Master Kong's Performance Slumps, Dealer Enthusiasm Dampened

Master Kong's performance suffered another 'Waterloo'. On May 26, Master Kong Holdings released its Q1 2016 results. The report showed that Master Kong's Q1 2016 performance continued to 'double decline', with total revenue of approximately $2.1 billion, down 9.54% year-on-year, and net profit of approximately $73.5 million, down 45.02%.

China Business Journal reporters noted that in Q1 this year, Master Kong's instant noodle business sales were $842 million, down 15.82% year-on-year, with net profit of $48.661 million, down as much as 48.34%. The beverage business net profit also declined by 40.16%. What caused such a significant shrinkage in Master Kong's performance? In response, Master Kong told China Business Journal that both the instant noodle and beverage businesses were affected by the phased impact of product upgrades and the short-term shock of channel inventory management policies. Q2 will still face great challenges. Currently, Master Kong's performance pressure mainly stems from the overall market environment, as the entire instant food industry is experiencing slowing growth.

In recent years, in the beverage industry driven by products, Master Kong's traditional products have aged, and new product sales have been sluggish, failing to bring ideal profit returns to distributors. Xiang Jianjun, a food industry researcher at CIC Consulting, warned, 'If product sales continue to be sluggish, it will not only affect the enthusiasm of channel distributors, but may even trigger new conflicts.'

Both Instant Noodles and Beverages Decline

The decline in Master Kong's instant noodle business is directly reflected in reduced sales volume. Reviewing Master Kong's Q1 financial report, the largest sales contributors, container noodles and high-end bagged noodles, were $420 million and $239 million respectively, down 15.98% and 36.91% year-on-year.

Master Kong stated that in Q4 2015, distributors adopted a wait-and-see attitude, leading to poor performance growth, but through continuous communication and strategies to accelerate filling price gaps with multiple price points, the Q1 decline narrowed quarter-on-quarter.

According to Nielsen data for 2015, the overall instant noodle volume declined 6.3%, and sales value declined 2.6%. Although the overall instant noodle market is declining, Master Kong's decline is particularly pronounced. Uni-President's instant noodle revenue in 2015 was 7.567 billion yuan, down 4.9% year-on-year, a smaller decline than Master Kong's 12.69%.

Gao Jianfeng, founding partner of Zhonglue Capital, believes, 'In the current market environment, the entire instant noodle industry is not doing well. The previous gutter oil incident in Taiwan is not something that can be resolved in a year or two, and food delivery seems to have more market potential now. Additionally, consumption is diversifying, and frozen products, as a major substitute for instant noodles, are seeing significant growth, squeezing the market growth of instant noodles.'

Master Kong has been striving to improve net profit by raising prices and launching 'Ai Xian Da Can' instant noodles priced above 5 yuan. However, after a series of measures, profits further declined.

A Master Kong insider revealed that last year's price increases for instant noodles were too aggressive, and competitors did not follow suit, so the impact on performance improvement was not as ideal.

Master Kong's other major pillar, the beverage business, also saw a significant decline, with Q1 sales down 5.41% and net profit down 40.16%. In Q1 2016, Master Kong's beverage business revenue was approximately 1.192 billion yuan, down 5.41% year-on-year. Master Kong attributed the decline to unsatisfactory performance of packaged water and the decline in large-format packaging business.

A Master Kong business supervisor in Hangzhou told reporters that in the Hangzhou market, Master Kong remains the leader in the tea beverage segment, fruit juice drinks are relatively stable, but the packaged water business is declining.

Distributors Complain About Thin Margins

'In the early years, the beverage market was just water, tea drinks, and fruit juices. Master Kong has always been strong, especially in tea drinks. But now beverage products are highly diversified and segmented, and Master Kong's old products are being eroded. In a product-driven industry, Master Kong has not yet introduced new products that can hold their own,' said Gao Jianfeng.

Master Kong responded to reporters that it will continue to strengthen channel and end-consumer brand communication and product upgrade plans both online and offline. This summer, it will continue to adhere to the strategy of 'flavor upgrade and packaging upgrade', launching mid-to-high-end products such as Nong Nong Lemon Tea, Lipton English Fruit Tea colorful mixed flavors, jasmine fruit tea new products, and refreshing milk tea. In the second half of the year, it will launch new products like lactic acid bacteria drinks.

'Since the second half of last year, Master Kong has launched six new products. The launch phase is basically over, covering vitamin water, milk tea, lactic acid bacteria drinks, and premium tea. Two fruit teas were launched based on original green tea and jasmine tea. Fruit tea sells better mainly because Master Kong's tea drinks have an advantage. The other new products have not yet gained market influence, and after the initial stocking, there have been no repeat orders,' said the Master Kong business supervisor in Hangzhou. He also noted that sales of all Master Kong categories in the local area have decreased by about 10% compared to previous years.

Regarding the poor performance of new products, he admitted that it is because Master Kong's new products lack breakthrough innovation, basically just extending the original products slightly. In contrast, Uni-President has launched more exciting new products.

'From the current new products Master Kong has launched, they will help some with summer sales, but not much. In regions where Master Kong is strong, such as Zhejiang, new products account for no more than 5% of total sales,' said the Master Kong business supervisor. He believes that overall, Master Kong's business team has exposed significant problems. Compared with peers, Master Kong distributors' pay is not proportional to their efforts. Distributors' profit per box was 1 yuan ten years ago, and now it is only 1 to 1.5 yuan, not much change.

'Master Kong faces the awkward situation of aging star products and new products unable to establish a foothold in the market,' said Xiang Jianjun. This will to some extent affect the enthusiasm of channel distributors.

In this regard, Gao Jianfeng said, 'In the short term, it is unlikely that all Master Kong distributors will withdraw, after all, Master Kong is a good brand and agency rights are hard to obtain. But the market requires investment, and for distributors, only with blockbuster products will they work harder. Therefore, many distributors also represent other brands besides Master Kong. If Master Kong finds it difficult to develop blockbuster products with market influence, it may prompt distributors to be reluctant to invest money, shifting some funds and energy to other brand agencies.'

From the Master Kong business supervisor, reporters learned that for new products like Nongfu Spring's Tea π, the profit per box is 7 to 10 yuan, while Master Kong's tea drinks and water new products have a profit of only 2 to 3 yuan per box, and mature brands only about 1 yuan. Distributors are not very enthusiastic about new products. 'Master Kong is also trying to adjust, but it underestimates the operating costs of distributors. What Master Kong sees as high profit, distributors see as not high. Distributors have large upfront investments in warehouses, forklifts, vehicles, etc., so profit margins are relatively thin.'

Regarding the channel's wait-and-see attitude due to product upgrades, Master Kong said it will continue to launch a multi-price-point product portfolio to ensure high-quality products for consumers while bringing ideal profit returns to distributors.

Frontline Talent Attrition and Market Share Decline

Reporters learned that Master Kong's channel expenses have also been reduced in the past two years. 'This also gives distributors a headache. Master Kong adheres to a ladder-type, pyramid-shaped channel coverage model. Now the proportion of channel expenses is low, and marketing expenses have decreased by 30% to 50% since last year. Distributors' business coverage is not as good as in previous years,' said an insider.

In the '2016 Global Brand Footprint Report' released by Kantar Worldpanel on May 19, Yili Group surpassed Master Kong for the first time to become the most chosen FMCG brand by Chinese consumers, with a penetration rate of 88.5% and an average annual purchase frequency of 7.8 times.

'Master Kong's talent reserve is not sufficient. The economic environment is not good, and the income of middle and low-level employees is not guaranteed, especially frontline salespeople. In the past two years, many excellent people have left, and new entrants lack experience. With reduced expenses, it is also quite difficult,' said the Master Kong business supervisor. He explained that the main reason for frontline staff leaving is that wages are not guaranteed. In first-tier cities, terminal stocking salespeople should earn more than 5,000 yuan, but now about 40% do not reach this wage level.

According to the latest AC Nielsen market share data, in Q1 this year, Master Kong's market share by volume and value was 43.5% and 52.4% respectively. Although it still firmly holds the leading position, its market share has been declining continuously.

Master Kong responded to reporters that Q2 will still face great challenges. It will continue to launch products that meet the needs of different consumer groups and continue to effectively monitor and manage financial operations.

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