Source: FBIF Food & Beverage Innovation (ID: Foodlnnovation) The condiment market is becoming less profitable. On October 12, 2021, Haitian announced that it would adjust the ex-factory prices of some products, including soy sauce, oyster sauce, and sauces, with main price adjustments ranging from 3% to 7%, and the new prices will be implemented starting October 25, 2021. In fact, Haitian's price increase had been foreseeable. In the second quarter of 2021, the surge of community group buying disrupted the traditional channel model of the condiment industry, while prices of soybeans, packaging materials, and freight continued to rise, leading to poor performance among listed condiment companies, with collective declines exceeding 50%. [1] Haitian soy sauce products. Image source: Haitian Official Flagship Store Despite the decline in net profit and gross profit of established condiment companies, it has not deterred new entrants. In terms of financing in the sector, according to Xiniu Data, from January to the end of September 2021, there were 15 financing events in the condiment market, with well-known investment institutions such as IDG Capital, Hillhouse Capital, and GSR Ventures participating. From the perspective of cross-industry entrants, on August 2, 2021, Three Squirrels' subsidiary Xiaolu Lanlan launched children's soy sauce, and on August 3, two major meat product giants, Shuanghui and Longda Meat, announced their entry into the condiment market. This raises several questions: 1. How can the condiment industry save itself? 2. Do new entrants really have a chance to break through? 3. Are compound seasonings a new opportunity in the condiment market? Can old brands in the condiment industry regain their glory? Price increases: Can they help old brands in the condiment industry regain their glory? The condiment industry once had a brief period of glory. According to data from Caibaoshuo, starting in March 2020, Haitian, the leader in the condiment industry, experienced rapid growth, with its stock price rising from 75.92 to 215.28, reaching a market value of up to 650 billion yuan, achieving a brief period of revelry. After the noise, loneliness followed. Starting in January 2021, the bubble in the condiment industry burst, and Haitian's stock price fell off a cliff, basically returning to the price level before the rise. At the same time, the entire condiment industry no longer enjoyed its former glory. According to data from China Industrial and Commercial Network, in 2021, Qianhe Weiye's net profit plummeted by 58.09% year-on-year, and other listed companies also performed poorly. Zhongju High-tech, Yihai International, Hengshun Vinegar, etc., all saw declines in net profit in the first half of 2021. In the context of a poor overall consumption environment, Haitian officially announced a price increase on October 12. But this raises a question: Can price increases really restore the glory of the condiment industry? Before answering this question, we need to look at what ended the glory of the condiment industry. 1. The sudden popularity of community group buying. Under the internet's money-burning model, the original channel model of the condiment industry was disrupted. Compared with prices in traditional channels, products under the community group buying model are cheaper, shaking the original price system of condiments. 2. Insufficient consumption power. Due to the pandemic outbreak in 2019, most consumers stocked up on condiments as daily necessities. After the pandemic ended, some stockpiles remained undigested, leading to insufficient demand for condiments. In addition, after the pandemic, the recovery of household consumption was less than market expectations. The year-on-year growth rate of total retail sales of consumer goods was significantly lower than market expectations, and residents' willingness to consume remained at a low level. [2] At the same time, the catering industry has not fully recovered. According to data from China Industrial and Commercial Network, 50% of demand in the condiment industry comes from B-end catering enterprises. However, due to the impact of the pandemic, the catering industry has not fully recovered compared with 2019, affecting condiment sales this year. 3. Increased cost pressure. The prices of raw materials for condiments, such as soybeans, packaging paper, and PET bottles, have risen significantly. From the end of 2019 to 2021, the increases reached 18%, 12%, and 28%, respectively, putting considerable pressure on production costs. [3] In fact, Haitian's price increase was expected. On the one hand, 2021 is a node in Haitian's price increase cycle (from the end of 2010 to 2017, Haitian raised prices every 2-3 years, with increases ranging from 4% to 5%). On the other hand, Haitian needs to raise ex-factory prices to increase channel profit margins and stabilize distributor sentiment. It is worth noting that under the current economic pressure, in the short term, price increases may temporarily alleviate cost pressure, but in a highly competitive market, in the long run, it may affect sales and consumer evaluation. More importantly, 2021 is not a good time for price increases. The ideal way to raise prices is driven by demand, not cost. When product brand power increases and consumer demand is stronger, that is a better time for price increases. However, after 2015, China's GDP growth rate fell below 7%. Although the sales revenue of the condiment industry continued to grow, the growth rate has been fluctuating and has never returned to the high level of 2011. Coupled with the post-pandemic era, consumer demand is under pressure, and the outcome of price increases at this time is uncertain. Changes in sales revenue of the condiment industry. Image source: National Bureau of Statistics, Forward Industry Research Institute As the leading enterprise in the condiment industry, after Haitian raises prices, the price increase space for the entire condiment industry will also open up. Haitian's move, while expanding distributor profit margins, also increases their inventory costs. Based on the current situation, the biggest challenge for established condiment companies is not channel changes or cost increases, but distributor turnover. According to a report by Kuaixiao Jun, some distributors are already giving up Haitian. The reason is that Haitian's distributor gross margins are too low. Behind Haitian's impressive 40% gross margin, the comprehensive gross margin for large distributors is generally below 6%, and most products are piled up in distributors' warehouses, causing them great distress. [4] In the past decades of rapid development in the condiment industry, leaders like Haitian had few competitors, and distributors profited from representing Haitian's products. But now, the number of condiment product categories has exceeded consumer demand, and product surplus has led to a shortage of distributors. In the game between brands and distributors, distributors now have the right to say "no" to brands. If established products do not increase distributor profit margins, they may face industry disruption. New brands break through in involution Even though the growth rate of the entire condiment industry is declining, it cannot stop the ambitions of new entrants in the 100-billion-yuan market. In 2021, in just nine months, there were 15 financing events, several capital investments, and frequent entries by cross-industry giants. As investors say, "The entire consumer goods track is worth redoing." Now, the entire condiment track is also being redone. But even condiment giants have to face the fate of price increases. In a track with giants and many competitors, it is not easy for new brands to stand out. To this end, in the "involution," new brands are looking for ways to break through. 1. Conquer the young people's dining table New brands in the condiment industry are targeting the dining tables of young people. Since the dining characteristics of young people today are very different from before, compound seasonings have become a new choice for young people. The new seasoning brand "Add Some Flavor" (加点滋味) recognized this characteristic of young people and targeted the youth market from its inception, developing three product lines for young people's dining and kitchen scenarios, including the table sauce "Mei Jiang" and Japanese-style rice topping "Fan Xiang Song." The channels also chose mainstream online e-commerce, closer to young people's consumption habits. Add Some Flavor seasonings. Image source: Add Some Flavor 2. Meaningful product innovation and differentiation If "positioning" is to make a brand stand out in the minds of potential customers and is the basic way to attract customers, then the product is the key to improving repurchase rates and retention. As Nie Yunchen, founder of Heytea, said, new tea drinks are a brand that transcends the industry itself. This applies to seasoning brands as well—the breakthrough for seasoning brands is to make products transcend the category itself. Just like years ago, when we mentioned soy sauce, we thought of Weijixian, and when we mentioned vinegar, we thought of Shanxi aged vinegar. But these products, in a sense, have not fully achieved transcending the category itself; "transcendence" remains their future upgrade direction. Take the hot pot base segment as an example. Tomatoes, as a foreign import during the Ming Dynasty, have very mature cooking methods and culinary brands abroad, but in China, there are few culinary brands focused on tomato products. However, in a Haidilao e-commerce flagship store, tomato hot pot base is the second best-selling product. "Seven Tomatoes One Pot Soup" (七个番茄一锅汤) seized this gap, starting from tomato hot pot base and entering this blue ocean market. Seven Tomatoes One Pot Soup. Image source: Chengming Tmall Flagship Store In addition, the product of Seven Tomatoes One Pot Soup differs from traditional hot pot bases; it can not only be used as a hot pot base but also for cooking noodles, stewing meat, and other home cooking. The seasoning brand "Kouwei Quan" (口味全), established in 2020, positions itself with nutritional seasonings as its differentiation, focusing on the healthy upgrade of Chinese seasonings. The brand adds a series of popular nutrients such as enzymes and dietary fiber to its products. Enzyme active soy sauce. Image source: Kouwei Quan Zhou Jun, co-founder of Kouwei Quan, told us that the main way for new brands in the condiment industry to break through is through meaningful product innovation and differentiation. The development of the condiment industry has gone through three eras. From 1.0 to 3.0, the development of seasoning products is a combination of subtraction and addition—subtracting unhealthy ingredients and adding more nutrients. 3. Packaging wins: interesting and beautiful Looking at the packaging of most new seasoning brands, it is inseparable from the words "interesting" and "beautiful." National trend and Chinese style are popular elements in recent years. In the clothing and new tea drink industries, the use of these elements has made brands shine. From enzyme active soy sauce to dipping soy sauce, Kouwei Quan applied national trend elements such as awakening lion, koi, monkey king, and panda in the packaging of its soy sauce series, trying to stimulate consumers' memory points of Kouwei Quan from a visual perspective. Kouwei Quan dipping soy sauce. Image source: Kouwei Quan WeChat official account Fan Saoguang uses anime forms in most of its brand packaging, with an overall design leaning towards lightness and brightness, using packaging to win the favor of young people. Fan Saoguang spicy assorted. Image source: Fan Saoguang WeChat official account Xibao Zhiyan, which just received financing in October, uses an "EDU+Monte" style in its packaging, incorporating the concept of blind box economy and adding childlike fun, allowing consumers to experience childlike innocence while tasting sauces. Xibao Zhiyan chili sauce. Image source: Xibao Zhiyan WeChat official account 4. Focus on marketing, create brand memory points Due to their short establishment time, new seasoning brands are inferior to mature brands in terms of brand awareness, consumer recognition, and product categories. Even if brand positioning and product innovation are done well, if consumers do not know the brand exists, the brand cannot grow. Therefore, for new brands, brand marketing is far more important than for mature brands. From this point, the self-heating hot pot brand "Zihaiguo" (自嗨锅), which emerged in January 2018, can serve as a positive example of brand marketing. By investing in apps like Xiaohongshu, Bilibili, and Douyin, Zihaiguo conducted strong and high-frequency brand communication on social platforms where young people frequently reside. E-commerce festivals, live streaming带货, and cross-border collaborations are also promotional models Zihaiguo is good at. Zihaiguo's marketing on Xiaohongshu. Image source: Xiaohongshu Like traditional consumer brands, Zihaiguo is also keen on drama placements, using title sponsorships of popular TV dramas for brand exposure, deepening consumer impressions, and opening up the market. In June this year, Zihaiguo launched the seasoning brand "Xiaoqi Kitchen" (小七厨房), targeting young people who cannot cook. In the future, Xiaoqi Kitchen is likely to approach consumers through marketing, just like Zihaiguo. Xiaoqi Kitchen. Image source: Xiaoqi Kitchen official WeChat account For new entrants in the condiment industry, marketing methods have a certain universality. We surveyed several brands, including Kouwei Quan and Xibao Zhiyan, and found that these new brands with good sales mainly focus their marketing on social platforms like Xiaohongshu and Douyin. The common characteristic of these social platforms is that they cater to young people and are gathering places for them. In the future, if condiment brands want to stand out in marketing, social platforms remain the top priority. However, everyone knows the principle of not putting all eggs in one basket. In addition to marketing through social platforms, marketing methods such as variety shows, drama placements, and brand collaborations also need to be continuously followed up. However, the problem of increased corporate expenses due to marketing cannot be underestimated. Single seasonings hit a bottleneck; compound seasonings become the only growth pole? According to Frost & Sullivan data, in 2020, the market size of compound seasonings in China was approximately 150 billion yuan, accounting for 22.1% of the total seasoning market. From 2015 to 2020, the growth rate of compound seasonings was about 14.7%. According to predictions by China Commercial Industry Research Institute, the market size of compound seasonings in China will continue to grow from 2021 to 2025, reaching 218.3 billion yuan by 2025, with extremely fast growth. Therefore, compound seasonings have become the generally recognized new direction for upgrading the condiment industry. A survey by Dongwu Securities mentioned that single seasonings represented by sugar, salt, soy sauce, and vinegar, as "rigid needs" in cooking, have high market penetration, accounting for about 80% of the entire condiment market, and their development is already mature. According to the BCG matrix model, they are cash cow products in the condiment industry, while the compound seasoning market is in a rapidly growing market and has not yet brought a continuous stream of cash flow to enterprises. Not only that, most compound seasoning brands are in the process of financing and burning money, requiring continuous cash investment to ensure development, making them candidates to become cash cow products. [5] Condiments. Image source: pixabay It is worth noting that the growth opportunities in the condiment industry are not only in compound seasonings. Zhou Jun, co-founder of Kouwei Quan, told FBIF that single seasonings are more meaningful to Chinese users. Although compound seasonings mainly meet consumers' need for convenience, matching the consumption thinking and behavior of the new generation, with stronger technological content and functionality, single seasonings are the only choice for Chinese people's "seven things to open the door" (note: the seven things are firewood, rice, oil, salt, soy sauce, vinegar, and tea), and they better meet consumers' taste needs. At the same time, compared with the population range of compound seasonings, the user profile of single seasonings is broader. Regarding where the growth opportunities lie, we will introduce the methodology of Zhu Weihua's team at the Research and Development Center of China Merchants Securities for elaboration. Zhu Weihua's research shows that the investment value of a food and beverage company depends on product power, brand power, and channel power. According to the current consumption habits of young people, compared with mass products, young people prefer high-end products. This is not only a universal economic law under inflation but also a psychological law for young people to distinguish themselves from others. For young people, high-end products are social currency. Compared with products that achieve success through low-cost strategies, products that meet needs through differentiation are more irreplaceable. Therefore, seasoning brands exploring high-end or starting from health aspects may stimulate a new wave of consumption demand conversion. In our interview with Zhou Jun, he also mentioned that consumers' demand for additional product attributes is increasing. Under the trend of consumption upgrading, nutrition and health will become important factors for consumers when choosing seasonings. Brand power starts entirely from consumer psychology and is divided into necessities, addictive products, social products, and belief products. How to make consumers' perception of the brand transcend the industry itself is an important indicator for measuring the development stage of brand power, just like Starbucks and See's Candies. The former sells culture, and the latter sells regional belief. In our dialogue with Zhou Jun, co-founder of Kouwei Quan, we also discussed the issues of product power, brand power, and channel power in the condiment industry. In this regard, Zhou Jun's view is that in terms of order, brand power takes precedence over product power and channel power. The key to brand power is to express positioning through products. Taking Kouwei Quan as an example, the purpose of launching their first product, enzyme active soy sauce, was to fully express the brand positioning—nutritional seasonings—and only then enter appropriate channels to be chosen by consumers. With the continuous growth of product categories today, the substitutability of condiment products is stronger. Even well-known brands may be abandoned on supermarket shelves. Therefore, enhancing the added value of the brand is as important as product development. This is also the most important viewpoint of the "positioning" theory—positioning the product in the minds of potential customers. If we start from this point, new brands are not necessarily unable to replace old brands. Channel power is deeply integrated with the above two. Brand image and product audience determine what channels the product should adopt, just as Heytea will not sell on roadside stalls, and Qingdao's bagged beer cannot be placed in self-built stores. Conclusion In the coming years, competition between new and old players in the condiment industry may become increasingly fierce, but after intense competition, the entire industry will continue to upgrade and recast. Let us wait and see the outcome of the second half of the condiment industry. References: [1] China Industrial and Commercial Network: Did community group buying hit the condiment industry? Related leading companies' semi-annual reports show collective decline [2] Securities China: April economic data released! Consumption recovery less than expected, what signal? Real estate and exports remain main support [3] Pacific Securities: "Condiment Industry Tracking: Sales darkest hour passed, cost pressure to be resolved" report [4] Kuaixiao: "Company performance is stable, but why are some distributors giving up Haitian?" [5] Dongwu Securities: "Condiment Industry Special Series 1: National regional grassroots research, condiment special, marginal weak improvement, head advantages obvious" report Are you "watching" me?