Dagong Europe - Dec 11, 14 - Alcoholic Beverages - China’s Role Over the Short - Term Horizon

8/9/2019 Dagong Europe - Dec 11, 14 - Alcoholic Beverages - China’s Role Over the Short - Term Horizon

http://slidepdf.com/reader/full/dagong-europe-dec-11-14-alcoholic-beverages-chinas-role-over-the 1/11

DAGONG EUROPE - www.dagongeurope.com

Francesca RussoDirectorCorporates Analytical Team

[email protected]

Richard MiratskySenior DirectorCorporates Analytical [email protected]

Alcoholic Beverages:Global Industry Outlook andChina’s Role Over the Short-

Term Horizon

11 December 2014

Commentary



Corporates

2 Alcoholic Beverages – Global Industry Outlook and China’s Role Over the Short-Term Horizon

11 December 2014© 2014 Dagong Europe Credit Rating. All rights reserved.

TABLE OF CONTENTS

1. INTRODUCTION

2. MAIN TRENDS

3. GLOBAL INDUSTRY OUTLOOK AND CHINA FOCUS

Spirits

Beer

Wine

4. CONCLUSIONS



Corporates



1. INTRODUCTION

In this report we provide an overview of the alcoholic beverages industry worldwide, focusing

on the opportunities and threats affecting the spirits, beer and wine segments over the last 18

months. In 2014, the results of alcoholic beverage manufacturers have shown some

vulnerability, especially those with business concentrated in Western Europe, challenged by

soft consumer spending and structural decline in alcohol consumption, and those with higherexposure to premium and super premium spirits in China. In November 2012, the Chinese

government launched a campaign against exuberant spending and gift-giving. Likewise,

actions against traditional karaoke bars and budget reviews of official ceremonies led to strong

disruption in premium alcoholic beverage consumption, which we expect to continue in the

short term.

Among European players, Remy Cointreau’s operating margin temporarily dropped to 14.6%

at YE Mar 2014 from 20.6% at YE Mar 2013, following the backdrop of weaker consumption

in China. Pernod Ricard reported broadly stable organic growth in 2013-14 compared to the

previous year, but its revenues were down 6% due to adverse Indian Rupee and US Dollar

forex effects. Similarly, adverse currency effects eroded SABMiller’s approx. EUR 700Mn

organically generated growth. China is gaining in importance in the global alcoholic beverages

market. And despite regulatory risks remaining high, large international manufacturers are

increasingly signing strategic alliances with Chinese manufacturers to take advantage of local

opportunities and complement their revenue streams. The structure of the report follows the

three main alcoholic beverage segments – spirits, beer and wine. At the end of each segment

overview we provide our short-term outlook for China.

2. MAIN TRENDS

Europe challenged by subdued macroeconomic environment and declining

alcohol consumption: Europe’s leadership as the world’s largest alcoholic beverages

market is currently being chased by Asia. In the past decade, while the European market

has been declining by an average of 0.9% yoy, the Asian alcoholic beverage market has

grown by +3.9% yoy during the same period.

China hit by government austerity measures in the short term, but demographic

trends remain supportive of medium term growth: The drop in premium and super-

premium spirits caused by the anti-extravaganza campaign is expected to be partially

offset by growth in beer and wine consumption.

China/Spirits: Subdued in 2014-15 as a consequence of the government anti-

extravaganza campaign, the segment is expected to gradually recover thanks to the

implementation of diversification strategies from the manufacturers’ side.

China/Beer: Estimated to grow in the high single-digit range in 2014, due to

increasing demand for international brands, a larger product offering and more

efficient distribution networks.

China/Wine: Good opportunities for European winemakers, supported by high

demand, favourable import duty regulation and increasing free-trade agreements.



Corporates



3. GLOBAL INDUSTRY OUTLOOK AND CHINA FOCUS

The value of the global alcoholic beverage industry is estimated at around USD 1.5Tn1. It has

been growing by an average of 1.4% yoy for the last 10 years and the outlook at global level

remains encouraging. Favourable demographic dynamics in emerging markets,

premiumisation strategies and consolidation trends have been the main drivers behind the

industry’s strong, long-standing performance globally. Today’s USD 1.5Tn market value isgenerated 36% by Europe, 28% by Asia and 36% by North America. In the last decade, Asia

especially has been gaining in importance, driven by higher average salaries and increasing

urban lifestyles.

In the last half-decade, the expansionary potential of the alcoholic beverage industry has been

limited by soft consumer spending in certain markets like Western Europe, and adverse

currency volatility, especially against the Euro. In 2013-14, additional pressure has come from

regulatory changes in China, particularly affecting the spirits segment. Despite these factors,

the industry grew by 1.7% worldwide in 2013, successfully compensated by the performance

in other segments and other geographic regions. The outlook for the industry remains

encouraging, even if a degree of volatility is expected in the short term.

Ex. 1 Alcoholic beverages sales evolution (2004-13)

0

200

400

600

800

1000

1200

2013201220112010200920082007200620052004

U

S D B n

WestEurope

EastEurope

Asia

North America

Source: Bloomberg

Overall, the alcoholic beverages market in Western Europe has declined by 1.5% yoy on

average over the last 10 years. Eastern Europe has been affected by high volatility in the past,but has been growing steadily since 2009, driven by the beer segment’s performance. In 2013-

14, soft consumer spending, forex issues and regulatory changes have affected large

European manufacturers with different intensity, depending on the operating segment and

company-specific geographic exposure. 2014 is expected to show an ongoing soft consumer

environment in Europe, especially in Western countries, suffering also from the effect of fairly

poor weather conditions during the summer. We expect the alcoholic beverage market in

Europe to show a gradual recovery in the medium term, driven by what should be an

encouraging consumer spending evolution in 2015 and the coming years.

On the back of its favourable demographic dynamics, Asia has been the main driver behind

the global growth, despite some regions facing a softening in consumer spending since 2011.

In November 2012, the new Chinese government launched anti-corruption and anti-graft

1 Bloomberg data 2013

The Western European alcoholicbeverage market has declined byan average of 1.5% yoy over thelast 10 years

The anti-corruption and anti-graft campaigns launched by the

Chinese government inNovember 2012 causedsignificant disruption in thespirits market



Corporates



campaigns aimed at cracking down on exuberant personal spending and gift-giving by

officials. Several agencies have been created to support monitoring activity to prevent

corruption, e.g. the Central Commission for Discipline Inspection and the National Bureau of

Corruption Prevention. This manoeuvre in China and political instability in other Asian

countries has put pressure on demand for alcoholic beverages in 2013 and 2014. In 2013,

the alcoholic beverage industry in Asia grew by 2.6% yoy against an average of 3.9% for the

past 10 years. We expect 2014 performance to also be below historical levels. A drop in spirits

could, however, be partially compensated by strong performance in the beer and wine

segments.

The North American market has grown by 1.1% on average over the last 10 years, mainly

driven by successful premiumisation strategies, outperforming the global average in 2012 and

2013. The North American market is today estimated at around USD 240Bn 2, i.e. 10% up

against 10 years ago. The majority of growth has been in the wine segment, up 2.8% (approx.

20% of the American alcoholic beverage spend); spirits are up 1.5% (30% of spend), while

beer remains almost flat (45% of spend).

Spirits

The global spirits market is fairly fragmented, with the top ten manufacturers representing26% of volumes sold worldwide3. The spirits segment has seen a concentration in the past

and we expect further opportunities, especially in emerging markets. We also expect a

structural decline in the stake of ‘informal alcohol’4, currently estimated at 70% in Africa, 20%

in Latin America and 10% in China5, being replaced by regular alcohol sales.

The spirits market in Europe is estimated to be worth around USD 141Bn and today

represents one third of the European alcoholic beverages spend6. Two thirds of this is

generated in Western Europe. Europe hosts five of the world’s top ten spirits manufacturers

by revenues, namely Diageo (UK), Pernod Ricard (France), LVMH (France), Campari (Italy),

and Remy Cointreau (France)7. Last fiscal year, the turnover of these five manufacturers

exceeded EUR 25Bn and their consolidated EBITDA exceeded EUR 8Bn.

Ex. 2 European spirits revenues and profit (2013)

Company Domicile Revenues (EUR Bn) EBITDA margin (%)

Diageo UK 12.3* 36.6*

Pernod Ricard France 7.9* 25.4*

LVMH France 4.2 35.2

Campari Italy 1.5 21.6

Remy Cointreau France 1.0* 16.2*

Belvedere France 0.9 2.4

CEDC Poland 0.6 -4.4

*Financial data at YE 2014. LVMH includes spirits & wine segment only. Source: Bloomberg, Dagong Europe

In the last fiscal year, the results of the European spirits groups have continued to be affected

by soft consumption in Western Europe and in some emerging markets, such as China and

South Korea. Diageo and Pernod Ricard reported consolidated revenues down in the mid-to-

high single-digit range. Pernod Ricard reported very different sales performances across its

end markets in YE Jun 20148: +3% in France, -7% in Spain, +7% in Germany, -23% in China,

-11% in South Korea, and +17% in India. To protect their profitability, European spirits

manufacturers have focused on strengthening their portfolios of international brands and on

2 Bloomberg data 20133 Ibid4 Intended as non-monitored spirits sales5 SABMiller, Mar 2014 Consumer Analyst Group of Europe (CAGE) presentation6 Bloomberg data 20137 Ibid 8 Source: Pernod Ricard YE Jun 2014 results presentation

Stake of ‘informal alcohol ’, iscurrently estimated at 70% inAfrica, 20% in Latin America and

10% in China



Corporates



improving their price-mix through premiumisation strategies. In addition, thanks to on-time

cost-cutting measures and the destocking of inventories, they have managed, in several

cases, to improve their margins.

China focus

At the end of 2012, the new Chinese government launched an austerity campaign aimed at

reducing exuberant personal spending and gift-giving by officials, and also regarded the

consumption of high-priced spirits during official ceremonies. This significantly impacted the

results of domestic and international spirits manufacturers operating in China, especially those

serving the premium and super-premium segment. In 1H14, the revenues of domestic

manufacturers with poorly diversified business profiles more than halved against 1H13. The

performance of the major Chinese spirits manufacturers is summarised below.

Ex. 3 Chinese spirits revenues trend (1H14 vs. 1H13)

Company Annual revenues (EUR Bn) 1H14 trend (% yoy)

Moutai 3.5+2.7vs. +35.0 average for past 5 years

Wuliangye 2.8 -24.9

Jiangsu Yanghe 1.8 -7.8

Luzhou Laojiao 1.2-83.4 in high-end products+46.6 in mid-low value categories

Shanxi Fen Wine 0.6 -43.6

Financial data at YE 2013. Source: Bloomberg, Dagong Europe

We expect China’s campaigns against exuberant spending to continue to negatively impact

the consumption of premium and super-premium products in the short term. However, it

should stabilise in the medium term (approx. 2-3 years from today9) and reposition towards

growth in the long term, driven by the favorable demographic trends. Companies operating in

the Chinese spirits market are now increasingly investing in expanding their product offerings

and brand portfolios to tap alternative market segments and improve their future capacity to

absorb shocks.

Beer

The global beer market is fairly concentrated with 65% of the global volumes generated by

the top ten players10, which own many global and local brands. The larger manufacturers

are highly diversified geographically, and continue to focus on expanding their production

capacities. The existing competitive environment is the outcome of both organic growth and

M&A transactions.

Ex. 4 Global top ten breweries by volume (2013)

Source: Bloomberg

9 Based on Bloomberg consensus for China’s leading spirits manufacturers 10 Bloomberg data 2013

Anheuser-BuschInBev20%

SABMiller 10%

Heineken9%

ChinaResourcesEnterprise

6%Carlsberg

6%

Tsingtao4%

Molson Coors3%

Beijing Yanjing3%

Kirin3%

Asahi1%

Others35%

In 1H14, the revenues of Chinesedomestic spirits manufacturers

with poor diversification morethan halved against 1H13

The global beer market is fairlyconcentrated, with 65% of globalvolumes generated by the top

ten players



Corporates



The beer market in Europe is estimated to be worth around USD 200Bn. Beer represents

approx. 40% of the European alcoholic beverages spend. 75% of the value is generated in

Western Europe and 25% in Eastern Europe. Beer consumption in Western Europe has

been declining by 2% yoy over the last 10 years, reflecting a challenging macro

environment. Eastern Europe, instead, has been growing by around 2% yoy during the

same period11.

The four largest breweries in the world are domiciled in Europe: Anheuser-Busch InBev(Belgium), SABMiller (UK), Heineken (Netherlands) and Carlsberg (Denmark). Together

they reported around EUR 75Bn revenues and more than EUR 20Bn EBITDA in their last

fiscal year.

Ex. 5: European breweries revenues and profit (2013)

Company Domicile Revenues (EUR Bn) EBITDA margin (%)

Anheuser-Busch InBev Belgium 32.5 39.8

Heineken Netherlands 19.2 21.5

SABMiller UK 12.5* 34.2*

Carlsberg Denmark 8.9 20.6

*Financial data at YE 2014. Source: Bloomberg, Dagong Europe

Large economies of scale and wide portfolios, including international and domestic brands,

have helped European breweries like Carlsberg to successfully weather Western European

volatility, and turbulence in Russia and Ukraine in 2014. Thanks to a highly diversified product

offering and leading positions in some key markets, SABMiller reported a 7% growth in EBITA

at YE Jun 201412. SABMiller’s profitability growth was driven by the emerging markets of

Africa, Latin America and China.

China focus

China Resources Enterprise and Tsingtao Brewery Company are today the biggest breweries

in Asia in volume terms, with 17% and 12% market share respectively, and are number four

and number six globally with approx. 6% and 4%13. The brand Snow, produced by ChinaResources Enterprise in joint venture with SABMiller, is the most popular brand globally in

volume terms.

According to data published by CeSIF14, China’s beer market has expanded by 29% in 2006-

11, and is estimated to grow in the high single-digit range in 2014. Foreign beer consumption

is growing in China due to increasing demand for international brands, a larger product

offering and more efficient distribution networks. The premium beer segment, especially, is

estimated to continue growing double digits over the medium term (2013-18) in all regions

worldwide, and especially in emerging markets.

Wine

The wine industry is highly fragmented at global level with the top ten players generating 13%

of the volumes sold worldwide. According to Bloomberg 2013 data, the North American wine

groups E&J Gallo, Constellation Brands and the Wine Group lead the global ranking of wine

manufacturers by volumes managed.

11 Source: Bloomberg data 2013

12 EBITA growth on an organic, constant currency basis 13 Source: Bloomberg data 2013 14 Centro studi per l’Impresa Fondazione Italia Cina, published with the 2014 report of the Italy-China Foundation ‘LaCina nel 2014 - Scenari e Prospettive per le Imprese’

China Resources Enterprise andTsingtao Brewery Company arethe biggest breweries in Asia,

and among the top 6 globally

With a value of aroundUSD 200Bn, the European beermarket represents approx. 40%of the European total alcoholic

beverage spend



Corporates



Ex. 6: Global top ten wineries by volume (2013)

Source: Bloomberg

Overall, the value of the wine market in Europe is estimated at around USD 160Bn. It

represents 34% of the total alcoholic beverages spend in Western Europe, against 19% in

Eastern Europe15. Portugal, France, Italy, Slovenia and Switzerland are the largest consumers

globally, with a consumption of approx. 40 litres per person per year in 2013. Spain is today

positioned among the second tier consumers, together with Germany and the UK, withapprox. 20 litres per person per year.

Ex. 7: Per capita wine consumption (litres)

Country 2004 2009 2013

Portugal 50.3 47.2 42.5

France 44.4 39.5 38.2

Italy 49.4 44.4 36.9

Slovenia 49.7 39.6 36.7

Switzerland 39.9 37.6 35.7

Austria 30.2 34.0 32.1

Belgium 25.6 27.6 26.7

Greece 33.1 31.7 25.9

Argentina 29.1 26.3 25.7

Netherlands 20.3 23.6 25.3

Source: Bloomberg

The European wine market is dominated by French and Italian producers: Groupe Castel,

LVMH and Pernod Ricard in France; Gruppo Italiano Vini (GIV), which is part of the wine

co-operative company Cantine Riunte & CIV, and Caviro Distillerie in Italy. The British group

Diageo also has a strong presence in the wine market.

In the last few years, the subdued macroeconomic environment in Western Europe especially,

and a structural decline in alcohol consumption have led to a general reduction in spending

on wine. According to LVMH data, shipments from the Champagne region as a whole were

down 2% in 2013 due to lower demand. LVMH shipments, however, benefitted from premium

brand positioning and contained the decline to -1% yoy. GIV’s consolidated revenues were

up 3.2% yoy in 2013. GIV benefitted from strong performance in the US and France, as well

as increasing interest from Russia and China, which offset a flat domestic market (27% of

2013 turnover). Diageo’s 2014 Western Europe net wine sales declined 7%. The drop in

Europe was, however, successfully offset by effective procurement and premiumisation

strategies, and 4% growth in North America.

15 Centro studi per l’Impresa Fondazione Italia Cina, published with the 2014 report o f the Italy-China Foundation ‘LaCina nel 2014 - Scenari e Prospettive per le Imprese’

Portugal, France, Italy, Sloveniaand Switzerland are the largestwine consumers globally, withapprox. 40 litres per person per

year

A subdued macroeconomicenvironment and a structuraldecline in alcohol consumptionhas led to a general reduction inspending on wine in Europe

Other wineries 87.2%

E&J Gallo , 2.7% Constellation Brands , 2.1%

The Wine Group , 1.6%

Vina Concha y Toro , 1.0%

Grupo Penaflor , 1.0% Pernod - Ricard , 0.9%

Treasury Wine Estates , 1.0%

The Castel Group , 1.0%

Accolade Wines , 1.0%

Caviro Distillerie , 0.6%

Top 10 Wineries 12.8%



Corporates



China Focus

China today consumes 0.38 litres of wine per person per year (0.7 litres in urban cities), which

is very low compared to 42 litres in Portugal and 38 litres in France. However, its 38 million

wine consumers16 make China the fifth largest wine market globally, after the US, Italy, France

and Germany17. China is actually the number one in red wine consumption, with 1.86 billion

bottles sold in 2013, up 136% versus the previous year. In 2007-13, China’s red wine market

grew by 175.4%. In the same period, the market declined by 5.8% in Italy and 18% in France18.

Since China’s entry to the WTO in 2001, custom duties on wine imports have dropped from

65% to 14%. Wine sales in China are additionally subject to 17% added-value tax (vs. 19-

25% rates among European Union member states) and 10% consumption tax (vs. no

minimum rate of excise duty on wine across the European Union, but member states may

legislate differently19). Several commercial agreements have been signed over this time

between China and wine manufacturing countries e.g. with New Zealand in 2008 and with the

European Union in 2013. China also signed a Closer Economic Partnership Arrangement

(CEPA) with Hong Kong in 2003, aimed at reducing tariffs and improving bilateral trades.

International wineries today see significant growth opportunities in China, driven by increasing

demand for wine. China has become the target of premium Italian and French winemanufacturers, who are strongly investing in promotion. In 2014, Vinitaly, an international

promoter of Italian wines, took part in the China Dalian International Wine & Dine Festival and

Sial Wine World in Shanghai, two major wine exhibitions in North-Eastern China. At present,

80% of the wine consumed in China is produced by local manufacturers and only 20% is

imported20. However, the import rate is growing, and we expect the trend to continue, driven

by increasing demand for high-quality products and favorable import duties regulation.

4. CONCLUSIONS

A foothold in China has historically been beneficial for European alcoholic beverage

multinationals, enabling them to compensate for flat performance in the more saturateddomestic markets. Manufacturing groups have successfully grown organically in China thanks

to higher average salaries and more widespread urban lifestyles. Currently, many European

beverage manufacturers continue to actively work towards expansion in China, and at the

same time implement defensive strategies to protect their results from risks from regulatory

changes, possible increases in excise duties and political instability. We believe that growth

opportunities from China, if adequately managed, can successfully offset the risks.

In the short term, we expect the spirits segment in China to remain subdued as a consequence

of the anti-extravaganza campaign currently in motion, but the segment should gradually

recover through the implementation of diversification strategies on the manufacturer s’ side21.

China’s spirits manufacturers forecast a degree of recovery starting from 201622. The beer

market is expected to continue to grow, driven by favorable demographic trends,

strengthening the positioning of Chinese top-selling brands. The beer premium segment,

especially, is expected to grow a double digit in 2013-18. The wine market also offers high

growth potential, in our view, as a result of increasing demand, favorable import duty

regulation and a still relatively high degree of fragmentation. The austerity campaign is not

16 Wine Intelligence 2014 17 International Wine and Spirit Research (IWSR) 2012 report 18 CeSIF 19 Council Directive 92/84/EEC of 19 October 1992 on the approximation of the rates of excise duty on alcohol andalcoholic beverages

20 CeSIF 21 Please refer to Dagong Europe’s commentary entitled Alcoholic Beverages - Core Strategies to Mitigate Risk Exposureto China and Other Emerging Markets 22 Based on Bloomberg consensus for China’s leading spirits manufacturers

38 million wine consumers makeChina the fifth largest winemarket globally, after the US,

Italy, France and Germany

We believe that growthopportunities from China’salcoholic beverage market, ifadequately managed, can

successfully offset the risks

Since China’s entry to the WTOin 2001, custom duties on wineimports have dropped from 65%

to 14%



Corporates



likely to strongly affect the wine business, which confirmed double-digit growth trends in

1H1423.

Growth via M&A is expected to vary by segment, in connection to the segment-specific rate

of consolidation. The global beer market is fairly concentrated with a few large multinational

operators. Acquisitions may be limited by the large size of deals. Instead, the spirits and wine

segments are still relatively fragmented due to wider product diversification, stronger linkage

with local tastes and a wider price spectrum, and they potentially offer more investmentopportunities.

DISCLAIMERS

NO CONTENT (INCLUDING CREDIT-RELATED ANALYSES AND DATA, VALUATIONS, OR OUTPUT THEREFROM)

OR ANY PART THEREOF (“CONTENT”) MAY BE MODIFIED, REVERSE ENGINEERED, REPRODUCED OR

DISTRIBUTED IN ANY FORM BY ANY MEANS, OR STORED IN A DATABASE OR RETRIEVAL SYSTEM, WITHOUT

THE PRIOR WRITTEN PERMISSION OF DAGONG EUROPE. DAGONG EUROPE DOES NOT INTEND TO ASSUME,

AND IS NOT ASSUMING, ANY RESPONSIBILITY OR LIABILITY TO ANY PARTY ARISING OUT OF, OR WITH

RESPECT TO, THIS CONTENT. THIS CONTENT IS NOT INTENDED TO, AND DOES NOT, FORM A PART OF ANY

CONTRACT WITH ANYONE, EITHER DIRECTLY OR INDIRECTLY. THE CONTENT SHALL NOT BE USED FOR ANY

UNLAWFUL OR UNAUTHORIZED PURPOSES.

RELATIONSHIP WITH ENTITIES OR INDIVIDUALS

DAGONG EUROPE DOES NOT HAVE A FIDUCIARY RELATIONSHIP WITH ANY ENTITY OR OTHER INDIVIDUAL

RECEIVING THIS RESEARCH. NOTHING IS INTENDED TO OR SHOULD BE CONSTRUED AS CREATING A

FIDUCIARY RELATIONSHIP BETWEEN DAGONG EUROPE AND ANY INDIVIDUAL OR ENTITY RECEIVING THIS

RESEARCH.

DAGONG EUROPE DOES NOT PROVIDE TO ANY PARTY ANY CONSULTANCY SERVICE, FINANCIAL ADVICE

OR LEGAL, AUDITING, ACCOUNTING, APPRAISAL, VALUATION OR ACTUARIAL SERVICES.

© 2014 Dagong Europe Credit Rating Srl (collectively, “Dagong Europe”). All rights reserved.

23 CeSIF and Jiangsu Yanghe 1H14 report



Via dell’Orso 8, 20121 Milan Italy Tel (+39) 02 72746011, Fax (+39) 02 72003544

www.dagongeurope.com

Documents

Dagong Europe - Dec 11, 14 - Alcoholic Beverages - China’s Role Over the Short - Term Horizon