Author: Lei Yanpeng Source: Market Insights (ID: ishijie2018) Three Squirrels, Bestore, and Baicaowei have risen from behind to secure their positions in the online traffic war, forming the 'BAT' of the snack industry, while Lai Yifen, the earliest entrant, has been left out. The main board's 'first snack stock' Lai Yifen (603777) is having an increasingly tough time. Three Squirrels, Bestore, and Baicaowei have risen from behind to secure their positions in the online traffic war, forming the 'BAT' of the snack industry, while Lai Yifen, the earliest entrant, has been left out. Having lost the online competition, Lai Yifen has shifted its strategic focus to expanding its offline stores. Since proposing the 'Ten Thousand Lights' strategy in 2017, Lai Yifen has accelerated its expansion from Jiangsu, Zhejiang, and Shanghai to the rest of the country, with a target of 10,000 stores. However, 'Ten Thousand Lights' has not illuminated its performance. The huge investment in store expansion has eroded profits, trapping Lai Yifen in a 'vicious cycle.' Revenue is growing but profits are not, and Lai Yifen is stuck in the traditional 'free shipping zone' of Jiangsu, Zhejiang, and Shanghai. According to Lai Yifen's latest annual report, revenue in 2018 reached 3.891 billion yuan, but non-GAAP net profit turned negative for the first time, making it the worst year on record. Rising offline and declining offline may be Lai Yifen's inescapable fate. A Dismal Year As early as 1999, the couple Shi Yonglei and Yu Ruifen opened their first snack store in Shanghai. Customers often said 'one serving, one serving' when buying roasted goods, so the brand 'Lai Yifen' was officially born in 2002. The business thrived, and this mom-and-pop shop began rapid expansion, spreading strongly across Jiangsu, Zhejiang, and Shanghai. The product range expanded to include not only roasted goods but also meat products, preserved fruits, aquatic products, candies/jellies, puffed snacks, fruits and vegetables, soy products, pastries, and more. Later, the couple told their expansion story to the capital market. In October 2016, the mom-and-pop shop made a key leap. Lai Yifen was officially listed on the main board of the Shanghai Stock Exchange, becoming the first leisure food company to list on the main board. Shi Yonglei, Yu Ruifen, and Shi Hui, the father, as actual controllers of the listed company, held a combined stake of over 63%. In the year of listing, Lai Yifen was highly favored by the capital market. Within just one month of listing, its stock price surged five to six times, from over 9 yuan to over 50 yuan, with a market value once reaching 10 billion yuan. The listing was the peak, and thereafter, Lai Yifen's stock price and performance both plummeted. In the three years since listing, 2018 was the worst year. During the reporting period, Lai Yifen achieved revenue of 3.891 billion yuan, with growth slowing to 7.01%; net profit was 10.109 million yuan, a year-on-year decline of 90.03%; non-GAAP net profit fell by 154.28%, with a loss of 46.5251 million yuan. Although revenue growth slowed, it still grew. So why did net profit decline by 90%? Lai Yifen responded to Market Insights, saying that to ensure sustainable development and increase market share, the company adjusted its development strategy, increased the intensity of online and offline market expansion, and correspondingly increased management and sales expenses, leading to revenue growth but a decline in net profit. During the reporting period, despite a 20.54% decrease in financial expenses, Lai Yifen's management expenses increased by 27.18% year-on-year, and sales expenses increased by 15.69%, reaching 43.0813 million yuan and 1.28 billion yuan, respectively. Sales and management expenses as a percentage of revenue both increased by nearly 3% year-on-year. Lai Yifen explained the increase in these two expenses as due to the introduction of technical personnel, investment in information technology, acceleration of direct-sales channel expansion, new regional market layout, faster expansion of offline and online businesses, and increased promotional activities during daily promotions and special events such as 'New Year Goods Festival,' '6.18,' 'Double 11,' and 'Double 12.' Affected by increased expenses, Lai Yifen's gross margin in 2018 was 43.91%, but net margin was only 0.26%. Looking at the past three years, gross margin has been declining, and last year's significant increase in management and sales expenses made the already low net margin even worse. Our snacks don't make money; we are just snack movers—this has become a true portrayal of Lai Yifen. With business development not going well and performance declining sharply, Lai Yifen's senior management also saw frequent changes. On December 29, 2018, shareholder supervisor Zou Xiaojun resigned; on the same day, Zhang Panhong also resigned from the positions of company director, member of the board strategy committee, and board secretary. On March 1, 2019, Feng Xuantian resigned, with the announcement citing personal reasons. Before resigning, Feng Xuantian served as vice president of operations development system and general manager of Shanghai Lai Yifen. The resignation of multiple senior executives in a short period may be closely related to the poor performance. The 'Vicious Cycle' of Offline Expansion With its own performance sluggish and competitors like Three Squirrels and Bestore pressing hard, facing internal and external troubles, Lai Yifen has launched many major moves both online and offline in an attempt to break through. Over the years, Lai Yifen has accelerated its offline channel layout, focusing on expanding nationwide. But after more than a decade, Lai Yifen still hasn't successfully broken out of its home base of Jiangsu, Zhejiang, and Shanghai. In 2017, Lai Yifen launched the 'Ten Thousand Lights' plan to accelerate offline channel expansion, advancing nationwide with a 'direct-sales + franchise' model, aiming to achieve a scale of 10,000 stores by 2023. As of December 31, 2018, the company had a total of 2,697 chain stores. The stores covered 20 provinces (autonomous regions and municipalities) including Shanghai, Jiangsu, Zhejiang, Beijing, Tianjin, Anhui, Jiangxi, Chongqing, Guangdong, and others, spanning more than 100 large and medium-sized cities nationwide. Stores have opened nationwide, but performance still relies heavily on the Jiangsu, Zhejiang, and Shanghai region, with other markets contributing very little. In 2017, the Jiangsu, Zhejiang, and Shanghai region accounted for 86% of stores and contributed 92.99% of revenue. In 2018, despite further expansion, the total number of stores increased by 237 year-on-year, but the revenue share of Jiangsu, Zhejiang, and Shanghai barely changed. In 2018, stores in the Jiangsu, Zhejiang, and Shanghai region accounted for 83%, contributing 3.592 billion yuan in revenue, or 92.32%. That is, in 2018, the proportion of stores outside Jiangsu, Zhejiang, and Shanghai increased from 14% to 17%, but the revenue share did not rise correspondingly and remained almost unchanged. Is it that only people in Jiangsu, Zhejiang, and Shanghai like to eat snacks? Not at all. Three Squirrels' largest market is also in East China, but other markets also contribute significantly. From 2014 to June 2017, Three Squirrels' revenue in East China remained around 37%, while North China, Central China, South China, Southwest, Northwest, and Northeast contributed relatively evenly, with these six regional markets accounting for about 63% of total revenue. According to the 'Ten Thousand Lights' plan, from 2018 to 2023, Lai Yifen needs to control an average annual net increase of more than 1,256 stores, but in 2018, it only increased by 237 year-on-year. Therefore, from 2019 onwards, for the next five years, Lai Yifen needs to net add more than 1,460 stores per year on average. That's a bit scary. However, for Lai Yifen, this is a choice without alternatives. If it continues to open stores, costs will be too high, and if they cannot effectively contribute to revenue, performance will only get worse; if it pauses store openings, the 'Ten Thousand Lights' plan will be shelved, and besides losing face, how can the company seek new growth in a snack industry with severe product homogeneity? Missing the Online Dividend Lai Yifen, which started with offline stores, has made many efforts online, but this has always been its weakness. Chen Mengyao, an analyst at Guosen Securities, analyzed to Market Insights that Lai Yifen started with specialty chain stores and missed the golden development period during its preparation for listing, especially the online dividend period. Lai Yifen's listing journey was full of twists and turns, with food safety issues frequently exposed along the way. Starting in 2007, Lai Yifen experienced explosive growth, capital poured in, and the couple Shi Yonglei and Yu Ruifen had the idea of listing. Lai Yifen uses an OEM model, essentially operating as a leisure food operator with its own brand. The rapid expansion under the OEM model led to frequent food safety issues. In 2012, CCTV-2's 'Consumer Advocate' program '3.15 in Action—How Delicious Preserved Fruits Are Produced' questioned Lai Yifen's 'toxic preserved fruit' issue; in 2013, it was exposed that its nougat had excessive coliform bacteria; in 2015, it was found that its hand-torn meat strips had excessive bacterial colonies... From 2013 to the first half of 2016, Lai Yifen recalled a total of 70,250 kilograms of substandard products, involving meat products, aquatic products, pastries, fruits and vegetables, etc. It wasn't until October 2016 that Lai Yifen escaped the troubles of food safety and sluggish growth and successfully listed. Around this time, the snack industry underwent structural changes. Bestore opened its first store in August 2006, laying out both online and offline, making it a balanced player; Three Squirrels was founded in 2012, starting with online business, with offline 'feeding stores' providing personalized experiences; in August 2016, Haoxiangni acquired Baicaowei for 960 million yuan, broadening channels and categories, and complementing each other's online and offline shortcomings. Three Squirrels, Bestore, and Baicaowei all have a certain 'internet celebrity' aura. When Lai Yifen, which took a decade to list, came to its senses, online snack consumers had already been divided among brands like Three Squirrels, Bestore, and Baicaowei. The 'latecomer' Lai Yifen made great efforts to launch an APP and also had a presence on e-commerce platforms like JD.com and Tmall, but only got a crumb of the cake. Online has become Lai Yifen's weakest channel. Zhu Danpeng, a Chinese food industry analyst, told Market Insights, According to the shopping mindset and behavior of the new generation, online and offline must be integrated, but Lai Yifen's online performance has always been relatively weak. Lai Yifen's former board secretary Zhang Panhong also said that because it was preparing for listing, Lai Yifen missed the e-commerce development trend. In its announcements, Lai Yifen mentioned that from January to June 2017, e-commerce channel revenue accounted for only 7.76%; from January to June 2018, it was 9.41%, which cannot be compared with the other three companies. The Next Trend In the leisure snack industry, although the rankings of several major players have been preliminarily set, there is no true 'king' yet. Based on 2017 data, Three Squirrels' revenue was about 6.85 billion yuan, Bestore's revenue was 5.424 billion yuan, Haoxiangni (including Baicaowei) had revenue of 4.07 billion yuan, and Lai Yifen had 3.636 billion yuan. According to the 'Report on the Development of the Snack Industry under Consumption Upgrading' released by the Circulation Industry Promotion Center of the Ministry of Commerce, from 2006 to 2016, the total output value of China's snack industry grew from 424.036 billion yuan to 2.21564 trillion yuan, with a compound annual growth rate of 17.98%. The report predicts that by 2020, the total output value of the snack industry will approach 3 trillion yuan. Although the snack industry is considered the most promising and dynamic industry in the FMCG market, the industry concentration is highly fragmented so far. In 2016, there were 10,871 enterprises above designated size in the domestic snack industry, and none of them had reached the 10-billion-yuan scale. Why is this? The above report summarized four reasons: Homogeneous competition is widespread, limiting corporate profit margins; 'heavy marketing and promotion, light product R&D' hinders industry innovation; quality and safety issues plague the industry's progress; and the internationalization process of brands remains slow. This is a common problem in the industry, and nut snacks are the best example. In 2016, Wolong, a little-known company in the industry, launched 'Daily Nuts,' a small-packaged mixed nut snack. After its launch, it became extremely popular, so brands like Three Squirrels, Baicaowei, and Lai Yifen all launched similar products, directly leading to homogeneity and price wars in this category. Facing a vast market, companies are seeing revenue grow but profits not, and they are racking their brains to find breakthroughs. Now, the battle of new retail and smart retail has begun again. What kind of battle is this? Yang Hongchun, founder and chairman of Bestore, explained it classically: 'New retail is the platform, we are the content; they set up the stage, and we perform.' Several leading companies are also adjusting their strategies. Bestore proposed a high-end snack strategy, first climbing out of the mud conceptually; Three Squirrels wants to shift to the supply chain side, aiming to become a supply chain enterprise; Baicaowei and Lai Yifen are competing offline, proposing 'One City, One Store' and 'Ten Thousand Lights' strategies, respectively. In the fierce competition, Lai Yifen chose the track it knows best, but the offline path is getting harder and harder. Tips will be paid 400-2000 yuan once adopted. China FMCG + Internet Professional New Media Committed to FMCG manufacturers' transformation and upgrading and channel digital solutions