I believe that most Chinese people over 20 have eaten Want Want rice crackers or instant noodles from Uni-President or Master Kong. However, one thing is certain: they don't eat them much anymore. After the March earnings season, I reviewed the annual reports of Want Want, Uni-President, and Master Kong, and the only feeling I got was that they really can't sell anymore! ▌1. Want Want, Master Kong, and Uni-President are all Taiwanese-funded enterprises. Want Want and Uni-President both came to China in 1992, while Master Kong came earlier, with its founder investing in China in 1988, though its instant noodle business also started in 1992. The timing of their entry into China was excellent: Chinese leaders had reached a consensus to vigorously develop the economy and continue opening up. Most importantly, China had a great resource at that time: people. On the demand side, people created demand. On the supply side, people provided labor. Especially when the market was a blank slate, unlimited demand plus low labor costs became a booster for these FMCG giants. Additionally, these companies had years of operation in the more developed Taiwanese market, and their capabilities in distribution, marketing, and branding were several streets ahead of their mainland counterparts. By keeping their brand logos constantly in front of consumers to expand brand penetration, and strengthening terminal channel control to ensure purchase convenience, sales were bound to be good. Another point: in the early days, Chinese consumers were not picky at all; as long as it was tasty, convenient, and filling, it was enough. At that time, my younger brother would sleep in, and my grandmother would buy boxes of packaged instant noodles for him. So, that was the best era for producing big single products. The big single product model, in simple terms, is standardized production to achieve scale, thereby lowering production costs. Companies concentrate resources on a single field, which is advantageous in building brand and channels. For Want Want, Master Kong, and Uni-President, this was a perfect match between products and market demand, coupled with China's economic growth that amazed the world—a stroke of good luck. It was hard for their performance not to soar. These companies with stable and ever-increasing demand, especially Master Kong which listed earlier, were perfect growth stock targets. If you had followed them all along, you would have done better than speculating in real estate (Note: monthly K-line, red/green is Master Kong, blue is Uni-President, purple is Want Want). However, no flower lasts a hundred days. Starting from 2014, the revenues of all three companies declined simultaneously and continued for three consecutive years. In terms of net profit, Master Kong declined for four consecutive years, and China Want Want declined for three consecutive years. Uni-President was forced to innovate, upgrade products, adjust structure, and push up single product prices, with profits even exploding in 2015. However, the fact that they can't sell anymore is true; the industry positioning determines the ceiling for price increases. Once prices can't be raised, gross margins decline, and profits are quickly squeezed. So in the recently announced 2016 results, we saw Uni-President's gross margin drop by 2 percentage points and net profit decline by 27%. As for stock performance, in 2014, Want Want once exceeded 150 billion, Master Kong exceeded 110 billion, and Uni-President peaked at over 33 billion. As of March 31, 2017, Want Want's market value was 67.3 billion, Master Kong's 54.7 billion, and Uni-President's was better at 23.6 billion. ▌2. Looking at the annual reports of these three listed companies, a common explanation is that China's economic growth has slowed and domestic demand conditions have changed. How should we understand this explanation? China's economic growth rate is indeed slowing, from the double-digit growth that amazed the world to 6.7% in 2016. A better indicator of consumption is the total retail sales of consumer goods, which for the first time fell to single digits at 9.5% in February 2017. More specifically, in the FMCG market, according to Kantar data, China's FMCG market sales grew by 2.9% in 2016, down from 3.5% in 2015, the lowest in nearly a decade. However, the slowdown in several macro indicators is clearly not enough to explain their decline. So the focus is on the latter part: changes in domestic demand conditions. What changes have occurred? Still starting from Want Want, Uni-President, and Master Kong, whether in terms of stock price, revenue, or profit, Uni-President has been more resilient than Want Want and Master Kong. Why is that? From the annual reports, it's not hard to see that Uni-President has been sparing no effort in launching upgraded new products in recent years. In beverages, Uni-President launched "Sea Whisper" and "Xiaoming Classmate"; in instant noodles, it launched "Metropolitan Bistro" and "Soup Master". These products have significantly improved in both appearance and style compared to Uni-President's previous offerings. Appearance and style are the trends of current consumption upgrades, so we see that Uni-President's resilience is key to its strong innovation capability. Comparing the new product launches of Uni-President and Master Kong in the past, it's also clear that the leader Master Kong has been following Uni-President in innovation. However, even with appearance and style, Uni-President does not hold another killer weapon: the health concept. Nowadays, consumers pay more attention to health and food safety, and their demand for healthy foods has risen to levels of organic, fresh, and nutritious. Instant noodles, tea drinks, and biscuits are labeled unhealthy due to frying, sugar content, or calories. Of course, among the above new products, Uni-President emphasizes low energy and low sugar, but the industry's long-standing image is there, and it cannot be changed in the short term by upgrading formulas or changing packaging. If even Uni-President, with its innovation, is like this, then Master Kong and Want Want are even more so. In summary, the reason they can't sell anymore is that as China's per capita income rises, their brands automatically sink and become low-end. Coupled with the industry's long-term unhealthy image, even if the product structure is upgraded and adjusted, they still cannot shake off the unhealthy label. ▌3. It can be said that the performance and stock prices of China Want Want, Master Kong, and Uni-President vividly describe what is happening in China today: consumption upgrade. We mentioned earlier that when Want Want, Master Kong, and Uni-President came to China, it was the best era for big single products, with no personality in consumer demand. The most successful single product might be China Want Want's Want Want Milk, which once had annual sales exceeding 10 billion RMB. However, starting from 2014, Want Want Milk's sales began to decline, and in 2016 it fell another 12%. Big single products are easy to replicate, which is convenient for lowering costs through scale production, but it also makes it easy for competitors to copy. Early China was a virgin market waiting to be developed, and replication was about seizing market increment. Today, with an abundance of goods, it's not about seizing increment but competing for existing market share. So, consumption upgrade is not just a result of upgraded consumer demand; it's also a need for companies to urgently find new growth points. Additionally, technological developments have also driven the possibility of consumption upgrades (e.g., the development of cold chain transportation has promoted the expansion of low-temperature milk). The market has become segmented as a result, and product innovation has risen to unprecedented heights. For example, in the deep development of milk, milk is segmented into room-temperature milk, low-temperature milk, and beverages, with full extensions, while China Want Want still only has Want Want Milk. For FMCG, the importance of channels is not what it used to be; continuously growing innovative products are the core competitiveness. For a company to maintain vitality, its products must keep up with consumer demand. Nielsen's report shows that from June 2015 to June 2016, 89% of companies in the FMCG sector had innovated very quickly in the past two years, with food innovation accounting for 93%. The reason companies are so enthusiastic about innovation is that it more easily brings sales; innovative products can increase price or sales volume by 1.2 times. For companies, an unfortunate news is that due to the acceleration of innovation, the life cycle of new products is relatively shortened. Companies continuously launch new products driven by the motivation to find new growth points. Amid the dazzling array of goods, consumer brand loyalty is being weakened. People's consumption habits are driven by trends, and the product life cycle is greatly shortened. Master Kong's Braised Beef Noodles was a classic for many years; Uni-President fully launched its Braised Pork Noodles in 2012, and by 2013 it had risen to become the fourth-largest brand in the market. However, in subsequent annual reports, we no longer see its description. It can be inferred that this product has entered a decline phase. Even if a niche market is entered, the survival rate of new products in reality is very low; only 5% of innovative products in the market survive more than a year, and those surviving two to three years or more are even rarer. A classic case is RIO: in 2013, premixed cocktails were predicted to be the next 10-billion-yuan single product, with industry growth rates expected as high as 30%-50%. But in just two to three years, this "huge potential" single product quickly completed its life cycle. To sum up, for these FMCG giants in food and beverages, the advantages of coming to China early have disappeared with the changing times. China's per capita wages and rental costs have risen, and the market has gradually saturated from incremental expansion to stock competition. The consumption environment and consumer behavior have undergone tremendous changes. Consumers have broader access to information; as long as they are willing, they can quickly meet various products. The influence of relying solely on advertising to guide consumption has greatly declined. Companies now need to compete more on product strength and innovation, although this is not a smooth path. ▌Conclusion For investors, this means future investment in this area will become more difficult. Food and beverage FMCG products once produced a batch of big bull stocks, and many who followed them should have made a lot of money, with larger caps being more favored. A senior researcher I know once said that in the Hong Kong stock market, consumer leading stocks are given a very high valuation, while others are a level lower. But in future investments in FMCG like food and beverages, this investment path may no longer be reliable. After all, we see that although consumption upgrade is a widely recognized direction, in the Hong Kong stock market, more stocks are being killed by consumption upgrade rather than lifted up. This article is republished with authorization from the WeChat public account "Hong Kong Stocks That Matter": The content and opinions herein represent only the author's personal views. The author does not hold shares in the mentioned companies. The information and analysis provided by the author are for investor reference only. Entering the market based on this is at your own risk! -END-