---
title: "Original Submission | Analyzing Master Kong's Problems and Pressures from Its Financial Reports"
description: "This article analyzes the operational pressures facing Master Kong from a purely technical perspective, based on its financial reports. It discusses issues such as the company's innovation strategy, its scale-oriented profit model, the integration with PepsiCo, and the performance of its convenience food business."
author: "张德昭"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2015-11-03"
language: "en"
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# Original Submission | Analyzing Master Kong's Problems and Pressures from Its Financial Reports

> This article analyzes the operational pressures facing Master Kong from a purely technical perspective, based on its financial reports. It discusses issues such as the company's innovation strategy, its scale-oriented profit model, the integration with PepsiCo, and the performance of its convenience food business.

**Introduction**
> ******We will not discuss the真假难辨的“black PR” popular on the internet, nor the employee complaints on Baidu Tieba, nor the “big company disease” common to companies of this scale—we will only casually discuss some operational pressures Master Kong may currently face from a purely technical perspective.******
>
> **This article is authorized for original publication by the original author Zhang Dezhao.**
Master Kong has recently become an official partner of the NBA in China and won numerous awards at the 22nd China International Advertising Festival. In the 2015 first three quarters report to be released on November 16th, it is expected that these achievements will be heavily promoted. So let us start from Master Kong's past financial reports and analyze them layer by layer—
**Overall Assessment of the Most Recent Financial Report**
Master Kong released its first half financial report on August 24, 2015. Overall: 1. Not optimistic; some structural problems may persist, as discussed below. 2. Master Kong's first half profit was approximately RMB 1.3 billion, while Uni-President's first half profit was approximately RMB 0.7 billion, narrowing the gap. Considering that Master Kong's business scale is larger than Uni-President's, in terms of profitability, Master Kong is slightly inferior. After the results were announced, Master Kong's stock price fell by more than 10%. 3. Let's look at the product strategies of Master Kong and Uni-President—regarding Uni-President, we may discuss it in another article later—since 2014, Uni-President seems to have changed its previous business model and started launching new products aggressively. However, in the first half of 2015, Uni-President's revenue declined by about 2% compared to the same period in 2014. Why? The addition of new products cannot drive overall performance growth in the short term, and existing products have declined significantly! So, Uni-President, which appears to be doing well on the surface, also has its own hidden difficulties. Fortunately, high-priced products can offer some margin benefits. Therefore, the so-called "innovation" is not as lofty as many experts claim; Uni-President's innovation is somewhat forced... Master Kong's overall strategy is stable, with basically no aggressive moves—this also confirms a principle: the leader defends. However, the overall decline in the category market has brought difficulties to its sustained profit growth, coupled with its "inherent deficiency" of low profit margins, giving a sense of pessimism. Let's look at the specific problems and pressures.
**The Awkward "Innovation"**
Currently, the most common comments about Master Kong on WeChat public accounts revolve around its "innovation capability," with terms like "copying," "imitation," "following," "knockoff," and "price war." On the surface, this is indeed the case: back in the day, when Master Kong launched Jasmine Green Tea, countless companies across the country followed suit, even the sworn enemy Uni-President was no exception. But recently, some products launched by Master Kong are indeed mediocre, lacking the original sharpness and sincerity. However, a deeper analysis reveals the underlying reasons and helps us understand its awkward position on this issue:
1. The risk of new products themselves. We are very willing to discuss a successful product with all kinds of praise; but we are unwilling to admit that beneath a successful product lie the corpses of several or even a dozen failed products. Even if all preliminary work is done properly, no one can guarantee that a new product will succeed. Runyan and Jishuang are the most frequently cited examples by the media. Uni-President launched more than a dozen new products intensively during 2014-2015, but how many can sustain long-term healthy development? So the "follow strategy" is safer for it.
2. The state of industry development. The category markets in which Master Kong's main business operates are generally stable or even slightly declining in overall market size. In this context, the success of a new product often means that other products are affected, i.e., a trade-off—the most obvious evidence is: Nielsen 2015.06 diluted juice market share trends show that due to the success of Uni-President's Hai Zhi Yan, Coca-Cola's juice and Master Kong's juice market shares have shown a clear downward trend. If Master Kong's new product affects its original classic products (self-cannibalization), especially when overall performance and profits have not significantly improved due to the new product, it would not be worth it.
3. Scale effects. Master Kong's overall strategic tone, in my opinion, is the pursuit of scale effects. Only scale can spread its huge operating costs. To use a not entirely appropriate analogy: if a new product can sell 100 million yuan a year, others will do it; but for Master Kong, a new product must sell at least 1 billion yuan a year before it is interested in investing. So this aspect may also limit its development of "small but beautiful" products.
Master Kong is currently facing pressure from low growth or even decline in both channel markets and category markets (consumer markets). In this situation, many market actions that were effective in the past may now be "neutralized." For example, new product development: in the past high-growth phase, a new product could bring considerable returns and even form a new market segment; but now, due to factors such as the risk of new product launch success, huge upfront investment, and relatively small short-term volume, new products in the current environment seem "more than willing but unable"... Blindly developing new products is not as practical as refining existing products. For it, launching a new flavor or a new category is absolutely easy, but strategic "innovation" is a problem for Master Kong at present.
**The "Scale-Oriented" Profit Model**
If we see BAT's core operating indicators such as revenue and net profit growing at high double-digit rates for many consecutive years, then all FMCG industries should feel ashamed; if we see that Anheuser-Busch InBev's net profit margin can exceed 30% and approach 40% at its peak, then Master Kong, also in the FMCG circle, should perhaps reflect on its simple "scale-oriented" business strategy. Among domestic listed food companies, if we talk about business scale, Master Kong is undoubtedly ranked first; but if we look at profit levels, many companies surpass Master Kong.
The long-held "scale orientation" allows it to maintain a relatively low net profit margin, pass benefits to consumers, make strong market pull investments, and rely on market growth (consumer market and channel market) and the volume of business scale to generate profits. This works when the market is growing rapidly—whether it's consumer-level growth or strong channel stocking—but in the current and possibly future unfavorable external environment, can this "scale-oriented" strategy continue when the overall market is slowing down? Can the situation of "buying performance with money" and "no promotion, no sales" improve?
The continuous decline in the net profit margin of the beverage business has affected Master Kong's overall profitability. The beverage business being "big but not strong" should be a serious ceiling that Master Kong currently faces. Although its sales share exceeds 50% of Master Kong's total business, and various market share numbers are impressive, the profitability of Master Kong's (original) beverage business is not as "mouth-watering" as imagined; in a sense, compared to the instant noodle business, its beverage business earns money very "laboriously." Let's look at the 2014 financial report. In 2014, Uni-President's beverage business revenue was RMB 14 billion, net profit was RMB 702 million, and net profit margin was 5%. Now let's look at Master Kong: in 2014, beverage business revenue was USD 5.801 billion, and net profit was USD 71.956 million. Simply comparing "RMB 702 million" and "USD 71.956 million," it seems that Uni-President's beverage business is indeed more profitable; but there is a small issue here: Master Kong reports "profit attributable to shareholders," and due to its complex equity structure, a portion of the profit must be given to others. In fact, Master Kong's beverage business total profit in 2014 was USD 154 million. But even so, let's look at its beverage business net profit margin: 1.54/58.01*100%=2.65%, which is only about half of Uni-President's beverage net profit margin.
**Integration with PepsiCo**
Master Kong is now fully leveraging its platform advantages: cooperating with Pepsi; distributing Wei Chuan's room-temperature lactic acid beverages; cooperating with Japanese food companies; cooperating with Starbucks; and not ruling out cooperation with other companies in the future... The cooperation with Pepsi is probably the most impactful, so let's briefly discuss its integration with Pepsi so far.
Previously, Master Kong issued a press release specifically reporting the "gratifying situation" of the integration with Pepsi, perhaps to reassure investors... It has been almost 4 years since the formal completion of the transaction with Pepsi on March 31, 2012. At least up to now, at least from financial data, the "Kang-Pepsi Alliance" has not shown significant results—although the financial reports always speak with confidence and positive energy when discussing this issue. In the 2013 financial report, the sentence that most invites speculation might be: "During the period, we also successfully achieved the goal of breaking even in Pepsi Beverages' operations." But the financial report only briefly mentions "breaking even" without providing separate consolidated income statements for "Master Kong Beverages" and "Pepsi Beverages," so it is somewhat unconvincing. And when the Pepsi business becomes profitable, how much profit can it contribute to Master Kong's beverage business? Even, can the "Master Kong + Pepsi" beverage business return to the profit level of the original beverage business before 2011? (Note: In 2011, 2012, and 2013, the annual profit of beverages was only 60%, 36%, and 59% of 2010, respectively.) Under the independent accounting of "Kang" and "Pepsi," what is the profitability situation and trend of Master Kong's original series of beverages? A simple "Pepsi loss" should not be a fig leaf and shield for the decline in profitability of Master Kong's original beverage series!
Another key issue: if I remember correctly, from the formal completion of the transaction in the second quarter of 2012 to now, despite fluctuations in performance, the overall scale of Pepsi's carbonated beverage segment has not seen substantial growth. In 2013, Pepsi's carbonated segment performance was USD 1.495 billion, in 2014 it was USD 1.373 billion, and in the first half of 2015 it was USD 734 million (estimated around USD 1.4 billion for the full year)—basically around RMB 8-9 billion. So the question arises: Have Pepsi's products actually entered Master Kong's "capillary" channels? At this stage and in the future, what is Pepsi's contribution and significance to Master Kong's overall business?
**Convenience Food Business Still Focused on Biscuits**
Master Kong stated in its Q3 2014 financial report that the future focus of its convenience food business will still be on the innovation and development of core cake and biscuit products. Personally, this is somewhat disappointing. After cooperating with so many new businesses, and with early losses to support them, if it still relies on products like "3+2" or "Miaofu" to support the business, wouldn't that be making a mountain out of a molehill? Moreover, the new businesses have more room for imagination—in the snack food sector, although the volume cannot match beverages, if managed well, it can thrive; think about how many big brands operate in the snack food industry???
I wonder what vitality Mr. Wei Junxian can bring to Master Kong under such circumstances...
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