In December 2023, Zhou Binquan, who had led Fuling Zhacai for 23 years, stepped down from all positions. After retirement, he remains the company's fourth-largest shareholder with a net worth exceeding 100 million yuan, achieving both fame and fortune and a graceful exit. However, what he left to his successor, Gao Xiang, is a situation of sharp slowdown: the stock price has fallen over 60% from its peak, market value has evaporated by over 25 billion yuan, and 2023 saw declines in both revenue and profit, with growth hitting a ceiling.

Pressure on the New Leader

In January 2000, when 37-year-old Zhou Binquan was transferred to Fuling Zhacai as chairman, the company was insolvent and on the verge of bankruptcy. After taking office, he implemented reforms in processing, branding, and channels, reviving the company. Today, the company's net assets exceed 8 billion yuan, with annual taxes and profits over 1 billion yuan. During his tenure, the company achieved 19 consecutive years of double growth in revenue and net profit. Fuling Zhacai has long established brand recognition nationwide, with a market share exceeding 30%, more than the combined share of second-tier brands Yuquan, Liubiju, and Gaofuji. In December 2020, Zhou Binquan announced an ambitious goal at a strategy launch meeting: Wujiang Zhacai would leverage the Wujiang brand to drive category development, aiming for sales of 10 billion yuan within 3-5 years, making it the first food enterprise in Chongqing to reach 10 billion in sales. Three years later, Fuling Zhacai's sales are only around 2.5 billion yuan, far from the 10 billion target. The bold words were spoken, Zhou Binquan retired, and the pressure fell on the new leader, Gao Xiang.

In 2023, Fuling Zhacai's performance suffered a Waterloo. Annual revenue declined by 3.86% year-on-year, the first decline since financial data became available in 2007. Revenue is the foundation of all operations, and this rare decline is a warning sign. Net profit attributable to shareholders fell sharply by 8% year-on-year, also a rare negative growth. In the first quarter of 2024, performance remained sluggish, with revenue continuing to decline by 1.5% and net profit slightly up by 3.9%. By category, in 2023, revenue from zhacai, radish, and pickled vegetables all declined, with year-on-year growth rates of -4.6%, -26%, and -6.5%, respectively. In terms of volume and price, zhacai sales volume decreased by 3.8% year-on-year, unit price fell by 0.8%, and radish saw even steeper declines in both volume and price. Fuling Zhacai's profitability also continued to deteriorate. Gross margin fell sharply from 58.6% in 2019 to 52% in Q1 2024, while net margin rose slightly. ROE dropped significantly from 30% in 2018 to 10.4% in 2023, mainly due to declines in asset turnover and equity multiplier. These indicators all point to heavy operational pressure. In the future, Gao Xiang will face even greater challenges. On the operational front, the price of raw materials (mustard tubers) is at risk of rising. According to Galaxy Securities, the price of mustard tubers was around 1,000 yuan per ton in 2023, compared to only about 700 yuan in 2019. Coupled with rising labor costs and other factors, prices are likely to rise rather than fall. On the channel front, the market is changing rapidly, and consumer demand is shifting, strongly impacting the company's traditional offline sales structure. Of course, the biggest headache for Gao Xiang is the ceiling on zhacai demand.

Hitting the Ceiling

In 2008, Fuling Zhacai's profitability was weak, and distributors complained about making no money. Zhou Binquan thought of raising prices. So he overrode objections and, taking advantage of a 30% reduction in mustard tuber production due to icy weather, resolutely raised product prices by 40%, from 0.5 yuan/70g to 1 yuan/100g. Escaping the low-price competition, Fuling Zhacai thus began a long road of price increases.

From 2009 to 2018, the company raised prices on packaged zhacai at least once a year, with increases ranging from 2% to 25%, passing through the 1 yuan, 1.5 yuan, 2 yuan, and 2.5 yuan eras. Such frequent price increases had almost no impact on sales volume.

▲ Fuling Zhacai's historical price increases Source: DBS Securities

But after a 10% price increase in October 2018, negative effects began to appear. In 2019, zhacai sales volume fell from 144,400 tons to 138,500 tons. Later, with the pandemic, residents staying home began stockpiling zhacai, and sales returned to positive growth. In 2020-2021, Zhou Binquan decided to raise prices twice more. The impact on sales volume was obvious. From 2021 to 2023, sales volume declined by -1%, -12.6%, and -3.8% year-on-year, respectively. The reason is that zhacai, as an economical side dish, has always been popular among migrant workers and working-class consumers, who are price-sensitive. The soaring prices eventually hit the acceptance limit of the main audience. Despite the impact on sales, the company insisted on raising prices, indicating problems in internal control and decision-making. Perhaps the more than 10 years of continuous price increases created path dependence among management, leading them to believe they could continue driving growth through price hikes. But zhacai is not Moutai; it has a price ceiling.

In the future, Fuling Zhacai's sales growth space is fraught with concerns. According to Euromonitor data, total consumption in the zhacai market increased from 689,000 tons in 2007 to 820,000 tons in 2021, with a CAGR of only 1.25%. Moreover, the growth in total consumption was contributed by bulk zhacai, which increased from 274,000 tons to 486,000 tons over the same period, while packaged zhacai declined from 415,000 tons to 334,000 tons, with the packaging rate falling from 60% to 41%. In the coming years, the packaged zhacai market may stabilize at around 300,000 tons.

▲ Historical zhacai sales volume Source: Euromonitor

Although total packaged zhacai sales are shrinking, Fuling Zhacai continued to increase volume before 2021. Only in 2008, due to the financial crisis leading to reduced labor demand in coastal areas, did the company's sales volume drop sharply by 22%. In other years, it maintained a trend of rising both volume and price. In the last three years, Fuling Zhacai's sales volume has continued to decline, which is enough to raise alarm. Besides the impact of price increases, potential demand may have changed significantly. In recent years, the real estate market and infrastructure demand have shifted downward, and cross-provincial labor mobility has slowed, leading to a slowdown in demand for zhacai, whose main consumer group is the floating population. Secondly, consumers are increasingly pursuing healthy eating concepts, and zhacai does not have a health label; it is high in salt and additives, so the consumption scenario of zhacai as a side dish has also slowed. Additionally, especially in the Sichuan-Chongqing market, small shops' handmade bulk zhacai, with its unique flavors, is continuously squeezing the share of packaged zhacai. Currently, Fuling Zhacai's market share in packaged zhacai is already high enough, and it will become increasingly difficult to grab others' market share. The company's unit price is relatively high compared to competitors, and second- and third-tier zhacai brands have been grabbing market share in recent years through low prices, taking some share from Fuling Zhacai.

It can be seen that Fuling Zhacai has limited room for future price increases, and sales volume has hit a ceiling. Gao Xiang's goal of achieving Zhou Binquan's ambitious 10 billion target seems out of reach.

Glory and Regret

Fuling Zhacai's strong rise is inseparable from several key decisions by Zhou Binquan. The current predicament is also Zhou Binquan's regret: he failed to successfully create a second growth curve during his tenure.

In the years after taking office in 2000, the company completed industrial transformation, greatly improving production efficiency, but products were not selling, which troubled Zhou Binquan. Overriding objections, he resolutely decided to spend 14 million yuan on CCTV advertising and signed "Emperor" Zhang Tielin as spokesperson. Fuling Zhacai became an instant hit, laying a solid foundation for its rise. After the CCTV ads, sales picked up, but many problems emerged on the sales front. Distributors complained about slow delivery, with payments made months before products arrived, while warehouses were stocked with unsold goods. After investigation, Zhou Binquan learned that multiple categories of zhacai required a full trainload to ship, which took 2-3 months to accumulate, causing contradictions between front and back ends. At that time, Fuling Zhacai also had a guiding principle: the stronger the new product development capability, the better the company. But the problem was that many new products couldn't be pushed through and were returned, requiring much effort to resolve. These issues made Zhou Binquan determined to drastically cut products. It is said he cut 80% of low-margin SKUs. After focusing, production and delivery went smoothly, and the scale effect of the big single product improved the company's gross margin. With these measures, Fuling Zhacai's operations improved, and Zhou Binquan gained much praise and immense wealth. Of course, he also had regrets. As early as more than 10 years ago, Zhou Binquan began exploring business diversification, initially laying out radish, seaweed, and other products, hoping to create another big single product. After years of cultivation and promotion, radish broke through 100 million yuan in 2018, but then stagnated, shrinking to 60 million yuan by 2023. Later, Zhou Binquan set his sights on pickled vegetables, believing the market prospects were broad, larger than zhacai, and at that time industrialization and branding were severely lacking, so there was great potential. Thus, in 2015, he spent 129 million yuan to acquire 100% equity of Sichuan Huitong Food Industry Co., Ltd., entering the pickled vegetable market. Although Fuling Zhacai's pickled vegetable business has grown, its scale is not large, with revenue just over 200 million yuan in 2023, still far from the dream of creating another Wujiang Zhacai. The "failure" is because radish and pickled vegetables are not good businesses. First, their gross margins are only around 30%, while zhacai's is as high as 57%. Second, the pickled vegetable threshold is low, with numerous competitors. Radish, pickled vegetables, and zhacai all belong to the same category of pickled products, and there is substitution in demand. After several twists and turns, in 2022 Zhou Binquan turned his attention to rice sauce, Sichuan-style compound seasonings, and other categories. Unfortunately, the timing of the transformation was too late, and the opportunity to make achievements had passed. In fact, multiple categories, including compound seasonings, had great opportunities in the past 10 years, with unstable market patterns and fast industry growth. Zhou Binquan missed the golden window to create a second growth curve across industries.

Zhou Binquan retired successfully, leaving Gao Xiang a Fuling Zhacai that has clearly hit a development ceiling. However, Gao Xiang is a market novice. Since graduating from university, he has been in politics in Fuling District, Chongqing, with no business experience in the zhacai industry. Facing this operational dilemma, Gao Xiang followed past practices, proposing to consolidate the zhacai main business in 2024, continue building the radish big single product, and cultivate other categories such as seaweed and pickled vegetables. In addition, Gao Xiang plans to develop modern online emerging channels to absorb the declining sales of hypermarkets. In fact, as early as 2017, e-commerce was an important supplement to the company's channels, achieving significant breakthroughs. However, over the years, the online channel share has remained at around 10%, without a larger leap. The reasons are, on one hand, due to consumer demographics and habits, the zhacai industry is mainly offline, with online share only in single digits; on the other hand, the company has already achieved national coverage, with thorough offline channel penetration, which is an advantage over competitors. If it fully shifts to online, it may also harm the interests of distributors, which is not conducive to overall business development. Overall, Gao Xiang, as the new helmsman, still takes conventional measures, and it may be very difficult to turn the tide. On one hand, the main zhacai business is limited in both volume and price, and there is no basis for high-speed growth. On the other hand, the diversification strategy has not improved after years of cultivation, and hoping it will successfully drive performance growth in the future is overly optimistic. As a result, Fuling Zhacai's performance decline is likely irreversible, and expectations for its investment value and medium-to-long-term returns should be lowered.

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