△Add friend and note 'inspection' to register As the market views the beverage industry as a stable investment, the author believes a storm of intensified competition is imminent. After industry growth slowed to single digits, major players shifted from focusing on their existing subcategories to engaging in 'all-out war' across all subcategories. Combined with the strong intent of multinational giants, the soft drink industry will face unprecedented competition. After the aftermath of the 2015 ChiNext feast and stricter regulation, capital favored industry leaders. Starting in 2016, 'white horse stocks' like Moutai, Gree, and Haitian Flavouring began steady rises, with beverages being a key sector for such stocks. The shift in investment style in 2016 accompanied a shift in investor values, with more embracing value investing and moats. However, this year's interim and Q3 reports from many white horse stocks disappointed the market. The author believes we should re-examine the boundaries of leaders and moats, especially in the beverage industry. Just as the saying 'no basis for RMB depreciation' was used two years ago, the author believes the beverage industry will enter a long, arduous, and highly competitive phase. Perhaps beverage white horse companies are entering a stage of 'no basis for sustained earnings growth to meet investor expectations.' This article covers soft drinks and dairy, excluding alcoholic beverages. The Logic Favoring the Beverage Industry Is Showing Cracks The market's reasons for favoring beverages can be grouped into three categories:

  1. Consumer habits: High repurchase rates, ability to capture 'mind share,' and brand loyalty enabling premiums. This industry is conducive to capturing consumers and generating sustained, stable sales.
  2. Industry structure: Although China's beverage industry concentration is much lower than the US (CR5 ~39% vs. ~57%), it's higher than other industries, giving companies stronger pricing power.
  3. 'Demonstration effect' of Buffett: Buffett often mentions the returns from buying Coca-Cola years ago, and there are successful domestic examples like Yili. These logics supported strong stock performance of beverage giants since 2016. However, valuations were relatively low then; now, valuation centers have risen significantly, and these logics may have fatal flaws. Past performance doesn't guarantee future trends. This year's interim and Q3 reports quietly reveal the Achilles' heel of beverage giants. Soft Drinks: Under Internal and External Woes, Competition Will Intensify Significantly Although the beverage industry's moat is based on consumer capture and high concentration, closer examination reveals that competition states vary greatly across consumer goods, and some moats may not be as high as investors think. The boundary between competition and moats is blurring. According to Euromonitor, China's soft drink retail market was RMB 573.6 billion in 2017 (note: company reported revenue is at ex-factory prices, much lower than retail; below, 'sales revenue' or 'sales' refers to reported revenue, and 'retail value' refers to retail amounts). Soft drink sales growth slowed from double digits before 2013 to low single digits. Before 2016, volume and value grew in tandem; in 2017, volume slightly declined, and value growth was mainly due to price increases. Data source: Euromonitor, Wind The author believes that after industry growth slowed to single digits, major players shifted from focusing on existing subcategories to 'all-out war' across all subcategories. With multinational giants also showing strong intent, the soft drink industry will face unprecedented competition. 01 Basic Competitive Landscape: Limited Contestable Space in a Zero-Sum Game Foreign Capital Strong, Local Players Grounded Let's look at the basic competitive landscape.
  1. Limited contestable space in a zero-sum game From the overall industry data, soft drink consumption slightly declined in 2017, with revenue growth mainly from price increases. This is a clear sign of a zero-sum game. Data source: Euromonitor, CICC research, Nielsen data from Tingyi annual reports, other online sources, author estimates As shown above, the seemingly large beverage market is already largely divided. Bottled water, carbonated drinks, coffee, herbal tea, energy drinks, and some plant protein drinks have high concentration; some categories even support a listed company's main revenue. Snatching share from any of these requires high costs. The remaining contestable areas are mainly fruit, tea, water, plant protein, coffee, or their mixtures. This may explain why some successful product breakthroughs occur here (Nongfu Spring's Tea π, Uni-President's Xiao Ming Tong Xue, etc.). Excluding sales already captured by giants, the total contestable retail value in these areas may be only tens of billions to around 100 billion yuan, a relatively small space for dozens of well-known beverage brands. Thus, the beverage industry is not only in an overall zero-sum game but also faces a limited contestable market, possibly less than 20% of the total. Future competition will focus on:
  1. Taking share from small and medium players, the familiar story of increasing concentration;
  2. Structural changes within subcategories (e.g., in juice, low-concentration juice accounts for 70% of China's market, while pure juice is 60% in Europe and the US, leaving room for upgrade);
  3. Breakthroughs in entirely new categories (like the rise of herbal tea). 2. Foreign Capital Strong, Local Players Grounded Key foreign companies' financials: Key local companies' financials: The three multinationals have considerable scale and financial strength. In contrast, China's second-largest soft drink player, Tingyi, has a market cap of only about $10 billion (about half from instant noodles), one-fifth of Danone, and one-twentieth of Coca-Cola and Nestlé. Besides Tingyi, Uni-President, Dali, Huiyuan, and Yangyuan have net assets in the tens of billions, but C'estbon, with 20% bottled water share, has only RMB 1.9 billion net assets. Other local players' profits and net assets are even smaller. Data source: Euromonitor, CICC research, author estimates However, among the top 10 retail players in China, only Coca-Cola and Pepsi are Western, and Tingyi and Uni-President are from Hong Kong/Taiwan. This shows that despite foreign capital strength, few have gained large market share in China. Local companies achieved this with limited capital, demonstrating their grounded advantage. Notably, excluding carbonated drinks, Coca-Cola's retail sales are similar to Nongfu Spring, C'estbon, and Wahaha, making it just one of several strong players. 02 Origins of Intensified Competition 1. Local Beverage Companies' 'Anxiety' Drives Strong Impulse to Fight for Share From the data, the beverage industry can be divided into high-share foreign, high-share local, low-share foreign, and low-share local. Local players are in an awkward position: they have some share (e.g., Nongfu Spring's retail sales rival Coca-Cola's non-carbonated business) but limited resilience (e.g., C'estbon's pre-tax profit is only RMB 600 million). If product differentiation is weak, continued deterioration could lead to 'capsizing.' In this anxiety, companies must retain or expand share while entering other subcategories, building a 'product matrix' with billion-yuan sales in multiple subcategories to avoid over-reliance on a single hit. Dali and Nongfu Spring have done well, potentially triggering industry-wide imitation (see next section). Even to maintain their position, companies need to run faster. Uni-President's 'Xiao Ming Tong Xue' was deemed successful, generating RMB 2.5 billion in sales with 'Hai Zhi Yan' in 2015, but the company's beverage revenue didn't rise much; in 2016 and 2017, it was even lower than before the 2014 launch. The above companies represent high-share local players; low-share local players likely struggle more. Because mid-sized companies are relatively fragile, if one can lead in market share or force competitors to exit at a loss, it's only a matter of a few years. In this life-or-death period, beverage companies will prioritize market share over short-term profits. 2. Successful Cross-Category Cases Stimulate Imitation While many cross-industry moves failed in recent years, making the market cautious, 'small crossovers' near the capability circle have succeeded in beverages. Nongfu Spring expanded its boundaries, successfully launching 'Tea π,' raising its tea drink share from 1.6% in Q4 2015 (when Tingyi and Uni-President had 80% combined) to 11.8% in Q4 2017 (when they had 70%), essentially snatching 10% share from the duopoly. Dali Foods treats cross-category breakthroughs as its core capability. Heqizheng (herbal tea), Lehu (energy drinks), and peanut milk all entered as latecomers and gained top-three share. In 2017, it launched soybean milk brand Doubendou. Some attribute Google's M&A appetite to the excellent 'user experience' of its early acquisitions, which helped form its business model. Similarly, despite low success rates for new products, successful cross-category cases and the urgent need for diversification mean beverage companies have strong incentives to do this, blurring brand and market boundaries. Companies have never stopped expanding; the table below summarizes some moves: Nongfu Spring's success contrasts sharply with Wahaha's declining share. Wahaha's domestic beverage share fell from 7% in 2013 to 4% in 2017. Nongfu Spring, after its tea breakthrough, saw overall share rise from ~4% in 2013 to 6% in 2017, becoming the largest domestic and private enterprise, second only to Coca-Cola and Tingyi. In the short term, beverage companies will likely try to cross category boundaries and compete for share. Many subcategories haven't reached equilibrium, so competition is expected to intensify as companies deploy and enter. 3. Diversification of Competition Sources Sources include new sales channels, marketing channels, cross-industry entrants, and private labels. Soft drink channels used to be supermarkets, convenience stores, kiosks, vending machines, etc. Now e-commerce is important, but giants don't dominate. Data show online CR10 for beverages is only 37%, far lower than the overall CR5 of 39%, because shelf space is limited in stores but online offers more options. Vending machines, once overlooked, are back on giants' radar; Uni-President will invest RMB 450 million in 2018 to deploy 10,000 machines to get closer to consumers. Physical milk tea, dessert, and coffee shops also compete for consumers' 'sugar intake'; milk tea and dessert sales are estimated at RMB 150 billion, and coffee shops at RMB 100 billion, totaling RMB 250 billion, impacting the bottled beverage market (RMB 400 billion excluding water). Traditional marketing channels may also face internet disruption. Short video apps like Douyin took 8.8% of netizens' time by June 2018 and unexpectedly became product promotion channels. Many snacks went viral via Douyin, and Thai bottle-cap drink Fresh Doze also became popular. In a volatile market, which channel will make a brand rise is uncertain. Monster Beverage, with global sales of RMB 20 billion and net profit of RMB 5 billion, rose in the US through 'ground promotion' rather than traditional marketing, now rivaling Red Bull. Non-beverage companies are also entering with strong brand images, like Three Squirrels' nut compound protein drink in September and Peppa Pig beverages. Moreover, strong channels are building private labels to capture product margins. Private labels account for a high share in foreign retailers (US 18%, UK 41%, Switzerland 45%), but low in China. FamilyMart has started selling its own water and snacks; it's easy to imagine a retailer with a good brand selling basic food and beverages. Soft drink companies already face intense regular competition; now they must also deal with competitors' vending machines, viral short video hits, and entrants like Three Squirrels and FamilyMart, intensifying existing competition. 4. Transmission Mechanism Affecting Profits Competition mainly takes the form of price cuts and increased advertising. Price changes are sensitive, affecting brand image and competitor reactions, so companies avoid frequent changes. Increasing ad spend has a smaller impact but achieves similar competitive effect. TV is the main advertising venue; according to Nielsen, over 90% of beverage ad spend goes to TV. With limited premium program and time slots, ad spend is crowded, and intensified competition will push ad costs up, hurting short-term profits. 03 Multinational Giants Are Eager and Returning Beyond the above, Coca-Cola, Nestlé, and Danone all show strong expansion intentions. Data source: Euromonitor The table shows carbonated drinks' share in China's soft drink market is declining. Although absolute amounts are still rising, they will eventually follow the global trend of stagnation or decline (carbonated drinks have declined in the US for over a decade, back to 1980s levels), making diversification urgent. Globally, Coca-Cola leads in carbonated drinks and holds 10-15% share in juice, water, energy drinks, tea, and coffee, demonstrating successful diversification. Coca-Cola's China layout is generally successful: besides carbonated drinks, it ranks top three in bottled water, juice, and sports drinks. Since 2012, it has invested $12.6 billion in acquisitions (excluding over ten undisclosed deals). Recently, it acquired Costa Coffee in September, launched an alcoholic beverage in Japan, breaking its 'no alcohol' taboo, and even announced developing a cannabis-infused drink. This shows strong expansion intent. In September, Coca-Cola's Greater China President Ferguson said 'Coca-Cola's market share in China is far below target.' Both the urgency of diversification and past success globally and in China will give Coca-Cola confidence to expand further. Nestlé terminated its partnership with L'Oréal in September 2018, divesting the skin health business, and stated it will focus more on food, beverages, and nutrition, making food and beverages core, with expected larger investments. Nestlé holds about 70% of China's ready-to-drink coffee market. Danone's venture arm plans to invest in 20-25 emerging beverage companies by 2020, having already invested in coconut water Harmless Harvest and deep sea water Kona Deep. Danone has brands like Mizone, Evian, Lemonade, and Yili in China, and while its overall share isn't top, it shouldn't be underestimated. Of course, these multinationals must allocate capital globally, not all to China. But if their willingness to invest in China's soft drink market increases, it will marginally intensify competition. Currently, multinational giants, especially Coca-Cola, will increase competition in China's soft drink market. 04 How Local Companies Should Respond Dali and Nongfu Spring are the most successful local beverage companies in the past decade. In 2008, their shares were 0.4% and 3.2%, respectively; in 2017, they reached 3% and 6%. In 2008, Dali's share was less than one-tenth of Wahaha's; now they are nearly equal. In terms of strategy, low-share local companies focus on maintaining and gaining share to survive; high-share local companies try to establish a presence in as many subcategories as possible, building a diversified product matrix to avoid over-reliance on any single product, category, or brand. Dali has deployed in herbal tea, soy milk, peanut milk, and energy drinks, while Nongfu Spring moves from mineral water to fruit tea, juice, and recently carbonated drinks. From a competition source perspective, high-share local companies, after winning, must face multinationals. However, given multinationals' many failed product launches in China, they are cost-conscious. For example, Monster Energy, invested by Coca-Cola, hasn't taken off in China, and Coca-Cola hasn't invested endlessly to grab share, seemingly leaving it to fate. Therefore, if high-share local companies successfully capture enough share in major subcategories, even with far less financial strength, multinationals won't engage in low cost-benefit battles. Local companies that achieve this layout can effectively counter competition from domestic and foreign players. From a capital market perspective, listed local beverage companies have significantly more financial reserves. For example, Dali had net assets of only RMB 3 billion at IPO, with 2.4% retail share, and raised over HK$10 billion (over RMB 8 billion). Post-IPO, Dali invested RMB 1.7 billion in plant, equipment, and land; in 2017, working capital increased by nearly RMB 1 billion for Doubendou promotion, with receivables up RMB 800 million and inventory up RMB 200 million. Overall, Dali has invested RMB 2.7 billion in current and non-current assets since listing, which would have been hard with pre-IPO net assets of RMB 3 billion and cash of RMB 700 million. Now Dali still has RMB 8 billion idle funds, providing ample ammunition for future investments. Listing greatly expanded Dali's 'margin of safety,' solving concerns about entering new categories. Wahaha, which has long refused to list, has begun to consider it. Listing may create internal conflicts (e.g., older employees with shares lack motivation, while younger employees doing most work get none), but at this industry stage, listing has strategic significance. Funds raised equal several years or a decade of retained profits, greatly enhancing expansion capability and trial-and-error tolerance. Seizing the 'high ground' of listing requires expanding brand imagination; revenue growth and subcategory rankings matter more than short-term profits. This is not the time to optimize profit margins but to race for territory and raise as much capital as possible with the strongest competitive posture. Investors may still pay a premium for Nongfu Spring's breakthroughs and industry position, but soon they may lose interest in another Lebaishi or Baishuishan. The industry's future space is limited, and there's no need to finance many similar companies. Those that list and raise funds first will survive, using attrition to eliminate competitors. Therefore, in the coming years, scale, market share, story, and imagination are crucial. After financing, expect a bloody battle to eliminate competitors; beverage companies will fight fiercely before and after listing. Dairy: Even Duopoly Isn't Safe Let me briefly mention dairy. Domestic dairy is a duopoly, so the industry structure is friendlier to giants than most soft drink subcategories. According to Nielsen, Yili and Mengniu together hold 60% share. However, Yili's 2018 interim report showed sales revenue up 19.26% YoY, but non-GAAP net profit only up 2.43%, mainly due to a significant rise in selling expenses from World Cup advertising. Dairy advertising channels and consumer appetite overlap with soft drinks, so it will inevitably be affected by intensified competition. Mengniu underwent a major reshuffle of business unit general managers in September 2018. Closing the gap with Yili is a key consideration; the sales gap is most visible (2017 revenue: Yili RMB 68 billion, Mengniu RMB 60.1 billion). Euromonitor expects dairy to grow only 6.6% annually over the next five years, with 60% of growth from lower-tier cities. Mengniu's aggressive pursuit of Yili in a market with low pricing power may significantly intensify competition, even in a duopoly. Re-examining Moats In recent years, with the collapse of the ChiNext myth, value investing has gained popularity, and investors often quote Buffett. However, just because a company or industry resembles Buffett's successful investments doesn't mean its moat is strong. Even if the moat is strong, short-term competitive dynamics may contradict long-term trends. The author believes that in the foreseeable future, the aforementioned short-term competitive factors will keep the beverage industry in a state of intense competition beyond expectations, significantly negatively impacting immediate profits. After this phase, industry concentration will continue to rise, and long-term fundamentals for giants remain positive, but this 'red ocean' phase may last longer than currently expected. Source: New Fortune (ID: newfortune) Tenth B-end E-commerce Inspection - 'From Product to Scene' Event time: December 10-13 Location: Wuhu, Nanjing, Changsha Agenda:

Dec 10 morning: Visit Three Squirrels HQ + snack store

Dec 10 afternoon: Visit Nanjing Squirrel Small Store

Dec 10 evening: Visit Nanjing Gao Dashi Beer Workshop

Dec 11 all day: Nanjing-Changsha, or free arrangement

Dec 12 morning: Community group buying exchange salon

Dec 12 afternoon: Kaola Select Heroes League launch

Dec 12 evening to Dec 13 early morning: Field visit to Kaola Select logistics center - This is peak sorting time, allowing direct observation and learning of backend operations of community group buying e-commerce Distributor friends interested are welcome to join us for understanding and field visits: Organization format 1. Expert exchange salon************2. Company visit

  1. On-site explanation
  2. One-on-one communication************5. Actual market case visits Friends who want to participate If interested in a specific day, you can register separately Long press this QR code or click 'Read Original' to register! Add friend and note your purpose -END-