On December 5, China Want Want released its latest interim results. For the six months from April to September 2017, revenue was approximately RMB 9.01 billion, up 6.3% year-on-year; net profit was approximately RMB 1.27 billion, down 10.0% year-on-year; and gross margin was 43.7%, down 4.2 percentage points year-on-year.
China Want Want has three main business segments: rice crackers, dairy and beverages, and leisure foods. During the reporting period, rice crackers accounted for approximately 20.9% of revenue, dairy products for approximately 50.8%, and leisure foods for approximately 28.3%. Therefore, the interim report focuses on the analysis of these three main business segments.
Regarding the growth in interim revenue, the report noted that it was mainly due to the optimization of business organization and the combined effects of various channels and terminal outlets, resulting in certain growth in each of the three main business segments during the period. Rice cracker revenue increased by 10.7% year-on-year; dairy and beverage revenue increased by 6.5%, with "Want Want Milk" (which accounts for over 90% of this sub-segment's revenue) growing by 10.1% year-on-year; and leisure food revenue increased by 2.8%. As for the decline in gross margin and profit, the report indicated that it was mainly due to rising costs of certain bulk raw materials such as packaging materials, sugar, and whole milk powder.
In the rice cracker segment, the interim report pointed out that growth was mainly due to the group's implementation of a "brand + channel" differentiated marketing strategy to meet the personalized needs of consumers in different channels. For example, the "Mr. Hot" brand's spicy rice cracker products targeted online channels and were well received by young consumers. As a result of this strategy, sales in modern channels (offline) for rice crackers achieved double-digit growth, while emerging channels (online) doubled. At the same time, expansion into fourth- and fifth-tier markets further solidified growth in traditional channels.
In the dairy and beverage segment, the interim report noted that over the past three years, when the group faced a weak overall dairy industry and shifting consumption segments, it did not resort to price cuts and promotions to solve the temporary difficulties of "Want Want Milk." Instead, it focused on terminal operations, managed channel inventory, intensively cultivated third- and fourth-tier cities, and increased resource investment in terminal outlet maintenance and services to consolidate the market share of "Want Want Milk." As a result, e-commerce sales of dairy and beverages doubled compared to the same period last year, and modern channels also achieved high double-digit growth.
In the leisure food segment, the interim report stated that growth was mainly driven by the ice cream business, as the company developed a large number of terminal freezer outlets this summer and used various display methods to attract consumer attention, leading to increased sales.
Additionally, some products were promoted through sales activities. For children, Want Want conducted the first season of the Chinese version of the stage play "Thomas & Friends: Carnival! Here!" and launched limited-edition Want Want Little馒头 (small steamed buns) and Want Want QQ糖 (QQ candy) featuring the new "Thomas & Friends" image. During the event, brand interaction with off-site consumers was also conducted online, which contributed to sales growth during the period.
Although revenue in each segment grew, rising raw material costs led to a decline in gross margins. Specifically, the gross margin for rice crackers was 38.7%, down 0.6 percentage points year-on-year; for leisure foods, it was 42.7%, down 4.4 percentage points; and for dairy and beverages, it was 46.4%, down 5.7 percentage points.
The report indicated that the decline in gross margins was due to rising raw material costs. In the rice cracker segment, the cost increase was mainly due to double-digit increases in the costs of bulk raw materials such as cartons, sugar, and palm oil compared to the same period in 2016. In leisure foods, the cost increase was mainly due to the high proportion of white sugar used in this category, with costs for white sugar and cartons rising by more than 20% during the reporting period. In dairy and beverages, the cost increase was mainly due to the continuous rise in costs of raw materials such as cartons and tinplate since the end of 2016, with double-digit increases compared to the same period in 2016, and also due to a certain increase in the cost of whole milk powder during the reporting period.
In summary, although China Want Want's revenue is on the rise, profits are declining due to rising raw material prices. The operating profit margin hit a six-year low of 19.62%. As of the interim report, the return on equity was only 9.78%, compared to 14.46% in the same period last year, a significant decline. The overall profitability and added value of products have clearly decreased. If costs continue to rise in the future, how will China Want Want adjust? Moreover, there are many substitutes for Want Want products, and the macro environment is constantly changing. Whether this former retail giant can continue to grow steadily remains uncertain.
Source: YIOU.com -END-