Tsingtao finds rising costs are hard to swallow

Fans of Tsingtao Beer are no doubt grumbling about recent increases in the price of their favourite tipple.

But the rises may not be enough to help the mainland's second-largest beermaker cover increasing costs - and more price rises could be in store, analysts warn.

Earlier this year, Tsingtao Brewery announced a nationwide price rise for some of its premium products after its major rivals CRE Snow and Beijing Yanjing - the number one and number three beermakers on the mainland - decided to lift prices in some regions.

However, market analysts said the higher prices for some individual products would be insufficient to offset cost growth.

According to the Shandong-based brewer, prices for imported barley jumped to between US$360 and US$370 per tonne in the first half of this year, nearly 40 per cent more than the second half of last year.

This was mainly because of the severe droughts and scale-backs in barley-producing regions in Australia and Canada last year.

Meanwhile, other raw materials such as rice and packing materials have also surged by five per cent over the past three months.

'The cost pressure will emerge in the second quarter this year when the company uses up the cheaper barley it stocked last year,' said analyst Hu Wenzhou, of BOC International in a recent research note.

Currently, half of the barley used by the brewer is from overseas, while the rest is from the mainland, which is 20 per cent cheaper. Yet the domestic-grown crops are now used only for the three lower-end brands it distributes, which are Laoshan, Hans, and Shanshui.

Sarah Li, an analyst with Sinopac Securities, expected the beermaker to raise prices further before the peak season in summer.

Tsingtao Brewery, which was founded by German settlers more than a century ago, said last month that it expected sales volume for last year to reach 6.3 million tonnes, up 6.6 per cent year on year.

The premium brand Tsingtao Beer contributed half of the revenue during the period. The company acquired Shandong Xin Immense Brewery, producer of Silver Wheat Beer, for 1.87 billion yuan (HK$2.2 billion) last December.

It also bought another Shandong beer company, Baotuquan, for 174 million yuan last March.

'The acquisition (of Silver Wheat) will enlarge Tsingtao's market share in Shandong by one per cent and help grow Tsingtao's 2011 earnings by nearly four per cent,' said Li.

'But it will make little contribution to its nationwide market share.'

Li said with the new capacity, sales volume was expected to grow by more than 10 per cent this year, while net profit would grow by six per cent.

Tsingtao Brewery, which holds around 14 per cent of the beer market on the mainland, is trying to catch up to its competitor CRE Snow, which holds 21 per cent of market share.

It has changed its marketing strategy this year by giving a bigger push to its lower-end brands in an attempt to expand in the mass market.

Analysts' views on the multi-brand growth strategy are mixed.

Hu Wenzhou, of BOC International, said sales growth in lower-end brands would drag overall gross profit margins down by one to two per cent, while Christine Peng, of UBS Securities Asia, said the multi-brand strategy would lead to low efficiency of marketing expenses.

Yet Merrill Lynch holds a bullish view on the Tsingtao Brewery, saying its continued mix improvement coupled with further price rises will boost the gross profit margin to 36 per cent this year from 34.4 per cent in 2009.

Tsingtao Brewery will announce last year's results on Wednesday.