APAC Focus: what will drive the next stage of beer premiumization?

Unlikely, in our view. Despite COVID headwinds during 2020-22, China’s beer profit pool grew 42% in the period as local breweries accelerated their premium strategies. We believe beer premiumization in China is likely to accelerate from 2023, driven by the reopening of on-premise channels, beer’s higher value proposition relative to other alcohols, and leading breweries' increasingly diversified brand portfolios.

Based on our regression analysis of GDP per capita and beer retail sales prices (RSPs) globally, we believe China has long-term RSP upside potential through product mix upgrade. Our profit pool analysis also indicated a simulated c88% implied upside for various breweries in China. From UBS Evidence Lab, the percentage of respondents who chose "spending more on beer" in the next 12 months stayed higher than those "spending less", implying China's premium beer trend continues. We also see positive average selling price growth, highlighting the ongoing premiumization trend. Moreover, the retail price of pure alcohol in beer is considerably lower than other categories of alcoholic beverages, such as wine, spirits, and ready to drinks, in the Chinese market. In contrast, mature markets like the US exhibit a much narrower price disparity between beer and other types of liquor, which suggests substantial potential for premiumization in China's beer industry.

Potentially, but likely with limited magnitude. In the US, craft beer now accounts for 13% of the total beer market, up from 3% in the early 2000s, though the share appears to be stabilising in recent years. UBS Evidence Lab survey shows Chinese consumers increasingly favour craft beer as their spending on beer is on the rise. However, there is no official legal definition of craft beer in China and the Chinese government does not limit the stake holdings of large breweries in microbreweries. These factors will likely reduce the competitive pressure from craft beer on leading breweries. Meanwhile, based on survey results, we believe that a major driver of craft beer purchases is experience, not just product quality. Large breweries with differentiated marketing execution may win more share, in our view.

UBS Evidence Lab China consumer survey shows increased willingness to experiment with new beer brands, growing approval of microbreweries' quality, and more positive perception of craft beer brands compared to a year ago. Together, this indicates a shift in consumer preference for craft beer, resulting in further premiumization through beer category mix upgrade. Comparing the craft beer trend in Germany vs the rest of Europe, along with UBS Evidence Lab survey results, we find quality isn't the only driver of the craft beer trend; instead, new experience and product differentiation are also key drivers.