Click image for details

Source: Jiangsu Saifu Research Department, Man Tan Xin Consumer Investment 2017-2018 China Beverage (Functional Drink) Industry and Investment & Financing Report I. Scope Definition of the Beverage Industry 1. Carbonated beverages: Cola, Sprite, etc. 2. Solid beverages: Sour plum powder, malted milk, instant coffee, etc. 3. Bottled (canned) drinking water: Drinking mineral water, purified water, etc. 4. Tea beverages and others: Tea soup drinks, fruit-flavored tea drinks, etc.; sports drinks, nutritional drinks, etc. 5. Milk-containing beverages and plant protein beverages: Soy milk drinks, coconut juice drinks, almond dew, etc. 6. Fruit and vegetable juices: Fruit juice, vegetable juice, etc. ▲ Data source: Meihao New Consumption, Qianzhan Industry Research Center According to statistics from the Qianzhan Industry Research Center, in the 2017 beverage industry output by segment, packaged drinking water accounted for the highest share at over 50%, while the share of carbonated beverages declined. In 2017 beverage sales revenue, packaged water, ready-to-drink tea, and fruit juice ranked in the top three. II. China Beverage Market Overview and Trends ▎1. 2014-2018 China Soft Drink Production and Growth With the accelerated arrival of technology, Internet+ models, and artificial intelligence, China has also ushered in the third round of consumption structure upgrading. This upgrade reflects China's growing consumption level and the development trend of focusing on food health and sensory experience. The third consumption structure upgrade not only drives the growth of related industries but also has a huge impact on public consumption concepts. Taking the beverage industry as an example, healthy drinks represented by fruit and vegetable juices and tea beverages have shown growth trends in recent years. According to data from the "Soft Drink Industry Production and Sales Demand and Investment Forecast Analysis Report" released by Qianzhan Industry Research Institute: In recent years, the growth rate of China's soft drinks has decreased. Since 2014, the growth rate has fallen below 10% and has maintained a downward trend, even turning negative in 2017. Specifically, in 2017, China's cumulative soft drink production was 180.512 million tons, down 1.6%. It is estimated that in 2018, China's cumulative soft drink production will reach 182.68 million tons, with a slight rebound. ▲ Data source: Qianzhan Industry Research Institute, Man Tan Xin Consumer Investment ▎ 2. Development Trends of China's Beverage Segments From a product attribute perspective, China's mainstream consumer groups have gradually transitioned from carbonated beverages to packaged water, and then gradually to tea beverages and healthy drinks. The market share of segments such as bottled water, ready-to-drink tea, and functional drinks has been increasing, while the carbonated beverage market is further being eroded. It is expected that segments such as carbonated beverages and concentrated fruit juice may experience negative growth in the future due to product substitution effects. The ready-to-drink tea market may also turn negative in the short term due to a certain degree of market overhang from earlier periods. However, segments such as ready-to-drink coffee and energy drinks may become new growth points in the industry in the future. ▲ Data source: Euromonitor, Yuanzhuo Analysis, Man Tan Xin Consumer Investment From the perspective of product consumption scenarios, due to the rapid growth of physical consumption venues in China in recent years and the increase in experiential consumption demands, the on-trade consumption market is growing faster than the off-trade market. With further changes in experiential consumption venues and behaviors, it is expected that the on-trade consumption market for some sub-categories may bring new growth space. ▲ Data source: Euromonitor, Yuanzhuo Analysis, Man Tan Xin Consumer Investment ▎ 3. Listed Soft Drink Companies' Revenue Growth in H1 2018 In the first half of 2018, the soft drink sector achieved total revenue of 3.027 billion yuan, a year-on-year increase of 7%. Some soft drink consumption is seasonal, concentrated in Q4 or Q1, with traditional festivals having a significant pull on consumption. ▲ Source: WIND, Zheshang Securities Research Institute ▎ 4. Competition in the Beverage Industry China's beverage industry is fully competitive, with high requirements for capital and company scale. Currently, the market structure for most beverage categories is basically set, and entry barriers are increasing. Among them, carbonated beverages are dominated by two international brands of cola; in the packaged drinking water industry, four companies including Kangshifu, Nongfu Spring, and Wahaha account for over 70%; in the fruit juice beverage industry, four companies including Kangshifu, Uni-President, Huiyuan, and Coca-Cola account for over 60%; in the functional drink market, Mizone and Red Bull hold major market share; in the tea beverage market, Kangshifu and Uni-President together account for about 60%; in the herbal tea market, JDB and Wong Lo Kat compete in a duopoly. In categories where the market structure is basically set, it is quite difficult for new entrants to seize market share. ▲ Data source: Qianzhan Industry Research Institute ▎ 5. Analysis of Main Consumer Groups in the Beverage Industry 1) Women purchase at a significantly higher rate than men, but men spend more per purchase Among beverage consumers, women account for up to 70% of consumption, significantly higher than men. The average annual purchase frequency is also higher for women, with women buying beverages 3 times a year on average, while men buy 2.8 times a year. ▲ Data source: Qianzhan Industry Research Institute, Man Tan Xin Consumer Investment ▲ Data source: Qianzhan Industry Research Institute, Man Tan Xin Consumer Investment As shown in the figure above, male consumers spend 4-5 yuan more per purchase than female consumers, and the higher the age, the higher the unit price. 2) Clear trend of younger consumer groups The main force of consumption in China's food and beverage industry has shifted from the 30-40 age group to younger groups, with purchasing power trending younger. Currently, China's young consumer population has reached 300 million, who have fully enjoyed the dividends of China's economic growth, and most are only children. Currently, the post-90s and post-00s consumer groups account for 22% of China's consumer population. ▲ Data source: Qianzhan Industry Research Institute, Man Tan Xin Consumer Investment ▎ 6. Analysis of Beverage Industry Consumption Channels New consumers are a generation that values individuality and is willing to try new things. The new consumer groups represented by the post-90s and post-00s have different consumption concepts, methods, and willingness compared to traditional consumers. They generally have larger consumption expenditures and a strong willingness to try new things, pursuing "personalized" consumption. Therefore, "youthfulness" has become a key issue for many brands. ▲ Source: Man Tan Xin Consumer Investment 1) Rapid rise of online consumption Online consumption caters to the preferences and demands of the new generation of consumers and has risen rapidly. Consumers' pace of life has accelerated, and they value efficiency. Most online consumption can achieve short-time delivery, allowing consumers to get the goods they need without leaving home, saving time and effort. At the same time, young consumers are willing to try and accept new brands and products with an open mind. Advantages of e-commerce channels: Channel flattening reduces costs, making products more cost-effective; demand for imported food is amplified, and e-commerce is its main carrier. ▲ Data source: Qianzhan Industry Research Institute 2) Chain convenience stores counterattack Convenience stores not only have a clear rent advantage over hypermarkets due to their small storefronts, but also offer convenience in consumption distance, meeting the "lazy economy" consumption trend. Convenience store products are "small but complete," meeting the immediate, urgent, and small-capacity consumption needs of new consumers. In 2017, convenience store channel revenue accounted for 23% of the top ten food and beverage on-trade consumption income in China, becoming the main channel for food and beverage on-trade consumption. ▲ Data source: Qianzhan Industry Research Center ▎ 7. Trend of Younger Consumption in the Food and Beverage Industry 1) The era of "big single products" is over Leading enterprises face the risk of a single product structure: For example, Chengde Lulu has been listed for a long time and is currently in a downturn; Yangyuan Zhihui's single product Six Walnuts has been questioned by anti-counterfeiting activists due to false advertising; Youyou Food, which focuses on pickled chicken feet, has mediocre performance. The number of entrants in vertical segments is increasing: According to statistics, in 2017, more than 20 functional drinks appeared on the market, including Dongpeng Special Drink, Lehu, Ailuo, and other brands competing on the same stage. With the popularity of health concepts in the consumer field, new-style tea drinks that combine health, quality, and fashion elements clearly fit the consumption upgrade needs of the younger generation. 2) Young consumers pursue high-end, healthy, and personalized products With the popularity of health concepts in the consumer field, new-style tea drinks that combine health, quality, and fashion elements clearly fit the consumption upgrade needs of the younger generation. ▲ Data source: Qianzhan Industry Research Institute 3) Personalized products are favored by young people High-appearance personalized products are increasingly favored by young consumers. ▎ 8. Soft Drink Development Trends The development of the soft drink market is not accompanied by simultaneous growth in all sub-product markets. For example, the carbonated beverage market is gradually shrinking, while functional beverage manufacturing is growing rapidly. Moreover, with the economic development and improvement of living standards in various countries, people are beginning to pay attention to nutrition and taste in their beverage choices. 1) Taste is the core attribute of soft drink products Taste innovation is the top priority in product innovation. If we trace back from a functional perspective, the functional essence of soft drinks is to quench thirst, and from quenching thirst, the next step is taste. Taste is the most basic and core attribute expression of soft drink products. Whether manufacturers' product innovation capabilities can meet domestic consumers' changing tastes is an important factor determining whether products sell well, and even the survival and development of the enterprise. 2) Consumption upgrade brings new industry trends Health and health care functions will receive more attention. To adapt to consumers' increasingly strong health demands, richer health care connotations will be an important development trend in the soft drink industry in the future. Under this trend, the decline of carbonated beverages is inevitable, while bottled water, protein drinks, fruit juice, sports drinks, light drinks, and other varieties that meet health characteristics have greater market potential. 3) Low-calorie soft drink products become a market trend In recent years, the two major carbonated beverage giants, facing obstacles in the carbonated beverage market, have vigorously developed zero-calorie or low-calorie natural sweeteners to better mimic the taste of full-calorie carbonated beverages. Taking Pepsi and Coca-Cola as examples, Pepsi has launched Pepsi Next nationwide in the United States, which is an artificially sweetened mid-calorie version of its flagship brand. 4) More attention to the connotation development of product packaging colors Red bottled beverages make consumers feel more cheerful, bright, youthful, and energetic, and are favored by female consumers; white tones represent cleanliness, simplicity, nobility, and sanctity; green tones represent ecology, nature, health, freshness, peace, and safety. In the future, soft drink products will put more effort into color tones in product packaging to highlight product characteristics and give consumers a fresh feeling. In summary, healthy, green, and clearly positioned soft drink products will become the development trend of the soft drink product market in the coming years. III. Functional Drink Category Overview and Market Size ▎ 1. Functional Drink Category Overview Functional drinks are the fastest-growing sub-category of soft drinks. According to the "China Soft Drink Classification Standard," functional drinks refer to beverages that adjust the composition and proportion of nutrients to meet the nutritional needs of specific populations. According to their functions, they can be roughly divided into: sports drinks, vitamin drinks, energy drinks, electrolyte drinks, and other special-purpose drinks. Sub-categories are continuously enriched with consumers' diverse functional needs for beverages. Although functional drinks in China do not yet have clear industry standards or definitions for sub-categories, the market has risen rapidly. According to Euromonitor data, the retail market size of functional drinks (including sports drinks and energy drinks) in 2017 reached approximately 60 billion yuan, with a compound growth rate of 15% over the past five years, making it one of the fastest-growing sub-categories in the soft drink market. With the high growth of functional drinks, their market share of the total soft drink market has gradually increased from 4% in 2003 to 10% in 2017, and they have become one of the important sub-categories in China's soft drink market. ▲ Data source: CICC Research Department ▎ 2. Market Size Heading Towards 100 Billion China's functional drink market has a history of about 30 years. The market was initially developed and shaped by the national sports drink representative "Jianlibao," and later promoted and expanded by the global energy drink leader "Red Bull." According to Euromonitor statistics, China's functional drink market has risen rapidly over the past 10 years with a compound growth rate of 15%, and has now formed a market size of nearly 60 billion yuan. Distinguishing energy drinks and sports drinks, according to Euromonitor statistics, in 2017, the energy drink market size was nearly 50 billion yuan, and sports drinks were about 10 billion yuan. Benefiting from Red Bull's education and leadership of the market, the energy drink market has grown faster than the overall functional drink market over the past 10 years, becoming the main driving force for the growth of China's functional drink industry. In recent years, the market has gradually entered a period of steady growth, but it remains the fastest-growing sub-category in soft drinks. According to Euromonitor forecasts, China's functional drink market is expected to grow steadily at an average annual rate of 8%, with the market size heading towards 100 billion yuan. ▎ 3. Increasing Consumer Demand for Functional Drinks 1) "Refreshing" function becomes a major need for modern drinks

  • Effective consumer education: After early long-term education of Chinese consumers by domestic and foreign functional drink brands such as the national sports drink representative "Jianlibao" and the global energy drink leader "Red Bull," and subsequent full rendering by various brand owners in TV media, sports events, music festivals, and other scenarios, the market acceptance of functional drinks with special functional ingredients and "energy activation," "refreshing" and other functions has continued to increase. At the same time, with the acceleration of modern life pace and the gradual formation of public exercise habits, functions such as "refreshing" and "anti-fatigue" have gradually become an important demand for modern drinks.
  • Consumer group continues to expand: Currently, the target consumers of the functional drink market are wide-ranging. By occupation, the main consumer groups of energy drinks have gradually expanded from medical workers, drivers, and others who work long hours to white-collar workers, students, and other levels of consumer groups. From the perspective of living habits, sports and fitness enthusiasts are the main consumers of sports drinks. According to Ipsos report data, 34% of consumers in first- and second-tier cities often run, of which 51% said they almost always/often drink sports functional drinks when running. With the continuous deepening of consumer education, functional drinks, with their functions of supplementing trace elements and refreshing and anti-fatigue, are developing towards younger and deeper penetration of consumer groups.
  • Diversification of consumption scenarios: Overtime work, staying up late, and various "fatigue" scenarios after sports and fitness are traditional consumption scenarios for functional drinks, while gatherings, travel, and daily health care are becoming more leisure consumption scenarios. Brand owners actively market in innovative scenarios such as gaming and e-sports, music festivals, etc., and strive to promote the diversification of functional drink scenarios from packaging, taste, formula, and other aspects, in line with the trend of younger consumption, which is conducive to increasing product purchase frequency and cultivating target group consumption habits. 2) Trends of natural and diversified formulas
  • Traditional formulas mainly use synthetic nutrients such as minerals, vitamins, and amino acids China's traditional sports drink representatives mainly include Jianlibao, Shuidongle, Gatorade, etc. The functionality of the formula mainly focuses on supplementing water, sugar, and other trace substances, usually including glucose, sodium chloride, and various sweeteners. Traditional energy drinks, such as Red Bull, Dongpeng Special Drink, Lehu, etc., mainly contain taurine, caffeine, lysine, inositol, B vitamins, etc. Traditional formulas are mainly based on synthetic nutrients, and moderate intake can have certain health care effects on the human body. Taking taurine, the king of traditional energy drink formulas, as an example, its main functions are to promote brain growth and development, maintain visual function, protect the myocardium to a certain extent, maintain heart function, normalize blood circulation, thereby eliminating fatigue products and enabling the body to effectively produce energy. Currently, China's main energy drinks contain this effective ingredient. ▲ Data source: Sohu Health, company official websites
  • Natural plant ingredients become rising stars, meeting diversified needs In recent years, with the improvement of people's quality of life and the strengthening of health awareness, consumers have higher-level demands for functional drink formulas. According to Mintel survey reports, 40% of surveyed Chinese consumers said they would buy energy drinks made from natural ingredients. Compared with traditional nutrients such as vitamins, minerals, and trace elements, herbal natural plant ingredients have become the new favorite of functional drinks due to labels such as "0 side effects" and "0 additives." Extracts such as guarana, ginseng, elderberry, and coffee beans are emerging among new functional drink brands. Currently, emerging differentiated natural formulas and existing traditional formulas coexist to meet consumers' diversified needs.
  • Trend of low sugar, low calorie, and fewer additives In recent years, under the consumption trend of "health and nature," some functional drinks have been criticized for "too much sugar," "excessive caffeine," and "too many additives." Consumer demand for traditional high-sugar, high-calorie, high-additive functional drinks continues to decline. We believe that driven by the concept of healthy consumption, more low-sugar, low-calorie, and low-additive functional drinks will follow the trend and seize more market share. 3) Significant room for demand growth China's functional drinks have grown rapidly over the past 10 years, reaching a market size of about 60 billion yuan in 2017. According to Euromonitor data, China's per capita consumption of functional drinks and consumption amount still have significant room for improvement compared with overseas markets. China's per capita consumption is about half of Hong Kong's, and the gap with the United States, Japan, and the United Kingdom is even larger, about 5-10 times. In terms of per capita consumption amount, the gap between China and Hong Kong, the United States, Japan, and the United Kingdom is even larger. We believe that with the continuous expansion of consumer groups, the diversification of consumption scenarios, and the continuous upgrading of functional drink formulas to meet more diverse consumption needs, China's per capita functional drink demand will steadily increase. Compared with overseas markets, there is several times the growth space. ▲ Data source: Euromonitor IV. Changes in Functional Drink Channels ▎ 1. Increasing Importance of Convenience Stores and Online Channels According to Euromonitor data, functional drinks are mainly sold offline both domestically and internationally. The characteristic of China's offline sales channels is the dominance of small individual stores, accounting for 57%. However, in the past five years, the share of modern channels such as convenience stores and supermarkets has gradually increased, and the share of online shopping is also increasing. According to grassroots channel and terminal research, the share of energy drinks in convenience stores and online channels may be higher, and these channels are becoming increasingly important for functional drink companies. ▲ Data source: Euromonitor ▲ Data source: Euromonitor V. Functional Drink Channel Changes ▎ 1. The Largest and Fastest-Growing Sub-Category of Functional Drinks Energy drinks are the largest and fastest-growing sub-category of functional drinks. According to Euromonitor data, in 2017, China's energy drink market size was about 50 billion yuan, accounting for about 80% of the total functional drink market, with a compound growth rate of 24% over the past 10 years and 13% over the past 5 years. In 2017, China's sports drink market size was about 10 billion yuan, accounting for about 16% of the total functional drink market, with a compound growth rate of about 12% over the past 5 years. Euromonitor predicts a compound growth rate of about 5% after 2018. Energy drinks have quickly become synonymous with "anti-fatigue" due to their strong functional attributes, winning consumer recognition. ▲ Data source: Euromonitor, Yuanzhuo Analysis ▎ 2. Global Functional Drink Market Shows High Concentration Looking at the global functional drink market, market concentration is at a high level. According to Euromonitor data, in 2017, China's functional drink CR5 reached 71%, while Japan, South Korea, the UK, the US, and other countries have higher concentration, and all show a large gap between the first place and other competitors. Taking the Chinese market as an example, Red Bull's market share in China's functional drinks is about 30%, with a gap of about 13% from the second place. In the energy drink segment, its market share was once as high as 80%, showing a dominant position. ▲ Data source: Euromonitor, CICC Research ▎3. Functional Drink Companies 1) Leading enterprises enjoy higher profit margins Because leading enterprises have larger market shares in a highly concentrated market, they have higher pricing power over upstream and downstream, thus enjoying higher profit margins. According to listed company disclosures, Monster and Dali Foods' Lehu had gross margins of 63% and 60% respectively in 2017, significantly higher than the average gross margin of beverage peers (using CITIC CS other beverage secondary sector, calculated using the overall method). In addition, according to historical data from the China Beverage Industry Association, it can be estimated that Red Bull's total profit/operating revenue is about 30%. Assuming an average industry income tax rate of 30%, Red Bull's net profit margin is at least 20%. In 2017, Monster's net profit margin was 24%, while the industry average net profit was around 10%, showing that both Monster and Red Bull's net profit levels are significantly higher than the industry average. This shows that once a company becomes a leader and achieves a strong industry position, it has the opportunity to enjoy attractive high profit margins. 2) Leader weakens, Red Bull's performance in China weakens Red Bull can be said to dominate China's energy drinks. According to Euromonitor data, its market share fell from 87% in 2011 to 56% in 2017. However, recently, Red Bull has been affected by trademark disputes in the Chinese market. The brand founder, Thailand's TCP Group, and the Chinese market operator, Huabin Group, have legal proceedings over trademark licensing terms and infringement issues. Some Red Bull factories in China have been shut down, directly negatively impacting its sales in China. According to Nielsen retail monitoring data, in 2016 and 2017, China Red Bull's revenue was 22.1 billion yuan and 19.6 billion yuan respectively. In 2017, China's energy drink market slowed significantly, with industry sales growth falling to single digits at 7%, while Red Bull, which accounts for 56%, saw its growth rate decline to negative growth of -4%, dragging down the overall industry growth. 3) Local brands grow rapidly, focus on structural opportunities China's energy drink market has outstanding local leaders. In 2017, except for Red Bull, the top five brands were all local brands. Although due to late-mover disadvantages, local leaders are smaller in size than Red Bull, in recent years, with the success of price and packaging differentiation strategies, high-cost-performance products have successfully and continuously seized market share. According to Euromonitor data and our calculations, excluding Red Bull, China's energy drink market size is about 15 billion yuan, with a compound growth rate of 28% in the past five years, significantly faster than the industry and Red Bull's growth. As Red Bull's performance gradually weakens, the energy drink industry may see structural opportunities, and local brands may use this opportunity to accelerate growth. 4) Local leaders fully utilize advantages in channels, brand promotion, and differentiated products
  • Strong penetration in lower-tier markets Since energy drinks are imported products, compared with overseas well-known energy drink brands such as "Red Bull," local brands have late-mover disadvantages. However, local brands such as Lehu and Dongpeng Special Drink fully utilize their complete national channel advantages, adopt aggressive brand promotion models, and differentiated product strategies in price and packaging, gradually winning more consumer favor, especially gaining more market share in lower-tier cities. Taking Dali's Lehu as an example, it mainly targets students and young consumers, using its channel advantages to distribute Lehu to small supermarkets near schools and communities nationwide, successfully attracting students and young groups with weaker consumption power through lower product prices. According to Euromonitor data estimates, since its launch in 2013, Lehu's sales compound growth rate has exceeded 50%.
  • Taking the high-cost-performance differentiation route Local brands such as Dongpeng Special Drink and Lehu all use lower product prices than Red Bull as a competitive strategy, although this also leads to a reduction in the content of effective ingredients such as taurine, caffeine, and inositol in the formula. In addition to attracting consumers with lower product prices, local brands also use more diverse product packaging to meet consumer needs. Dongpeng Special Drink and Lehu, while retaining the gold can packaging imitating Red Bull, also use more portable and drinkable PET bottles for packaging differentiation. Market tests have shown that the low-price high-cost-performance strategy and packaging differentiation strategy are very effective. Dongpeng Special Drink and Lehu have both recorded steady increases in market share over the past five years, and with Red Bull's weakening performance, there are signs of accelerating market share gains. 5) Local brands that are relatively favored Through analysis of functional drink markets in countries such as the United States and Peru, it is not difficult to see that highly clear product positioning, including product packaging, brand marketing, and price strategy, is a necessary condition for a single product to stand out. By sorting out local players in China's functional drink market, we use product differentiation and price strategy as two evaluation dimensions to examine whether products have sufficiently clear product positioning. The conclusions are as follows:
  • By-Health F6 Product specifications, packaging, and price are fully differentiated. By-Health released "F6supershot" (hereinafter referred to as F6) in July 2018, officially entering the functional drink industry. F6 itself has significant differentiation features, distinguishing itself from most competitors in the market in terms of concentrated drink concept, natural formula, small capacity, cool packaging, and other aspects. F6 targets high-end young consumers and focuses on the concentrated drink concept. Its advantages lie in brand advantages and clear product positioning. Fully differentiated products are conducive to differentiated competition and are expected to successfully attract high-end young consumers and seize market share.
  • Lehu & Dongpeng Special Drink Packaging and price differentiation under the high-cost-performance route. Although no significant differentiation efforts have been made in the product itself, such as formula, pricing has formed consumer group differentiation, and PET bottles have formed a certain packaging differentiation, thereby establishing local brand awareness. High-cost-performance products are conducive to low-tier penetration through their complete national network, seizing more market share by meeting strong public demand, and once becoming leaders, they enjoy pricing power and thus higher profit levels.
  • Yili Huanxingyuan Cross-border move, bold attempt. Yili is China's largest dairy company and launched the "Huanxingyuan" energy drink new product in April 2018. The product benchmarks Red Bull in terms of retail price, product display, channel distribution, etc., implementing close combat to quickly establish a competitive product image, which is conducive to directly obtaining traffic. Huanxingyuan quickly achieved product distribution from April to June and is currently advancing in stages. Yili's entry into energy drinks this time is a cross-border move from dairy products to healthy food, in line with the current trend of health and functionality in national food and beverage consumption. As the dairy leader with the strongest channel power, Yili's penetration rate in the liquid milk field has reached 80%. There is a certain overlap between dairy drinks and functional drinks in channels, so its new product is expected to catch up with competitors' first-mover advantages through Yili's strong channel power. VI. Valuation of Functional Drinks ▎ 1. A-share Food and Beverage Sector Valuation Still Has Room for Downward Revision The bottom of the average forecast P/E ratio for the non-alcoholic food and beverage sector since 2005 is around 25 times. Currently, the sector's forecast P/E ratio is around 30 times. Compared with other consumer sectors such as home appliances and pharmaceuticals, home appliances are currently near historical valuation bottoms, while food and beverage still have some space from historical valuation bottoms. ▎2. Valuation Analysis of Comparable Companies at Home and Abroad Selecting comparable companies similar to functional drinks at home and abroad, A-shares include By-Health and Yili Co., Ltd., with an average 2018 P/E valuation of 25.6 times; H-shares include Dali Foods, Uni-President China, and Tingyi Holding, with an average 2018 P/E valuation of 22 times; foreign stocks include Monster and Coca-Cola, with an average 2018 P/E valuation of 28.7 times. 1) From a profit perspective Monster (mainly functional drinks), Coca-Cola (mainly comprehensive beverages), and By-Health (mainly health products) all enjoy higher profit margins than other comparable companies, whether from gross margin or operating profit margin. 2) From a return perspective Yili Co., Ltd. (mainly dairy products), Dali Foods (mainly leisure food and beverages), and Monster are closer, all higher than other comparable companies in ROE and ROIC return levels. In summary, Monster, which mainly deals in functional drinks, has performed outstandingly and has certain guiding significance for companies in the industry aiming to enter the functional drink field. ▲ Source: Wind, Bloomberg, CICC Research Department VI. Five Forces Analysis and Outlook of China's Soft Drink and Functional Drink Market ▎ 1. Five Forces Analysis of China's Soft Drink and Functional Drink Market 1) Competition among existing competitors Currently, China's soft drink competition is fierce, especially the CR5 market concentration of functional drinks is as high as 71%. Among them, Red Bull has the highest market share, with a market share of up to 30% in functional drinks, and its market share in the energy drink sub-category is as high as 80%. Among domestic functional drink competitors, domestic beverage manufacturers are the main ones, and Red Bull's market share is continuously declining. New functional drink brands have mainly made differentiated designs in cost-performance, packaging, and formula, seizing Red Bull's market. In such high competition, being able to grasp the increasingly segmented consumer market is a major issue that functional drink companies need to consider in advance. 2) Bargaining power of potential competitors In China's beverage industry, especially the energy drink segment, the barriers for potential competitors to enter are very high, and the market share and awareness of major brands are very high. New entrants that can successfully enter must possess one of the following strengths: 1) Products have a clear positioning and are significantly different from mainstream products. 2) Products have very attractive packaging features that attract consumers to buy. 3) Products have a strong channel foundation that can bring products into the full view of consumers. 4) Brand owners carry out large-scale advertising promotion, but this consumes huge brand costs. 3) Substitution ability of substitutes Among functional drinks, the biggest substitute competition is energy drinks. In addition to energy drinks, the refreshing effect also includes ready-to-drink coffee, which has grown rapidly in recent years, especially the emergence of Internet coffee, which has seized a lot of the energy drink market. Other substitutes include protein powder competing with sports drinks, vitamin health products competing with vitamin drinks, etc., all of which have similar effects to the sub-categories. With consumption upgrading, products are becoming more diversified, consumers have more choices, and competition for product parties will become increasingly fierce. 4) Bargaining power of suppliers For leading enterprises in the industry, suppliers' bargaining power is not high; for new entrants, suppliers' bargaining power depends on the difficulty of formula production and the order quantity of the product party. The beverage industry is currently facing the threat of rising supplier costs. Although suppliers' bargaining power is not high, if costs increase, it will inevitably affect the overall price trend of the beverage industry. 5) Bargaining power of buyers In the highly concentrated functional drink market, consumers have low bargaining power when buying leading brand beverages, and the profit margins of leading enterprises are significantly higher than those of other small brands. However, new brands can enter the market by improving cost-performance differentiation strategies, which also enhances consumers' bargaining power. As the quality of new brand products improves and consumers have more choices, their bargaining power can be greatly enhanced. 2. Opportunities and Outlook for China's Beverage and Functional Drink Segments 1) Opportunities and Outlook for China's Beverage Industry The soft drink industry is becoming increasingly competitive. At the same time, beverage product diversity is increasing, and product structure is continuously adjusting. Currently, China's soft drink enterprises mainly face bottlenecks of weak market demand, sluggish performance growth, and rising costs. The dual pressure of costs and performance has intensified industry competition, leading to a continuous decline in average gross profit, and enterprises face the dilemma of declining revenue and profit growth. For current Chinese beverage companies, they need to comprehensively improve their product portfolio, achieve an omni-channel development model online and offline, and follow the consumption trends of the new generation of consumers to remain invincible.
  • Product positioning and portfolio Segment market selection. In an overall weak growth market environment, the choice of segments is increasingly important. With rising income levels, people have the willingness and economic ability to pursue a healthier lifestyle. Low-sugar, low-additive, more natural and beneficial health products have become new consumption hotspots. Cross-border innovation. Consumers' demands for beverage taste and related functions are becoming increasingly fragmented. Through cross-border innovation in different elements such as taste, function, and even consumption scenarios, meeting consumers' different consumption demands is also a direction that soft drink enterprises need to actively explore. Product design. For categories with relatively limited innovation space, or for soft drink enterprises stuck in lengthy new product launch processes, micro-innovations in appearance, packaging, form, and other product design aspects can achieve new growth.
  • External mergers and acquisitions The overall development of the soft drink industry is becoming mature, and achieving growth through external mergers and acquisitions will become the new normal. Through mergers and acquisitions, enterprises can quickly obtain new products, enter new markets, or achieve coverage of new consumer groups. In January 2016, Huabin Group, the Chinese operator of Red Bull beverages, acquired more than 50% of the equity of Norwegian premium bottled water manufacturer Voss for $105 million, introducing this high-end bottled water brand.
  • Omni-channel layout As lower-tier cities begin to accelerate catching up with first- and second-tier cities in e-commerce channel penetration and online consumption amounts, the era of large-scale physical store expansion has also come to an end. Soft drink enterprises also need to comprehensively layout according to omni-channels, that is, multiple channel categories and multi-dimensional market regions, to meet the needs of future Chinese consumers who are increasingly mature and have higher acceptance of omni-channels. 2) Opportunities and Outlook for China's Functional Drink Industry From the characteristics of energy sports drink consumer groups, price is not the primary concern for energy sports drink enthusiasts; function and taste are the key factors in consumer purchase decisions. As more young consumers join the consumption of energy sports drinks, single ingredients or tastes may affect their functionality. New ingredient combinations or the introduction of entirely new active ingredients may bring new market opportunities. Due to the specificity of energy sports drink function realization, there is also great development potential for targeting specific populations or achieving specific functions. In the energy sports drink market, there are also many local brands mainly deployed in third- and fourth-tier cities. These local brands are mostly packaged in PET bottles and are very competitive in pricing compared with leading brands such as Red Bull and Jianlibao. In the future, these markets still have significant penetration space. New Distribution will hold the 2019 (5th) FMCG + Internet Conference during the Chengdu Spring Sugar and Wine Fair from March 16 to March 18. At this conference, we will conduct in-depth discussions with many brand owners, supply chain service providers, distributors, retailers, etc., around the topic of "Breaking the Game." Compared with previous conferences, this summit will be fully upgraded. In addition to the original topics such as channel innovation, city distribution logistics, and distributor transformation, it also adds multiple parallel forums such as new marketing cases, IP + FMCG empowerment, community group buying, and innovative retail. Through three days of ten high-density and high-quality expert sharing and exchanges, we believe that every brand owner and distributor can learn the latest business models, expert opinions, and implementation methods, find new tools and methods for their own breakthrough in 2019, and return to the track of rapid growth. Review of Previous Conferences -END-