Industry Status: Positive Prospects, Clear Upgrade Trends
Five Stages of Condiment Development, Industry Enters Upgrade Period
China's condiment industry has a long history. In the mid-to-late 1990s, the modern condiment industry began to take off and develop rapidly. Since the reform and opening up, with rapid economic growth, residents' income and consumption levels have greatly improved, and condiments have entered the fast lane of industry development. Many enterprises have moved into industrial production, gradually establishing brand advantages with scale expansion. After 2010, there has been a clear trend of consumption upgrading.
Industry Under Pressure in 2016, Positive Trends in 2017
The high-growth phase of condiments has passed, and 2016 was under pressure due to the economic environment. According to statistics bureau data, from 2006 to 2014, the condiment industry's revenue CAGR was 18.4%, experiencing a period of high growth. In recent years, growth has slowed. From January to October 2015, condiment industry revenue was 230 billion yuan, up 8.9%; among which soy sauce and vinegar revenue was about 80 billion yuan, up 10.5%. In 2016, affected by macroeconomic factors such as economic downturn and slowing consumption, the overall condiment industry showed a sluggish trend. Listed soy sauce and vinegar companies saw revenue growth of 10.6% in 1-3Q16, slightly lower than the 10.8% growth in 2015. It is estimated that the overall industry decline was larger, with the condiment sector growing at around 5%, and soy sauce and vinegar growing at 5%-10%.
Pressure came more from the catering channel. The downstream channels for condiments include catering, supermarkets, and industrial clients, with a ratio of about 4:3:3 in 2007, now estimated at about 5:4:1. Supermarket data shows that soy sauce retail sales increased by 7.3% in 2016, up from -0.2% in 2015, indicating a recovery in household consumption. Catering social retail data increased by 10.8% in 2016, while limited catering grew by 6.0%, with growth continuing to decline, reflecting that catering channel pressure is the main source.
2017 began with price increases, showing a positive trend for condiments. Grassroots research indicates that at the beginning of 2017, large condiment companies saw positive shipment trends: first, the base in 2016 was low; second, affected by rising costs, with Haitian's price increase at the beginning of the year as the starting point, Chubang and Qianhe have followed or planned to follow, leading to a wave of price increases in the condiment industry; third, high-end catering has seen restorative growth. Looking ahead, with rising average product prices, stabilizing catering, and recovering consumption, condiments will show a positive trend.
Clear Structural Upgrade Trend, Multiple Companies Launch High-End Products
The upgrade trend in condiments is evident. With changing consumption concepts and habits, condiments show a clear trend of consumption upgrading, with two typical types: first, substitution between categories, such as shrinking demand for MSG, gradually replaced by high-freshness soy sauce and YE; second, structural upgrades within categories, such as an increasing share of high-quality soy sauce and vinegar. The former indicates sectoral changes; the latter forms industrial trends and investment opportunities, with high-end soy sauce gradually forming a niche market. Data shows that due to product upgrades, the average price of soy sauce in supermarket channels increased by about 3% year-on-year in 2015 and 2016, and in January-February 2017, affected by price increases, the average price rose faster.
From a company perspective, multiple companies have launched high-end products. For example, leading company Haitian's high-end product ratio has increased from 30% three years ago to 35%; Zhongju Hi-Tech's Chubang brand has been committed to high-freshness soy sauce, with expanding scale; Jiajia Food has upgraded products, creating two high-end single products: Noodle Fresh and Original Brew; Qianhe is expanding nationally with its "zero-additive" series; Hengshun has launched products like three-year aged and six-year aged, creating the concept of aged vinegar, and has built a new 100,000-ton high-end vinegar filling production line, establishing the structural upgrade trend.
Soy Sauce Price Band Pyramid Distribution, Consumption Shifts Upward
Due to the many condiment categories and complex data, we only use the soy sauce category to illustrate the price band distribution. Based on statistics bureau data, listed company reports, and channel research, we estimate the soy sauce market size at about 40 billion yuan, with price band revenue showing a typical pyramid shape, increasing from top to bottom: estimated market above 12 yuan (ultra-high-end) is about 0.8-1 billion yuan, 8-12 yuan (high-end) is about 8 billion, 5-8 yuan (mid-end) is about 13 billion, and below 5 yuan (low-end) is about 18 billion.
Estimated ultra-high-end soy sauce market is about 0.8-1 billion yuan, small share but fast growth. We define retail price above 12 yuan/500ml as ultra-high-end soy sauce. Domestic high-end soy sauce brands include Haitian Laozihao, Chubang Chunniang, Jiajia Yuanzao, Lee Kum Kee Chunweixian, Qianhe Zero Additive, and Shinho Liuyuexian, with total revenue of 0.8-1 billion yuan, accounting for about 2%, of which Shinho accounts for more than half. Ultra-high-end soy sauce focuses on safety and health concepts, with "zero additive" and "organic" as selling points. Although the share is low, it has maintained rapid growth in recent years.
Estimated high-end soy sauce market is about 8 billion, the main direction of consumption upgrading. We define retail price 8-12 yuan/500ml as high-end soy sauce, including Haitian Teji Jinbiao, Seafood Soy Sauce, Weijixian; Chubang Soy Sauce, Donggu Yipinxian, Lee Kum Kee Selected Light Soy Sauce, etc., with a total market size estimated at about 8 billion yuan, accounting for about 20%. This price band features premium and first-grade high-freshness soy sauce with excellent taste. As per capita income rises, consumers are not price-sensitive to soy sauce and can easily shift from the 5-8 yuan band to above 8 yuan. High-end soy sauce is the main direction for subsequent upgrades.
Estimated mid-end soy sauce market is about 13 billion, potentially absorbing huge consumption. We define retail price 5-8 yuan/500ml as mid-end soy sauce, including red-cooked soy sauce, dark soy sauce king, and local brands, about 13 billion yuan, accounting for about 33%. On one hand, demand for mid-end products may be diverted to the high-end price band; on the other hand, it will absorb huge consumption from the low-end market: the market below 5 yuan is nearly 18 billion, and once the upgrade trend is established, these consumers will shift to the mid-end market, potentially forming significant increments.
Estimated low-end market is about 18 billion, gradually shrinking. We define retail price below 5 yuan/500ml as low-end soy sauce, including many local small and medium brands, bagged soy sauce, mainly in third- and fourth-tier cities and villages, mostly sold through traditional channels. The low-end market is estimated at about 18 billion, accounting for as high as 45%, but gradually declining. With consumption upgrading, demand continues to shift upward, and it is expected that the low-end market will continue to shrink.
Factors Continuously Driving Industry Upgrades
Changing Consumption Concepts, Demand for Upgrades
Health and safety awareness is continuously improving. In recent years, food safety issues such as melamine and gutter oil have made people pay more attention to the safety of food and raw materials. The increase in sub-health conditions among residents has made health concepts deeply rooted. According to UBS Evidence Lab surveys, more than 40% of consumers are willing to pay more for healthy and safe condiments, ranking among the top in the food and beverage industry. The increased demand for healthy and safe diets will drive the consumption structure of the condiment industry to shift toward mid-to-high-end.
The pursuit of high-quality life brings demand for high-quality products. With the continuous improvement of living standards, people's dietary needs have shifted from eating full to eating well. First, across the entire food and beverage industry, demand for high-end products is strong, and new high-end products are emerging. Among them, high-end liquor represented by Moutai continues to see strong demand, with retail prices rising; Yili and Mengniu have both launched new high-end milk products; and the condiment industry is full of new high-end products. Second, per capita condiment expenditure has continued to grow in recent years, reaching 76 yuan in 2012 (CAGR of 10.8%). At the same time, taking the sub-industry soy sauce as an example, high-end soy sauce consumption grew by 63% in 2014, higher than the overall soy sauce consumption growth of 26%, confirming that residents are beginning to pursue high quality in condiment demand.
Rising Per Capita Income, Consumption Capacity
Urbanization + rising per capita income levels drive industry upgrades. First, with the country's vigorous promotion of urbanization in recent years, the urban population increased from 580 million in 2006 to 770 million in 2015, a CAGR of 3.1%. Second, the per capita disposable income of urban residents has grown steadily, exceeding 33,000 yuan in 2016. The improvement in per capita income provides strong consumption capacity and stable support for the structural upgrade of condiments.
Per capita condiment expenditure is low, usage cycles are long, and consumers are not highly price-sensitive. Data shows that in 2012, per capita condiment expenditure was about 76 yuan, accounting for 0.5% of total per capita consumption expenditure, ranking last among mainstream food expenditures. Due to the long usage cycle and low single consumption amount, consumers are not highly price-sensitive, which also provides conditions for industry structural upgrades.
Changes in Consumption Channels, Providing Upgrade Environment
The share of supermarket channels is rising, providing an upgrade environment for household consumption. First, in recent years, the proportion of hypermarkets and supermarkets in condiment sales channels has gradually increased, while traditional channels have slightly declined. Supermarkets and hypermarkets mainly sell mid-to-high-end condiments, providing a purchasing environment for structural upgrades from the channel perspective. Second, the main customers of supermarkets and hypermarkets are household consumers. According to McKinsey's report "Middle Class Reshaping China's Consumer Market," by 2022, affluent and upper-middle-class households will account for 63%. The increase in high-income households will, on one hand, increase dependence on supermarket and hypermarket channels, and on the other hand, increase sales of mid-to-high-end products in these channels. The combination of these two factors will continue the structural upgrade trend in the condiment industry.
High-end catering recovery drives demand for mid-to-high-end products. In China's condiment demand, 50% comes from catering procurement. The recovery of the catering industry drives the rapid development of the entire condiment industry. At the same time, the turnover of catering enterprises above a certain scale has grown rapidly, with a CAGR of 15% since 2003. The high requirements of high-end catering for raw materials provide strong momentum for the structural upgrade of the entire condiment industry.
High-End Soy Sauce Market Has Broad Space, Health and Segmentation Are Development Trends
High-End and Ultra-High-End Markets Have Broad Space
Large space and few competitors, ultra-high-end soy sauce is still a "blue ocean" market with at least 4 times the space. There are few competitors in the ultra-high-end market. Haitian focuses mainly on mass-market prices; Chubang and Lee Kum Kee are mid-to-high-end; Jiajia aims for transformation and upgrading, with mid-to-low-end products still mainstream, and currently only Qianhe and Shinho focus on high-end soy sauce production and sales. With large space and little competition, high-end soy sauce is still a "blue ocean" market. Taking the Shanghai market as an example, it is mainly concentrated in Qianhe and Shinho, with a combined estimated scale of about 0.3-0.4 billion yuan. Based on Shanghai's population and consumption levels, it is estimated that the ultra-high-end soy sauce market in first-tier cities is about 1 billion yuan, and the market in provincial capitals and separately listed cities is about 2.8 billion yuan. Conservatively, the national market is about 4 billion yuan, with at least 4 times the space currently.
It is expected that the high-end soy sauce market has room to double. In the high-end soy sauce field, Haitian and Zhongju account for half of the market. Based on data from the past three years, the growth rate of their high-end products is about 15%, indicating that the overall growth rate of high-end soy sauce is 10%-15%, faster than industry growth. With continuous consumption upgrades, the market ceiling is hard to see. Assuming that the high-end market absorbs half of the mid-end market consumption, the market size could reach 18 billion yuan, an increase of 125%. After deducting demand diverted to ultra-high-end, it is estimated that there is at least room to double.
Learning from Neighbors: Looking at Japan's Upgrade History, Grasping Domestic Development Direction
Japan's Soy Sauce History: High-Endization and Product Segmentation Drive Industry Upgrades
Japan's soy sauce industry entered a bottleneck in the late 1980s due to the disappearance of demographic dividends and serious aging problems. Subsequent development drivers included two factors: first, rising per capita income levels drove consumption upgrades. After three consumption upgrades in Japan, the current market has a very low share of low-end soy sauce, and the entire industry capacity is close to the ceiling. Second, product segmentation: after World War II, Japanese eating habits became Westernized, and the consumption of cold and convenience foods drove the functional segmentation of soy sauce, creating consumer demand, such as rice seasoning soy sauce, soup soy sauce, seafood soy sauce, and ice cream soy sauce.
Japan's Rising Income Levels Drive Condiment Expenditure
From the perspective of different income classes in Japan, overall condiment expenditure is significantly positively correlated with household income levels. The higher the income, the higher the average household condiment expenditure.
Soy sauce consumption also upgrades to high-end as income rises. From the perspective of soy sauce consumption, as income levels rise, Japanese households reduce traditional food consumption, soy sauce consumption volume decreases, but the unit price of soy sauce consumption significantly increases. The average price of soy sauce consumed by high-income households is 45% more expensive than that of low-income families, and overall soy sauce consumption expenditure is also about 10% higher.
Japan's Product Segmentation Drives New Consumer Demand
Due to the high penetration rate of traditional soy sauce, vinegar, and other condiments in Japanese households, the usage rate of basic condiments has exceeded 80%. The Japanese condiment industry has driven new consumer demand through product segmentation by launching more compound seasonings and specialized condiment products. The various new products in segmented categories, with many types and high added value, continue to drive product structure upgrades.
Health-Oriented and Functional Segmentation Are Future Development Directions for Domestic Soy Sauce
Health-concept soy sauce may become the mainstream upgrade. From the demand side, with economic development and improved living standards, people pay more attention to health issues, and dietary needs continue to develop toward health. From the supply side, companies cater to the health and functional trends, with increasing R&D investment leading to a continuous stream of new products. The domestic soy sauce health concept has gone through two stages: first, adding added value, such as "light salt soy sauce" and "iron-fortified soy sauce"; second, playing the natural card, mainly "zero additive" and "organic," deriving ultra-high-end soy sauce. In the future, health-oriented products remain the development trend and the main direction for upgrades.
Functional segmentation is a future development trend. With economic development and abundant material life, consumers' pursuit of gourmet food has led to functional segmentation of condiments. Even for a single soy sauce, categories are constantly enriched. The current market already has Noodle Fresh, cold dressing soy sauce, red-cooked soy sauce, steamed fish soy sauce, etc. Among them, Jiajia has achieved rapid growth with Noodle Fresh, and Lee Kum Kee with steamed fish soy sauce. Referring to Japan's experience, more functional segmentation will appear in domestic soy sauce in the future, and product upgrades will continue.
Haitian Flavoring: Actively Seeking Change, Sustained Growth
Accelerating growth, steady progress. Haitian's 4Q16 revenue and net profit increased by 10% and 20%, respectively. In 2H16, condiment revenue growth rebounded to 8.6%. By category, 2H16 soy sauce growth accelerated to 19%, due to: first, a low base in the same period last year; second, the negative impact of previous traditional market channel adjustments gradually eliminated; third, channel sinking in 2016, with development of blank markets bringing increments. In 2H16, oyster sauce and sauce growth slowed to 3% and -10%, respectively, mainly due to accelerated shipments to channels in 4Q15 leading to a high base, and in 2016, controlling shipment rhythm, focusing on actual market sales. The price increase at the beginning of the year can cover cost increases, with scale effects and improved output rates.
The leader actively seeks change, product upgrades sustain growth. Facing slowing consumption and industry downward pressure, the company's focus in 2016 was on channel refinement and brand building, strengthening its own advantages to gain sustained growth capability. In channels: first, continuous refinement and splitting, focusing on advancing into weak rural markets to improve the sales network; second, strengthening terminal category management, effectively achieving multi-category promotion. In branding, strengthening publicity, with five sponsored variety show advertisements broadcast successively, and influence will continue to manifest. New thinking will drive the low-end market to reverse its previous decline, and high-end products will achieve faster growth.
Dual promotion of channels and products, long-term trend positive. The company refines its channels, increasing market share through denser sales networks and diversified product placement, promoting enterprise development. At the beginning of 2017, the company has taken price increase measures to offset cost pressures. In the future, the company's main growth logic is still through existing channels for category diversification, with vinegar, cooking wine, and others expected to become main revenue growth categories.
Source: Leqing Think Tank (ID: lqzk168)
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