Signs of trouble as Heineken faces China distribution gap

The Heineken brand has had a challenging history in China, despite strong brand recognition in the region. These trials and tribulations are all too familiar to Andy Morton.

It's almost 15 years since I managed a bar in Chengdu, one of China's biggest second-tier cities, but I still remember the early afternoon opening ritual; shutters up, music on, and a quick restock of the fridge before customers arrived.

I would also manhandle the big Heineken sign we had from the back of the store cupboard out on to the street – a rigorous undertaking in Chengdu's sweat-box climate. But as I huffed and heaved, there was always the faint tug of a cognitive disconnect in the back of my brain. Something wasn't quite right. The sign sat out front every night, partially illuminating the bar – and the bicycle repair store next door – in Heineken's trademark green. The problem was, we didn't sell any Heineken.

This, in essence, is the argument set out by Bernstein analyst Trevor Stirling in a note that warns that Heineken is failing to get its distribution right in China, despite its strong brand equity.

Indeed, Stirling's note suggests China will be one of the major challenges for new CEO Dolf van den Brink, and comes as a warning to a company that in the past two years has invested a lot of time and resources into changing its fortunes in China.

In the mid 2000s, when I was wrestling with that sign, Heineken accounted for just a fraction of a vast and sprawling Chinese beer market that included swathes of regional brewers. Today, however, consolidation has narrowed the market and major international brewers including Anheuser-Busch InBev and Carlsberg have come to the fore. 

In a bid to join the country's boom in premium beer, Heineken joined forces in 2018 with domestic giant China Resources Enterprise – the owner of the Snow brand – and agreed a licensing deal for China, Hong Kong, and Macau under the CR Beer venture.

According to Stirling, however, the deal has yet to make the hoped-for difference on the street. The analyst cites a survey conducted for Bernstein that shows Heineken distribution in the key premium restaurant channel remains limited in Chengdu, Hangzhou, and Shenyang – three strongholds for CR Beer that should, Stirling says, represent the "lowest-hanging fruit" for the company.

Heineken had its highest penetration in Hangzhou, where 45% of the premium restaurants surveyed list the brand. That presence is still behind A-B InBev's Budweiser (55%) and CR Beer's Snow (65%). In Chengdu, the situation is worse, and Stirling said CR Beer looks to be prioritising its own brands over the licensed Heineken. Stirling describes the situation as "myopic", as he believes Heineken lager has better prospects for premium growth compared to CR Beer's portfolio.

One of his reasons is down to the success A-B InBev has had with Budweiser. Again, back when I had the bar in Chengdu, we sold Budweiser in the big 50cl sharing bottles favoured by consumers who generally drank beer in restaurants with friends and family. Also, Budweiser wasn't much more expensive than Snow or the local brands.

In the past decade, A-B InBev has turned Budweiser into one of the biggest selling premium beers in China, and has reworked the brand's packaging in the country into something that US consumers would better recognise. Meanwhile, the company has invested in marketing within China's bustling beer bars, clubs and karaoke venues.

In his report, Stirling notes that Budweiser has the third biggest distribution in Chengdu's premium restaurants, an excellent result in a city that is home to western China's biggest brewer, Blue Sword, which is owned by CR Beer. His argument is that if A-B InBev can succeed in Chengdu, then Heineken should be able to effectively ramp up its own distribution.

As for my old bar, I heard that it closed down last year, a victim of Chengdu's proliferation of nightlife options. Heineken will hope its beer does not suffer the same fate.