For many born in the 1980s and 1990s, the translucent, chewy, and sweet jelly is an unforgettable taste of childhood, a snack staple that is never missing during festivals. However, as time flies, those children have grown up, and the snacks on supermarket shelves are changing rapidly, making jelly seem gradually outdated.
Crayon Shin-chan Fashion Dessert Jelly
Last week, Crayon Shin-chan Food, a well-known Chinese jelly producer, released its 2017 financial report. Data shows that in 2017, Crayon Shin-chan Food achieved revenue of 903 million yuan, a slight increase of 1.1% year-on-year; gross profit of 203 million yuan, a decrease of 7.8% year-on-year; and an annual loss of 289 million yuan, narrowing by 51.9%.
Slight Revenue Increase, Narrowing Loss
Crayon Shin-chan's main leisure food products can be divided into four categories: jelly products, confectionery products, beverage products, and other products. Among them, jelly products are the absolute main business, consistently contributing over 66% to the group's revenue.
Due to the increased consumption intention of leisure food in China, the revenue from jelly products increased by 3.2 million yuan in 2017. In addition, the growth in overseas market demand, changes in customer consumption preferences, and Crayon Shin-chan's adjustment of its own business structure also contributed to the group's revenue growth to some extent.
Nevertheless, the purchase price of certain raw materials, including packaging materials, increased by more than 30%, which still led to a decline in the gross margin of the Crayon Shin-chan Group. Moreover, the group spared no expense in advertising and promotion to timely promote new or core products. Even though it was reduced by 27.7% year-on-year in 2017, advertising and promotion expenses still reached as high as 171 million yuan.
Consolidated Statement of Profit or Loss and Other Comprehensive Income
Excessively high operating costs dragged down Crayon Shin-chan's performance, leading to impairment of fixed assets such as property, plant, and equipment. The consolidated income statement shows that in addition to a loss of approximately 80 million yuan from the disposal of property, plant, and equipment related to the Tetra Pak beverage production line at the Anhui production plant, Crayon Shin-chan also needed to accrue an impairment loss of 94.535 million yuan in the report.
Industry Downturn and Aftermath of Toxic Gelatin
Excessively high operating costs are not the root cause of Crayon Shin-chan's consecutive losses, or rather, they are only the reasons shown in the financial report. Reviewing Crayon Shin-chan's operating performance over the past five years, it can be seen that the turning point for profitability appeared in 2014. Before 2014, Crayon Shin-chan's net profit attributable to shareholders increased year by year; after 2014, it declined year by year until 2017 when it slightly narrowed. So what exactly happened in 2014 that caused the rapid reversal of Crayon Shin-chan's performance?
Crayon Shin-chan's Net Profit Attributable to Shareholders in the Past 10 Years
Crayon Shin-chan's 2014 annual report provided the answer: Affected by reports from certain Chinese media (including CCTV News) in mid-March 2014 about certain enterprises using toxic gelatin in their food production process, and the contamination of soft candy products due to the use of toxic gelatin in the production process by "Crayon Shin-chan" and other brands, Crayon Shin-chan's sales that year decreased significantly. To promote sales after the toxic gelatin incident, the group also gave some distributors one-time discounts, further eroding Crayon Shin-chan's gross margin.
For a food company, especially one producing children's food, food safety is of paramount importance. The extent to which Chinese parents can be cautious about food safety can be seen in the frenzy of overseas infant formula purchasing in previous years, which is also why Crayon Shin-chan has not been able to recover to this day.
Moreover, as mentioned at the beginning, leisure snacks on the market are updated quickly, and the entire jelly product market is on the decline. There is another jelly producer listed on the Hong Kong Stock Exchange - Qinqin. From the operating conditions of Crayon Shin-chan and Qinqin, it can be seen that jelly product sales are indeed declining year by year, but Crayon Shin-chan's sales decline is more pronounced and rapid due to the adverse impact of the toxic gelatin incident.
Operating Conditions of Listed Jelly Companies
199IT once conducted a survey on the development trends of leisure food in China, and the first item in the report stated: Leisure food will develop towards low-calorie, low-fat, and low-sugar healthy nutrition. Jelly products naturally meet the above requirements. The fact that Crayon Shin-chan's fruit and vegetable beverage sales increased significantly, leading to a year-on-year increase of about 18% in beverage product revenue, can serve as evidence for this view.
At the same time, the survey report also pointed out: Young and fashionable youth groups will become the mainstream consumers of leisure food, and they value brand packaging as well as quality and taste. Crayon Shin-chan's vigorous promotion of new products around November last year also coincides with this view. From this perspective, Crayon Shin-chan has both obvious product advantages and the ability to grasp market changes. If it can strictly control product quality in the future, despite the fierce competition in the leisure food market, it should not be a problem to maintain a place!
Source: Hong Kong Stock Market Interpretation
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