(Yicai  Global) Nov. 27 -- Chinese craft beer sector is expanding quickly as  the country draws up the industry's first set of standards, which will  be open for public comments soon.

Organizers  of the third China Craft Beer Awards described the development of the  sector in the country as "extremely rapid in a short space of time." The  industry has been growing at a rate of 40 percent annually since 2015.  Eight hundred craft beer brands exist in China though consumption only  accounts for less than 1 percent of the market.

The  market share of craft beer is expected to account for 3 percent to 5  percent of the whole market in the future, according to data from the  China Alcoholic Drinks Association.

Explosive Growth of Sector

"More  than half of the people [in China] who consume craft beer are now  Chinese," Shen Kai, founder of Dream Brewers, told Yicai Global. "While  many craft beer stores were more of a gathering place for foreigners in  2015 or earlier." 

Shen  and his firm just completed B-round financing of more than CNY30  million (USD4.3 million) last month and set up a flagship store in  Shanghai's central Jing'an district. In 2015, Shen also set up another  project BeerGeek, a mobile community about craft beer, which is home to  more than 200,000 registered users and has become one of the largest  professional craft electronic commerce platforms in China.

"Our  equipment and production technology are all from Germany, and they are  not available at rival breweries," Li Qing, president of Urbrau Craft  Beer, told Yicai Global. Li refutes reports that even the tiles of his  facility came from Germany, adding that the imports were limited to  equipment.

As  one of the largest craft beer factories in northern China, the location  in Handan city is a suitable place for beginners with a production  capacity of 30,000 tons.

Urbrau has hundreds of thousands of followers with China's online community attracted by its reputation.

"The  Chinese craft beer sector has taken on four business forms," Li said.  The first is retailers' focus on imported or domestic products while the  second concerns those bars home to their own microbreweries. The third  is about catering to craft beer lovers, which remain small in size at  present, and the fourth refers to the development of a factory with self  or subcontracted-production.

Hidden Concerns Behind Prosperity

"The  average annual growth of craft beer is very high, and no other industry  in the consumer goods sector is exhibiting such rapid expansion," Shen  told Yicai Global, adding that Beijing is the largest regional market  for craft beer in Asia, with more than 1,500 bars and bottle shops,  while Shanghai is home to most craft beer brands.

The  low barriers to entry and strong demand among hardened consumers are  two key factors in the sector's explosive growth. "It is not hard to  start a microbrewery now with a few million yuan enough," said Wang Rui,  founder of Chengdu Harvest Brewing.

As  one of the representatives of Sichuan craft industry, Wang has suffered  setbacks when entering the sector, and depended on himself to solve a  lot of issues. In his view, getting into business has become easier now.

A  large number of craft beer training institutions or affiliate programs  have emerged online, allowing those interested to buy a full range of  brewing equipment and receive training. However, this also brings  problems, according to Wang.

"The  knowledge and experience gained from training courses are not enough to  brew good beer since these courses and equipment are just part of  efforts to popularize brewing," Wang said, adding that low entry  barriers do not mean products will be good. 

However,  many of the new brands that have sprung up over the years have  collapsed due to a lack of consumer knowledge of the products. The bar  business not only depends on the beer itself but also on location,  management and operations, Wang said.

Those  who joined the sector early on were driven by passion, according to  Wang,  while those joining now are increasingly pursuing profits,  betraying the original intention of craft brewing.

Shoddy  or fake craft beer also remains an issue that is hard to eliminate, one  winemaker said, adding that Chinese consumers may find it hard to  distinguish from the real thing due to the concept of craft beer being  new in the country. "Common hops cost between CNY30,000 (USD4,323) and  CNY40,000 per ton, while the price of premium hops is between CNY300,000  (USD43,230) and CNY400,000 per ton, and their effects are completely  different," he said.

The  biggest problem in the craft beer sector is that proper sales channels  and consumption scenarios do not properly exist yet, according to the  various brewers interviewed. Most of the major craft beer brands are  expanding online sales and distribution channels, but none of them are  doing well, they added. 

The  reason for this is that transportation of products for e-commerce is  not easy due to high cost, and craft beer is still a niche product  lacking brand and consumer awareness. Using traditional dealer channels  is unable to reflect the strength of craft brewing products and they  also face problems such as price wars.

Capital  factors also limit business development as the cultivation of brands  and consumer education require a lot of investment, which is difficult  to afford for many brewers.

The  Chinese craft beer sector remains in its initial stage and the  appropriate sales channels and consumption scenarios still need the  long-term exploration of China's brewers, according to expert Fang Gang.

Competition from Industry Mainstays

Traditional  beer brands still occupy 99 percent of the domestic beer market and are  widely sold everywhere in convenience stores and supermarkets, though  these industry mainstays have taken note of the potential within the  craft beer market. 

Belgium-based  Anheuser-Busch InBev set up ZX Ventures in 2015 to tackle head on the  shrinking traditional beer market and the rise of demand for craft beer  in China. Z stands for Zythology, which means beer research, while X  stands for Experience.

"The  company has opened several different craft beer-themed restaurants in  Shanghai, Beijing and other places, some of which are equipped with  brewing equipment to bring a more immersive experience for consumers,"  an insider at AB InBev told Yicai Global.

AB  InBev's new CNY60 million (USD8.6 million) factory in Wuhan entered  operation at the beginning of the year. The new factory has an annual  output of 30 million bottles and is dedicated to producing craft beer  for the Chinese Market.

Domestic  beer giants are working on the sector too. China Resources Beer has  obtained orders from several craft beer brands through cooperation with  Dutch brewing company Heineken NV The former is now considering the  acquisition of some high-quality craft beer brands to expand  distribution channels and promote product diversification, according to  an insider at CR Beer.