reform development, foreign capital flowed into China and was matched to a large degree by domestic investment in the sector. This led to a considerable number of transactions. In some sector segments, including those that are capital intensive, mergers and acquisitions have become the dominant force of competition. The liquor and soft drinks segments are good examples of this trend.
Stage 1: 'Mom-and-pop' operations
In the early 1980s, the development of the sector typically involved importing foreign machinery and technologies. Compared with other economies around the world, development in China's food and beverage sector came later than many and, consequently, the sector was comprised of many more smaller businesses than there are today - the "mom-and-pop" operations. During this period Coca-Cola and Pepsi had only two bottling plants in China and nearly all available beverages were local brands.
By the 1990s, the market was entering its first merger and acquisition stage. This stage saw the arrival of foreign parties in limited numbers, looking to test the waters of the marketplace. These transactions were typically joint ventures, not particularly large in scale nor featuring many of the global players at the time.
Some notable transactions did take place. In 1993, Anheuser-Busch acquired a 5 percent stake in Tsingtao beer as a means of accessing the high-growth market. Anheuser-Busch was not simply a provider of capital. As a participating shareholder with expert industry knowledge, the US brewer gave Tsingtao the benefit of its experience and strategic advice. This paved the way for further cooperation.
The following year, Anheuser-Busch purchased an 80 percent holding in Zhongde Brewery and established Budweiser Wuhan.
Stage 2: A trillion dollar powerhouse
The turn of the century saw the arrival of large international players, including Starbucks, Coca-Cola and Budweiser. Their brand names are now well represented throughout China. This period was accompanied by significant foreign direct investment and a significant increase in the scale and competence of domestic beverage producers.
Many foreign players entered the Chinese market through mergers and acquisitions. The predominant strategy was to partner and recapitalize a large domestic player to create synergies between the two businesses. At the same time, domestic regional magnates were beginning to appear on the scene as they consolidated fragmented domestic positions.
Between 2001 and 2005 there were at least 16 significant beer-related mergers and acquisitions involving big names such as InBev, Anheuser-Busch, Heineken, Interbrew, Carlsberg, Scottish & Newcastle, Miller and SAB.
Stage 3: Surge in M&A activity
This phase ushered in the rise of fierce competition.
Large players in the market started to look toward securing a position where a few dominant players would have significant control and influence over their markets. In order to achieve this, they needed to expand market share. The fastest way to do this was through mergers and acquisitions - the equivalent of a land grab that saw the demise of smaller businesses and widespread rebranding.
This frenetic period saw profits drop dramatically. Inevitably, there were exits from the market, including many regional mid-sized brewers.
A typical example was the 2006 sale of Fujian Sedrin to Anheuser-Busch. Sedrin was the largest brewer in the southeastern province. Whilst the net assets of the business were only 500 million yuan (US$78 milion), the price paid for a 100 percent interest was 5.9 billion yuan.
Of course, the whole story isn't told by simply considering net assets. However, even on a per-capacity unit basis, the price was high - more than double what Anheuser-Busch had offered to acquire Harbin beer.
The soft drinks industry has shown similar trends to those seen in the brewing segment. In 2008, Coca-Cola made a cash offer for Huiyuan, China's largest fruit juice maker, of HK$17.9 billion (US$2.3 billion). Ultimately, the transaction failed after the industry regulator invoked anti-monopoly laws.
Present and future trends
Consolidation within the food and beverage sector is very much a present feature of mergers and acquisitions. And we believe it will continue to be.
However, there are some new trends emerging. In addition to the continuing takeovers by large players of smaller competitors, we believe there also will be consolidation among the larger players.
One example is the recent joint venture between Suntory and Tsingtao that has created a local market share in Shanghai and Jiangsu. The alliance will account for more than 30 percent of East China's production capacity.
As the frenetic period of competition abates, profits are normalizing and the market outlook is becoming clearer. Large names that were able to sustain the market pain and invest at the same time will now reap their rewards.
Another feature of the M&A market going forward is Chinese outbound investment.
There is no reason to believe this will not extend in time to the food and beverage sector. Arguably, it has already begun as Chinese investors pursue dairy and wine assets abroad.
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