Click the image above for details In recent years, the Chinese bakery market has grown rapidly. Bakery products have not only become the top snack category in China but also the second-largest market globally. In particular, short-shelf-life bread products are highly favored by consumers, and the pandemic has further strengthened the essential nature of bread, making it extremely popular. So, what is the development history of bakery products in China, which have a large existing market and fast growth, and what innovations are there now? In the current Chinese bakery market, there are listed companies with revenues in the billions: Toly Bread and Dali's Meibeichen. There are also various internet-famous brands that have gone viral and received investments: China Everbright Limited invested in Xiaobai Xinli Ruan, Qinglan Fund invested in Xuamma Egg Yolk Pastry, Yunji invested in Liulang Yike, and Tiantu Capital invested in Baoshifu... Domestic short-shelf-life bakery brands have received high attention in recent years. Who exactly is the future of Chinese bread? -01-
Low Concentration: Dali + Toly Bread Only Nibbled 8%
Bakery products, beloved by domestic consumers, were once monopolized by foreign brands. At that time, the mainstream bakery brands in the market were Mankattan, Orion, Bimbo, Yamazaki Bread, etc. But when it comes to food, Chinese people have never been outdone. Stimulated by foreign brands, domestic bakery brands quickly rose and overtook them to become market leaders. Data shows that in 2018, the bakery revenue of Mankattan, Orion, BreadTalk, Yamazaki, and Bimbo in China was approximately 0.8 billion, 2 billion, 1.2 billion, 0.12 billion, and 0.5 billion yuan respectively. In contrast, local brands Toly Bread and Dali Foods had bakery revenues of 4.8 billion and 6.25 billion yuan in 2018, far exceeding foreign brands in market share. Although Toly and Dali hold leading positions, their combined market share is only about 8%, showing the low industry concentration. In fact, due to regional consumption habits, there are few well-known bread manufacturers operating across regions in China. Most bread manufacturers are small and medium-sized enterprises in local areas, lacking the strength to expand central factories. Apart from the two giants, other internet-famous brands are relatively small and cannot challenge the first tier, so competition is mainly between the two giants. Although the industry concentration is currently low, the growth rate is still considerable. Relevant data shows that the bakery market size is expected to reach 256.7 billion yuan in 2020, with an average annual compound growth rate of about 10.9%. So, what is the development situation for the leaders Dali and Toly? -02-
Rising Concentration, High Barriers to Scale, Favorable for Leaders
First, the industry's overall high growth rate indicates a promising future. As an industry develops rapidly, brand concentration inevitably increases. We can compare with our neighbor Japan in the same bakery industry: From the 1960s to the 1980s, Japanese lifestyles and eating habits gradually changed. Rapid economic growth accelerated the pace of life, making bread a more convenient staple that saved time for consumers. The bread industry grew rapidly. From the early 1990s, as Japanese consumers' spending power increased, they preferred food diversity. Bread gradually became a leisure food, and the growth of staple bread almost stagnated. The bread industry matured, and the market stabilized. At the same time, industry concentration increased, and Japan's bakery leader Yamazaki Bread successfully topped the market during this process, holding over 25% of the Japanese bread market by 2016. The development of China's bread industry corresponds to the process of market maturation, and industry concentration will gradually increase in the future. So, if there is a company likely to represent Chinese bread in the future, it will probably emerge from giants like Toly and Dali. Besides the change in industry concentration, another factor clearly favors leading enterprises: the relatively high barriers to scale. With the emphasis on food safety, the state has set stricter requirements for bread industry standards and testing. To scale up, bread manufacturers need high standards in raw materials, food additives, production processes, and packaging. This not only raises product quality and industry thresholds but also benefits leading companies with advantages in technology, equipment, and raw material supply. On the other hand, from the consumer demand perspective, there are higher requirements for product diversification, marketing innovation, and service. The high costs of innovative product R&D, communication, and market training are unaffordable for small enterprises. Moreover, with increased awareness and improved product quality, the bread industry is trending toward brand consumption and high-end consumption. These changes also favor leading companies like Dali and Toly. The industry trend is positive and favorable for leading brands. So, who will take the lead between Dali and Toly? -03-
Dali Has the Advantage of Distributors, Toly's Model Is More "Yamazaki"
Currently, Dali's brand competing with Toly is Meibeichen, a short-shelf-life bread brand launched in 2018. In terms of business model, the two have some similarities, both based on the central factory + wholesale model. That is, companies establish central processing factories in various cities and then sell products through supermarkets. This avoids the high storefront and labor costs of chain stores and makes it easier to achieve economies of scale. This model is highly replicable and conducive to rapid promotion in new regions. The difference is that Toly places more emphasis on terminal connections, focusing on large chain supermarkets (KA customers) and small and medium supermarkets and convenience stores in central cities. The company directly signs agreements with them to sell products. By 2019, Toly had 240,000 terminals. However, as it expanded southward in recent years with slower development, Toly has gradually increased its distribution model through distributors for outlying markets, convenience stores, county and township stores, and small shops. Meibeichen, on the other hand, leverages Dali's nationwide distributor channels, giving it an advantage in distributor distribution. Moreover, Toly's production-to-sales model keeps its return rate far below the industry average of 13-15%, at only 7-8%. In contrast, Meibeichen has a return rate as high as 20%, according to institutional research. Of course, this is also related to its early stage of market cultivation, as it pursues higher distribution rates to grab market share. When Meibeichen was launched, Dali invited Yang Zi and Huang Lei as spokespersons, with various promotions. In contrast, Toly does not do large-scale advertising, relying on years of accumulated reputation. In the first quarter of this year, Meibeichen adopted a large-scale promotional strategy with various buy-one-get-one offers, putting significant pressure on Toly. Experts point out that Toly's model follows a path similar to Japan's Yamazaki Bread, using the Northeast as a base, consolidating its leading position, and radiating nationwide. However, the domestic market differs from Japan's, and whether it can continue to grow and maintain its leading position in the future remains uncertain. Looking at the development of the Japanese bread market, if Toly or Dali can secure the top spot when the market matures, reaching a scale of 10 billion yuan should be easy. -04-
Toly's Difficulty in Going South
Although Toly Bread holds a leading position and Dali has nationwide brand awareness, the extremely low brand concentration in the short-shelf-life bread market means that both face difficulties in expanding nationwide and have their own problems. Toly's problem is that its national expansion requires significant investment, especially in the East China and South China markets it focused on last year, where it faces numerous challenges. According to the 2019 financial report, Toly's revenue share in South China is not high. Meanwhile, of its 36 subsidiaries, 20, including those in Shanghai, Shenzhen, Jiangsu, Hefei, Guangxi, Fuzhou, and Xiamen in South China, are in a loss-making state. The rising expenses have not yielded ideal results. Since 2016, its selling expenses have increased by 123.7% over four years, but net profit attributable to shareholders has only increased by 56.7%. Unlike Toly's strongholds in North China and the Northeast, the bakery market in East and South China has lower brand concentration, and the South China market has competitors like Dali and Panpan, creating intense competition. Moreover, Toly's expansion is mainly based on local supermarkets and convenience stores, but in South China, strong regional convenience store chains like FamilyMart and Lawson have their own private-label bread or choose local strong bread brands. These reasons have made Toly's southward expansion difficult. Despite increasing selling expenses for several consecutive years, profits in South and East China have not grown significantly, and some regions have even seen declines. -05-
Dali's "Follow" Strategy
Dali's Meibeichen still faces challenges in challenging Toly's current position. Meibeichen needs time to build market layout and consumer awareness. Although Meibeichen is a brand under Dali, consumer awareness needs to be re-cultivated, which takes time. But Meibeichen may not necessarily need to defeat Toly; being second can also satisfy Dali's interests. Because Dali's multi-brand and multi-category strategy often does not require occupying the "first" position. Looking at Dali's development history, the "Dali Model" is a follow strategy—in multiple categories, it is not the pioneer or leader, but it is a master of following, ranking in the first tier in many categories, second only to the leading brand. Looking back at Dali's various brands. In various segments, Daliyuan Egg Yolk Pie is No.1 in pastries, KEBOKE is No.3 in potato chips, Haochidian is No.2-3 in biscuits, Heqizheng is No.3 in herbal tea, Peanut Milk is No.2 in compound protein drinks, and Lehu is No.2-3 in functional drinks... Most of these brands are not No.1, but their combined profits exceed most competitors. Achieving this in multiple categories is undoubtedly a high-level strategy. So, although Meibeichen's goal is clearly Toly, as long as it surpasses other competitors, it can achieve profitability. Of course, to break the current pattern, Meibeichen still has a long way to go. Currently, although Dali has invested 500 million yuan in marketing for Meibeichen, its impact on Toly's sales in the short term is not significant. Toly has 20 years of accumulation in the short-shelf-life bread industry, giving it a huge advantage in awareness and a large consumer base. Its supply chain advantages are also not something Meibeichen can surpass in a short time. Comparing the two, Dali has a massive scale of over 20 billion yuan and is already the leader in long-shelf-life bread. With years of accumulated distributor channels and capital, it has a natural advantage in entering short-shelf-life bread. In recent years, Dali's other businesses have seen slowing growth or even decline, making it pay more attention to the short-shelf-life bread business. Toly is more focused on short-shelf-life bread and is far ahead in this field, but it also faces enormous market pressure. Will Toly continue to lead in short-shelf-life bread in the future? Can Dali continue to rely on its "follow" strategy for sustained development and even surpass the leader to replace Toly? Let's wait and see.