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August 21 marked the 25th anniversary of Master Kong's founding. Listed in Hong Kong, Master Kong gave itself a birthday gift: amid widespread pessimism about instant noodles, its 2017 interim results unexpectedly surged, with revenue of 28.568 billion yuan and net profit up 54.59% to 700 million yuan. Instant noodle and beverage net profits each rose 33.54% and 33.54% respectively. Master Kong's half-year net profit already far exceeded Uni-President's full-year profit of 607.3 million yuan last year.

As Master Kong's pillar businesses performed well, it reminds us of Uni-President's chairman Luo Zhixian's recent statement about "exiting the instant noodle market" after its interim report, though Uni-President quickly denied this as media "misinterpretation." The financial report shows that Master Kong's new products performed well in the first half of this year. In instant noodles, while consolidating classics, it steadily increased its share of the high-end noodle market with slow-cooked broth series and innovative new products. Black Pepper and White Pepper, Golden Soup series, Pot-Cooked Ramen, and DIY Noodles cater to diverse consumer preferences. Black Pepper and White Pepper has become a hit product with both reputation and market success, and the Golden Soup series, launched just five months ago, has already outpaced similar products' post-launch growth rates. In beverages, Fruit Tea Story, Fruit Fiesta series, bottled Starbucks Frappuccino, and room-temperature lactic acid bacteria drinks all received positive market responses with significant sales growth. Bottled Starbucks Frappuccino showed encouraging revenue trends; Wei Chuan lactic acid bacteria drinks have become the top brand in the room-temperature lactic acid bacteria category in Shanghai and Jiangsu. Regarding the strong first-half performance, Master Kong stated that China's GDP grew 6.9% in the first half, and the overall food and beverage industry showed a stabilizing and improving trend, mainly driven by the rising proportion of the middle class and continued consumption upgrades. Master Kong also noted that raw materials are still affected by economic recovery and environmental policies, putting upward pressure on costs. Even so, the overall instant noodle market saw positive sales growth in the second quarter, showing signs of recovery; the overall beverage market, partly due to favorable weather, saw both sales volume and value rise in the second quarter, significantly better than last year. In contrast, how is old rival Uni-President doing? 2017 First Half | Master Kong | Uni-President Revenue and Growth | 28.568 billion yuan | 10.8861 billion yuan Growth 4.2% | Decline 7.1% Profit attributable to shareholders (net profit) and Growth | 700 million yuan | 569.6 million yuan Growth 54.59% | Decline 26.5% Instant Noodle Business | Revenue | 10.2718 billion yuan | 3.954 billion yuan Growth 1.75% | Decline 1.4% Profit attributable to shareholders (net profit) | 532 million yuan | Growth 33.54% | Beverage Business | Revenue | 17.5366 billion yuan | 6.598 billion yuan Growth 5.8% | Decline 11.4% Profit attributable to shareholders (net profit) | 166 million yuan | Growth 41.32% | According to Uni-President's 2017 interim report, its first-half revenue was 10.8861 billion yuan, down 7.1% year-on-year; net profit declined more severely, with profit attributable to equity holders at approximately 569.6 million yuan, down 26.5% from 775.2 million yuan last year. The instant noodle business was basically flat, with revenue of 3.954 billion yuan, down 1.4% year-on-year. The beverage business was very bleak, with first-half revenue of 6.598 billion yuan, down 11.4% from 7.448 billion yuan in the same period last year. For the decline, Uni-President noted in its report that the revenue drop was mainly due to the continued implementation of operational reforms in the beverage business from the second half of 2016, adjusting sales pace according to seasonal beverage demand, creating a large gap compared to the same period in 2016; also, gross margin declined due to rising raw material purchase prices. 25 Years of Covert Warfare Between Master Kong and Uni-President Their rivalry began in 1992. Over the years, amid the overall downturn in traditional instant noodle and beverage markets, the two giants, after the instant noodle battle and the ham sausage subsidy war, are now both targeting the mid-to-high-end brand battlefield. Although the food industry environment is not what it used to be, both sides remain highly competitive. A Covert War Sparked by a Bowl of Instant Noodles Master Kong says this year marks the 25th anniversary of the birth of its红烧牛肉面 (Braised Beef Noodles). The mainland market battle between Master Kong and Uni-President started with this bowl of beef noodles. Uni-President was founded in 1967 and is one of the major Taiwanese manufacturers of non-carbonated beverages and instant noodles, considered a veteran brand in Taiwan. Master Kong's predecessor was Dingxin Oil Factory, founded in 1958 in Changhua, Taiwan, renamed Ting Hsin Oil Company in 1974, mainly producing industrial castor oil. With the deepening of reform and opening up, Master Kong shifted its battlefield to the mainland. In 1992, Uni-President entered the mainland market with its shrimp-flavored noodles popular in Taiwan. Almost simultaneously, Master Kong launched its first pack of红烧牛肉面 on the mainland. The latter was a great success, while the former suffered severe acclimatization issues. After a poor start, Uni-President's strategic adjustments and heavy advertising spending failed to reverse the decline. By 1998, Uni-President's revenue lagged Master Kong's by about 1 billion yuan. According to reports, during the 2003 international palm oil price surge, instant noodle companies' monthly production costs suddenly increased by tens of millions of yuan, so Uni-President and Master Kong agreed to raise prices together. But when Uni-President adjusted prices as agreed, Master Kong held back, quietly seizing Uni-President's market share. By 2008, Uni-President was overtaken by Jinmailang and Baixiang, dropping from second to fourth in market ranking. In a panic, Uni-President brought in a revamped version of its old-style pickled cabbage beef noodles and invited Wang Han as spokesperson. The catchy slogan "This sourness, unbelievable" spread rapidly through major TV stations, and the pickled cabbage noodles quickly became a hit in the instant noodle circle. In 2010, this flavor offensive peaked, with sales of old-style pickled cabbage beef noodles exceeding 4 billion yuan, ending Uni-President's two consecutive years of losses. This made Master Kong fear losing its top position and also began developing pickled cabbage noodles. "Someone imitates my face, and also imitates my noodles," Uni-President's ad at the time was a veiled reference to Master Kong's follow-up, creating a tense and acrid atmosphere. Additionally, in 2012, Master Kong was embroiled in the "exclusion incident." At the time, it was reported that Master Kong had implemented a "plan to exclude Uni-President," subsidizing sales points with at least 500 yuan per month regardless of cost, causing Uni-President to lose about 40,000 sales points. In an interview with Yangcheng Evening News, Uni-President said claims of losing about 40,000 sales points were untrue, but regarding Master Kong's "exclusion plan," Uni-President played it coy, neither confirming nor denying. In marketing, the two instant noodle giants were locked in a fierce battle to the end. To compete for market share, Master Kong pulled out a killer move—giving away a ham sausage with each box of instant noodles—and Uni-President had to respond in kind. This ham sausage war lasted over a year. According to Business Review magazine, the two companies used up more than 4 billion ham sausages. This battle caused heavy losses for both sides. In 2014, Uni-President's instant noodle business lost 93.575 million yuan, down 34% year-on-year. At the time, Uni-President Chairman Luo Zhixian announced: "The inflection point for instant noodles has arrived; price competition should shift to value competition." Beverages in Urgent Need of Blood Transfusion In the battle between the two giants, instant noodles are the charging cavalry, followed closely by beverages. Master Kong created a generation of prosperity with green tea and iced black tea. The Chuan Shi Xin Yin series (sour jujube juice, rock sugar pear), and the Tea Expert series (jasmine tea, Tieguanyin tea) helped Master Kong capture half of the beverage market. In the first quarter of this year, these products still gave Master Kong a 49.7% market share, but they were all launched in 2011. After 2011, Master Kong relied on these well-regarded old products and its channel advantages from a large sales force to make money, rarely developing new products. The 2016 financial report shows that beverages are Master Kong's main business, accounting for 58% of total revenue. However, since 2015, Master Kong's beverage business has been in continuous decline. By the first quarter of 2017, beverage profit attributable to shareholders was 36.91 million yuan, down 54.13% year-on-year. On June 29 this year, a document published by the Ministry of Commerce showed that Master Kong planned to sell five of its subsidiaries to Zhangzhou Yilaifu Food Co., Ltd. These five companies' businesses are mostly concentrated in the production and sale of ready-to-drink tea beverages, fruit juice drinks, carbonated drinks, and bottled water, occupying a marginal position in Master Kong's production system. In contrast, in recent years, Uni-President has been continuously launching new products, from the 2009 launch of Uni-President Assam Milk Tea to rock sugar pear, Sea Salt, and in 2015, Xiao Ming Tong Xue targeting young consumers, as well as Ai Kua, Assam Mini Milk Tea, Bama Water, and Yaha Coffee, all of which have won market share for Uni-President. But even with vigorous new product development, Uni-President's beverage business continues to shrink. In May 2016, Uni-President transferred its indirect 47.83% stake in Jinmailang Beverage Co., Ltd. to external parties. In December of the same year, Uni-President again sold assets in its beverage business, transferring 100% of Jianlibao Trading to the Jianlibao Group. On July 6 this year, news spread online that "Uni-President forced employees to resign and shut down factories," including the closure of two factories in Xuzhou and Shijiazhuang. According to Uni-President's official website, these two factories mainly produce beverages, with a combined monthly capacity of 5 million boxes. In this year's interim report, Uni-President said the revenue decline was mainly due to the continued operational reforms in the beverage business from the second half of 2016, adjusting sales pace according to seasonal beverage demand, creating a large gap compared to the same period in 2016; also, gross margin declined due to rising raw material purchase prices. Industry insiders analyze that the biggest reason is the challenge of demand upgrading in the mainland beverage market. New categories of high-end food and beverages with health labels are more sought after, while traditional beverages are powerless against these fast-fashion drinks. The explosive popularity of drinks like Yidiandian and Heytea is strong evidence. In 2016, Uni-President launched a total of 7 new beverage products, with 3 functional drinks retailing at nearly 20 yuan. The feasibility of this attempt still needs market and time verification. This also indicates that in the future, Master Kong and Uni-President will likely have to continuously develop and make product innovation a KPI for transformation. Coincidental Exit: Developing Mid-to-High-End Brands Although the 15-year battle is still undecided, the industry environment for both companies is not what it used to be. Most notably, in the Chinese version of "Midnight Diner," when Huang Lei cooks a bowl of old-style pickled cabbage noodles, many viewers complained, feeling it was out of place. People seem to not like instant noodles as much as before, and declining sales are the most direct reflection. A market analysis report on the instant food industry said that in 2016, China's instant noodle sales fell 6.75%, the fourth consecutive year of decline. The period of continuous decline in China's instant noodle sales coincides with the explosion of the food delivery market. According to statistics from the China Cuisine Association, in 2016, China's online food ordering users reached 256 million; the national food delivery market exceeded 160 billion yuan, with growth of 33%. People's fast-food habits have shifted from instant noodles to food delivery, with Ele.me, Meituan Waimai, etc., becoming new mass brands. The emergence of food delivery largely caters to young consumers' pursuit of quality and health, seizing part of the instant noodle market. At the same time, instant noodles still need to work on dispelling food rumors and safety crises. There were online rumors that instant noodles take 32 hours to digest. Although media have repeatedly debunked this, freshly made foods like rice and vegetables are more convincing in terms of safety. The gutter oil incident further drove Chinese people's fondness for instant noodles to zero. In 2014, Taiwan's Ting Hsin black-hearted oil incident erupted, with problematic beef tallow discovered after inferior pork, eventually leading to the dissolution of Taiwan Master Kong in early 2017. At the time, 19 products from Uni-President were also taken off shelves preventively due to the use of Ting Hsin's problematic beef tallow. Coincidentally, both Master Kong and Uni-President seem to view developing mid-to-high-end brands as a way to save their declining revenues. In 2015, Master Kong launched several products priced around 5-6 yuan. In February, "Zhenliaoduo" and "Tangdashi" were launched, with a single cup priced around 6 yuan. Master Kong said these two products target students, white-collar workers, and middle-to-high-income groups respectively. On August 11, 2017, Uni-President Chairman Luo Zhixian announced that in the future, Uni-President would gradually exit the instant noodle market, but would not leave the noodle market, and would reposition itself. Later, Uni-President responded that it simply would not spend too much energy on traditional instant noodles. In this year's interim report, Uni-President praised the performance of instant noodle products such as "Tang Daren," "Old-Style Pickled Cabbage Beef Noodles," and "Man Han Da Can" at length. It specifically pointed out that the key brand "Tang Daren" is rising rapidly. From 2014 to 2015, Tang Daren grew at over 100% for two consecutive years, with sales exceeding 500 million yuan. In the 52 weeks up to September 2016, Uni-President's Tang Daren alone contributed 77.3% of the growth in Uni-President's instant noodle sales. Initially, the 7.5 yuan price of "Tang Daren" deterred many, but Uni-President insisted on not lowering prices and continued to make displays at sales terminals, ensuring that for every two rows of old-style pickled cabbage, there was one row of Tang Daren. For a long time to come, this battle will continue. Source: Compiled and edited by New Distribution, referencing: Hushuo Youli, AI Finance and Economics Click image for details The 3rd (CFIC) China FMCG + Internet Conference will be held in Chongqing in October 2017. 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