In spite of the fact that the level of taxation on the beer retail price in China was one of the lowest in the world at 19% (as compared with South Korea at 53.5%, Australia at 52.8% or the UK at 44.6%, for example), beer producers in China found it hard to make a profit, generally operating at capacity utilization levels of just 50-65%. The problems faced by foreign entrants can be summarized under four heads: _ The high price-sensitivity of consumers.
_ A high level of loyalty to local brands.
_ The difficulty of converting brand awareness into
_ The notoriously underdeveloped distribution
* In effect beer is a commodity product
* Beer is sometimes sold cheaper than soda
* In the 1990s the average price of beer was US$0.20-$0.30 * Foreign brands were priced about 400-500% more than local brands * The leading local brewers appeared to be consciously using their volume efficiencies to engage in predatory pricing to exploit consumers’ price sensitivity Local Loyalty
* Beer industry had an intensely local nature with patriotic feelings attached
Difficulties converting brand awareness
* These included building global brands through expensive advertising campaigns aimed at differentiating premium beer in the eyes of consumers and loading the product with emotional associations. In China, such campaigns mostly proved a waste of time and resources. They created significant awareness but not the desire or the ability to pay the premium price for the beer. * Locals also displayed a strong sense of loyalty coupled with a lack of desire to actually purchase these new brands. As one local consumer commented, “I’ve heard of Tenant’s, but local people should drink local beer!” The final nail in the coffin was the staggering inefficiency of China’s distribution systems. The country was too vast and distributors just too unreliable for these western businesses. Local had triumphed over global. * High marketing expenditures and significant brand awareness of global beer brands has not proven sufficient to encourage enough Chinese consumers to pay the huge price differentials charged by foreign entrants. Local consumers have preferred to stick to their local brews; also demonstrating their patriotism by doing so.
In the beer industry, tailoring the competitive strategy to the local environment proved the most important factor for success. Unsuccessful foreign competitors attempted to compete based on differentiation (premium pricing and superior product quality). While this strategy can be successful in more developed markets, in this case firms failed to appreciate the particular features of the China market: the high price sensitivity of consumers; the high level of patriotism when it comes to drinking beer; the difficulty of converting brand awareness to actual purchases; and the notoriously underdeveloped distribution systems. The high level of fixed costs involved in beer production exacerbated the situation. Source: Fermentation in the China Beer Industry (2006) Available at: http://researchdocs.cox.smu.edu/slocum/china%20beer%20article.pdf
* Persistent low price of beers brewed domestically
* 90% of beer is sold for less than 4RMB
* Regional variation of prices – prices are higher in eastern and coastal regions * In some cases beer is cheaper than coke
* While MNCs might be more efficient and have more money to spend on sales and promotions it is not easy to recover these costs * With prices so low companies find it difficult to pass costs on to consumers * The main price distinctions are between cheap ‘standard’...