As a leading enterprise in China's frozen food industry, Sanquan Food Co., Ltd. (hereinafter referred to as "Sanquan Food") has still failed to avoid the embarrassment of mismatched revenue and net profit, as well as a long-term low net profit margin.

Annual report net profit margin continues to decline

Recently, Sanquan Food released its 2017 annual report, showing that the company's net profit increased by 82.45% year-on-year to approximately 72 million yuan. Although Sanquan Food's net profit grew again after 2016, it has still not recovered to its 2012 profit level, and there is a significant gap. On the other hand, the net profit margin, which reflects the company's profitability, has also continued to decline.

On April 26, Sanquan Food released its 2018 first-quarter report, showing that the company achieved revenue of 1.817 billion yuan, a year-on-year increase of 7.65%; net profit attributable to shareholders of the listed company was approximately 28 million yuan, a year-on-year increase of 6.41%.

This is the second time that Sanquan Food's revenue and net profit have grown, following the 2017 annual report. As China's first frozen rice and flour food enterprise, Sanquan Food has the largest frozen food production base in the country, with main businesses including frozen dumplings, tangyuan, zongzi, and pastries. Relevant data shows that Sanquan Food currently holds about 30% of the market share in China's frozen food industry.

Mainly in supermarkets, high sales expenses compress profits

"Sanquan Food is still building momentum in a low valley, and its performance will not see a significant rise in the short term." Brand marketing expert Lu Shengzhen pointed out that Sanquan Food is taking a path of horizontal product development and expansion, failing to break through the blockade of high-end foods such as Wan Chai Ferry in the vertical direction. In terms of channels, it has already occupied cold storage cabinets in most cities, leaving limited room for growth.

In addition, although its new product business cultivation is gradually showing vitality, its reliance on leading products has not changed, and the increase in terminal sales efforts and promotional expenses has also led to a stagnant gross margin and a declining net profit margin.

It is understood that Sanquan Food's sales channels are mainly supermarkets, but the increasing cost of entering supermarket channels has kept its selling expenses, administrative expenses, and other period expenses high.

Sanquan Food's 2017 annual report shows that during the reporting period, the company's selling expenses were 1.455 billion yuan, a year-on-year increase of 2.68%. Specifically, market expenses were 553 million yuan and business expenses were 460 million yuan, together accounting for two-thirds of selling expenses. The growth rate of administrative expenses was even higher, at 13.08%, with personnel costs increasing from 85 million yuan in 2016 to 107 million yuan in 2017. In comparison, Anjoy Foods, another listed frozen food company, had selling expenses and administrative expenses of 490 million yuan and 152 million yuan respectively in 2017, far lower than Sanquan Food.

Brand aging, failing to capture new catering opportunities

Since 2005, China's frozen food industry has experienced rapid development. From 2004 to 2015, industry sales revenue increased from 4.566 billion yuan to 77.898 billion yuan, with an average annual compound growth rate of 29.41%. With the acceleration of consumption upgrades and the slowdown of macroeconomic development, the sales revenue of the frozen food industry has shown a gradual decline.

In this situation, Sanquan Food has expanded its scale through mergers and acquisitions on one hand, and sought new profit growth points through continuous product innovation on the other, but the results have been less than satisfactory. Although the acquisition of Longfeng Food has firmly secured its position as the number one in China's frozen food industry, it has not helped much in increasing its net profit. Moreover, integration difficulties after the acquisition have affected Sanquan Food's profitability to some extent.

In terms of product innovation, Sanquan Food launched products such as Private Kitchen Vegetarian Dumplings, Children's Deep Sea Fish Series Dumplings, and Colorful Little Tangyuan in 2017. However, the results are still less than satisfactory. In Sanquan Food's Tmall flagship store, these products do not rank high in sales; the top sellers are still its traditional tangyuan and dumplings.

"The Private Kitchen Vegetarian Dumplings are benchmarked against Wan Chai Ferry's related products, but the latter has higher brand awareness and a fixed consumer base, so sales are better than Private Kitchen Vegetarian Dumplings," said a staff member at a supermarket in Hangzhou. The employee also said that Sanquan Food's children's dumplings, being the first in the industry, sell relatively well.

In the view of Sun Wei, an expert in top-level design and fast marketing at Tsinghua, Sanquan Food has a brand aging problem. He said that as consumer spending continues to upgrade, Sanquan Food needs to keep up with brand upgrades and accelerate product upgrades. But currently, Sanquan Food has not seized the opportunities of the growth of the food delivery market and the rise of young white-collar consumer groups, nor has it mastered effective means, such as targeting market segments, activating the brand, and developing products more attractive than competitors.

In addition to product innovation, Sanquan Food has also attempted to innovate in business models to create new profit growth points. It is understood that around 2014, Sanquan Food launched the Sanquan Fresh Food business, focusing on the fresh food catering field. However, this business not only failed to help Sanquan find new profit growth points but also dragged down the company's profitability.

In the 2017 annual report, Sanquan Food did not mention the revenue of Sanquan Fresh Food, only briefly stating that it would continue to research and upgrade vending machines in fresh food technology, and emphasized that the company would gradually increase promotion efforts and scope in the future. It is understood that the Sanquan Fresh Food business is currently not profitable, with losses expanding from 8.4697 million yuan in 2015 to 21.8177 million yuan in 2016.

Sun Wei said that Sanquan Food's "Sanquan Fresh Food" is an upgrade of a category model, and its innovative spirit is commendable, but this new internet model still needs time to develop, and it is not an area where Sanquan Food excels. At present, the brand awareness and user accumulation of Sanquan Fresh Food still need to be strengthened.

Source: Sina.com, New Ingredients

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