Looking to China for Growth

In the annals of the Beer Wars, 2004 will go down as a year to remember. Everything from vicious attack ads to court cases to takeover battles have marked a tumultuous year for this industry. Following Anheuser-Busch's (NYSE: BUD) announcement that it would be taking Harbin Brewery private, another chapter closed in this story.

The Harbin acquisition was groundbreaking in many ways. SABMiller's initial bid was the first hostile takeover attempt of a publicly listed Chinese firm, and the strategies employed by both SABMiller (partially owned by Altria (NYSE: MO)), and Anheuser-Busch could have set a precedent for how deals will (and won't) be done in China. Aside from the deal-making process, the price Anheuser-Busch paid for Harbin has implications of its own.

At 35 times earnings, the price paid for this regional brewer is a sign that the world's largest brewer is willing to pay big bucks for growth, which has hit a wall in the U.S. market. Anheuser-Busch's domestic beer volume grew less than 1% in 2003, following just 2% growth the prior year. The king's rivals aren't faring much better. Miller Brewing reported a volume decline of 0.4% for the year ended March 31, 2004, while Coors Brewing (NYSE: RKY) shipped 1.4% fewer barrels in the U.S. during 2003. Premium brewer Boston Beer (NYSE: SAM) saw its U.S. volume decline 3.9% last year.

Obviously, the U.S. market is saturated, and it appears that U.S. beer drinkers are getting more than their fill. Favorable pricing environments have helped Anheuser-Busch grow sales faster than volume and boost margins, but there's a limit to how much you can charge someone for a six-pack of Bud. Also, the company will soon hit a limit on share repurchases, which are replacing equity with debt to boost earnings per share.

Anheuser-Busch obviously sees potential in Harbin, since it was willing to pay a high price for a regional beer maker in a fragmented marketplace. The bottom line, however, is that Anheuser-Busch and its rivals have to find ways to grow.

While some brewers are planning to get together, the race is on to woo the now-coveted Chinese beer drinker. The regional markets in China are larger than most European countries, and the beer market is expected to grow 5% to 6% annually over the next five years. Capturing just a piece of this market is enough to slake any growth-craving brewer's thirst.

Fool contributor Chris Mallon has been known to knock back a few Buds every now and again. He owns shares of Anheuser-Busch and Altria through his private investment partnership.