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April 28, 2019

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Let’s raise a glass to a craft beer gamble!

LEE Tseng’s craft beer business was twice in danger of falling apart.

The 40-something co-founder of Shanghai’s Boxing Cat Brewery had grappled with severe cash flow problems and the death of a key founding member to build the brewery into one of the biggest players on China’s budding craft beer scene.

In 2007, Tseng, who had been working with relatives on old house renovation and a coffee chain business, was looking to set up shop on his own. He met Kelley Lee, his future partner and a female chef with years of experience in the restaurant business. The duo decided to open a brewpub offering, among others, craft beer brewed on the premises.

Born in Taiwan and immigrated to Canada at the age of 6, Tseng is familiar with the craft beer culture in his adopted country.

But craft beer seemed to be an odd start to his entrepreneurial endeavors, as it was then a highly niche segment where few had tread — or succeeded. To some extent, Tseng’s decision was a gamble.

“We agreed that craft beer was ahead of its time, but it was worth a try,” Tseng said. “Early movers enjoy a head start.”

The first step in running a brewpub involved finding a skillful brewer, and by a stroke of luck he was introduced to Gary Heyne, a brewmaster from Houston. Together, they formed the founding team of Boxing Cat.

Unable to afford rent in the city’s prime locations, Tseng chose to operate in a bustling part of Huacao Town in suburban Minhang District, home to international schools and a large number of expats.

When the brewhouse opened in April 2008, business was good for the first few months, until things came unstuck in the most unexpected way.

After losing money during the summertime, when schools were closed and expat families headed out of town on holiday, the financial crisis hit in October, sending the global economy into a tailspin. Soon the shockwaves could be felt in China.

Most of the customers who frequented Tseng’s brewpub were employees of the big three American carmakers — General Motors, Ford and Chrysler — which were among the hardest hit by the crisis.

As part of the plan to restructure the embattled carmakers, massive layoffs ensued, with some expats packing up and leaving China while others who stayed had to live on a tightened budget. They cut back on spending, considerably reducing the revenue streams for Tseng and his partners. Their initial investment of 1.1 million yuan (US$164,000) quickly ran dry.

An existential crisis followed, and Tseng was stuck between the difficult choices of closing the establishment for good or readjusting his plans to see what went wrong and how things could be remedied.

He decided that the entrepreneurial concept was right, but they had chosen the wrong spot for business, and the only way to revive the faltering brewpub was to reopen elsewhere, preferably downtown.

It was near the end of 2008, and despite China’s massive 4 trillion yuan stimulus package to bail out the economy, the investment climate remained chilly, with people fearing that worse was yet to come.

Tseng said the initial positive feedback he had garnered from customers gave him the confidence to invest at a time of great economic uncertainty. He and his partners managed to raise 1.4 million yuan to find a new home for the brewpub.

Desperate for revenue streams to pay outstanding debts, the team was under grave pressure to find a spot in downtown Shanghai to resume business within two to three months, ideally before summer.

Thanks to the buzz he created in advance, the new Boxing Cat brewpub, on Fuxing Road W. near its intersection with Yongfu Road, opened to much fanfare in June 2009.

Customers turned out to be more numerous than expected, which Tseng attributed to correct positioning of the brewery.

“Boxing Cat was originally conceived as a neighborhood bar and restaurant,” said Tseng.

He explained that the reason for reopening the pub in an old villa in downtown was that people who live in surrounding areas could find quality beer and food within walking distance.

“I grew up in Canada, where there is a successful brewpub in almost every community,” Tseng told Shanghai Daily.

The three-story villa, with a floor space of 307 square meters, was a turning point in Boxing Cat’s revival and evolution into one of the most iconic landmarks for beer lovers and revelers.

As the brewpub expanded, it began to weave together a brand story of sorts. The brand logo, a cat with a pair of boxing gloves on, is said to have been inspired by the brewer Heyne’s cat. One day the kitten sipped beer and stood on its hind legs in an amusing posture, “as if punching in fits of drunkenness.” That’s how the name Boxing Cat came about.

Bolt out of the blue

When Boxing Cat was invited in May 2010 to open its second downtown outlet in Sinan Mansions, a new shopping and recreational center composed of refurbished old-style villas, it was dealt another blow, this time even more devastating than a cash crunch. Its brewmaster Heyne died of a heart attack, aged 45.

“It was like a bolt out of the blue,” said Tseng. “We were caught completely off guard, and how could a brewpub cope without its head brewer?”

Fortunately, Heyne had trained a two-man team capable of brewing six or seven beers according to the recipes he left behind. In the meantime, Tseng began to scour the globe for experienced brewers.

After screening and interviewing a handful of candidates, he chose Michael Jordan from Denmark. The namesake of the American basketball great is an award-winning brewer. Fed up with work in Denmark that offered little room for adventure and innovation, Jordan accepted Tseng’s offer. Together they set specific goals for Boxing Cat to accomplish over the following years.

These included winning medals at major international beer competitions such as the World Beer Cup and the Australian International Beer Awards. According to Tseng, this was a way to justify and showcase the quality of his products to a populace that still had only vague ideas about what craft beer was.

Boxing Cat did win multiple medals at important beer contests, but despite its newfound recognition, Tseng’s pet peeve remained: China’s craft breweries were too small to be taken seriously.

This was reflected in situations when he tried to purchase ingredients such as malt, yeast and hops from established overseas suppliers.

Tseng said the amount he asked for was often too small to reach the minimum order value required by suppliers. Delays in processing orders were common, resulting in pressure for him to manage the supply chain.

Besides, since China’s incipient craft brewing community had yet to build scale, industry players were often denied price discounts in dealing with global suppliers.

Tseng resolved to raise their collective bargaining power. He talked leading breweries in Beijing and Shanghai into agreeing to group-buy ingredients from abroad, so as to lower the average cost for each.

“I want local breweries to use the best ingredients in the world, so that all they have to worry about is to brew fine beer,” said Tseng.

Strength in numbers

Tseng realized that craft beer could only grow in China when brewery operators like him banded together to seek strength in numbers.

And in a nation that is steadily trading up amid waves of consumption upgrades, conditions were becoming ripe for launching awareness campaigns to promote the product.

Tseng’s plan was to hold beer festivals. Unlike those where scantily clad sales girls coaxed visitors into warehouses to gulp down bottle after bottle of beer in an adrenaline-filled show of machismo, the alternative Tseng had in mind was more focused on cultivating a refined lifestyle, whereby “people could sample different beers and hang out for the whole day.”

He added: “The point is never to get drunk.”

The first craft beer festival under the auspices of Boxing Cat and six other restaurants in Shanghai opened in Sinan Mansions in 2011 and attracted only several hundred visitors.

It, however, kept expanding and in 2013 the festival drew a crowd of 10,000. This now annual event set a template for similar gatherings in Beijing, with local counterparts such as Great Leap Brewing and Jing A echoing Boxing Cat in throwing a party once in a while for beer lovers.

Tseng’s role has transitioned over the years from a pioneer championing China’s craft beer revolution to trendsetter. In contrast to breweries intent on adding local delicacies like chili into the beer to add flavor, Tseng aimed to bring his products in line with global standards.

“Here’s what I can offer: Whatever beer styles you taste, IPA (India pale ale) or APA (American pale ale), they are on par with international competitors,” Tseng proudly claimed.

Nonetheless, Boxing Cat was no stranger to trending practices such as cross-brewing. It once brewed a beer using black tea leaves from Yunnan Province together with Great Leap Brewing.

Boxing Cat was also the first domestic brewery to introduce an indigenous Belgian-style sour beer and barrel-aged stout. “I hope we can connect customers with the latest trends in craft brewing around the world,” said Tseng.

In March 2017, Boxing Cat had a new owner. The world’s biggest beer company by sales and market capitalization AB InBev bought the Shanghai brewery for an undisclosed price.

Tseng said he had an about-face concerning the deal. As early as 2012, he began to hatch the idea of building a factory to mass-produce bottled beer and selling it across the country, rather than just serving fresh beer on tap at Boxing Cat’s brewhouses.

This ambition was enormously challenging financially, requiring an estimated investment of at least 80 million yuan and convoluted processes to secure the necessary paperwork and licenses for manufacturing.

Due to the banks’ reluctance to lend to small businesses, Tseng was forced to turn to private equity for help. But talks didn’t go smoothly, since most PE firms underestimated the potential of craft brewing in China.

“Their valuation for Boxing Cat was too low,” Tseng complained, adding that this was as much a negotiation strategy as a choice of a wrong benchmark against which to judge the brewery’s growth potential.

“You can send a 100-meter sprinter on a marathon, that’s okay,” said Tseng. “But it’s not what he does best.”

He also had a foreboding that he would one day be forced out of the company he founded in much the same fashion as the many hostile takeovers that have won PE investors a bad name — “barbarians at the gate.”

Eventually, he agreed to a buyout from AB InBev, citing the conglomerate’s strengths in branding, marketing and experience in supporting scores of craft breweries it has acquired around the globe under ZX Venture, the corporate investing arm of the beer giant.

From a trendsetter to a promoter

Tseng said AB InBev’s vision for Boxing Cat tallied with his, and that’s why he opted for a full sale rather than partial investment from PE. “If I were to entrust Boxing Cat to someone else, I’d rather put it in the hands of someone who has the knowledge and incentive to take good care of it,” said Tseng.

It seems he made the right choice. The Leuven, Belgium-headquartered conglomerate has the marketing resources and wide channels of distribution to help deliver bottled Boxing Cat beers to more customers in China.

Early last year, the largest craft brewing factory in Asia began operating in Wuhan, capital of Hubei Province, and the first batch of Boxing Cat’s four bottled beers rolled off the production line. Boxing Cat beers can now be seen on major supermarket shelves, and it has since added three more beers available in bottles.

Tseng has remained in his post as general manager, with new responsibilities involving consulting for the brand and helping develop new products.

Asked if he fitted into the new managerial role, he said the decision-making process and approval period is longer, and he can no longer operate with the flexibility as he did before, but admitted that the changes are “totally acceptable.”

The next step is to adjust existing beer recipes to bring, for example, the alcohol by volume of Ringside Red, an award-winning amber lager, to less than 4 percent as most first-time drinkers of craft beer tend to delight in lighter-bodied beers with less alcohol.

This means Boxing Cat would gradually diversify from a trendsetter keen on satisfying beer geeks’ increasingly discerning palates into a promulgator of craft beer culture.

Despite double-digit growth of craft beer in China for successive years, Tseng said the market size was still tiny compared to that for flavorless industrial lager. Craft beer has yet to shake up the domination of bigger players like Snow or Tsingtao. Instead, he is setting his sights on spreading the gospel of craft beer among younger consumers in first and second-tier cities, so as to change the image of beer as a cheap and unstylish drink. “The people I am most keen to target are consumers between 28 and 40 years of age,” said Tseng. “When you are too young, you don’t care about what you drink.

“But as people get older and mellow, they’ll learn to appreciate the nuances in taste, and craft beer may emerge as their first choice of alcoholic drink,” Tseng explained.


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