Industry insiders believe that Xiang Piao Piao's continued reliance on 'money-burning' advertising investment is likely to bring about unhealthy performance growth, and the high advertising costs may ultimately become a 'time bomb' eroding the company's net profit. Relying on cup milk tea for its success, Xiang Piao Piao has been unable to enter the A-share market. Recently, Xiang Piao Piao has once again launched an assault on the A-share market to become the 'first cup milk tea stock'. With huge advertising expenditures, Xiang Piao Piao's performance has shown continuous growth in recent years. However, industry insiders believe that the continued reliance on 'money-burning' advertising investment is likely to bring about unhealthy performance growth, and the high advertising costs may ultimately become a 'time bomb' eroding the company's net profit. At the same time, against the backdrop of increasingly fierce competition in the cup milk tea industry, Xiang Piao Piao has also begun to attempt to enter the liquid milk tea market to avoid the operational risks posed by a single product structure. However, in the liquid milk tea market where competitors like Uni-President and Master Kong are formidable, whether Xiang Piao Piao can successfully gain a share remains highly uncertain. High Advertising Expenditure Hides Hidden Concerns In 2011, Xiang Piao Piao initiated its IPO plan, proposing to create the 'first listed company among domestic milk tea suppliers', but ultimately it came to nothing. The prospectus recently disclosed by Xiang Piao Piao shows that although the company's performance in recent years has been relatively impressive, it relies on high advertising costs. Industry insiders say that the huge advertising investment may ultimately become a 'time bomb' eroding the company's net profit. Xiang Piao Piao, which mainly focuses on the research, production, and sales of milk tea products, has made substantial investments in advertising. Data shows that from 2014 to 2016, Xiang Piao Piao's operating revenue was approximately 2.093 billion yuan, 1.952 billion yuan, and 2.39 billion yuan, respectively. During the same period, the net profit attributable to shareholders of the parent company was approximately 185 million yuan, 204 million yuan, and 266 million yuan, respectively, showing a trend of continuous growth. Behind slogans like 'Little hungry, little tired, have some Xiang Piao Piao' and similar 'barrage-style' advertising is the cost of Xiang Piao Piao's huge advertising investment. Data shows that from 2014 to 2016, Xiang Piao Piao's advertising expenses were approximately 333 million yuan, 253 million yuan, and 359 million yuan, respectively, totaling about 945 million yuan. In these three years, the company's total profit was about 655 million yuan, significantly lower than the advertising investment during the same period. In an interview with Beijing Business Today, Xiang Piao Piao stated that the company belongs to the fast-moving consumer goods (FMCG) industry, and a good brand image is crucial for the sales of FMCG products. During the reporting period, the company continuously increased brand promotion efforts, expanded brand awareness and influence through advertising, and provided strong sales promotion support for distributors. At the same time, during the reporting period, the company's total profit and net profit attributable to shareholders of the parent company achieved growth. However, in the view of Zhu Danpeng, a researcher at the China Brand Research Institute's food and beverage industry, Xiang Piao Piao's growth is an unhealthy growth. Zhu Danpeng said that such large-scale advertising investment will have some effect in the short term, but after two or three years, the effect will disappear. From the perspective of the development of the entire enterprise category, including introduction, growth, maturity, and decline, Xiang Piao Piao's category (cup milk tea) has already entered the decline stage, with no possibility of growth, and all growth is unhealthy. 'Relying on advertising promotions to drive sales is different from coffee or functional drinks. The company does not have sustained development profits, and the entire category does not have much core competitiveness,' Zhu Danpeng said. In addition, in Zhu Danpeng's view, after about 15 years of development, cup milk tea has reached the ceiling of its category. Zhu Danpeng frankly stated that cup milk tea will not see significant growth because Xiang Piao Piao has encountered a bottleneck period. The company is currently desperately sponsoring and participating in variety shows, which is also relatively difficult overall. According to the sales volume of cup milk tea mentioned in the prospectus, it is generally in a state of growth, but this growth has obvious fluctuations. From 2014 to 2016, Xiang Piao Piao achieved sales of 38.171 million boxes, 34.0915 million boxes, and 39.3628 million boxes, respectively. The data shows that sales declined in 2015, and although they increased in 2016, compared with 2014, the increase was only 1.1918 million boxes. Song Qinghui, a well-known economist, told Beijing Business Today that Xiang Piao Piao's crazy advertising investment can boost sales and improve company performance in the short term, but it is an extensive growth model with high risks, requiring high capital and imposing excessive cost pressure. Song Qinghui frankly stated that if the advertising marketing effect is not good, it may bring a significant impact to the company. Currently, with the sluggish macroeconomic situation and the overall slowdown in the milk tea industry, relying on crazy advertising investment can only achieve temporary results. An anonymous analyst said that for Xiang Piao Piao, advertising investment may fall into a dilemma. If Xiang Piao Piao further increases or maintains high advertising investment, it will ultimately erode the company's net profit. If it cuts advertising investment, it may also have a negative impact on the company's sales or brand building. Low Capacity Utilization but Still Planning Expansion It is worth mentioning that while expanding brand awareness and influence through advertising and providing strong sales promotion support for distributors, Xiang Piao Piao plans to expand production capacity by building an automated production line project for cup milk tea with an annual output of 145,400 tons in its fundraising investment projects. However, in the context of low capacity utilization and the industry's development hitting the ceiling, industry insiders believe that this expansion behavior is quite aggressive. In the prospectus, Xiang Piao Piao stated that it plans to raise approximately 748 million yuan for the construction of two projects, one of which is the automated production line project for cup milk tea with an annual output of 145,400 tons. However, data shows that from 2014 to 2016, Xiang Piao Piao's cup milk tea production capacity was 154,000 tons, 158,300 tons, and 158,300 tons, respectively, with capacity utilization rates of 86.9%, 74.2%, and 87.3%, indicating that capacity utilization was not fully saturated. When mentioning the original intention of building this project, Xiang Piao Piao stated that the sales of its main product, cup milk tea, have obvious seasonality, with the fourth quarter of each year to the first quarter of the next year being the peak production and sales season, and the second and third quarters being the off-season. At the same time, the company implements a 'production based on sales' model, adjusting production plans according to actual orders to improve inventory turnover efficiency. Therefore, during the annual peak sales season, all production bases operate at overcapacity, with capacity utilization exceeding 100%, highlighting capacity bottlenecks. The company's fundraising for the above projects is mainly to meet the development needs of the next five years. However, after expanding production capacity, whether the company can digest the capacity is questionable for investors. In fact, Xiang Piao Piao's cup milk tea has already established a place in the market. According to AC Nielsen data, during the reporting period, Xiang Piao Piao ranked first in the cup milk tea market segment. Other major brands include Youlemei and Xiangyue. Data shows that from 2014 to 2016, Xiang Piao Piao's market share in cup milk tea was approximately 57%, 56.4%, and 59.5%, respectively. It can be seen that in 2015, the company's market share declined year-on-year, but in 2016, compared with 2014, it increased by 2.5%. Zhu Danpeng mentioned in an interview with Beijing Business Today that cup milk tea is a fixed type, and new consumers, including those who like Gong Cha, prefer this type of milk tea. Xiang Piao Piao's external growth is difficult. 'The so-called external growth relies on adding new customers. Xiang Piao Piao does not have much possibility in this regard. The main possibility is to 'eat' the customers of Xiangyue and Youlemei within the industry. Brands like Xiangyue and Youlemei do not have as much advertising pull, which gives an advantage in terms of becoming part of Xiang Piao Piao's brand or cannibalizing them. So if Xiang Piao Piao eats up this part of the industry, its market share will rise. But in the long run, the development prospects of cup milk tea are not optimistic,' Zhu Danpeng added. Zhu Danpeng said that Xiang Piao Piao's capacity expansion may lead to a series of problems, such as increased inventory and stale production dates. Song Qinghui believes that when capacity utilization is not fully saturated, the company's plan to build an automated production line for cup milk tea with an annual output of 145,400 tons not only has the suspicion of making up the number of IPO projects but also carries high operational risks. Entering Liquid Milk Tea Is Hard to Be Optimistic Facing a business model heavily dependent on cup milk tea, Xiang Piao Piao seems to have realized the 'crisis' and plans to enter the liquid milk tea market to avoid the risk of a single product structure. Another fundraising investment project is the construction of a liquid milk tea production project with an annual output of 103,600 tons. However, given the fierce competition in the liquid milk tea market, whether Xiang Piao Piao can gain a place in the liquid milk tea field is also worrying. Xiang Piao Piao stated that during the reporting period, its main product was cup milk tea, with operating revenue from cup milk tea accounting for over 90% of total revenue, reaching approximately 2.065 billion yuan, 1.926 billion yuan, and 2.364 billion yuan from 2014 to 2016, respectively, accounting for approximately 98.68%, 98.68%, and 98.9% of total operating revenue. The single product structure makes the company's operating performance heavily dependent on the production and sales of cup milk tea. When discussing the original intention of entering the liquid milk tea market, Xiang Piao Piao stated that the overly concentrated peak sales season brings operational pressure in production, sales, management, and personnel arrangements. By investing in the fundraising project to enter the liquid milk tea market, the company can also complement its existing products in terms of peak sales season and production scheduling. At the same time, in response to the interview, Xiang Piao Piao also stated that the liquid milk tea market currently has a stable group of fashionable consumers, has formed a relatively stable market size, and has passed the rapid growth period, entering a stable development stage. The liquid milk tea industry urgently needs new growth points such as technology and product innovation to lead industry upgrades. The company plans to produce liquid milk tea products that will be differentiated from existing liquid milk tea products in terms of taste, packaging, etc., and leverage the company's mature cup milk tea product operation experience and market channels, relying on the company's existing brand influence and consumers' recognition of the 'Xiang Piao Piao' brand as a 'milk tea expert', to create a new growth point for the company's future development based on the increasingly mature liquid milk tea consumption concept and in line with the industry's diversified development trend. However, according to data from Uni-President's 2016 interim report, Uni-President's share in the aseptic packaged liquid milk tea market exceeded 71.1%. In Zhu Danpeng's view, liquid milk tea is a red ocean product. Companies like Wahaha, Uni-President, and Master Kong, whether small or large, are all making liquid milk tea, but the results are not particularly good. If Xiang Piao Piao enters this segment, the difficulty is relatively high. Similarly, Zhu Danpeng is not optimistic about the company's fundraising project and believes it may drag down the company's profits. Zhu Danpeng frankly stated that Xiang Piao Piao is slightly inferior to Uni-President, Wahaha, and Master Kong in terms of terminals, channels, and teams, and its foundation is not solid, wasting too many resources. The company does not have the capability or experience to operate such channels, nor does it have customers in this regard. In addition, Zhu Danpeng emphasized that bottled milk tea is also a declining category. Similarly, Song Qinghui believes that 'in the liquid milk tea market, beverage industry giants such as Uni-President, Kirin, Master Kong, and Wahaha have already laid out their positions, and the market competition is fierce, making this fundraising project face the risk of losses.' Song Qinghui believes that overall, Xiang Piao Piao's milk tea business model is relatively traditional, and its product line is relatively single. In the future, it should actively transform to gain greater development space. Otherwise, this business structure highly dependent on milk tea may become a 'roadblock' in the listing process and also bring significant risks to the company's performance. 'The trend of cup milk tea is not good, and the trend of bottled milk tea is also not good. We need to find new categories, not categories that others have already exhausted,' Zhu Danpeng said. Original Title: Uncovering the Secrets Behind Xiang Piao Piao's Money-Burning Marketing Strategy -END-