---
title: "Performance Swings Wildly: How Can Uni-President China Break Out of Its Predicament?"
description: "My view is clear: after the free trade zone becomes the norm, high-quality FMCG products from abroad, which have already undergone upgrades more than a decade ahead of China, will enrich China's FMCG market. Our consumption habits and concepts will undergo tremendous changes, posing a huge impact on Chinese FMCG companies. At the same time, during the supply-side upgrade, Chinese FMCG companies will inevitably face overcapacity and inventory reduction, leading to a double blow to their performance. However, huge challenges often bring huge opportunities. Here, I analyze Uni-President China, a leading Chinese FMCG company."
author: "New Distribution"
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published: "2016-03-31"
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# Performance Swings Wildly: How Can Uni-President China Break Out of Its Predicament?

> My view is clear: after the free trade zone becomes the norm, high-quality FMCG products from abroad, which have already undergone upgrades more than a decade ahead of China, will enrich China's FMCG market. Our consumption habits and concepts will undergo tremendous changes, posing a huge impact on Chinese FMCG companies. At the same time, during the supply-side upgrade, Chinese FMCG companies will inevitably face overcapacity and inventory reduction, leading to a double blow to their performance. However, huge challenges often bring huge opportunities. Here, I analyze Uni-President China, a leading Chinese FMCG company.

My view is clear: after the free trade zone becomes the norm, high-quality FMCG products from abroad, which have already undergone upgrades more than a decade ahead of China, will enrich China's FMCG market. Our consumption habits and concepts will undergo tremendous changes, posing a huge impact on Chinese FMCG companies. At the same time, during the supply-side upgrade, Chinese FMCG companies will inevitably face overcapacity and inventory reduction, leading to a double blow to their performance. However, huge challenges often bring huge opportunities. Here, I analyze Uni-President China, a leading Chinese FMCG company.

Uni-President China (hereinafter referred to as Uni-President or the Company) entered a difficult period in its operations starting in 2010, which is largely related to the overall weakness of China's economic environment. When the economy is poor, consumer spending naturally declines. During the four years from 2011 to 2014, Uni-President bucked the global economic downturn by relying on bank loans to support rapid expansion with high debt. During these four years, Uni-President actively invested in brand building, continuously created brand value, and strengthened its sales network to consolidate and expand its customer base. Despite this, Uni-President's operating performance during these four years still recorded significant ups and downs, with main business profits being very unstable. It was not until the first half of 2015 that a turning point finally emerged, but although a turning point appeared, whether the company's operations can continue to improve requires close attention.

Uni-President began operations in mainland China in 1992 and has since developed into a leading manufacturer of beverages and instant noodles. The company's main beverage products are fruit juices and ready-to-drink teas. According to ACNielsen reports, the company is the second-largest fruit juice beverage manufacturer in China (the first is Huiyuan Juice). It is also the second-largest manufacturer of ready-to-drink tea (the first is Master Kong). The company also produces and sells milk tea, coffee, mineral water, and yogurt products.

For over a decade, Uni-President has consistently lagged behind Master Kong in market share in its two main businesses: beverages and instant noodles, ranking second. Before the new century (2000), Uni-President had always been the absolute leader in Taiwan's food industry. However, in the "Kang-Tong" war at the beginning of the new century, Uni-President lost both face and substance. Uni-President's chairman, Kao Ching-yuen, who came from a background of being a "working emperor," adopted a bold and decisive management style. Although this increased market share during the "Kang-Tong" war, the financial accounts showed huge losses, with input-output severely disproportionate. Coupled with Master Kong seizing the opportunity to counterattack, Uni-President has since been no match for Master Kong in the mainland market. Now, with China's economy continuing to weaken and the internet economy having a huge impact on traditional industries, Uni-President's operations have once again fallen into a new predicament. When Kao Ching-yuen, Lo Chih-hsien, and other Uni-President leaders faced challenges again, they once again displayed their consistent management style—bold and decisive, moving against the wind. Since 2010, can five years of high-debt, counter-cyclical rapid expansion reverse Uni-President's long-standing second-place position in the mainland? More notably, at this critical juncture, Master Kong sent a "gift"—the gutter oil incident. The latest financial flash report shows that Master Kong's operating performance in 2015 declined sharply by 35-40%. In contrast, Uni-President's interim report for 2015 shows a major turnaround in its fundamentals. Will the huge credit crisis faced by its competitor and its severe performance decline give Uni-President an excellent opportunity to turn the tables? Furthermore, even if Uni-President becomes the leader in China's food and beverage industry, can it ensure long-term success?

Before making a judgment, let's first look at what Uni-President has done over the past five years. To know the future, look at what you do today. From the income statement, Uni-President's operating performance has indeed been volatile:

From 2010 to 2014, main business profits were: 558 million, 261 million, 881 million, 932 million, and 371 million yuan respectively. In 2011, main business profit declined sharply, while in 2012 and 2013, it was quite substantial. The problem is that there was no sustainability, and in the following 2014, profit fell sharply again. By the first half of 2015, main business profit rose sharply again. For an established mature company like Uni-President, why have main business profits fluctuated so much since 2010?

We note that after 2010, Uni-President's selling expenses increased significantly, jumping from 3.29 billion yuan in 2010 to 4.29 billion yuan in 2011, and then reaching 6.043 billion, 6.825 billion, and 6.3 billion yuan in 2012-2014 respectively. Huge marketing investments were made to boost revenue and profit. At the same time, large amounts were invested to expand production scale, establish new production bases for instant noodles and beverages, and construct equipment to meet the needs of market expansion and company growth.

After 2010, the company's fixed assets grew rapidly: 4.022 billion, 6.442 billion, 8.32 billion, and 10.04 billion yuan, and by 2015, the growth of fixed assets had not stopped, reaching 11.2 billion yuan. The conversion of construction in progress to fixed assets also went smoothly. Capital expenditures in 2011-2014 were as high as 3.052 billion, 3.488 billion, 4.502 billion, and 3.055 billion yuan respectively. It was only in 2015 that the company's expansion slowed down. These operational measures vigorously propelled Uni-President forward. They also reflect the consistent tough management style of the core leadership, Kao Ching-yuen and Lo Chih-hsien. However, the capital expansion over these five years was not mainly supported by the company's own cash generation as before 2010, but by debt expansion to accelerate capital. As shown below:

After 2010, both short-term and long-term borrowings increased significantly and continuously. Relative to the company's own cash generation, operating cash flow growth was not sustainable, and net cash inflows were not substantial. They were completely insufficient to support Uni-President's large-scale capital expansion. Why did Uni-President, which had been a cautious and steady developer before 2010, become a capital "madman"? What were Kao Ching-yuen and Lo Chih-hsien's capital expansion strategies responding to? As shown below:

Uni-President's large-scale expansion did indeed achieve significant revenue growth in the following years 2011-2013. However, in 2011, the company's profit declined severely, mainly due to a significant rise in raw material prices (the prices of polyester chips and sugar, which are packaging materials, rose sharply), causing a decline in gross margin. In addition, the company's product mix was being adjusted, with instant noodles transitioning to the mid-to-high-end market, and "Laotan Sauerkraut Beef Noodles" had not yet truly gained momentum. In 2012, "Laotan Sauerkraut Beef Noodles" became a hot-selling product, and the adjusted instant noodle mix achieved a disruptive improvement. In beverages, "Rock Sugar Pear Tea" also experienced explosive growth, and milk tea continued to maintain high growth. With raw material prices falling, the gross margin returned to the average level of 35% seen before 2010. The company's main business profit subsequently increased significantly. This growth trend lasted for two years until 2013. However, in 2014, both revenue and main business profit declined, with profit falling sharply to a new low since the major expansion began in 2010. So what caused the main business profit to fluctuate so wildly? There is an obvious surface answer: 1. The company's main business profit is greatly affected by raw material price fluctuations; 2. The core reason lies in the company's products themselves. Super hot-selling categories like "Laotan Sauerkraut Beef Noodles" and "Rock Sugar Pear Tea" typically maintain their popularity for at most 2-3 years. Products developed after 2013 have not reached the heights of these two products. Even the two very successful products are nearing the end of their life cycles. During these five years, the company launched a large-scale plant expansion plan, introduced high-speed new process production lines, addressed previous capacity shortages, and solved problems of long transportation distances and untimely distribution. The construction of these "infrastructure" facilities still failed to bring Uni-President back to a relatively stable operating state. This is not just a problem for Uni-President; it is a common problem for the entire FMCG industry. When an entire industry faces the same problem, the industry must be "sick."

2010 is an interesting year. In human history, it is defined as the first year of the mobile internet. In the following years, mobile internet technology began to enter "offline" (traditional industries), which not only had a huge impact on the business models of traditional industries but, more accurately, was a disruption! Among these industries, the FMCG industry, with the broadest audience and directly facing end customers, naturally suffered the greatest impact.

Everyone knows that the FMCG industry emphasizes "fast" and continuous innovation. In the past, innovation was "manufacturer-centric": manufacturers produced what they wanted, and consumers passively accepted it. Consumption habits and concepts were led by manufacturers, and market demand was created by manufacturers. But the advent of the mobile internet era changed the rules of the game. "Thirty years east, thirty years west." Now it is an era where consumers decide what manufacturers should innovate and produce. No matter how wide and deep the moat (channels) a company has built, or how complete its "infrastructure" (production bases), if it does not have products that satisfy consumers, even a leading company will fall. This places higher demands on Uni-President for product innovation. It is both a challenge and an opportunity. In the past, channels were king. Master Kong, Wahaha, and others, although not strong in innovation (more of a follow-the-leader tactic in products), had a winning weapon—marketing channels—dominating the Chinese market for decades. Now, in the mobile internet era, the era of product supremacy has arrived. Products determine channels. Uni-President's product innovation advantage will surely stand out in this context.

Entering 2016, China's reforms have entered the substantive deep-water zone. Now people talk more about specific reforms, namely supply-side reform. Let's talk about supply-side reform (upgrade) in the consumer goods industry. In a nutshell, it means that Chinese people's material wealth has increased, and their consumption capacity and concepts have upgraded. However, the manufacturing enterprises that provide goods have not upgraded and cannot provide consumers with better, higher-quality goods as desired. The most obvious and direct example is that Chinese people first went to Hong Kong to shop; when Hong Kong could not satisfy them, they went to Japan and South Korea; now they go directly to Europe and the United States to shop. Why do Chinese consumers go far rather than near? It is because the domestic supply side has problems. Supply-side reform provides consumer goods manufacturers with a rare opportunity that comes once in decades.

Uni-President has rich product innovation capabilities. As mentioned earlier, the current environment and background are very favorable to Uni-President. If it can seize the opportunity of supply-side reform and complete supply-side upgrades ahead of its competitors, the huge domestic consumption capacity is truly enough to keep Uni-President thriving for many years. However, we really should not be too optimistic too early. A stronger external enemy is about to arrive.

China's opening up to the outside world, once the door is opened, can never be closed again, and it will become more and more open. Opening up not only means going out ourselves, but also means others coming in. This is a trend that no one can stop. Take the free trade zone, for example. Currently, it is mainly piloted in large cities and coastal cities. In the future, free trade zones will become the norm nationwide. In the future, Chinese people will not need to go abroad to buy foreign goods. A large number of high-quality foreign goods will be displayed in front of consumers, allowing them to choose freely, with prices absolutely in sync with foreign markets. So, should we also think developmentally? After a large number of high-quality foreign goods come in, will the impact be an even greater challenge for domestic manufacturers? As for FMCG, some may say that foreign consumer goods entered China 20 years ago and did not have much impact on the domestic consumer market. That is true. The question is, under what premise and environment did this fact exist? Has this premise and environment changed now? I believe everyone must deeply understand the significance of the Chinese government's free trade zone. After free trade zones become the norm nationwide, the entire environment will change. We may see a qualitative change in Chinese people's consumption concepts and habits.

While we are rejoicing over supply-side reform, we must also know that many countries, especially developed Western countries, completed supply-side reform 10 or 20 years ago (the United States completed supply-side reform during the Reagan era). The barbarians at the gate are about to enter, and they are armed to the teeth. China's huge consumer market, this big piece of meat—can we eat it ourselves, and how much can we eat? Challenges mean opportunities. Big challenges mean big opportunities.

I have said a lot above, some are logical thinking, some are vivid examples. All are to pave the way for solving specific problems. Uni-President's specific problem, reflected in its operations, is the volatility of performance. On the surface, it is financial data fluctuations; internally, it is a supply-side problem. As mentioned earlier, the entire food and beverage industry is "sick." What disease is it? It is that the supply side is too backward and cannot keep up with consumer demand. If the root is problematic, can performance be good? Can it not fluctuate wildly? We believe that for Uni-President to get out of its predicament, first, it must upgrade the supply side. This should be Uni-President's strength and advantage. Its product innovation capability far exceeds that of Master Kong, so Uni-President will complete supply-side upgrades first. In the era of product supremacy, Uni-President has already seized the most favorable starting point. Second, it must strive to grasp the most important lever and find the point of force. Uni-President should use mobile internet technology and thinking, absorb and digest them, and ultimately fully apply advanced things to product innovation and marketing. Upgrade Uni-President from a traditional FMCG manufacturer to an Internet+ FMCG service provider. Finally, products should be a combination punch, relying on overall product strength to win. The era of relying on a single product to dominate is gone forever. After successful supply-side upgrades, products will surely present a flourishing scene (if we do not have a hundred flowers blooming, foreign products will have already bloomed and come to our door). Of course, among the hundred flowers, there will occasionally be some strange flowers (single products), but under the premise that consumers determine product innovation and the internet determines marketing speed, strange flowers (single products) are always beautiful but hard to last. The "fast" in FMCG still needs to be emphasized, but the overall product portfolio must remain stable. Products in the portfolio should be adjusted from time to time according to market conditions, with the purpose of ensuring that the overall strength of the product portfolio is stronger than that of competitors.

There is nothing difficult in the world, only those who are attentive. But this is an imperfect and flawed world. Uni-President doing its own job well is its duty, but the impact of foreign strong enemies cannot be taken lightly, and the impact will obviously be huge. How much impact will it have on FMCG companies like Uni-President? It is difficult to quantify, but the impact is certain, just a matter of degree. We need more time to observe. Moreover, once Uni-President enters supply-side upgrades, it will inevitably face overcapacity and inventory reduction, which will have a short-term adverse impact on its balance sheet and income statement. In addition, Uni-President has its own hard shortcomings. As a consumer goods company, it does not have its own upstream resources, or cannot control upstream resources. It can only respond to the upcoming huge challenges with constant change (innovation). If it wins, as investors, we may be able to achieve a 10-fold investment space in the process of Uni-President creating value again.

Source: Xueqiu

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