Aug. 3 (NBD) -- China Resources Enterprise, Limited ("CRE") and China Resources Beer (Holdings) Company Limited ("CR Beer") have struck a non-binding agreement with Dutch brewing giant Heineken NV, the Chinese brewer said in an announcement Friday.
Under the deal, Heineken will take a 40 percent stake in CRH (Beer) Limited ("CBL"), the owner of CR Beer, for a consideration of approximately 24.4 billion HK dollars (3.1 billion U.S. dollars), while CRE will purchase 5.2 million Heineken treasury shares (equivalent to a 0.9 percent shareholding in the Dutch company) for about 463.6 million euros (542.7 million U.S. dollars).
CR Beer is the largest brewer in China in terms of sales volume. The company sold about 11.8 million tonnes of beer in the country last year, grabbing roughly one quarter of the Chinese beer market with the top-selling Snow, which targets the low-end segment and is almost exclusively sold in China.
As part of the deal with Heineken, CR Beer will be able to leverage the Dutch brewer's global distribution channels to support and accelerate the international growth of its Snow beer brand and other Chinese brands.
China's beer production and sales have begun to show a downward trend since 2014. The production has dropped 15 percent while the sales volume have slid 12.2 percent cumulatively as of the end of last year, He Yong, secretary-general of the beer branch of the China Alcoholic Drinks Association, once said.
China Resources Snow Breweries Limited, a wholly-owned subsidiary of CR Beer, only saw a rise of 0.9 percent in beer sales volume last year, the company said in the annual reports for 2017.
However, the premium beer sector is growing rapidly and will be a major battlefield for beer makers in the future.
NBD noticed in the results report for 2017, CR Beer put forward a plan to optimize its product structure and shift the focus to the manufacture and sale of medium/high-end beer.
At Friday's press conference for the partnership with Heineken, the company said that to build a strong presence in the premium segment, only having local brands are far from enough, and it is critical to possess international brands.
In the new deal with Heineken, the Chinese brewer was licensed to exclusively use the Dutch brewer's flagship Heineken brand in mainland China, Hong Kong and Macao. The Heineken beer is sold at a price that is almost three times the price of Snow. Moreover, Heineken China's current operations will be combined with CR Beer's operations. The deal will help CR Beer break into the upscale beer market and improve the brand value.
To Heineken, the cooperation with CR Beer will expand its footprint in China's beer market, which is now the second largest premium beer market globally and is forecast to be the biggest contributor to premium volume growth in the next five years, driven by its rapidly growing middle class.
Heineken entered China as early as 1983 but has struggled to gain a firm foothold with its Heineken lager, which lags far behind AB InBev's Budweiser in the premium market. According to research firm Euromonitor International, the Amsterdam-based company had a 0.5 percent share of the China market by volume in 2016, while CR Beer accounted for more than a quarter.
Fang Gang, expert of the beer industry, told NBD that the partnership between CR Beer and Heineken is highly complementary. Through Heineken's global distribution network, CR Beer can reach out to the rest of the world and earn a place in the premium segment, while Heineken is able to set up a strong distribution network by taking advantage of the Chinese partner's dominance.