Since Shuanghui Development reported declining revenue and profit in its Q3 report on October 25, 2014, both have continued to fall, with H1 2015 revenue and profit down 3.4% and 10.8% year-on-year respectively. The company's performance is weak, and its stock price has been sluggish, dropping to late-2012 levels amid the market downturn. Investors are asking: what's wrong with this long-term blue-chip stock, and can Shuanghui still grow? Shuanghui's products mainly include high-temperature meat products, low-temperature meat products, and fresh frozen products. This series will explore issues in each category across three articles and offer development suggestions. This is the first article: High-Temperature Meat Products.
- High-Temperature Meat Products
What's wrong with Shuanghui? Shuanghui's products mainly include high-temperature meat products, low-temperature meat products, and fresh frozen products. In terms of gross profit composition, high-temperature meat products (mainly ham sausages, referred to as such below for convenience) are the main source of operating profit. In 2013, ham sausages accounted for 48.83% of gross profit, with a rising trend year by year. As the first article in the series, this piece discusses how Shuanghui's ham sausages should develop; low-temperature and fresh frozen products will be covered in subsequent articles. Although Shuanghui's profit decline has only recently surfaced, the problem has long existed. Consider two data points:
- Based on Shuanghui's annual report estimates, the ex-factory price of ham sausages was 10.3 yuan/kg in 2001, rising to 11.9 yuan/kg in 2013—a 15.5% increase over 12 years, with a compound annual growth rate of 1.2%, far below the CPI during the same period.
- In 2013, Shuanghui's revenue was 45 billion yuan, with advertising and promotion expenses totaling 235 million yuan. In the same year, Yili's revenue was 47.8 billion yuan, roughly comparable to Shuanghui, but its advertising expenses reached 3.92 billion yuan. These figures show that over the past decade or more, Shuanghui's ham sausages have failed to keep up with the trend of consumption upgrading, with price increases far below CPI, making the products increasingly low-end. Meanwhile, marketing investment has been insufficient (though Shuanghui and Yili are in different industries and cannot be directly compared, the order-of-magnitude gap is telling). On one hand, the products themselves lag behind the times; on the other, marketing and communication are severely inadequate, causing ham sausages to be gradually marginalized. If ham sausages were considered mid-to-high-end food in 2001, by 2013 they had come to be seen as unhealthy junk food. The marginalization of ham sausages is also evident from personal experience. In the past, many people around me ate ham sausages, considering them tasty and nutritious. Now, fewer people seem to eat them; many only add one when eating instant noodles, and when asked, they often say ham sausages contain preservatives and are unhealthy, or that they are mostly starch and lack nutrition. Additionally, in large supermarkets like Walmart, the display space for ham sausages is shrinking, reflecting the decline of the entire category. Category is the foundation of a brand. At this stage, Shuanghui can still maintain some growth through channel下沉, developing village and town markets, strengthening distribution, and compressing costs. But in the long run, if the ham sausage category becomes increasingly marginalized and abandoned by consumers, Shuanghui, as the leading brand, will also face marginalization.
What should Shuanghui do? Shuanghui has been focusing on cost control and operational efficiency to gain cost advantages, thereby lowering product prices to capture more market share from competitors and enlarge the market pie. In this regard, Shuanghui has been very successful; according to Founder Securities research data, Shuanghui's ham sausage market share has reached 60%, with a clear leading advantage. However, the consequence is that the entire category has become low-end, and with continuous consumption upgrading, the ham sausage category is gradually being marginalized. If the market pie is melting, even a high market share won't help. For example, as public health awareness rises, carbonated beverage consumption continues to decline; even Coca-Cola, despite its strength, struggles to reverse profit declines. Therefore, as the leading brand in the ham sausage category, Shuanghui must expand the market pie and take responsibility for strengthening the category. Specifically, there are four tasks:
Strengthen industry self-discipline and enhance consumer confidence in the entire industry. Ham sausages and milk can be said to be brothers in misfortune. In 2008, milk was hit by the melamine scandal, and in 2011, Shuanghui was hit by the clenbuterol incident. Both events had significant negative impacts on their industries, but comparing the performance of industry leaders Shuanghui and Yili shows a clear difference. Yili successfully built a responsible brand image through continuous "factory visit" activities and extensive advertising. Shuanghui, although it also carried out activities like "head-to-head inspection" and "walk into Shuanghui," had much smaller scale and promotion, resulting in more negative consumer perceptions of the ham sausage category than the milk category. As the industry leader, Shuanghui should lead by example, represent the industry, build a responsible corporate image, and enhance consumer confidence in the industry.
Optimize and upgrade products, and raise prices moderately. Consumer demand for food has long shifted from "eating enough" to "eating well." Consumers are willing and able to consume healthier, more nutritious ham sausages. Again, consider milk: around 2004, the milk industry was mired in a brutal price war, with milk once cheaper than bottled water, leaving dairy companies with thin profits. In 2005, Mengniu launched its high-end milk brand Telunsu, and Yili followed with Jindian. The two giants worked together to expand the high-end milk category and successfully upgraded milk products. In contrast, although the ham sausage industry has seen upgraded products like "big meat chunks" and "starch-free," overall, consumer demands are scattered, product value is unclear, and there is no focus on core products to form a synergy, so the category has not achieved overall upgrading. As the industry leader, Shuanghui should strive to raise industry product standards, such as reducing starch content and lowering additive levels, to provide consumers with healthier, more nutritious, and tastier ham sausages.
Focus on and build core items, reducing unnecessary flavor innovation. Shuanghui's current advertising for ham sausages mainly focuses on new product launch announcements, such as the 2010 "弹脆香肠" (crispy sausage), 2012 "大肉块" (big meat chunk), and 2014 "椰果烤香肠" (coconut grilled sausage). The company's intention is clear: to seize more market share by launching new products. However, this kind of innovation—developing alternative new flavors—rarely has real effect. Under the same brand (Shuanghui), launching new flavors is most likely to attract existing Shuanghui consumers; those who buy the crispy sausage might have previously bought the "润口香甜王" (moist and sweet king), and those buying the coconut grilled sausage might have bought the "台式烤香肠" (Taiwanese grilled sausage). New products steal consumers from old products—this is the "seesaw" effect. This kind of product innovation may seem busy, but its actual effect is minimal, and the company may develop an illusion that it must keep launching new products because, from the financial statements, sales of old products are indeed declining. However, it is precisely because new products take away consumers from old products that old product sales decline. Launching new products due to declining old product sales reverses cause and effect. Moreover, this constant "innovation" has a major drawback: it lengthens the product line, reducing economies of scale for individual items and increasing consumer choice difficulty. New flavor innovation is only necessary in one case: to block and defend against competitors' new products. For example, when Jinluo launched "肉粒多" (meat chunks), Shuanghui's launch of "大肉块" was necessary. Shuanghui should focus on core items, reduce unnecessary new-flavor innovation, to increase single-item sales, improve profitability, and simplify consumer purchase decisions.
Strengthen category promotion and broaden the consumption occasions for ham sausages. Ham sausages once had a place on the dining table, used as ingredients in stir-fries and fried rice. But now, ham sausages are more often perceived as a snack, and their appearance on the dining table is increasingly rare. The main reason is insufficient marketing investment by Shuanghui, inadequate category promotion, and insufficient consumer guidance. Ham sausage consumption relies mainly on early-cultivated habits and natural consumption. Ham sausages are not a necessity for cooking; without long-term promotion and guidance, this consumption pattern will inevitably be marginalized. Re-cultivating the habit of using ham sausages in cooking would, on one hand, broaden consumption occasions, and on the other, increase product exposure through association with cooking, helping to raise consumer attention to the category. The company has recognized this issue and proposed a transformation from "snack" to "table." But the key is "broadening," not "transformation"—that is, broadening from "snack" to "table," not transforming to "table." Shuanghui needs both "snack" and "table"!
Low-Temperature Meat Products
What's wrong with Shuanghui? In its 2012 annual report, Shuanghui Development proposed the business strategy of "developing big low-temperature," indicating its determination to focus on low-temperature meat products. However, the reality is that the proportion of low-temperature meat products in revenue fell from 23.4% in 2012 to 21.1% in 2013, and only slightly rebounded to 21.8% in the first half of 2014, still 1.6 percentage points below 2012. It is often said that low-temperature products are the future of the meat industry, and the company is aware of this, having proposed the strategy of "developing big low-temperature and vigorously promoting new products." Why has the revenue growth of low-temperature meat products lagged behind the company's overall revenue growth? Because Shuanghui faces the "innovator's dilemma." Since both are meat products with considerable consumption substitution, the development of low-temperature meat products first impacts high-temperature meat products. High-temperature meat products are currently Shuanghui's most important profit source, so developing low-temperature products inevitably faces internal resistance. Kodak, the film giant, lost to Japanese companies like Canon and Sony in digital photography; Nokia, the mobile phone giant, fell behind Apple in smartphones. A key reason is that new business is a disruptive innovation to the old business that is the main profit source, making companies hesitant and even complacent, falling into the "innovator's dilemma" and missing the opportunity to develop new business. It is indeed not easy to revolutionize oneself! But it is better than being revolutionized by others, like Kodak and Nokia. Moreover, due to shelf life and storage constraints, the substitution of low-temperature meat products for high-temperature ones will not be as disruptive as digital photography replacing film or smartphones replacing feature phones; it is a complementary substitution, like fresh milk and yogurt complementing room-temperature milk.
What should Shuanghui do? How can Shuanghui avoid the "innovator's dilemma" and develop its low-temperature meat products? Low-temperature meat products are essentially an upgraded version of high-temperature meat products, a different category. However, because brands in the low-temperature category have long lacked category building and consumer education, consumer awareness of this category is unclear. A common perception might be that low-temperature meat products are displayed in freezers, but what specific product features they have, what unique consumption value they offer compared to regular ham sausages, or even what the main product forms are—ham sausages, bacon, or meatballs—many consumers are not particularly clear. Therefore, if Shuanghui wants to grasp industry trends and grow its low-temperature business, it needs to use category strategy thinking—that is, to build low-temperature meat products into an independent category. Shuanghui's goal should be to become the representative brand of this category and the first choice for consumers. The key points are as follows:
Establish an independent operating team. For Shuanghui's low-temperature meat products to achieve substantial development, it must first establish an independent operating team. If mixed with high-temperature products and operated by the same team, it will inevitably be affected by internal interest conflicts. Additionally, as a "star business," low-temperature products should not be evaluated by the same standards as mature "cash cow businesses" in terms of resource investment, marketing expense accounting, and profit rate assessment. There is a time lag between investment and return for "star businesses." At this stage, low-temperature products are in the investment period. Shuanghui's strategic goal is to seize category leadership and promote the category's growth into an independent mainstream category, not to immediately earn profits. Financial goals should not hinder strategic goals.
Launch an independent new brand. Many may disagree, but I have sufficient reasons. Let me explain. Shuanghui is both a company name and a brand name, similar to Coca-Cola, which is both a company name and a brand for cola carbonated drinks. Coca-Cola also has brands like Sprite, Fanta, and Minute Maid, representing lemon soda, orange soda, and orange juice with pulp, respectively. As a category different from high-temperature meat products, launching an independent new brand for low-temperature products has two main benefits:
It can generate significant attention for the low-temperature meat category. Shuanghui can turn the launch of an independent new brand for low-temperature products into a PR marketing event. Given Shuanghui's industry position, it can easily obtain extensive free media coverage. On one hand, the new brand can gain exposure and quickly build brand awareness; more importantly, it can spark strong consumer interest in the low-temperature meat category: Why would Shuanghui launch an independent new brand for low-temperature products? There must be something different. Arousing consumer interest creates an excellent opportunity for Shuanghui to promote the category's value.
It facilitates the independent formation of the category. A category corresponding to a leading brand is more in line with consumer cognitive habits. Using an independent new brand to represent a category helps the category form independently in consumer minds and grow into a mainstream category. The representative brand of a mainstream category is often an expert brand that solely refers to that category. For example, in P&G's shampoo line, the smoothing shampoo is called Rejoice, the nourishing shampoo is called Pantene, and the anti-dandruff shampoo is called Head & Shoulders, rather than being called P&G Smoothing Shampoo, P&G Nourishing Shampoo, and P&G Anti-Dandruff Shampoo. That's the principle.
Promote the category's value. As mentioned earlier, consumers generally lack clear awareness of low-temperature meat products. Most only know that they are displayed in freezers, perhaps with fewer preservatives and additives, and are fresher and healthier, but they are unclear about the specific differences from high-temperature products, so they lack a clear reason to buy. Moreover, many stores placing regular Shuanghui ham sausages in freezers adds to the confusion. In the absence of a leading brand in the low-temperature category, if Shuanghui can be the first to promote the category's value and educate consumers, it can both drive category growth and establish a brand-category association in consumer minds, naturally becoming the representative brand. For example, Wanglaoji (now JDB) promoted the category value of "preventing heatiness," driving the growth of the herbal tea category and becoming its representative brand. Similarly, Six Walnuts promoted the "brain health" value, driving the growth of the walnut milk category and becoming its representative brand.
Build core items in the category. Like instant noodles, tea drinks, and fruit juices, low-temperature meat products are naturally a multi-item category, including ham sausages, luncheon meat, bacon, and even meatballs and char siu. For multi-item categories, focusing on core items is crucial. Shuanghui's focus on building core items for the low-temperature category has the following benefits:
It helps consumers establish awareness of the low-temperature meat category. Consumers find simpler things easier to understand and accept. Shuanghui's focus on core items helps consumers form a clear understanding of the category, facilitating its formation in consumer minds. If Shuanghui simultaneously launches ham sausages, luncheon meat, bacon, and other items, although from an industry perspective these can all be called low-temperature meat products, from a consumer perspective, these items differ significantly in form, consumption method, and taste, making it difficult to classify them as the same category, and thus hard for the low-temperature category to form independently.
It helps the company concentrate resources to promote mainstream items. As relatively new products, low-temperature meat products require extensive marketing to be quickly accepted and consumed. Launching too many items at once disperses consumer cognitive resources, increases cognitive difficulty, and is not conducive to concentrating resources on core items, hindering the growth of the category and items.
For a brand, only when its main promoted item becomes the mainstream item of the category can the brand have the opportunity to become the representative brand. A classic case is in the instant noodle industry. In Taiwan, Uni-President was the dominant brand, while Master Kong was a minor player. But when entering mainland China, Master Kong conducted market research and found that mainland consumers' favorite noodle flavors were beef, pork ribs, chicken, and seafood. Therefore, it launched a beef-flavored noodle—Braised Beef Noodles—while Uni-President launched a shrimp-flavored noodle popular in Taiwan—Shrimp and Fish Noodles. As a result, Master Kong took the lead and maintained it, always staying ahead of Uni-President in the mainland instant noodle market. In product development, less is often more; broad sowing often leads to thin harvest. Take the automotive industry: Chery was once a leader among domestic independent brands. However, in product development, Chery pursued quantity and breadth, believing in "more sons to fight," launching four brands—Chery, Riich, Weilin, and Karry—covering high-end to low-end. As a result, each "son" was beaten black and blue, and Chery lost its glory. In contrast, the latecomer Great Wall focused on SUVs for a long time, even specializing in economy SUVs, in stark contrast to Chery's wide product line, yet it grew into a new leader among independent brands. Therefore, in the low-temperature meat category, Shuanghui must also focus on core items, rather than launching many items in a short time and hoping for natural market movement. So what should be the core item for Shuanghui in the low-temperature category? The trick is to leverage consumers' existing knowledge and align with their mainstream needs. Leveraging existing knowledge allows the item to be quickly recognized and accepted; aligning with mainstream needs allows the item to grow into a mainstream item. With this in mind, the core item for Shuanghui's low-temperature products is clear: low-temperature ham sausages. Low-temperature ham sausages inherit consumer awareness of high-temperature ham sausages, making them easy to recognize and accept, and they also align with the mainstream Chinese dietary demand for meat products—cooking. In contrast, Shuanghui's recent low-temperature new products include Hong Kong-style char siu, meatballs, Hawaiian breakfast sausages, and Hawaiian golden hot dogs. Hong Kong-style char siu and meatballs are frozen convenience foods, just one of many frozen Chinese dishes, and are unlikely to become mainstream items. Hawaiian breakfast sausages and golden hot dogs are Western-style products without widespread consumption habits in China. The development pattern for multi-item categories is to first focus on mainstream items, then branch out. Shuanghui should first focus on low-temperature ham sausages to drive the category's development, and only after the category matures should it develop branch items like char siu and breakfast sausages. With an independent operating team, an independent new brand, first-mover promotion of the low-temperature category's value, and a focus on low-temperature ham sausages as the core item, Shuanghui still has great potential in the low-temperature meat category!
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