Desperate times call for desperate measures.
Heineken N.V. (HEINY) is making a big play for China, where it holds a tiny share of the market, as global beer makers are increasingly searching for fast-growth markets and new segments to ward off declining sales in mature economies.
On Friday, Heineken announced a $3.1 billion stake in the parent of China Resources Beer, as the company is looking to expand its distribution network in China and target the nation's premium segment.
"We believe we can win together in this new era of the Chinese beer market, in which the premium segment will become increasingly important," said Chen Lang, chairman of China Resources Enterprise.
Heineken is not alone in venturing into new geographies, market segments or entirely new product lines as consumers are turning away from traditional beer brands in favor of a new wine, cider or cannabis-infused drinks.
Heineken's volume growth was 5.6% for both North and South America, and only 0.9% for Europe in the second quarter. Asia Pacific was the beer maker's fastest-growing region, so the China play makes sense. And increasingly, it's the craft beers, low alcohol offerings or ciders that are delivering double-digit sales growth.
With less than 1% of the market in China, the local market is dominated by China Resources, Tsingtao Brewery and Anheuser-Busch InBev (BUD) .
Alcohol producers are increasingly embracing cannabis, which is barely legal, as a new growth opportunity.
In a major industry move, Wine & Spirits Wholesalers of America (WSWA) said on July 12 it supports the right of each U.S. state to legalize cannabis if they introduce regulations, as reported in Real Money. A wider industry acceptance could establish cannabis as a new product category for the alcohol industry as they hunt for new growth segments.
Constellation, which brews Corona Beer, also announced a new cannabis-infused sparkling water for sale in California this week. Constellation was up 2.9% Friday to $214.01 a share. Last year, Constellation invested $186 million in Canadian company Canopy Growth Corp. (CGC) and is planning to launch a cannabis-derived beverage before the end of the year.
On Aug. 1, Molson Coors announced it was forming a joint venture with Hydropothecary Corp. (TSE:HEXO), a Canadian cannabis grower, to develop non-alcoholic cannabis-infused drinks. The announcement came as the brewer reported a 3.1% drop in revenue in the U.S. accompanied by a sales volume drop of 4.8%. Molson stock was up 0.5% on Friday to $69.20.
Premium Sector Play
Javier Gonzalez Lastra, a senior research analyst for Berenberg Bank in London said the announced deal to license Heineken to China Resources Beer gives the Dutch beermaker a foot through the door in the "international premium segment," in the world's largest beer market, a niche dominated by Anheuser-Busch Inbev.
Lastra rated both ABInbev and Heineken as "buy" stocks, giving them price targets of 114 euros ($132.14) and 82.3 euros ($95.39), respectively.
"It is a good move for them for the simple fact the premium beer segment has been accelerating in recent years so there has been a big divide between that succeeding and the mainstream beer market that is declining," Lastra said in an interview on Friday. "The international premium segment which is actually very profitable and has been growing at very high rates."
Heineken's American Depositary shares traded 1% higher Friday to $52.00 after news it had taken a $3.1 billion stake in the government-owned China Resources Beer, the top brewer in the world's largest beer market, which had $83.3 billion in sales last year, according to Euromonitor. Anheuser-Busch Inbev stock was up slightly in Friday trading. The announcement came within hours of China announcing tariffs of $60 billion on U.S. goods, the latest return volley in a U.S. Chinese trade spat.
Heineken is turning over its China operations to China Resource Beer and will only be a minority shareholder in the parent company, CRH (Beer) Limited.
"Heineken is unlikely to have much influence on the joint venture," Deutsche Bank analyst Andrea Pistachi wrote in a note Friday.
Lastra added that Heineken probably realized it needed to sacrifice most of its control to establish itself in the market.
"At the end of the day they are making billions in investments on top of licensing CRB to sell Heineken in China," he said.
A Way to Bypass Tariffs
Lastra said that ongoing trade tensions and a U.S. tariff on aluminum would have no discernible effect on either Heineken or Anheuser-Busch InBev because the beer they sell in China is also produced there.
Also, premium international beer sold in China is bottled in glass rather than canned in aluminum, Lastra said.
Heineken and Anheuser-Busch Inbev did not respond to a request for comment.
Lastra said that ABInbev faces a potentially worse situation marketing Budweiser beer which could face a backlash from the Chinese public if they begin to shun products associated with the United States.
"There could be an indirect impact in China if there is a reaction to anything that is American because of the aggressive stance Trump has taken with China on trade," Lastra said.
-- Martin Cassidy contributed reporting to this article