Master Kong's performance has suffered another Waterloo. On February 22, Master Kong Holdings Limited (hereinafter referred to as Master Kong) released its 2015 performance forecast. Master Kong stated that it expects unaudited net profit for the year ending December 31, 2015 to decline by approximately 35% to 40% compared to 2014. This marks the largest annual profit decline for Master Kong in over a decade. For the reasons behind the decline, Master Kong explained that it was mainly due to three factors: "price increases for upgraded instant noodle products, short-term sales decline due to channel观望," "beverage business making impairment provisions based on conservative financial principles," and "exchange rate fluctuations during the period affecting group profitability." However, investors seem unconvinced by Master Kong's explanation. As of February 25, Master Kong's stock price on the Hong Kong Stock Exchange fell below HK$7.1, a decline of 15.49% from February 22. Industry insiders say Master Kong's market value has evaporated by HK$80 billion compared to its peak. "As instant noodles are labeled unhealthy, the demographic dividend of consumers is lost, and O2O food delivery models impact the market, Master Kong's performance may see an even steeper cliff-like decline in the future," Zhu Danpeng, a researcher at the China Brand Research Institute, told the Legal Weekend reporter. Master Kong's Performance Predicament In fact, signs of Master Kong's decline were already evident in 2014. In 2014, Master Kong's revenue was US$10.238 billion, down 6.43% year-on-year; profit attributable to shareholders was US$400 million, down 1.97% year-on-year. Master Kong's Q3 2015 financial report showed that revenue for the first nine months was US$7.634 billion, down 9.75% year-on-year; profit attributable to shareholders was US$342 million, down 12.67% year-on-year. Industry insiders judge that if Master Kong's forecast of a 35% to 40% decline in unaudited net profit for 2015 compared to 2014 is accurate, then the Q4 2015 loss is actually more severe than the first three quarters. Master Kong's performance predicament is even more reflected in the capital market. Public data shows that since the beginning of 2014, Master Kong's stock price has fallen almost every quarter. In 2014 and 2015, its adjusted stock price fell by 20.13% and 36.59%, respectively. Since the beginning of 2016, the decline has accelerated, falling 35.99% from January 1, the largest single-quarter drop in its history. So, what directly caused such a significant shrinkage in Master Kong's performance? The Legal Weekend reporter reviewed Master Kong's financial reports and found that its business mainly consists of instant noodles and beverages, which accounted for 40% and 57% of revenue in 2014, respectively. Among these, Master Kong's instant noodle business has seen a decline in revenue share and gross profit contribution since 2011. Specifically, the revenue share of instant noodles dropped from 46% in 2011 to 40% in 2014, and gross margin fell from 30% in 2012 to 28.33% in 2014. Meanwhile, Master Kong's 2015 performance showed that its instant noodle business also performed poorly. In the first half of 2015, instant noodle revenue was US$1,792,137 thousand, down 11.88% year-on-year; in Q3, it was US$1,061,913 thousand, down 6.2% year-on-year. "The shrinkage in Master Kong's performance is due to multiple reasons. First, the main products of instant noodles and beverages have faced difficulties in recent years, reducing overall industry profitability. Second, FMCG products update quickly, and consumption upgrades force Master Kong to accelerate high-end product transformation, but the high-end market is not fully open. Third, frequent product safety incidents have affected Master Kong's performance to some extent," Liang Mingxuan, a food industry researcher at CIC Consulting, explained to the Legal Weekend reporter. Encroachment from O2O Food Delivery Models However, multiple industry insiders interviewed by the Legal Weekend reporter said that although Master Kong's performance decline has internal causes, the more fundamental reason is that O2O food delivery models under the internet background are gradually eroding and replacing the instant noodle market, and Master Kong, as the industry leader, is inevitably affected. Public data shows that since 2013, with the rise of internet O2O models, the food delivery market has developed rapidly, with platforms like Meituan Waimai, Baidu Waimai, and Ele.me emerging. According to iResearch's "2015 China O2O Food Delivery Industry Development Report," the scale of China's food delivery market exceeded 160 billion yuan in 2014, accounting for 5.8% of total catering consumption. By 2017, this proportion is expected to reach 9%, and the overall market size will exceed 300 billion yuan. "The prosperity of O2O food delivery models under the internet has had a significant impact on Master Kong's instant noodle business. Convenience is the main reason consumers favor instant noodles, but the rise of O2O food delivery allows consumers to purchase nearby fast food without leaving home, which is no less convenient than instant noodles, and offers more choices and relatively healthier and more nutritious products. Therefore, O2O food delivery has impacted Master Kong's instant noodle business," Liang Mingxuan said. "New healthy eating methods are gradually replacing unhealthy eating methods like instant noodles," Xu Xiongjun, a strategic positioning expert in the food and beverage industry, told the Legal Weekend reporter. So, will Master Kong, the leader in the instant noodle industry, decline like the once-glorious mobile phone giant Nokia due to the rise of smartphones? "If Master Kong continues to stick to old ways and does not strive for progress, it is not impossible that it will face a fate similar to Nokia's decline," Xu Xiongjun believes. On one hand, the current instant noodle market is like an old person in their 70s or 80s, having passed its peak and moving toward decline. On the other hand, consumers are no longer as curious about instant noodles as they were a decade ago; they have realized the unhealthiness of instant noodles, and the consumer base is shrinking. "You will notice that trains now offer more hot fast food, and instant noodles are rarely seen," Xu Xiongjun added. Zhu Danpeng expressed a similar view to Xu Xiongjun in an interview with the Legal Weekend reporter. "Although both face development difficulties due to consumption upgrades, the situations of Master Kong's instant noodle business and Nokia's mobile phones are different. Looking at the food and beverage industry, no company or product can be absolutely called healthy. Basically, all companies in the industry face the same predicament as Master Kong. Master Kong itself is aware of the consumption trend and is upgrading its products to meet consumer health needs. As long as Master Kong can truly implement product health quality, it can continue to maintain its advantages," Liang Mingxuan expressed a different view. Falling Behind Competitor Uni-President Under the threat of O2O food delivery models, Master Kong also faces pressure from its old rival Uni-President Group (hereinafter referred to as Uni-President). In 2014, Uni-President faced a similar situation as Master Kong, with a sharp 60% decline in performance. However, in just the first half of 2015, Uni-President turned its instant noodle business profitable with the help of two high-end instant noodle products: Man Han Feast and Tang Daren. Meanwhile, the Legal Weekend reporter found that Uni-President has also begun transformation and upgrading in the beverage sector. In March 2015, Uni-President strongly launched Xiao Ming Tong Xue cold-brewed tea, which was well received upon launch due to its innovative cold-brewing process and stylish packaging, leading to significant sales growth. In addition, public data shows that Uni-President also launched products such as Assam milk tea, Yaha Hey series coffee, and Wei Shike 100% fruit and vegetable juice in 2015, all of which received positive market responses. "Compared to Uni-President's active launch of new products to cater to the market in 2015, Master Kong showed a completely different side, somewhat sticking to old ways and not striving for progress. In fact, Master Kong has rarely launched new products in the past two years, instead clinging to old products," Xu Xiongjun said. Zhu Danpeng also believes that the entire Master Kong brand and products have aged. He also believes that the gap between Master Kong and Uni-President is more reflected in market layout and market strategy. In October 2015, Master Kong raised instant noodle prices by 10% to 20%, with bagged noodles' retail price adjusted from 2.5 yuan to 3 yuan, and bucket noodles from 4 yuan to 4.5 yuan, but competitor Uni-President did not follow suit. "Master Kong's price increase undoubtedly had a significant impact on its performance. The third- and fourth-tier markets are Master Kong's main battlefield. On one hand, these markets are already besieged by various low-end instant noodle companies. After the price increase, instant noodle sales in third- and fourth-tier cities may shrink. Meanwhile, in first- and second-tier markets, Master Kong's brand awareness is slightly inferior to Uni-President, so its high-end advantages cannot be leveraged," Zhu Danpeng said. In Zhu Danpeng's view, after experiencing significant declines in revenue and net profit in 2014, Uni-President has shown a good development trend with rising revenue and net profit after two years of painful transformation, while Master Kong has remained stagnant. If this continues, it is not impossible that Uni-President will surpass Master Kong in the future. Upgrading and Renewal Is the Only Way to Survive How can Master Kong save itself? In the view of industry insiders like Zhu Danpeng and Xu Xiongjun, although the instant noodle business is shrinking, Master Kong finds it difficult to abandon it. "As the saying goes, 'a lean camel is bigger than a horse.' Master Kong's instant noodle business brings in the majority of its performance. Although the market is shrinking, selling several billion yuan is still not difficult," Xu Xiongjun said. Zhu Danpeng also believes that Master Kong currently finds it difficult to break away from the instant noodle business. A key to self-rescue is to upgrade the positioning of the instant noodle business. "Currently, Uni-President's instant noodle business has shifted to the high-end market, but Master Kong is lagging behind. Therefore, Master Kong must undergo generational upgrading, including upgrading brand positioning, product positioning, and consumer group positioning," Zhu Danpeng explained. "Consumption upgrading is a major trend in China's economic development. Nutrition and deliciousness are the vitality of the food and beverage industry that Master Kong operates in. Therefore, Master Kong's performance self-rescue should increase investment in high-end product research and development, not only high-end instant noodles but also high-end beverages, high-end biscuits, etc. The high-end transformation of all product lines should develop synergistically to achieve Master Kong's brand upgrade," Liang Mingxuan expressed the same view. Meanwhile, in Xu Xiongjun's view, Master Kong should also learn to adapt to new market changes, actively embrace "Internet+", and launch more new, healthy products. "Further upgrade and renewal, do some food and beverage industries or non-food and beverage industries that conform to social trends. For example, it can do e-commerce for food and beverages, do logistics, and not confine itself to the traditional instant noodle field." "On the other hand, Master Kong should effectively implement product quality control. In the context of consumption upgrades, consumers' tolerance for product safety and quality issues will become lower. Master Kong cannot continue its old ways," Liang Mingxuan reminded. 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