Carl 2019 Five Predictions Blog
Carl 2019 Five Predictions Blog
January 7, 2019

Ok. 2018 was a long year for a lot of craft beer brands in China, and all for different reasons. Some overhyped and overheated their brands. Some fell victim to changing markets and tastes. Even more realized the bitter truth that renting high priced real estate and installing mini factories onsite isn’t a sustainable model. People watching the industry got a lot of things wrong and very few things right, which goes to show you that can’t predict and understand China from the outside. For 2019, we can expect more change, more growth, and some more failure. Thus, and without any further ado, here are five things that I think will happen in 2019 that will further shape Chinese craft and push us forward, whether we want to move or not:

One. Chinese craft beer will continue to improve and define itself. This will be represented by several indicators, but none more important than a break away from the constant shit show parade of sucking up to foreign brands and treating them as superior. Listen, craft beer is based on shared experience and peerage. Literally eye to eye shit. There’s no bowing of heads or straining your neck to see to the heights of people that would never survive in craft beer if it meant starting a brand in China and FOR China. I spoke about this in my blog about how our market will not be defined by international brands, but this point is a bit more succinct than that. My prediction is that a generation of Chinese craft breweries will step forward to represent the future of our industry by creating beers and quality reputations that put them in a position to say no to foreign brands that need us more than we need them. 2019 will be the year that this realization takes hold and becomes a reality.

Two. Contract brewing will be exposed as usurious and contributory to cost inflation. Our market is being held back, and the true potential and market cap for Chinese craft beer will never be achieved under the current model of production and distribution. My thoughts on contract brewing are pretty clear, but the real damage that this practice has caused us is only now beginning to be measured accurately. For the better part of the last six years, we’ve been led to believe that it’s awesome that brands you’ve never heard of are now Logan Paul before the suicide forest because they are now available in… bottles! Or cans. Wonderful. A 35rmb 330ml bottle of beer from a brand that you’ve never heard of. You can literally measure the excitement every time a guy all of a sudden has a bottled beer for sale. The problem is that after a year of trying to sell their contract brewed investment to include the cost of production, their margin, distributor fees, and logistics, they realized it was too expensive and too difficult to move any real volume. The restaurants and chains that they tried to sell their bottles to realized one simple thing: they also had a phone and money. They could just call the same contract brewery that is making beer for the brand owner trying to sell them an unheard of brand of beer and just cut out the middle man and directly buy their own house-branded beer. This was the most frustrating thing that happened in 2018. Whether it’s mega-chain restaurants like Haidilao (nationwide), or smaller restaurant groups like Blue Marlin (Suzhou/nation wide) and True Legend Group (Shanghai), restaurateurs are tightening the logistic chain and paying contract breweries to just brew beer directly for them.

And how do these beers taste? Some are good and some aren’t. However, what they represent is a howling wind that demands an end to this lazy bullshit. Craft breweries have to take charge of their own production, tighten up efficiencies, and offer better beer at a cheaper price before consumers’ experience brand appeal fatigue. It’ll pan out like this: these restaurant groups will invest in their own beer and that beer will underperform, but for 18 months those channels will be blocked to other independent brands and once the experiments fail to turn a sufficient profit to justify the expense the management and decision makers of those groups will most likely keep all craft beer off their menus for another slug of time just because of the bad memory. All because contract brewing resulted in cost inflation and planted a bad idea in more heads than it should’ve.

Three. China Resources will acquire a major craft beer brand and Chinese beer drinkers will be pushed to the point of no return on the definition of craft beer. This doesn’t need a lot of words; it’s pretty self-explanatory. Whether it’s over-leveraged brands like BrewDog and Stone or a start-up East Asian brand that has generic appeal in China, CRE will broker a deal to purchase a craft brand, distribute it to their retail and commercial in-house channels, and use their real estate largess to roll out a blinding amount of retail locations in a short period of time. My money is on a soulless international brand that already thinks they are too big to fail, but I’ve been wrong about details before.

Four. Bad investment money will infect and implode a popular Chinese craft beer brand. Good investors are priceless, whereas bad investors are idiots and don’t know it. This has arguably already started to happen, but the devil is in the minutiae. A lot of people won’t notice, but people will keep passing around pitch decks for investment opportunities stating they are on their series A/B/C/C+ or whatever investment yet their beer isn’t easily locatable and their pitch isn’t based on brewing success as much as it is on a black box service that uses metadata to create penta-deltas of synergy, or APPs (for a good reason that they can’t explain), or even better, franchises! Any or all of those things are evidence that that little experiment is going to crash, and crash hard. Nevertheless, dumb investors love those words. See where I’m going with this? It’s time. It was bound to happen. Might as well happen this year.

And

Five. Someone is going to actually accurately analyze the Chinese craft beer market and the results are going to motivate us all to work harder and high-five less. There a myriad of assumptions about the size of the Chinese craft beer market in terms of percentage of overall beer consumption in China, which is currently at 450,000,000hl per year – roughly double that of commercial beer production in the United States – at somewhere between 1%-5%. For those of you who good at math, you already know that that is between 5,000,000 and 22,500,000hl per year. These assumed numbers came from X and Y, and they are starting to get re-published and, even worse, believed. The problem with these numbers is that there is no evidence to support them. Exaggerations don’t help craft beer in China develop or grow. They actually hurt us.

The way new markets develop is founding brands first lay a foundation. That foundation equates to revenue, which in turn attracts investors and expansion. Investors hire independent due diligence firms to do market research that is usually done by a combination of querying anonymous professional networks, open source research, and examining comparable markets. It’s also a little bit more predictable than that. Investigators don’t like negative results, rather they like telling investors exactly what they want to hear. In this case it’s that, “…Chinese craft beer is on par with American craft beer and is posed to overtake it. You guys should definitely invest.” The problem is that this leads to aggressive and ignorant investment (as mentioned above in point 4) in a market that is nowhere near as developed as “1%-5% of the total beer market”. The higher end is 22.5 million hectoliters per year, and the lower end is five times the annual production of Sierra Nevada Brewing Company’s 2017 output. I don’t want to belabor this, but China doesn’t have anything near a fraction of that.

We have a lot of hard working breweries that are fighting everyday to improve the reputation of Chinese craft beer domestically and internationally. What we don’t have is anything that even equates to 4.5-22.5 million hectoliters a year. Nevertheless, investors will invest on these assumptions because that’s how the system works. Those investments will fail, and as a result of those failures craft beer will become a toxic market. Someone needs to do the research and show the true state of the market before that happens. I think that will be this year. I hope it will be this year.

Just one more note on why those numbers are garbage and dangerous. Trucks. Trucks are the best way to gauge whether or not a brewery is really moving product. Next time you go on a brewery tour, pay attention to the loading dock. If the low end of those Chinese craft beer numbers are correct then that means between 81 and 405 forty-foot containers leave breweries across China filled with delicious pallets of beer everyday. It takes about 45-90 minutes to load a 40’ container. That means that even with the most efficient packing times and lowest number of containers (81), a total of 60 hours are spent loading trucks with craft beer every day across China. My point here is that this isn’t currently happening in China. Not today or yesterday or tomorrow, or even next week. But it will, soon.

Ok, those are my five predictions for 2019. It’s going to be a great year, but some weird shit is also going to happen. Brace yourself.

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