Market Forces Push Beverage Industry into the 5-Yuan Mainstream Price Zone

Since 2015, China's beverage industry has bid farewell to the strong double-digit growth of the past and entered an adjustment period alongside economic transformation. According to the National Bureau of Statistics, soft drink sales volume grew only 4% year-on-year in 2015. In 2016, heavy rainstorms in both the north and south during the peak sales months of June and July further exacerbated the industry's woes. It is expected that the industry's growth this year will remain lackluster.

Despite the fact that first-tier companies such as Wahaha, Master Kong, Coca-Cola, and Uni-President are all facing varying degrees of performance decline, Uni-President stands out in terms of profit growth, achieving a 192% year-on-year increase in 2015. Uni-President was highly active last year, with its premiumization of instant noodles and new beverage product strategy becoming industry focal points in 2015. In the beverage sector, Xiao Ming Tong Xue became a representative of Uni-President's many new products. Uni-President emphasized that Hai Zhi Yan and Xiao Ming Tong Xue had strong sales momentum, with combined revenue exceeding 2.5 billion yuan in 2015.

Driven by products like Xiao Ming Tong Xue, Hai Zhi Yan, and Mizone, the price point of Chinese beverages is rising from the 3-yuan range to the 5-yuan mainstream price zone. Amid the overall slowdown in industry growth and the prevalence of healthy eating and quality consumption concepts, the mainstream price range has quietly shifted upward, moving from the 3-yuan range after a decade to the 5-yuan range. This has made the otherwise underperforming beverage industry noteworthy in the overall market.

So what is the basis for the price increase in China's beverage industry?

Weakness in mass-market products, the thin-margin high-volume business model is in trouble

Since 2015, China's economy has been in deep adjustment. As a traditional industry, beverages have been affected by the economic environment, with most mass-market products experiencing weak growth.

The previous model of thin margins and high volume, under the panic of economic instability, has reduced the appetite and confidence of distributors and retailers to stock up. They are unwilling to hold inventory. Traditional best-selling mass-market products, because their prices are transparent and market pressure is high, distributors are reluctant to bear more pressure from manufacturers. They prefer to take on new products with opaque pricing rather than put pressure on seemingly best-selling traditional mass-market products and brands. This has led to the widespread death of many beverage products that were low-priced and lacked technical content or distinctiveness.

The most typical example is room-temperature lactic acid bacteria drinks. In 2015, many companies rushed in, but by 2016, almost all had ceased operations, with very few surviving. Additionally, brands like Wahaha, despite launching many new products each year with changed packaging and names, find it difficult to reverse the trend of declining performance.

Under market pressure, it is imperative for companies to break through on price positioning. When volume growth is unattainable, companies have to seek profit breakthroughs.

Niche market breakthroughs, new consumer groups are rising

With the rise of the "post-90s" and "post-00s" consumer groups, and under the influence of internet culture, niche products are developing rapidly. These two groups grew up during China's affluent period and have stronger purchasing power than the "post-70s" and "post-80s." This consumer segment has accumulated family wealth, without the pressures of supporting parents or mortgages, leading to personalized and interest-driven consumption habits. They are less price-sensitive; to them, there is no distinction between 3, 4, or 5 yuan products. What matters is their interests and hobbies. If a beverage product can resonate with them, they will not hesitate to pay any price.

If the "post-70s" and "post-80s" are characterized by herd consumption and deference to authority, making mass-market products attractive to them, then the "post-90s" and "post-00s" are individualistic consumers who pursue niche interests and personal value orientation. Therefore, niche products with distinct personalities are more likely to appeal to them and make them willing to spend. This is the path to success for Xiao Ming Tong Xue and Cha Pai.

If cola is the drink of the "post-70s," iced black tea is the drink of the "post-80s," and Mizone is the drink of the "post-90s," then the drink of the "post-00s" is products like Xiao Ming Tong Xue.

The operation of functional drinks has raised the industry's price space

Functional drinks represented by Red Bull, through long-term operation and accumulation, have pulled up the price range of the beverage industry, creating a price gap of 3-6 yuan. Additionally, the price positioning of various regional specialty functional products has provided a solid consumption base and purchasing atmosphere for products in the 4-5 yuan range. Moreover, with herbal teas like Wanglaoji and JDB priced at 5 yuan at the retail end, the market has a solid price foundation, giving traditional beverage prices room to rise.

Since 2013, products in the 4-yuan range have gradually emerged across the entire Chinese beverage market. Whether tea drinks, plant-based drinks, or even purified water, many have jumped out of the 2-yuan and 3-yuan price points to achieve breakthroughs. Although few companies have succeeded, they have fully educated the industry's distributors and channels, who are gradually accepting higher-priced beverages. Therefore, in a poor industry environment, distributors are beginning to pursue profit growth.

Currency depreciation has laid the foundation for possible price increases in the beverage industry

Data from the central bank shows that at the end of 2015, M2 balance was 139.23 trillion yuan, a year-on-year increase of 13.3%, higher than the 12% target set at the beginning of the year. Narrow money (M1) and M2 both grew rapidly. M1 balance was 40.10 trillion yuan, up 15.2% year-on-year; currency in circulation (M0) balance was 6.32 trillion yuan, up 4.9% year-on-year.

The continuous depreciation of the RMB has laid the foundation for possible price increases in the beverage industry. Facing weakening purchasing power, rising labor costs, increases in commodity prices, and higher corporate financing costs, corporate profitability has generally declined. Among the 1,979 beverage manufacturing enterprises above designated size nationwide, 224 were loss-making, a year-on-year increase of 6.16%. In such an economic environment, beverage companies cannot remain immune. To ensure survival, companies are forced to raise prices in line with the market.

With the foundation of leading products and companies in the 4-yuan and 5-yuan price ranges being solidified, over the next 3-5 years, the Chinese beverage market will mainly revolve around this price segment for brand competition. To seize market breakthrough opportunities, companies must solidify their products in this price range and then seek breakthroughs with new products in the 8-10 yuan range to meet market and economic development needs. In the process of price positioning, companies also need to pursue more original and innovative products based on consumer characteristics, to cater to the increasingly niche and interest-driven needs of consumers, and to win consumer praise with more distinctive products and brands that meet the aesthetic demands of increasingly discerning consumer groups. In the future, only products that move consumers will get them to pay.

This article was written by Zou Wenwu, Chairman of Beijing Shengxiong Brand Planning Co., Ltd., industry advisor for "Sales & Marketing" magazine, and chief planner of the Golden Distributor Platform. Personal WeChat: zouwenwu.

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Group photo of the 3rd B-end e-commerce inspection, from top to bottom: Yunbao Shangmeng, Weijie Chengpei, Wanshang Yizhan.

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