Hong Kong: High rents and competition make brewers pursue export markets

Stressed by high rents and a highly competitive domestic market, Hong Kong’s leading local brewers are now aggressively pursuing export markets around Asia, and in some cases to Europe and the US, The South China Morning Post reported on June 30.

Patrick Gatherer, general manager of The Globe, one of Hong Kong’s best known bars for promoting craft beer, said local brewers have developed a level of reliability and quality suitable for bigger business aims.

“Some of them are breaking away from the pack,” said Gatherer.

Exact numbers on the nascent Hong Kong industry are hard to come by. The Hong Kong Craft Brew Association does not keep exact tallies and most brewers are reluctant to give production and sales figures.

There are as many as 35 brands and 18 breweries in Hong Kong. These start-up brewers are often former bankers, lawyers or other professionals who have turned passion projects into successful businesses.

Ian Jebbit, founder of Gweilo beer, now recognised as Hong Kong’s biggest local brewery, said he started exporting about a year ago. Jebbit, a former intellectual property lawyer in Hong Kong with DLA Piper, is determined to make Gweilo Beer a household name. “This is what I wanted from the outset. I home brewed with my dad when I was a kid. Later, I became a lawyer for one of the world’s biggest law firms. I gave that up, so this business has to work.”

Gweilo has ambitious plans for overseas. In 2018, Jebbit invested in new production equipment to the tune of US$5 million. “The new brewery was always about exporting,” he said.

Jason Lowe, founder of Heroes Beer and the current president of the Hong Kong Craft Beer Association, said that 2018 was a turning point for Hong Kong brewers, in part thanks to Gweilo’s added capacity.

“The large facility significantly increased the overall capacity of Hong Kong breweries, and the bigger players began to realise that Hong Kong is too small a market for all these capacities,” said Lowe, who reckons that Hong Kong’s small brewers have passed 1 million litres per year in capacity.

That still pales next to San Miguel Brewery in Hong Kong, which has stated annual capacity of 100 million litres per year and derives over half its revenue from exports to China and the Philippines, according to its latest annual report.

Jebbit says that his company recently signed a deal with Shelton Brothers, a US beer distributor, which will first focus sales on Chinatowns and airports in the US. Among Jebbit’s many plans is a production facility in the US.

“We are going to grow a lot. We just did a big deal recently that will see the beer going global,” said Jebbit. He declined to give details but industry rumour has it that Gweilo has signed a distribution deal with a global airline.

Rohit Dugar, founder of Young Master Ales, has pursued export business for the past two years, embarking on a relatively costly strategy of opening small restaurants and offices in his core export markets of Singapore and southern China. This contrasts with Hong Kong’s other major breweries, who rely on a network of distributors and shippers, or direct shipments to overseas bars and restaurants.

Young Master Ales’ Singapore office and restaurant has two people handling logistics and 15 restaurant staff. The new Shenzhen location has just two back office people often coming up from Hong Kong, and a local team running the restaurant.

Young Master Ales already owns four neighbourhood restaurants in Hong Kong.

“It’s a long term plan to build this up,” said Dugar, a former executive director at Goldman Sachs. “We are incurring a lot of costs, but in the long run, we capture more of the margin and share.”

In May 2017, Young Master Ales sold its first shipment of beer to Singapore. The following May, Dugar and his team opened a taproom and office. Dugar estimates that in 2019, Singapore and Shenzhen will each account for about 10 per cent of Young Master Ales sales, with Hong Kong and other international markets the remainder. Dugar estimates his current production at about 1 million litres per year.

Dugar invested his own money in his brewery at the start, later bringing on a private investor before opening a second production site in Wong Chuk Hang. His original site in Ap Lei Chau now makes small batch, niche beers.

Despite Dugar’s enthusiasm for the mainland consumer, do not expect to find many Gweilos in China. “I was a food and beverage lawyer working on intellectual property. I’ve witnessed a lot of clients spending a fortune in China and then retreating,” said Jebbit. “Our plan is to focus outside China, and ring fence China, so that people in China become aware of it and want it first. It’s such a big black hole and it is hard to control what happens there.”

Moonzen Beer, founded in 2013 by Laszlo Raphael and Michele Wong Raphael, sells about 15,000 litres of beer every year into Thailand, the company’s main export market. Laszlo Raphael estimates Thailand represents about 5 to 6 per cent of total production. The next biggest overseas market is the UK, where Moonzen sells directly to bars and restaurants.

Raphael said that about 10 per cent of Moonzen’s production goes overseas, and he hopes to increase it by focusing on bar and restaurant deals, as the beers they make are not price competitive yet.

While Southeast Asia looks promising, Raphael has no interest in China and is instead focusing on Japan, South Korea and Taiwan, where appreciation of craft beer is higher. He says that he is in talks to open a new taproom in Tokyo.

Yardley Brothers, born out of a Lamma Island partnership, is now a sensation in the Hong Kong craft beer scene. The company has been selling beer for two-and-a-half years and has a capacity of about 10,000 litres per month. Co-founder Luke Yardley says that his company is operating at full capacity, with orders for Singapore and other Southeast Asian markets currently on hold.

Yardley is planning a big expansion in production volume. “Exports are now about 10 to 15 per cent of the business. It’s part of the reason for the expansion,” said Yardley. Yardley Brothers grew sales in Hong Kong by 150 per cent in the last year.

Singapore is a common target for exports for Hong Kong brewers, and Yardley plans to build his own brewpub in the Lion City. Singapore went from ordering about 1,000 litres every other month to about 2,000 to 3,000 litres every month. Yardley says a good brewpub would have a capacity of 1,000 to 1,500 litres per month.

Construction work has already begun on a small Yardley Brewpub concept on his Lamma Island home – the first ever brewpub on the popular Hong Kong tourist destination.

Beyond Singapore, Yardley is also looking to China for growth. He expects to settle on a distributor to handle Shenzhen and then spread to Guangzhou and beyond. “China is promising, but it’s the hardest nut to crack. But it would be great to do it,” said Yardley.

The biggest hurdle in developing the export business is exorbitant rents charged for good locations, a problem that Hong Kong beer companies have become familiar with in their home markets.

David Gallie, co-owner of Black Kite Brewery, said that he is keen to expand his export sales in large part because the Hong Kong market is just too tough. He estimates that his brewery is now producing at about a-third of capacity.

Gallie cites the lock-up deals used by big-name beer brands, such as Carlsberg and Heineken, which will pay Hong Kong bar owners marketing money plus provide discounts on beer to be the sole beer available in the bar.

“It’s the only way that some bar owners can stay afloat in Hong Kong,” said Gallie, thanks to the high rents they pay.

Another challenge is the relatively high price point of their beers. Craft beers from the US or the UK are priced the same or even less in premium retail outlets such as City'super, and big name brands sell for a fraction of the price.

Because of the intense competition, Hong Kong brewers have managed to build a hard-won reputation for quality in overseas markets, winning numerous awards in Australia and even in Europe. “The Hong Kong brewers are certainly more confident [than other international offerings] to experiment and produce flavours that appeal to the Asian or Singapore palate,” said a spokesman for the Singapore Craft Brew Association. “Incorporation of unique Asian flavours from fruit, botanicals and spices have been a big hit with the craft beer community in Singapore.”

The competition is increasing. Over the past two years, Perry Lam has used his own money to build a new brewery, Hong Kong Lovecraft, with a massive investment in tailor-made equipment from Germany, specially installed in his facility in Tsing Yi. Trained at a Munich brewery school, he plans to specialise in large volumes of German lager beer, which he feels is undeveloped in Hong Kong, and dreams of exporting to Europe.

Owlsome Group, which has a capacity of 550,000 litres per year and is contract brewing for two craft labels, launched its own brand, Carbon Brews, eight months ago.

Most brewers in Hong Kong feel that Hong Kong beer has developed its own brand cache. “If you’re good in Hong Kong, you’re good in Asia,” said Yardley.

But the window for Hong Kong brewers to truly go global may narrow.

“In my view, it's important for Hong Kong breweries to capture our edge now, quickly scale up, and build some strong brands, so we can stay strong and survive in the export markets,” said Lowe.

Hong Kong is due to capture global attention from the beer market as AB InBev, the world’s largest brewer, is expected to list its Asia business in Hong Kong, this summer, according to reports. The focus on Hong Kong could renew efforts by global brands to boost market share by whatever means necessary.

“Where we are able to acquire businesses if they make sense to us, we will,” said Steve Deng, corporate affairs director, Carlsberg Asia.

30 June, 2019