The jury is out on Heineken’s deal with CR Enterprise
Heineken’s planned tie-up with CR Enterprise, valued at over USD three billion, has received mixed reviews so far. After years of declining beer volumes, China is a very competitive market, characterised by low prices and margins. Industry observers estimate that operating margins (EBIT) are around six percent at CR Beer, while they amount to 15 percent at Heineken and are as high as 30 percent at AB-InBev.
In an opinion piece Bloomberg writes that Heineken is making the wrong choice by targeting volume rather than margins and that this strategy will not close the gap with AB-InBev. The transaction will not drag down Heineken’s operating margins much. But it will not get it any closer to catching up with AB-InBev either.
Several analysts were sceptical whether Heineken could make up ground on AB-InBev’s Budweiser in the short term, even with CR Beer’s help. Being home alone and not stuck in a suffocating joint venture, AB-InBev has managed to push ahead with its international premium (Budweiser) and super-premium brands (Corona, Stella Artois, Goose Island). Therefore, its revenues in China have grown significantly on the back of increases in premium and super-premium brands.
Euan McLeish, analyst at Bernstein, commented that Heineken and CR Enterprise will not be making any quick gains, not least because the Heineken brand retails at a 25 percent to 30 percent premium to Budweiser. CR Beer intends to maintain the gap.
Another reason why analysts are wary is the nature of the deal: a joint venture. In the past, plenty of partnerships between foreign brewers and large Chinese beer groups have struggled. The last victim to date is Japan’s Asahi. It sold its 20 percent stake in China’s brewer Tsingtao, the country’s number two brewer by volume, in December 2017, after years of being frustrated in its attempts to push its partner towards higher-end beers.
According to forecasts, beer – as a share of total alcohol consumption in China – will fall from almost 30 percent in 2015 to less than 25 percent in 2022. Selling beer in China will definitely not get any easier.
What the critics say
