---
title: "In-depth Report | Insights into the Snack Food Industry: Beyond 'New Retail', What Other Trends Are Emerging?"
description: "In the medium to long term, the snack food industry is expanding offline and embracing new retail as a major trend. In the short to medium term, online competition is intensifying with price wars among leading players. Since its proposal in 2016, new retail has developed rapidly but is still in its early stages."
author: "国海证券"
publisher: "New Distribution"
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published: "2018-11-24"
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# In-depth Report | Insights into the Snack Food Industry: Beyond 'New Retail', What Other Trends Are Emerging?

> In the medium to long term, the snack food industry is expanding offline and embracing new retail as a major trend. In the short to medium term, online competition is intensifying with price wars among leading players. Since its proposal in 2016, new retail has developed rapidly but is still in its early stages.

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In the medium to long term, the snack food industry is expanding offline and embracing new retail as a major trend. In the short to medium term, online competition is intensifying with price wars among leading players. Since its proposal in 2016, new retail has developed rapidly but is still in its early stages.
> **Category Analysis: Retailers Dominate, Online Leads**
Different product category characteristics determine the most suitable business model. As an industry with many participants, we will discuss its characteristics and suitable business models in this section.
We believe that snack foods have attributes such as fragmented categories, low entry barriers for manufacturers, deferrable consumption, and quasi-standard products. From a category perspective, they are characterized by retailer dominance and online leadership.
**1.1 Retailer Dominance**
Snack food categories are numerous and constantly changing. According to Taobao data on snack food subcategories, whether by sales volume or sales value, there is no dominant category. The top 5 subcategories each account for 10%-25% of sales, with little difference. Moreover, the categories with high sales volume/value are constantly changing.
The upstream manufacturers of snack foods have low entry barriers and intense competition. According to the National Bureau of Statistics, as of July 2018, there were 8,923 food manufacturing enterprises with annual revenue above 20 million yuan, and 6,738 enterprises in alcohol, beverages, and refined tea manufacturing. The number of food manufacturing enterprises is higher than that of alcohol enterprises. Among food manufacturers, the number of snack food manufacturers (candy, chocolate, preserved fruit; canned food; convenience food; bakery; other food) is much higher than that of dairy and condiment manufacturers. The number of enterprises indirectly indicates industry barriers, so food manufacturing has lower barriers than alcohol, and snack food manufacturing has lower barriers than dairy/condiments. According to data from Qianzhan Industry Research Institute, the number of enterprises in the industry increased from 2011 to 2017, reaching 2,771 in 2017, a year-on-year increase of 4.42%. It is evident that the number of entrants in China's snack food industry continues to increase, and industry competition shows no signs of easing.
According to the "Retail Four Quadrants" (see Appendix I), in product categories where upstream manufacturers have low entry barriers and are fragmented, advantageous retailers are more likely to emerge, and vice versa.
Snack food categories are fragmented, and upstream manufacturers have low entry barriers, giving retailers a comparative advantage in the model. Retailers can improve efficiency and reduce costs by organizing upstream production, enhance consumer experience by organizing downstream sales, and strengthen control and management of all links through information systems.
**1.2 Online Leadership**
Strong deferrable consumption attribute. Similar to categories like clothing and personal care, snack foods have a certain deferrable consumption attribute. Unlike fresh produce, catering, and pharmaceuticals, snack foods do not require immediate consumption but have a certain impulse consumption attribute. However, the deferrable consumption attribute is stronger than the impulse consumption attribute.
Quasi-standard product attribute. Compared to digital products like home appliances and mobile phones, snack foods have a weaker standard product attribute, but at the same time, product differences are not significant, possessing both standard and non-standard characteristics, thus having a quasi-standard product attribute.
According to the "Retail Four Quadrants" (see Appendix I), categories with deferrable consumption, standard products, long tail, and low logistics cost proportion are more suitable for online sales. Such categories should focus on B2C e-commerce retail development, while also combining offline stores and avoiding offline hypermarkets.
Snack foods have deferrable consumption and quasi-standard product attributes, making them more suitable for online-led sales, while offline store retail can also meet some impulse consumption needs. Therefore, B2C e-commerce retail-led, combined with offline, is the optimal channel solution.
**1.3 Data Confirmation**
From the data, retailers have obvious revenue advantages, and the online penetration rate of snack foods is high, which confirms our judgment.
**A: Snack food brand retailers lead in revenue, and the model is advantageous.** Retailer companies are organizers of upstream fragmented productivity. By creating hit products to boost downstream sales, they also manage supply chain, goods, warehousing, logistics, and other links through comprehensive information systems. Reviewing the top snack food companies in 2016/2017, we find that 4 of the Top 7 are brand retailers, and the Top 3 are all brand retail enterprises.
**B: Snack food e-commerce penetration is high, and the channel is advantageous.** According to the "2017 China Online Snack Consumption Trend Report," the snack category is the largest pillar of China's online food, accounting for about 30% of total food sales, ranking first and increasing slightly year by year. According to the "2018 China Shopper Report," snack foods such as candy, chocolate, and biscuits have high online penetration rates, with candy and chocolate at 7%-8% and biscuits close to 15%. Both brands and retailers are increasing resource investment, and online penetration is on the rise.
> **Business Essence: Asset-Light, High Turnover, Similar to Uniqlo Model**
>
In the previous section, we discussed that snack food categories have characteristics such as retailer dominance and online leadership. We refer to companies like Three Squirrels, Be & Cheery, and Bestore as brand retailers, and our research involves a certain cross-disciplinary approach (food & retail). In this section, we conduct an in-depth analysis and discussion of their business models, striving to uncover the essence of their business and key success factors.
Snack food brand retailers are essentially asset-light, high-turnover models, similar to Uniqlo, playing dual roles as brand owners and retailers in the industry chain. We believe that the long-term competition among snack food brand retailers lies in downstream product/marketing innovation capabilities and full-chain supply chain management capabilities.
**2.1 Company Classification: Brand Retailers**
The snack food industry is overall fragmented, with low entry barriers for upstream manufacturers, but there are also subcategories with long product life cycles and large scale, such as melon seeds, red dates, bakery, and braised products. These large subcategories have been cultivated by companies for many years, with prominent scale advantages and enhanced brand power, some even becoming synonymous with the category, such as Qiaqia, Haoxiangni, Juewei, and Zhou Hei Ya.
Based on this, we further divide snack foods. According to whether the company's field of cultivation is concentrated in categories and whether the upstream manufacturer entry barrier is high (whether a moat has been established), we divide snack foods into four quadrants. Companies in the third quadrant (many categories, low upstream manufacturer entry barriers) are brand retailer model companies, including online (e-commerce) and offline (specialty stores). The food and beverage industry chain generally includes raw material supply, brand, channels, etc. Brand retailers focus more on the "brand + channel" link. We mainly discuss the online model (e-commerce) of snack food brand retailers.
**2.2 Business Model: Asset-Light, High Turnover, Similar to Uniqlo Model**
**2.2.1 Snack Food Industry Chain Analysis**
The snack food industry chain is long and spans multiple fields. The industry chain is roughly divided into four parts: upstream, midstream, downstream, and the information system that runs through the entire process.
**Upstream:** Preparation work for snack food production, including raw materials, semi-finished product production, and product R&D;
**Midstream:** The entire production process, including finished food production, quality inspection, logistics, and warehousing;
**Downstream:** Brand marketing and sales channel links. Sales can be roughly divided into online and offline channels. Brand marketing provides stable users and high added value for products.
**Information System:** It is the foundation that runs through the upstream, midstream, and downstream of the enterprise, providing guarantees for information-based operations, seamless connection of links, and full-chain control.
**2.2.2 Brand Retailer Model Analysis**
Facing upstream food manufacturers with highly fragmented categories and low entry barriers, and downstream consumers with rapidly changing tastes and increasing pickiness, snack food brand retailers mainly do three things: first, organize upstream production to improve supply chain efficiency and reduce supply chain costs; second, organize downstream sales to enhance consumer experience; third, manage all links through comprehensive information systems.
**(1) Upstream: Asset-Light Model**
Generally, they intervene with an asset-light model, maintaining control over the upstream supply chain without directly participating in production, through product R&D and quality control at both ends.
**A. Product R&D:** Considering both market and technical factors, ensuring that designed products not only align with the company's own product positioning but also with the company's market forecasts and consumer cognition, and ensuring that R&D plans can be implemented considering raw material procurement, production processes, warehousing, and logistics.
**B. Raw Material Procurement:** Leveraging the company's scale advantages, they collaborate with major suppliers for large-scale procurement of raw and auxiliary materials to reduce procurement costs.
**(2) Midstream: Asset-Light Model**
Due to the numerous snack food categories and the small scale of individual categories, it is difficult to form scale advantages. Therefore, brand retailers generally adopt an OEM model, cooperating with suppliers for production.
**A. Product Quality:** The company defines clear product inspection standards, controlling product quality from key links such as supplier selection, factory inspection, sealing samples, and spot checks.
**B. Product Production:** Promoting the construction of a flexible industry chain, enabling the company to quickly respond to changes in demand from snack food enterprises, adjust production lines at low cost, and meet fragmented, small-scale, and diversified production needs.
**C. Warehousing and Logistics:** Promoting the construction of a comprehensive information system, aggregating information flows from various links such as sales and inventory by region and category into one system for management, reducing cross-enterprise management costs.
**(3) Downstream: Asset-Heavy Model**
**A. Marketing:** Unified branding reduces consumer cognitive costs, and multi-touchpoint brand placement is carried out uniformly to meet consumers' personalized needs;
**B. Service:** Unified service standards improve consumer satisfaction and loyalty, meeting consumers' increasingly picky tastes.
**(4) Information System**
Through information management systems, control over the upstream and downstream of the industry chain is achieved. Upstream: origin management system, controlling the selection of every fruit from the source; Midstream: information systems for the entire industry chain including production, logistics, and warehousing; Downstream: integrated management of online and offline sales channels, customer feedback management, etc.
Snack food brand retailers have lighter assets upstream and midstream, and heavier assets downstream. They rarely involve production links and focus more on sales, essentially an asset-light, high-turnover model, similar to Uniqlo.
**2.2.3 Financial Performance: Low Net Margin, High Turnover**
We believe that snack food brand retailers are essentially asset-light, high-turnover models, similar to Uniqlo, playing dual roles as brand owners and retailers in the industry chain, which is also reflected in financial data.
Financially, brand retailers have low ROE, low net margin, and high turnover. Brand owners imply a certain brand premium, while retailers imply high turnover. Taking the 2017 annual report data as an example, snack food companies can be divided into two categories: Juewei, Qiaqia, and Yanjin Shop are traditional brand owners, while Bestore, Laiyifen, and Haoxiangni are brand retailers. Traditional brand owners have significantly higher ROE (10%-25%) than brand retailers (single digits). The ROE contribution of traditional brand owners mainly comes from higher net margins, with net margins of 8%-13%, while retailers' net margins are only 2%-3%. At the same time, on average, retailers have higher turnover (retailers 2.53 vs. brand owners 1.46).
**2.3 Key Success Factors: Innovation Capability, Supply Chain Management Capability**
The starting point of consumer goods research is the consumer, and the endpoint is the enterprise. Therefore, to study the key success factors (KSF) of snack food enterprises, we must start from the consumer group and product demand attributes. The main consumer group for snack foods is young women aged 23-28. This consumer group determines that snack foods have characteristics such as short product life cycles and high price sensitivity. Demand attributes determine that enterprises should focus on downstream product/marketing innovation capabilities and full-chain supply chain management capabilities in their operations.
**2.3.1 Demand Attributes: Short Life Cycle, High Price Sensitivity**
The main consumer group for snack foods is young women. According to CBN Data report analysis, women account for the majority of online snack consumption, with women accounting for 68% of online snack consumption in 2016. By age group, 23-28 years old is the main consumer group.
This consumer group determines that snack foods have characteristics such as short product life cycles and high price sensitivity. Young people aged 23-28 like new things, have low loyalty to a single snack category, and low repurchase rates, leading to short product life cycles for snack foods. At the same time, young people have lower income levels and weaker consumption capacity, resulting in high price sensitivity to snack foods.
1) The product life cycle of snack foods is generally two years, much lower than other food categories such as condiments. From Taobao snack food transaction data, the top three categories by transaction amount changed significantly between 2017/12 and 2018/08. In 2017/12, the top three were nuts, biscuits, and preserved fruit, while in 2018/12, the top three were pastries, biscuits, and dried meat. According to the "2017 China Online Snack Consumption Trend Report," the period from introduction to maturity for snack foods is generally two years, far lower than other food subcategories such as condiments.
2) High price sensitivity. Compared to high-end products like baijiu, which convey face, security, and emotional appeal and have low price sensitivity, FMCG products are generally more price-sensitive, and snack foods are no exception.
**2.3.2 Key Success Factors: Product/Marketing Innovation Capability, Supply Chain Management Capability**
The characteristics of short product life cycles and high price sensitivity in snack foods determine that the business model of snack food retailers needs to enhance two capabilities.
**1) Product/Marketing Innovation Capability:** Enterprises continuously launch new products and create a certain number of hit products, extending the overall category life cycle through the superposition of single product life cycles. This requires the company to have strong product innovation capabilities to continuously launch new products, and strong marketing innovation capabilities to effectively launch new products to target consumer groups and achieve traffic conversion.
**2) Supply Chain Management Capability:** Enterprises strengthen supply chain management to enhance their bargaining power upstream and midstream, thereby reducing costs and gaining a comparative advantage in competition. At the same time, improved supply chain management also means higher operational efficiency, providing more thoughtful services to downstream consumers, thereby winning customers, increasing sales scale, forming greater scale advantages, and strengthening the positive feedback mechanism in the industry chain.
> **Stage Landscape: At the Beginning of the Warring States Period for Snack E-commerce, Cultivating Strength for the Final Battle**
>
In terms of development stage, snack e-commerce has established a replicable business model, and the industry has moved from introduction to growth. Industry growth has shifted from high speed to medium-high speed. The gap among advantageous enterprises is not large but is gradually widening. The industry is currently transitioning from the Spring and Autumn period to the Warring States period, roughly at the end of the Spring and Autumn and the beginning of the Warring States.
In terms of landscape, the three strong players—Three Squirrels, Be & Cheery, and Bestore—have formed, but each has its own characteristics. Among them, Three Squirrels has strong IP operation capabilities and outstanding brand power. Bestore has "blooming on both lines" in channels, with outstanding channel power. Be & Cheery implements a super single-product strategy, with outstanding online hit product creation capabilities.
In terms of future development, in the short to medium term, industry companies will fight a defensive battle for online market share, and in the medium to long term, they will embrace new retail for offline growth.
**3.1 Development Stage: End of Spring and Autumn, Beginning of Warring States**
Snack e-commerce, as a latecomer in retail, lags behind supermarkets and specialty stores. As a category that started early online, snack e-commerce development is almost synchronized with retail e-commerce development.
From the development history of retail e-commerce, category extension has gone from products to services, and from standard to non-standard products. In the first stage, categories with the highest standardization and light services went online, such as books and daily chemicals; in the second stage, non-standardized, light-service categories saw high-speed online sales growth, such as clothing, shoes, bags, and fresh produce; in the third stage, non-standardized, heavy-service categories will gradually go online, such as home furnishing, decoration, real estate, and automobiles.
**Since its inception, retail e-commerce development can be divided into five stages:**
First stage: 1999-2007 (germination period, first-mover advantage). Around 1999, China gradually entered the Internet era, and domestic retailers slowly embarked on the e-commerce journey.
Second stage: 2007-2014 (introduction period, hard work wins). Consumers were not yet very rational about shopping on retail e-commerce platforms. Many stimulating promotions helped retail e-commerce gain a large number of users and achieve profits. The competitiveness of retail e-commerce was reflected in large-scale marketing, and this was an era of universal participation.
Third stage: 2015-2016 (Spring and Autumn period, rise of heroes). Consumers became more rational, and the competitiveness of retail e-commerce was required and developed in all aspects. Retailers in product, service, marketing, experience, and other aspects gained certain advantages in the market. At this time, different tiers of sub-industry brands emerged.
Fourth stage: 2017 to present (end of Spring and Autumn, beginning of Warring States). China's retail e-commerce faces fierce competition. To win in the brutal competition, one must see the impact of technological changes and trends in consumer demand changes. At this time, leading brands in sub-industries emerge.
Fifth stage: Unknown (late Warring States, battle of giants).
As a category that started early, snack e-commerce development is almost synchronized with retail e-commerce stages. Around 2010, snack e-commerce started, with snack e-commerce companies like Be & Cheery and Three Squirrels established. From 2014 to 2016, offline enterprises successively went online, increasing online participants, and the pattern of "three supers and many strong" began to emerge. From 2017 to the present, online dividends have gradually disappeared, the three-strong pattern has been established, and the battle for market share among leaders has begun. At the same time, new retail has opened a new era of retail, and giants have embraced new retail. We believe:
1) Snack e-commerce has moved from introduction to growth. The introduction period has great growth potential but high risk. The core of the growth period is to establish a replicable business model, gradually leverage scale advantages, and continuously expand the value of technological innovation. The growth period is characterized by high certainty of growth, and the business model is continuously refined. Currently, the business model of snack e-commerce has been established but is still in the stage of continuous refinement and optimization.
2) Snack e-commerce has moved from the Spring and Autumn period to the Warring States period. If the growth period is divided into two stages, we compare them to the Spring and Autumn and Warring States periods. The theme of the Spring and Autumn period is land grabbing; the industry is in a high-growth period, the first tier completes land grabbing, and competition is fierce, making it difficult to determine a winner. It is a time for each to practice internal skills and accumulate strength. The theme of the Warring States period is the battle of giants; the industry enters a period of medium-low growth, competition for existing market share intensifies, and the gap between advantageous enterprises gradually widens.
From the perspective of industry growth rate and the gap between enterprises in the industry, we are currently roughly at the end of the Spring and Autumn and the beginning of the Warring States.
1) The industry has moved from high-speed growth to medium-high-speed growth. The sales growth rate of FMCG urban retail channels can be divided into two parts with 2016 as the boundary. Before 2016, the growth rate was above 30%, and after 2016, it fell below 30%. Since 2018, the growth rate of online snack food data has continued to slow, with the annual growth rate expected to be around 15%.
2) The gap among advantageous enterprises is not large, but it is continuously widening. Overall, the market share of the top three in the snack e-commerce industry has increased rapidly. In 2015, the CR3 market share was only 13%, and in 2017, it rose to 23%. At the same time, the gap among the top three is gradually emerging. From Taobao's monthly market share data for snack foods, the CR5 market share is around 25%, with Three Squirrels at about 11%, Be & Cheery at about 7%, Bestore at about 5%, and the fourth and fifth at about 1%. The gap between the top three and others is continuously widening.
**3.2 Competitive Landscape: Three Strong Players Stable, Each with Unique Characteristics**
The entry barriers for new entrants in snack e-commerce have increased, and the industry moat is gradually forming. The increase in industry barriers is mainly reflected in the following points:
1) Online customer acquisition costs continue to rise. In recent years, the growth rate of mobile Internet users in China has slowed year by year, expected to drop to 3.6% in 2017. The total user scale of online retail is stabilizing. According to data from YOUMRI, the cost of developing customers in pure online form is getting higher and higher. The development of new retail formats has become an inevitable trend.
2) Platform discounts are no longer available, and the unit operating cost for new brands is relatively high. In the early days of platforms like Tmall, they would actively invite well-known brands to join, with significant discounts. Companies like Three Squirrels, Be & Cheery, and Bestore took advantage of the platform's rising period to quickly enhance their brand awareness. Now, platform discounts are no longer available, and the unit operating cost for new brands is relatively high, making exposure more difficult.
Currently, the three-strong pattern of Three Squirrels/Be & Cheery/Bestore has been formed, and the pattern is stable, with each developing its own characteristics.
1) The oligopoly pattern of the top three is stable, and the market share of the top three is not much different. Since 2017, online data shows that although the fourth and fifth brands in the industry have been changing, Three Squirrels/Be & Cheery/Bestore have stable rankings in online snack sales. From Taobao's monthly market share data for snack foods, the CR3 market share is around 23%, with Three Squirrels at about 11%, Be & Cheery at about 7%, Bestore at about 5%, and CR5 at about 25%, with the fourth and fifth at about 1%. The market share of the top three is not much different, but all are far higher than the fourth and fifth.
2) The top three oligarchs have their own development characteristics. Three Squirrels started with online nuts, focusing on distinctive service experience. The company has strong IP operation capabilities and outstanding brand power. Bestore started with offline full-category stores and chose the "blooming on both lines" model from the beginning, with outstanding channel power. Be & Cheery started offline, cut offline to go online, and implemented a super single-product strategy in 2016, with outstanding online hit product creation capabilities.
**3.3 Future Outlook: Medium-Term Share Defense Battle, Long-Term Embrace of New Retail**
The industry has entered the end of the Spring and Autumn period and the beginning of the Warring States period. The theme of this stage is the battle of giants, and future development is mainly reflected in two aspects.
1) Short to medium term: Online stock share defense battle. Snack food categories are numerous, product life cycles are short, and at a certain point, there are fewer hit products. At the same time, the three companies' products are not significantly differentiated, and price wars are a common tactic to compete for share. If one side initiates a price war, the other two will inevitably follow to maintain their share.
2) Medium to long term: Offline growth and embrace of new retail. Retail e-commerce competition is fierce, online traffic dividends are gradually disappearing, and online cannot solve experience and service issues, so "new retail" emerged. Leading companies are laying out new retail to gain an advantage in subsequent competition.
**3.3.1 Short to Medium Term: Share Defense Battle**
Price wars are a common tactic. Under the B2C model, snack food products are not significantly different, and online consumers are highly price-sensitive, so price promotion is one of the main marketing methods. Price adjustments are highly autonomous and frequent. Product pricing strategies are mainly affected by market competition, promotion frequency, product inventory, seasonality, and competitors' pricing strategies.
Share defense battle under the prisoner's dilemma. Currently, the online landscape is stable, with Three Squirrels/Be & Cheery/Bestore in the top three. Product structures and company strategies are slightly different, and the three maintain a harmonious dynamic balance. If one side initiates a price war, the other two will inevitably follow to maintain their share. If at some point the industry leaders reach a consensus and have common interests, they can act in concert, which is beneficial to short-term gross and net margins.
**3.3.2 Medium to Long Term: Embrace New Retail**
Retail e-commerce competition is fierce, online traffic dividends are gradually disappearing, and online leaders are laying out new retail. Currently, new retail is mainly reflected in two aspects: 1) Multi-touchpoint channels (fragmentation of online traffic entrances, offline stores meeting experience and immediacy needs); 2) Application of information systems.
Online leaders, on the one hand, lay out new retail to achieve complementary advantages online and offline, and on the other hand, consolidate their long-term competitiveness and accumulate strength for subsequent development. In new retail construction, the three companies have simultaneously increased their layout of online and offline channels, but in information system construction, the three have different foundations and stages. In building long-term competitiveness, the three have different focuses. Three Squirrels still focuses on brand building, Be & Cheery lays out four major strategies simultaneously, and Bestore will fully leverage its information advantages to provide consumers with better services and experiences.
**(1) Three Squirrels: Focus on Brand Building, Channel Development Offline**
Three Squirrels was established in 2012, located in Wuhu City, Anhui Province. Three Squirrels started with nuts, using cute marketing and thoughtful service, focusing on consumer needs, bringing consumers an experience that exceeds expectations. The company gradually builds its brand image through IP, animation, personification, and comprehensiveness.
Channel development focuses on offline experience: Currently, offline includes "Three Squirrels + Investment Food Store," "Three Squirrels + Suning Xiaodian," and "Three Squirrels + Alibaba Retail Link." Online includes mainstream e-commerce platforms, self-operated APP, group buying, and other channels.
Brand building drives strong consumer connection: The company takes brand building as the starting point, planning overall business along the development path of single brand—big IP—cultural ecosystem, continuously outputting to penetrate user minds, ultimately achieving a strong connection between brand and consumers. With the arrival of new retail, the company continues to focus on IP and word-of-mouth building, using data-driven refined operations to attract consumers and build core competitiveness.
**(2) Be & Cheery: Four Major Strategy Upgrades**
The company is headquartered in Hangzhou. In 2003, Be & Cheery opened its first offline store in Hangzhou. In 2010, the company cut 160 stores and fully transitioned online. In 2016, the company re-entered the offline market and embraced new retail.
In terms of channels, it cooperates with Retail Link and restarts offline experience stores. In July 2017, Be & Cheery officially cooperated with Alibaba Retail Link. In 2018, the new retail strategy fully set sail. The company established a new retail business unit to enter the new retail market across all channels and scenarios. The company plans to open a new offline experience store by the end of 2018 to lay out the new retail market.
Be & Cheery's new retail carries out four major strategic layouts. In addition to restarting offline experience stores, the company will also increase investment and construction in product upgrades, IP marketing, and supply chain management.
**(3) Bestore: Committed to Supply Chain Construction**
Bestore was established in 2006, headquartered in Wuhan, Hubei Province. It started with an offline store model. In 2012, Bestore began to enter the e-commerce model. In 2017, the first year of new retail, it embarked on the path of new retail and digital transformation. Bestore chose the "blooming on both lines" model from the beginning.
Taking the lead in multi-channel coordination, advantages have already emerged. Currently, online channels cover mainstream e-commerce platforms, social platforms, and self-owned apps, among other multi-channel sales models; offline channels also include direct-operated stores, franchise stores, key account group buying, and O2O delivery. The company has over 2,000 offline stores, mainly concentrated in Hubei, Hunan, Jiangxi, Sichuan, and other regions. Markets such as Shaanxi, Guangdong, and Jiangsu are still in the initial development stage.
Information systems support overall operations. Bestore has achieved digitalization of the entire industry chain, including supply chain, channels, products, marketing, and customers. With a solid big data foundation, the company provides data support for supply chain optimization and better user experience for consumers.
**Current Logic: Build Reserves, Delay Claiming Kingship**
In the medium to long term, offline expansion and embracing new retail are the general trends. In the short to medium term, online stock competition and price wars among leaders continue. Since its proposal in 2016, new retail has developed rapidly but is still in its early stages. Therefore, when considering the current logic, we temporarily set aside new retail and only consider the online perspective.
The sustained growth of offline snack leaders mainly comes from three aspects: the simultaneous increase in volume and price in the snack food industry, the increase in online penetration rate, and the increase in CR3 market share. The improvement in industry net margin mainly comes from three aspects: short-term price war easing; category adjustment; and scale advantages.
**4.1 Space Analysis: Online Snacks Still Have Potential**
The sustained growth of offline snack leaders mainly comes from three aspects: the simultaneous increase in volume and price in the snack food industry, the increase in online penetration rate, and the increase in CR3 market share. We expect the average growth rate of leaders from 2017 to 2020 to be about 30.86%.
**(1) Opportunity for Simultaneous Volume and Price Increase in Snack Foods**
The market space is nearly 500 billion yuan, with a CAGR of 6% from 2011 to 2017, with volume growth (3.3%) higher than price growth (2.7%). According to data from Qianzhan Industry Research Institute, the scale of China's snack food market increased from 320.5 billion yuan in 2011 to 484.9 billion yuan in 2017, with an average annual compound growth rate of 6%. In 2018, the market size is expected to exceed 500 billion yuan. Sales volume increased from 13.5 million tons in 2011 to 16.93 million tons in 2017, with an average annual compound growth rate of 3.3%. The average unit price increased from 23,700 yuan/ton in 2011 to 28,600 yuan/ton in 2017, with an average annual compound growth rate of 2.7%.
In the future, the market size of the snack food industry will continue to expand, facing opportunities for simultaneous volume and price increases. With the improvement of national income and the continuation of consumption upgrades, the snack food industry is gradually heating up, and the overall market size continues to expand. Volume increase: the increase in residents' disposable income drives up consumption volume; price increase: product structure upgrades drive up product unit prices.
**Market Space Estimation:** Assuming that the future industry consumption volume continues the 2011-2017 compound growth rate (3.3%), and the sales unit price grows at a rate slightly lower than the 2011-2017 compound growth rate (2.7%), we assume future consumption volume and unit price growth rates are 3.3% and 2.5%, respectively, then the sales growth rate is 6.09%. Based on this, the snack food industry scale is expected to reach 572.2 billion yuan in 2020 and 641.5 billion yuan in 2022.
**(2) Online Penetration Rate Can Still Be Improved**
Online channels remain the fastest growing. According to Kantar's "China Shopper Report," from 2012 to 2017, the compound annual growth rate of FMCG sales was 5.3%, of which e-commerce had a compound annual growth rate of 38.9%, far higher than other retail formats. Convenience stores and supermarkets/hypermarkets ranked second and third, with growth rates of 8.6% and 6.7%, respectively. Looking only at FMCG e-commerce growth, before 2016, e-commerce growth was above 35%, and in 2017, it declined but remained at a high level of 28.6%.
The online penetration rate of snack foods can still be improved. According to data from Qianzhan Industry Research Institute, Taobao data, and listed company prospectuses, in 2015, snack e-commerce sales were approximately 29.4 billion yuan, with an online penetration rate of 6.8%. In 2017, snack e-commerce sales were 49.96 billion yuan, corresponding to an online penetration rate of 10.30%. Against the background of e-commerce growth leading the FMCG industry, we believe that the online penetration rate of snack foods can still be improved. We expect the online penetration rate to increase to 14% in 2020 and 16% in 2022.
**(3) Leading Concentration Is Expected to Continue to Increase**
The top three concentration in snack e-commerce is high. From the monthly data of snack e-commerce in 2017, the CR3 concentration was about 23%, CR5 about 26%, CR10 about 30%, and CR4-10 only 7%, with the industry concentrating toward the top three.
With brand advantages superimposed on scale advantages, the market share of the top three continues to increase. Overall, the market share of the top three in the snack e-commerce industry has increased rapidly. In 2015, the CR3 market share was only 13%, and in 2017, it rose to 23%. In the future, with the continuous branding of the industry, the CR3 concentration is expected to continue to concentrate. We expect the CR3 market share to be 30% in 2020 and 35% in 2022.
**(4) Online Leader Space and Growth Rate Estimation**
Online CR3 sales = Snack food industry scale * Online penetration rate * CR3 market share
Based on the judgment of the offline snack development stage, we assume that the online penetration rate will increase to 14% in 2020 and the CR3 market share will increase to 30%. Then, in 2020, CR3 sales will reach 24 billion yuan, with an average annual growth rate of 28% from 2017 to 2020. Assuming the online penetration rate increases to 16% in 2022 and the CR3 market share increases to 35%, then in 2022, CR3 sales will reach 35.9 billion yuan, with an average annual growth rate of 26% from 2017 to 2022.
**4.2 Net Margin Improvement: Price War Easing; Category Adjustment; Scale Advantages**
The improvement in industry net margin mainly comes from three aspects: short-term price war easing; category adjustment; and scale advantages. Given the retailer characteristics of online snack food retailers, we expect the future net margin to likely increase to 5%-6%.
**(1) Price War Easing**
The snack e-commerce industry landscape is stable, with Three Squirrels/Be & Cheery/Bestore ranking in the top three. The industry has entered the early Warring States period, with no major wars among leaders but continuous small battles.
Snack food categories are numerous, product life cycles are short, and at a certain point, there are fewer hit products. At the same time, the three companies' products are not significantly differentiated, and price wars are a common tactic to compete for share. If one side initiates a price war, the other two will inevitably follow to maintain their share.
If at some point the industry leaders reach a consensus and have common interests, they can act in concert, which is beneficial to short-term gross and net margins.
**(2) Category Adjustment**
Nut categories have low gross margins and contribute traffic, while non-nut categories have high gross margins and contribute profits. Snack e-commerce companies all started with nuts. In 2014, the proportion of nuts for Three Squirrels and Be & Cheery was 88% and 73%, respectively. After that, categories continued to diversify, and the proportion of nuts gradually declined, but it is still above 50%. Among many categories, the gross margin of nuts is about 22%-28%, the lowest, mainly for traffic attraction; non-nut categories, such as dried fruit and candy, have higher gross margins than nuts and contribute more profits.
The proportion of non-nut categories is increasing, and the gross margin is expected to increase by 1-2 percentage points. With the decline in the proportion of non-nuts, the gross margin continues to rise. Among them, Three Squirrels' gross margin increased from 24.15% in 2014 to 30.20% in 2016, an increase of 6 percentage points. Be & Cheery's gross margin increased from 24.87% in 2014 to 25.51% in 2017, an increase of 2.55 percentage points. In the future, with the further increase in the proportion of non-nut products, the gross margin is expected to increase by another 1-2 percentage points.
**(3) Scale Advantages**
As sales revenue increases, the sales expense ratio continues to decline, and scale advantages continue to emerge. Reviewing the changes in the expense ratios of Three Squirrels/Be & Cheery/Bestore, as sales revenue continues to increase, the sales expense ratio has declined significantly. Three Squirrels' sales expense ratio decreased from 25.35% in 2014 to 20.75% in 2016, a decrease of 4.6 percentage points. Be & Cheery's sales expense ratio decreased from 22.44% in 2013 to 19.83% in 2015, a decrease of 2.61 percentage points.
In the future, the expense ratio with a relatively fixed attribute will decline, and the net margin is expected to increase by 1 percentage point. Breaking it down, fixed expenses such as employee compensation in the sales expense ratio account for a continuously declining proportion of revenue. In the future, as sales revenue gradually increases, the expense ratio is expected to continue to decline by 1-2 percentage points.
It is expected that the future net margin can be increased to 5%-6%. Currently, the net margin of snack e-commerce is around 3%. In the future, with the easing of price wars, category adjustment, and the gradual emergence of scale advantages, we expect the industry net margin to improve. Given the retailer characteristics of snack e-commerce, its net margin is lower than that of brand owners (8%-10%), and we expect the future net margin to increase to 5%-6%.
Through the analysis of snack food product categories, business essence, stage landscape, and current logic, our judgment on the industry is as follows:
**1\. Development Stage:** In terms of development stage, snack e-commerce has established a replicable business model, and the industry has moved from introduction to growth. Industry growth has shifted from high speed to medium-high speed. The gap among advantageous enterprises is not large but is gradually widening. If the growth period is divided into the Spring and Autumn and Warring States periods, the current stage is transitioning from the Spring and Autumn to the Warring States, roughly at the end of the Spring and Autumn and the beginning of the Warring States.
**2\. Competitive Landscape:** The three-strong pattern of Three Squirrels, Be & Cheery, and Bestore has been formed. The gap among the three is not large, and each has its own development characteristics. Among them, Three Squirrels has strong IP operation capabilities and outstanding brand power; Bestore has "blooming on both lines" in channels, with outstanding channel power; Be & Cheery implements a super single-product strategy, with outstanding product innovation capabilities.
**3\. Medium and Long-Term Logic:** In the short to medium term, industry companies will fight a defensive battle for online market share, and in the medium to long term, they will embrace new retail for offline growth. Looking at the medium and long term, online leaders have already laid out new retail, on the one hand, multi-channel layout, and on the other hand, building and consolidating their competitive advantages to accumulate strength for the subsequent battle of giants.
**4\. Short and Medium-Term Logic:**
(1) The online snack food industry still has potential: The simultaneous increase in volume and price in the snack food industry, the increase in online penetration rate, and the increase in CR3 market share are three factors driving the development of the online snack food industry. The snack food industry scale is 500 billion yuan, with a CAGR of 6% from 2011 to 2016. In the future, the industry will see simultaneous volume and price increases. If it grows at a rate of 6%, the industry scale is expected to reach 572.2 billion yuan in 2020. If the online penetration rate increases from 10.3% in 2017 to 14% in 2020, and the leader market share increases from 23% in 2017 to 30%, then the CAGR of leaders from 2017 to 2020 will be 28%.
(2) Net margin improvement: Price war easing, category adjustment, and scale advantages will improve the net margin of industry companies. Considering the retailer characteristics of snack e-commerce, we expect the future net margin to likely increase to 5%-6%.
> **Appendix I:**
"Retail Four Quadrants": In product categories where upstream manufacturers have low entry barriers and are fragmented, advantageous retailers are more likely to emerge, and vice versa.
"Retail Four Quadrants": Categories with deferrable consumption, standard products, long tail, and low logistics cost proportion are more suitable for online sales. Such categories should focus on efficient retail channels, such as B2C e-commerce retail-led, combined with offline stores, avoiding offline hypermarkets.
> **Appendix II:**
Product life cycle theory divides the development of an industry into four stages: introduction, growth, maturity, and decline. The introduction period has great growth potential but high risk; the growth period has formed a stable and feasible business model, and has begun to take shape. Companies with competitive advantages begin to form clear competitive barriers; in the maturity period, the standardization of products and services is extremely high, scale advantages and cost control become core competitive points, and the position of industry leaders becomes increasingly stable; in the decline period, products and services face the threat of substitutes, and the industry faces pressure to decline.
The core of the growth period is to establish a replicable business model, let scale effects play a role, and continuously expand the value of technological innovation. In this process, the certainty of growth is very high, and the business model is continuously refined, but the uncertainty is where the "ceiling" of growth is.
Maturity period: Successful business models in the industry have been tested by time, forming commercial advantages that are solidified in the maturity period. Differences between competitors no longer expand but gradually narrow. At this time, the blade of battle often shifts from innovation to cost. Large-scale manufacturing, industry chain integration, and relying on high-efficiency operation and synergy to consolidate market position become the top priority in this period.
**The 10th B-end E-commerce Inspection - Community Group Buying Changsha Special Session**
Event time: December 12-13
Event location: Changsha · New High Bridge
Event process:
> Morning of December 12: Community group buying exchange salon
>
> Afternoon of December 12: Kaola Selection Heroes League Launch Conference
>
> Night of December 12 to early morning of December 13: On-site inspection of Kaola Selection Logistics Center——**This time period is the peak sorting period in the warehouse, allowing direct observation and learning of the backend operation process of community group buying e-commerce**
Distinguished guests
**Zhao Bo, Founder of New Distribution**
**Tang Guangliang, CEO of New High Bridge**
**Liu Chunxiong, Famous Marketing Expert**
**Wang Jun, New Retail Industry Expert**
**Ren Xiaodong, CEO of Magic Cloud Sales**
**Song Fang, Partner of New High Bridge**
**Cai Jingzhong, Partner of Galaxy Creation Venture Capital**
**Chang Ke, Co-founder of Kaola Selection**
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