Due to the lack of comprehensive whole-industry-chain safety control, food safety issues are highly likely to occur; over-reliance on online channels and a single homogeneous product category may lead to a cliff-like decline in performance in the event of unexpected situations. "Three Squirrels, due to its lack of comprehensive whole-industry-chain safety control, is highly prone to food safety issues; and its over-reliance on online channels and a single homogeneous product category may cause its performance to plummet in the event of unexpected situations. These potential risks will, to some extent, become obstacles to its IPO." During "Double 11," Three Squirrels Co., Ltd. (hereinafter referred to as "Three Squirrels") once again created a sales miracle. According to information published by Three Squirrels on Weibo, on November 11, it achieved sales of 522 million yuan throughout the day, with a total of approximately 4.2819 million consumers participating in placing orders. So, what does "522 million" mean? Three Squirrels' sales in the first half of 2017 were 2.894 billion yuan, and "522 million yuan" accounts for about one-fifth of that. Perhaps driven by confidence in the rapid growth of performance over the past two years, Three Squirrels has been making frequent moves in the capital market. Information on the official website of the China Securities Regulatory Commission shows that Three Squirrels had re-filed its prospectus as early as the end of October, intending to list on the ChiNext board. However, several industry insiders interviewed by a reporter from Legal Weekend expressed that behind Three Squirrels' impressive performance, there are hidden risks from products, channels, markets, and other aspects. "Three Squirrels, due to its lack of comprehensive whole-industry-chain safety control, is highly prone to food safety issues; and its over-reliance on online channels and a single homogeneous product category may cause its performance to plummet in the event of unexpected situations," food expert Zhu Danpeng told a Legal Weekend reporter. "These potential risks will, to some extent, become obstacles to its IPO." ● ● ● Product: Frequent Problems In fact, in recent years, Three Squirrels has had continuous product problems. In August this year, the China Food and Drug Administration issued an announcement stating that pistachios labeled as produced by Three Squirrels, sold on Tmall Supermarket on the Tmall (website) mall, had a mold detection value of 70 CFU/g, which is 1.8 times higher than the national standard (not exceeding 25 CFU/g). As soon as the news came out, it immediately triggered public opinion on the internet. Subsequently, Three Squirrels responded that it was highly likely that the products were contaminated with mold due to improper storage and transportation conditions after leaving the factory, leading to the unqualified samples taken during circulation. However, the investigation results of the Wuhu Food and Drug Administration (hereinafter referred to as "Wuhu FDA") showed that Three Squirrels "failed to inspect the purchased food raw materials as required." Ultimately, Wuhu FDA imposed an administrative penalty on Three Squirrels, as per the "(Wuhu) Food and Drug Supervision Food Penalty [2017] No. 8," issuing a warning, confiscating illegal gains of 2,505.89 yuan, and imposing a fine of 50,000 yuan. Regarding product issues, Three Squirrels is not just facing this one trouble. In February 2016, the media exposed that through third-party testing, a Three Squirrels cream-flavored sunflower seeds product was found to have excessive sodium cyclamate content. In May 2016, Three Squirrels was fined 56,345.62 yuan for adding drugs to food and producing food with non-food raw materials. In addition, a Legal Weekend reporter, after reviewing Three Squirrels' prospectus, found that from July 2016 to June 2017, Three Squirrels and its holding subsidiaries had 10 pending lawsuits, of which 9 were as defendants. Among these 9 lawsuits, 8 were related to product issues, with litigation reasons involving product shelf life labeling not conforming to food safety standards, products not meeting food safety standards, labeled fat content differing from actual content, sugar content not meeting grade requirements, and ingredients not being labeled on the label, among others. Regarding the frequent product problems of Three Squirrels, several industry insiders interviewed by a Legal Weekend reporter stated that this is related to Three Squirrels' business model. According to Three Squirrels' prospectus, its products are mainly processed by commissioned manufacturers or directly purchased from suppliers, and then the company repackages and sells them under its own brand. "Under such a model, Three Squirrels finds it difficult to effectively supervise food safety issues, after all, it is not the food producer, making effective supervision difficult," Chen Lin, a researcher at Shenzhen Zhongwei Zhiyan Consulting Co., Ltd., told a Legal Weekend reporter. In Chen Lin's view, although the "OEM" sales model can fully utilize external market advantages in product resources, combined with its own brand resources, forming a complementary model, "in the 'OEM' sales model, the variety of food is rich, sources are diverse, logistics and transportation requirements are high, and testing is not easy, which leads to food safety risks in the 'OEM' sales model, requiring enterprises to effectively improve their supervision levels to prevent food safety issues." ● ● ● Channel: Over-reliance on Online Channels In 2013, annual sales exceeded 300 million yuan; in 2014, it tripled to 924 million yuan; in 2015, it doubled again to over 2 billion yuan; in 2016, it jumped to 4.4 billion yuan. Such impressive performance growth was achieved by Three Squirrels through online channels. "As is well known, Three Squirrels started online," Zhu Danpeng frankly said. "But, as the saying goes, 'Success is due to Xiao He, and failure is also due to Xiao He.' Three Squirrels currently relies too heavily on online channels." Three Squirrels' prospectus states: "During the reporting period, the company continuously expanded diversified sales channels through self-operated apps, group buying, offline experience stores, etc., but sales revenue is still mainly realized through third-party platforms such as Tmall and JD.com." The prospectus shows that from 2014 to 2016 and the first half of 2017, the operating revenue proportion from its top five cooperative e-commerce platforms was 96.53%, 95.06%, 89.71%, and 90.41%, respectively. Among these, Tmall accounted for the "lion's share" of Three Squirrels' operating revenue. Data shows that from 2014 to 2016 and the first half of 2017, sales revenue realized through Tmall accounted for 78.55%, 75.72%, 63.69%, and 55.22% of operating revenue, respectively. Regarding the status of online channels, Chen Lin also believes there are certain hidden risks. "There is a risk of excessive channel concentration. If Tmall or JD.com adjust their business strategies, it will inevitably pose a potential threat to Three Squirrels' sales, either affecting sales revenue or profits," Chen Lin said. "Three Squirrels should independently build its own e-commerce system to balance and diversify the risks of Tmall and JD.com channels." In fact, Three Squirrels itself also expressed concerns about over-reliance on online channels. "At present, third-party channels such as Tmall and JD.com have gradually developed into mature open e-commerce platforms and have become important drivers of retail growth in consumer goods. However, if the stability of these e-commerce platforms' operations or their business models and strategies undergo major changes, and the company cannot adjust in a timely manner, it may have an adverse impact on the company's operating performance," Three Squirrels stated. Three Squirrels also said that if the stable cooperative relationship with third-party platforms undergoes major changes in the future, it may also affect the company's operating activities and financial condition. ● ● ● Market: Severe Homogenization In addition to the difficulty of effectively supervising product issues and the risk of over-reliance on online channels, industry insiders believe that Three Squirrels also faces the problem of product homogenization. "In fact, Three Squirrels' products are relatively homogeneous, especially nut products. The reason Three Squirrels succeeded, I think, is that it seized the right moment and stood at the forefront of the internet sales of mid-to-high-end snacks. However, over-reliance on a single homogeneous product category poses significant risks, and it is easy to be overtaken by competitors," Zhu Danpeng said. A careful review of Three Squirrels' business reveals that since its establishment five years ago, its product line has expanded to cover nuts, snacks, dried fruits, flower teas, and other leisure snack areas. However, the nut business remains the core business of Three Squirrels. The prospectus shows that the operating revenue from the nut business accounted for 87.85%, 80.44%, 69.83%, and 68.51% of total revenue in 2014, 2015, 2016, and the first half of 2017, respectively. In addition, the proportion of the snack business has been increasing, from 0.92% in 2014 to 19.6% in 2016. In Zhu Danpeng's view, while Three Squirrels seized the right moment, due to the homogeneous nature of its products, it can only win through brand effect and scale effect, which inevitably requires measures such as price wars and huge advertising expenses. However, such a strategy will affect the gross margin. The prospectus shows that from 2014 to 2016 and the first half of 2017, Three Squirrels' comprehensive gross margin was 24.15%, 26.90%, 30.20%, and 30.90%, respectively. On the other hand, the average gross margin of comparable listed companies was 43.06%, 43.69%, 42.40%, and 40.73%, respectively, significantly higher than Three Squirrels. In fact, Three Squirrels itself admits this. "From 2014 to 2015, the company's gross margin was lower than comparable companies, mainly because the company's business model is primarily online sales, while improving operational efficiency and providing consumers with quality products and services. During this period, the company was in a rapid development phase, expanding market share through pricing strategies," Three Squirrels stated. Zhu Danpeng believes that while continuing to develop its leisure food business, Three Squirrels should actually adopt some diversification measures. -END-