Recently, Zhongjing Food released its semi-annual report for the first half of 2022, showing a situation of revenue growth without profit growth. Revenue reached 417 million yuan, up 6.12% year-on-year, but profit was only 63 million yuan, down 8.61% year-on-year. Looking back at 2021, the company also experienced revenue growth without profit growth, with revenue of 806 million yuan, up 10.95%, and net profit attributable to shareholders of 119 million yuan, down 7.33%. This consecutive profit decline is undoubtedly a winter for Zhongjing Food. Two years ago, when Zhongjing Food was just listed, it was all the rage, with a total market value exceeding 12 billion yuan at one point, which was its most glorious moment. But soon after, the listing hype faded, the halo disappeared, and everything returned to normal, with performance also returning to normal. This consecutive profit decline has led many to believe it is a sequelae of the fading halo after listing. But is this a temporary bottleneck or a sequelae of the fading halo? To this end, the reporter contacted relevant personnel at Zhongjing Food, but they have not yet responded. This article will analyze this issue from a third-party perspective. To analyze this clearly, we must first look at the reasons for Zhongjing Food's revenue growth without profit growth. The article will analyze the reasons from four aspects: category diversification, sinking market, advertising expenses, and raw material price increases.
01
Category Diversification Diverts Energy
Since its listing, Zhongjing Food has been hailed as the "first stock of mushroom sauce." This title represents both the industry's recognition of Zhongjing mushroom sauce and a stereotype of Zhongjing Food. Relying on a single major product—mushroom sauce—Zhongjing Food has been thriving for years, seemingly becoming one with mushroom sauce, which has become synonymous with the company. However, mushroom sauce, as a type of condiment sauce, is ultimately a small segment in the condiment field. In 2020, the market size of China's condiment industry was approximately 395 billion yuan, with condiment sauces accounting for 9.5%, or about 37.5 billion yuan. There is a ceiling for growth, and the already crowded condiment sauce track has brands like Haitian, Jixiangju, and Dingdian'er also wanting a piece of the pie. Clearly, to achieve faster growth, finding new breakthrough points is essential, and developing new products to achieve category diversification is a good idea. The 2021 annual report also mentioned: "To further enhance profitability, the company continuously develops new products and innovates categories to meet consumers' diverse needs." But in fact, Zhongjing Food's products have never been limited to sauces; its product range is quite diverse, from condiment sauces to seasoning oils to Sichuan pepper ingredients. Despite the variety, there are no blockbuster hits, making it difficult to break free from the mushroom sauce seal. For long-term development, with capital support, Zhongjing Food began optimizing and upgrading products, enhancing the competitiveness of other categories. Last year, Zhongjing Food optimized and upgraded its mushroom sauce, beef sauce, and other meal accompaniment products; iterated and updated seasoning oil products. It also launched original "guochao" (national trend) food products represented by Chengdu red oil, Shanghai scallion oil, and Guizhou spicy chicken; innovatively launched five-spice filling oil, upgrading traditional spice powder and enriching the seasoning oil product matrix; launched catering series products represented by rattan pepper sauce and black pepper sauce, developing quick-cooking seasonings like rattan pepper beef and yellow braised chicken, marking the company's products moving from table accompaniments to kitchen cooking, adding new flavors to the catering business and cultivating new growth points. Diversified product upgrades brought some positive revenue feedback: "guochao" original products achieved revenue of over 27 million yuan in 2021; seasoning oil products achieved revenue of over 30 million yuan in 2021. But similarly, category diversification and product upgrades diverted the company's originally focused energy, and costs remained high, making revenue growth without profit growth an indisputable fact.
02
Sinking Market Costs Rise
After strengthening category diversification, it is necessary to expand more distribution channels to sell products and further extend the sales network. Zhongjing Food's past main battlefield was in KA stores. To horizontally expand sales, Zhongjing Food moved more from KA supermarkets to community convenience stores, fresh food stores, and farmers' markets, increasing terminal channel coverage; fully leveraging differentiated advantages such as scenario displays (hanging nets, jump cards) and tasting promotions, valuing on-site consumer experience, strengthening offline channel sales, and deeply penetrating to make products visible to customers. In the initial stage of sinking into lower-tier markets, market promotion costs are not small. In 2021, Zhongjing Food's market promotion expenses increased by 13.6163 million yuan year-on-year, up 68.62%. The company stated in its annual report that this was mainly due to increased market promotion, with investments in store entry, display, and e-commerce promotion increasing compared to the same period. Moreover, covering more community stores requires more distributors and salespeople. From the annual report, Zhongjing Food's number of distributors has been steadily increasing: from 1,082 in 2019 to 1,762 as of July 2022. In the early stage of market development, revenue from new channels is far less than the costs.
03
Advertising Investment Increases Significantly
In the past two years, Zhongjing Food has not only invested heavily in R&D and channel expansion but also made great efforts in advertising to enhance brand awareness and recognition. In 2021, the company fully refreshed the "Zhongjing" brand and the "Little Girl Picking Mushrooms" spokesperson image, upgraded the packaging of Zhongjing mushroom sauce, created new advertising films with 3D characters as creative elements, and output new vitality for the brand image. Offline, the new brand and product images were continuously presented through main shelf displays, new media, elevators, high-speed rail advertising, and other forms, reaching target audiences in multiple dimensions. Online, it increased new media investment, interacting with consumers through live streaming, seeding, and influencer collaborations on platforms like Douyin and Kuaishou, grasping new consumption trends; launched science popularization articles on mushrooms such as "Little Mushroom, Big Nutrition" and "Who is LNT," created creative videos like "If Life Deceives You," initiated topics like "Cold Mix Little Days," strengthened communication with consumers, reinforced brand value delivery, expanded fan base, and promoted traffic conversion. Advertising and promotion expenses increased by 11.1627 million yuan year-on-year, up 67.46%, mainly due to the company's efforts to improve brand awareness and influence, increasing investment in promotional materials, advertising, brand planning and design, and exhibitions. Among them, promotional material fees were 12.7748 million yuan, subway, high-speed rail, and traditional media advertising were 7.3708 million yuan, online advertising and naming fees were 3.8237 million yuan, exhibition fees were 2.2133 million yuan, and planning and design fees were 1.5266 million yuan.
In 2022, new CCTV advertising investment was 23.3654 million yuan, and advertising and promotion expenses increased by 100.07% compared to the same period. The company's advertising and promotion expenses increased by 16.5503 million yuan year-on-year, up 100.07%, mainly due to the company's efforts to improve brand awareness and influence, increasing advertising investment. Among them, CCTV advertising investment was 23.3654 million yuan, subway, high-speed rail, and traditional media advertising were 4.9301 million yuan, aerospace cooperation naming and online advertising were 1.9933 million yuan.
Although high advertising and promotion expenses have increased costs, they have also led to rising sales. Zhongjing Food remains optimistic internally, believing that the benefits of advertising will not be immediately reflected in the short term but will benefit the company's corporate image and product sales in the long run. Indeed, with fragmented advertising information today, influencing consumer minds is not achieved overnight; short-term effects are minimal, and long-term persistence is needed, but it should also be based on the company's revenue capacity.
04
Raw Material Price Increases
The cost of raw materials accounts for a high proportion of Zhongjing Food's main business costs, almost over 80%. Therefore, if the supply or prices of raw materials fluctuate significantly, it will have a major impact on Zhongjing Food's profitability. In 2021, the purchase price of green Sichuan pepper/green and red pepper increased by 44.51% year-on-year; soybean oil purchase price increased by 43.41% year-on-year. Continuing into this year, rising costs of Sichuan pepper, soybean oil, beef, and other materials caused the main business cost increase to be greater than the main business revenue increase, with gross margin declining by 3.12%. From the annual report, in the first half of the year, both condiment food and condiment ingredients saw revenue growth, but gross margins declined. Condiment food achieved operating revenue of 238 million yuan, up 6.75% year-on-year, with gross margin of 36.96%, down 1.16% year-on-year; condiment ingredients achieved revenue of 177 million yuan, up 5.22% year-on-year, with gross margin of 38.45%, down 5.71% year-on-year. The reason is that operating costs also increased year-on-year.
However, raw material price increases affect not only Zhongjing Food but the entire industry, so it is not a core factor. The core factors affecting Zhongjing Food's consecutive 18 months of revenue growth without profit growth are category diversification diverting energy, rising sinking market costs, and significant increases in advertising investment.
Recently, the reporter also visited some supermarkets in Beijing and found that Zhongjing Food products generally have a relatively long shelf age, indicating that the company may have significant inventory backlog pressure in channels, which adds insult to injury for Zhongjing, which is already experiencing revenue growth without profit growth.
The core factors mentioned earlier are not difficult to understand. For the Zhongjing brand to develop long-term, it needs continuous innovation: a single category is not enough to stand firm, so diversification is needed, but diversification diverts originally focused energy; with new products, more channels and markets need to be expanded, but expanding channels also requires significant costs.
For Zhongjing, although these innovations are necessary, they yield minimal returns in the short term. So it is not difficult to understand the temporary difficulty—revenue growth without profit growth. As long as it persists in the difficult but correct direction, the day of profitability is not far away.