Uni-President is more aggressive in product innovation, while Master Kong has stronger channel advantages, and their corporate temperaments are increasingly divergent. However, when it comes to the future youth market, both are currently in a defensive position.

After more than two decades of rivalry, will people still mention Master Kong and Uni-President in the same breath? From the current perspective, they are becoming increasingly different.

Facing a packaged food market with slowing growth and even declining categories, the strategies of these two archrivals have diverged completely. Uni-President is attempting to respond to the new market with a large number of high-priced, high-margin new products; judging by the quantity and positioning of new launches, Master Kong relies more on existing products and channels.

However, 2016 was a difficult year for both Uni-President and Master Kong. Uni-President's revenue was RMB 20.9 billion, a year-on-year decrease of 5.1%; the larger Master Kong's revenue was USD 8.3 billion (approximately RMB 57.68 billion), but it experienced a larger decline of 8%.

Neither made much profit. Uni-President's net profit last year was RMB 607 million, down 27.2% year-on-year; Master Kong's was USD 213 million (approximately RMB 1.47 billion), down 24.3%.

From this perspective, they are more like brothers in adversity.

However, thanks to its early positioning in mid-to-high-end products and its instant noodle business catering to "consumption upgrading," Uni-President's overall decline was not as severe as Master Kong's. But if we focus on the beverage business, which accounts for 58% of both companies' revenue structures, they face the same dilemma. The beverage business is also where the two companies are showing the most divergence.

New Products

Let's first look at the beverage products launched by Uni-President and Master Kong in 2016.

Uni-President launched a total of 7 new beverage products in 2016 (compared to 12 in 2015), not only in large quantity but also with bold concepts. The most radical examples are three functional beverages with retail prices close to RMB 20: "Relax" and "Wake Up" from the "Natural Lab" series, and "Qing Chang Jiao Zhu."

"Natural Lab" is a new product unlike any before. Its retail price is RMB 19.9, the highest for Uni-President's beverage products, comparable only to imported beverages. The bottle design and material are also impressive, using a Bottle-can commonly seen in imported beverages, and it is claimed that the bottle is imported from Japan.

Another significant change is that you have to look carefully to see the Uni-President logo, which is placed in a corner of the bottle. Similar to new products after 2012, it no longer follows the naming convention of "Uni-President + category name" (such as Uni-President Iced Tea), reflecting a de-Uni-President product strategy. You can find similar characteristics in Xiao Ming Tong Xue and Hai Zhi Yan, where the group's attributes are weakened. Chen Wei, a section chief in Uni-President's public relations department, once told QDaily that this is to achieve "branding" for subsequent products, and the parent company name Uni-President will be increasingly downplayed.

In addition to Natural Lab, Uni-President's other new products, such as "Tian Mi Guang Nian Yang Zhi Gan Lu," "Qing Chang Jiao Zhu," and "Shui Qu Duo," are all beverages with retail prices above RMB 5. There are also 2015 new products like "Ru Wei Shi Ke" (fruit and vegetable juice), "Xiao Ming Tong Xue," and "Assam Little Milk Tea," which mainly target young consumers in first-tier cities who are willing to try new things and have considerable purchasing power.

In contrast, Master Kong launched fewer new products. "Nong Nong," "Mango Xiao Lao," "Xiang Ning Li Zhi," and "Jin Cheng Bai Xiang Guo" are still tea and juice drinks—traditional areas where Master Kong excels and which are its two largest beverage revenue sources. Master Kong has not explored new categories, nor has it made fundamental innovations in product concepts. For example, the design of "Mango Xiao Lao" compared to the previous "Mei Ri C" juice series has a richer taste—following the route of compound-flavored drinks—but the positioning is not much different: still very feminine with a hint of "freshness."

Master Kong's new product prices are also relatively lower, with only "Nong Nong" priced above RMB 5. In 2014, Master Kong launched the light-flavored water product "Shui Yang," which was clearly positioned against "Hai Zhi Yan" and Suntory's "Qin Ning Shui," but priced lower at RMB 3. This product failed to achieve the success of "Hai Zhi Yan" and "Qin Ning Shui" and was discontinued in 2016.

Compared to Uni-President's bold "de-Uni-President" approach and attempts at double-digit priced new products, Master Kong lacks breakthrough innovation. "Master Kong faces the embarrassment of aging traditional star products and new products failing to establish a foothold in the market," said Xiang Jianjun, a food industry researcher at CIC Consulting, in an interview.

Among Master Kong's new products, fewer have market influence than Uni-President's. You will see that most new products launched in 2014 and 2015, such as "Shui Yang" (vitamin water) and "Yi Ke Guan Qing Shuang Nai Cha," failed to stand the test of time ("Hai Jing Ning Meng" did survive, but it is more of a follower product to "Hai Zhi Yan"). Its most prominent products in first-tier cities and new channels are still the Jasmine Green Tea and Jasmine Honey Tea series, as well as Master Kong Green Tea and Black Tea. These products have a history of more than 10 years.

You can see that Master Kong still follows the big single-product model: targeting the most mainstream market, mass-producing a product to lower costs, and leveraging its developed channel advantages for small profits but quick turnover.

Until 2016, Master Kong was still "strengthening channel sinking" and trying to seize "urbanization opportunities" (official wording from its financial report); while Uni-President began to look at the "middle class" (or "pan-middle class") of 250-300 million people, who account for the top 20% of China's mainland population in terms of consumption power, intending to do business in the consumption upgrading market. This is also the reason why Uni-President's overall gross margin has been 2-5 percentage points higher than Master Kong's over the past five years.

However, in September 2016, Master Kong was removed from the Hang Seng Index, and several investment banks, including HSBC and BOCOM International, downgraded Master Kong's rating. The important reason is that Master Kong's product innovation is too weak. At its peak in 2014, Master Kong's market value exceeded HKD 110 billion, but now its market value is only HKD 58.5 billion, a decline of nearly 50%; in contrast, Uni-President is more stable, with a market value only half of Master Kong's, but its stock price has only fallen 28.5%.

Innovation and Failure

In fact, before the hot "Laotan Sauerkraut" in 2003, Uni-President was relatively passive in its competition with Master Kong. It entered the mainland market late and lagged behind Master Kong, which originated in the mainland, in channel development.

Uni-President has a larger market share and longer history in Taiwan, and comparatively, it has an advantage in product R&D. Uni-President's strategy of targeting the mid-to-high-end market was evident as early as 2008. That year, Uni-President turned its bottled water business profitable by launching the higher-priced Alkaqua water. This also led Uni-President to exit the low-end bottled water market in 2014.

Phrases like "stepping out of the low-price competition pattern" and "continuously launching differentiated beverages" began to appear repeatedly in Uni-President's context around 2012. Almost all of its new products were beverages priced above RMB 4 with gross margins of 40%, or instant noodles priced above RMB 5 with gross margins above 35%. Within Uni-President, these are regarded as "2.0 products," described in financial reports as "personalized, diversified, and high-end."

This high-end approach is first reflected in product design. Uni-President has won the "Pentawards," known as the Oscar of packaging design, six times (in this regard, among domestic FMCG companies, only Nongfu Spring may be comparable). Uni-President's "Bama Spring," "Ming Ming Shi Cha" (a product launched in Shanghai in 2013 and now discontinued), and "Xiao Ming Tong Xue" earned it one silver and two gold awards. In 2016, Assam Little Milk Tea and "PLAN N Times" (plant protein beverage) won gold awards. "Ge Mian" is the award-winning product among Uni-President's instant noodles.

The R&D process has also changed. In addition to the traditional R&D department, Uni-President has adopted a bottom-up product proposal mechanism since 2004. This differs from the traditional FMCG development process, which relies less on raw material suppliers and market research results; every employee of Uni-President China can propose product ideas. It is said that the idea for "Xiao Ming Tong Xue" came from a Uni-President product manager who tasted cold-brewed tea during a trip to Taiwan.

Proposals are reviewed by a creative committee composed of senior employees drawn from various departments. After the committee and the proposer determine the product concept and gross margin, two independent teams develop the product simultaneously, and the committee selects one for market launch. Uni-President even invites college students to participate in development decisions; the "Pan-90s Consumer Review Panel" participated in the development of "Xiao Ming Tong Xue" and "Hai Zhi Yan."

Currently, these "2.0 products" account for about 24% of Uni-President's total revenue. Hou Ronglong, general manager of Uni-President Enterprises, aims to increase the proportion of high-margin products in sales to 40% within three years.

However, Uni-President's innovation has not been smooth sailing.

At present, its aggressive new product strategy has not brought sustained success to its overall beverage business. Uni-President's beverage performance is not satisfactory—beverage revenue was almost stagnant in 2015 and fell 13% last year. This decline is much larger than Master Kong's beverage decline of 6.49%.

Last year, Uni-President did not have a new product hit like "Xiao Ming Tong Xue," which sold over RMB 500 million in half a year. The success rate for new beverages in the industry is too low, with only about 5% surviving more than one year.

Products that survived in 2016 and are still on sale include "Shui Qu Duo," "Tian Mi Guang Nian Yang Zhi Gan Lu," and "Qing Chang Jiao Zhu." "Only 1% of products can sustain sales for more than three years," said Niu Ka, manager of Uni-President's Comprehensive Beverage Business Division/Functional Beverage Brand Group, in a previous interview with QDaily.

And the "Natural Lab·Wake Up" has basically exited the market: you can no longer find this product in convenience stores or e-commerce.

Uni-President is still experimenting. Starting with Uni Sports in 2015, Uni-President began making functional beverages. Master Kong has not yet entered this field (although after acquiring PepsiCo's China business, it can sell Pepsi's Gatorade). The reason it chose to enter this category is the rapid development of China's functional beverage market. Natural Lab is its second attempt (and failure) in functional beverages.

If a new product fails to hit the market, the previously invested costs are considered "sunk." From R&D to production to promotion, launching a new beverage product requires approximately RMB 60-80 million. Frequent new product launches may harm the company's vitality. The overly dispersed new product development process may prevent products that should be supported from receiving sufficient resources. "Natural Lab" had almost no budget for advertising and channel distribution, which may be one of the reasons for its failure.

Addressing this issue, Luo Zhixian, chairman of Uni-President Enterprises Group, said at a recent analyst meeting: "Uni-President must have disciplined management toward new products. We will continue to develop new products, but they may not necessarily be launched... It will depend on market conditions." It seems that in 2017, it will continue to have new products, but perhaps not too many.

Channels

Master Kong was among the first batch of FMCG companies to propose channel sinking. Around 2000, it expanded its sales network to prefecture-level cities and townships. This laid the groundwork for its subsequent development. It is said that Master Kong can complete the distribution of new products nationwide from large cities to mom-and-pop stores in townships within two weeks.

In contrast, Uni-President's reach is not as broad or dense; it basically only does business in cities above the prefecture level. To compete with Master Kong, Uni-President acquired stakes in Jinmailang Beverage (47.83%) and Jianlibao in 2006 and 2007, respectively, also eyeing their channel and distribution capabilities in lower-tier cities and rural markets.

According to a 2014 analysis report by Guotai Junan, although Master Kong lacks product innovation, it possesses a powerful channel system and channel control that Uni-President cannot match.

From 2012 to 2014, Master Kong was consistently ranked first in Kantar's China Brand Footprint Report (in 2015, it was surpassed by Yili, dropping one place). This indicates its purchase frequency and penetration—channel capability—are very high. Uni-President has always been behind, fluctuating between 4th and 7th place.

Around 2012, possibly boosted by the sales of high-margin products like Tang Daren and Alkaqua, Uni-President began seeking to sell its stake in Jinmailang Beverage, effectively reducing the importance of lower-tier cities and rural markets. In May 2016, Uni-President officially sold its Jinmailang Beverage stake for RMB 1.291 billion. In September of that year, it sold its Jianlibao stake for RMB 950 million to Chunxin Capital, a subsidiary of CITIC Assets. The divergence in brand positioning between Uni-President and Jianlibao Group—one high-end and one low-end—is considered one of the reasons for the sale.

Consumer habits have changed, and new channels are increasingly important, especially small retail formats like convenience stores and community supermarkets, as well as e-commerce. According to Nielsen data, in 2015, chain convenience stores and chain personal care stores contributed 7% and 5% of beverage category growth, respectively, thanks to meeting customer needs faster and more conveniently.

Both Uni-President and Master Kong are increasingly focusing on convenience store channels, especially for new products, where shelf competition may be more intense than in traditional supermarkets. Uni-President Group's Uni-President Supermarket operates 7-Eleven convenience stores in Shanghai; it also holds a 55% stake in the Shandong convenience store chain "Uni-President Ginza." Master Kong's parent company, Ting Hsin Group, holds a 50.5% stake in FamilyMart convenience stores in mainland China.

A QDaily reporter randomly checked the beverage shelves at FamilyMart, Lawson, and 7-Eleven in Shanghai's Huangpu and Xuhui districts, finding that Uni-President and Master Kong beverages were evenly matched on the shelves. Although retail and food are operated as separate businesses, brands entering convenience stores or small supermarkets must pay channel fees, and being in the same group provides certain conveniences and preferential treatment in distribution policies compared to competitors. FamilyMart slightly favors Master Kong beverages (though there are differences among FamilyMart stores).

Because Ting Hsin has more convenience stores in mainland China, theoretically Master Kong would have an advantage. However, launching products suitable for convenience store consumption may be as important as grabbing shelf space, and Uni-President has done better in promoting mid-to-high-end beverages. Consumers in first-tier cities are also more willing to pay higher unit prices for convenience than in hypermarkets.

Another channel is e-commerce. Uni-President launched its Tmall official store in 2014, and Master Kong officially entered Tmall in June 2016. Although official stores may not contribute significant sales (especially compared to online supermarkets), they are a convenient and low-cost channel for testing new products. Indeed, Uni-President has launched many new products on e-commerce platforms in recent years.

Market

The beverage sales of both Uni-President and Master Kong peaked in 2013 and have been declining since. 2016 simply continued the trend after 2013. The main reasons are the disappearance of "channel" dividends and rapid changes in consumption habits.

The main factor driving the rapid growth of FMCG companies over the past decade was channel expansion: continuous distribution and regional expansion (ultimately, it was the demographic dividend, digging deeper into China's market layer by layer). As their distributors and channels approach saturation, this demographic and geographic dividend is about to be exhausted.

Master Kong's distributor count stopped growing after 2014, which coincides with its revenue growth curve—its revenue peaked in 2013.

"The importance of economies of scale and low-cost competitiveness to overall operations is no longer what it used to be," said Luo Zhixian, referring to the common challenge now facing both Master Kong and Uni-President: the big single-product model no longer works, and consumption is becoming increasingly fragmented.

Besides Uni-President and Master Kong, Coca-Cola is also struggling in China. In its 2016 financial report, it specifically cited the Chinese market as dragging down overall performance in the Asia-Pacific region. Mizone, which has held the top market share in the functional beverage market for over a decade, has also begun to decline, and its parent company Danone has had to launch new products like "Sui Yue" and "Ning Meng Lai De" to boost sales.

This is actually a global issue: as consumers become more health-conscious, food companies experience slower growth or even decline in (relatively) mature markets. In the U.S. market, Coca-Cola and Pepsi have launched smaller packages, invested in emerging food brands, or reformulated products to be healthier.

Danone's "Ning Meng Lai De" enlisted SNH48 members as endorsers

They also face more and more new competitors. Yu Limin from Euromonitor International told QDaily, "There are more and more chain fresh juice shops now. They offer fresher-tasting and more diverse juices, and compared to bottled juices, the price is not much higher. Meanwhile, developed food delivery services make it convenient for people to get a glass of fresh juice."

Not only juice, but also freshly made milk tea, coffee, and tea drinks are competing for this market. According to research data from Kantar and CTR, two-thirds of people purchased freshly made beverages at least once in 2016, and consumers in first- and second-tier cities currently purchase freshly made beverages an average of 14.3 times per year, which may have affected packaged beverage sales to some extent.

Consumer preferences and purchase decision processes have become more complex, and the replacement cycle of individual beverage products has accelerated.

"Previously, a product might take at least ten years from launch to peak to decline. Now, the average cycle for many products may be just three years," Niu Ka told QDaily in an interview six months ago. "Recently, whether from our data or Nielsen's, the entire product upgrade cycle is continuously shortening."

Products like Master Kong Iced Tea or Uni-President Green Tea can have a life cycle of up to 20 years; Assam Milk Tea and Master Kong Jasmine Tea series also have a life of about 10 years. But Suntory's Qin Ning Shui and Hai Zhi Yan were only active for about 3 years. Some star products have even shorter cycles from rise to fall. For example, in 2011, both Uni-President and Master Kong launched pear juice drinks (both called "Bingtang Xueli"), which sold well initially, but by 2014 the overall pear juice market began to decline.

A recent example is Uni-President's "Hai Zhi Yan." When it was first launched, it was very successful: within eight months of launch, its sales entered the top 10 for juice single products, and Uni-President followed up with new flavors. In 2014 and 2015, this star product was "specifically praised as a successful example" in financial reports, but in 2016 it suddenly began to decline. Uni-President's official explanation was "changes in consumption trends," sales rhythm, and channel adjustments. Excluding Uni-President's subjective factors, a possible explanation is that this light-flavored drink with a salty and fruity taste is no longer popular.

With many new products, intense competition, and low consumer loyalty, it seems to have entered a vicious cycle. "Because consumer tastes change quickly, the market cycle for beverage products is continuously shortening, and manufacturers actively launch new products to attract consumers. The increase in new products also intensifies competition in the beverage industry," said Yu Limin.

No one dares to claim they understand consumers anymore.

So, facing the changed youth market, whether it is Uni-President's aggressiveness or Master Kong's conservatism, in fact, both are showing a defensive posture.

Bigbang endorsing Cha Pai

In 2016, neither Master Kong nor Uni-President won in the beverage market. The new product with sales exceeding RMB 1 billion that year came from Nongfu Spring: Cha Pai, which had both good design (product appearance and concept) and traffic (with Bigbang as endorsers). This may be a story that Master Kong and Uni-President did not anticipate.

Coincidentally, this year, both Master Kong and Uni-President have beverage revenue accounting for 58% and instant noodles accounting for 39%. But behind the numbers, they are already completely different.

It is no wonder that Uni-President executives say they no longer pay much attention to Master Kong. "I am observing Nongfu Spring," said Luo Zhixian.

The two major beverage types for Master Kong and Uni-President are tea drinks and juices

Chart: Feng Xiuxia Cover image from Pexels, Tmall, and various brand Weibo accounts Source: QDaily -END-