"The emergence of any new channel will inevitably incubate new brands." Before going public in 2019, Zhang Liaoyuan, founder of Three Squirrels, said this during a small-scale sharing session. Just as the wholesale market gave birth to "Silly Boy Melon Seeds" and the supermarket channel enabled the rise of "Qiaqia," the Internet era holds more potential for disruptive change than ever before, which gave Three Squirrels the opportunity to rise. Three Squirrels leveraged the momentum of e-commerce to grow. Compared with offline stores, it seized the disruptive opportunity of the online channel being more concentrated and easier to build a brand. But now, e-commerce channels are also differentiating and changing. The new wave of disruption comes from the threat of social e-commerce to traditional e-commerce... If major channel changes breed major brands, then in the current new channels, will new channel brands also emerge? This article from 36Kr focuses on the following three points:

1. There are already more than 5 leading brands in the snack food industry, with intense channel competition. How will the industry landscape evolve next? 2. We believe that brands growing on Pinduoduo may become strong competitors to the current leading snack food companies. 3. Low-price bestsellers are not an obstacle to the growth of "Pin brands"; the biggest opportunity for new brands lies in de-leisure-ization.

-01-

The Snack Food Business: Heavy on Channels, Light on Brands

Unlike most consumer goods companies that heavily emphasize brands, the snack food industry may be better viewed as a business centered around "channels." This business has the following characteristics:

1) The industry is extremely fragmented, with offline leading brands holding less than 2% market share, making channels the dominant force. 2) Products are highly homogeneous, consumer behavior is mostly impulsive, and operational strategies affect the sustainability of consumption. Specifically, first, as can be seen from the figure below, the vast majority of sales in the snack food industry still come from offline. From the figure above, offline sales accounted for 89% of snack food sales in 2018. Although online sales growth for snack foods has been impressive in recent years—for example, Three Squirrels started on e-commerce platforms and now has a market value exceeding 30 billion RMB—offline channels remain the actual main sales force. Second, offline channels are characterized by numerous brands, fragmented markets, and low concentration. As shown in the figure below, in 2018, the combined market share of the top 5 brands did not exceed 2%, and international food giants such as Mondelez, Nestlé, Mars, and PepsiCo dominated. Looking at the second figure, although Three Squirrels, Qiaqia Food, Bestore, Lai Yifen, and Haoxiangni are now well-known, none of them has an offline market share exceeding 0.5%. 98% of offline sales in the industry come from small and medium companies and brands outside the top players, showing the industry's fragmentation. Once the industry is fragmented and concentration is low, channels become the dominant force in the business model, and brands must actively seize channels to establish a foothold. The early development of Qiaqia Food also proves this point—since its founding in 2001, Qiaqia followed the expansion of supermarket channels nationwide. Benefiting from the supermarket channel dividend, Qiaqia maintained an annual revenue growth rate of at least 13% from 2002 to 2008, peaking at 42% growth. Furthermore, from the source, the severe homogeneity of products themselves exacerbates the industry's characteristic of being more channel-focused and making it difficult to create significant brand differentiation. As shown in the figure below, the product categories of major brands are extremely similar, mostly including nuts, dried fruits, jerky, and other categories. Moreover, because nut and other snack products have low processing levels, it is difficult for consumers to form a clear brand perception through the product itself. In 2018, 65.54% of Three Squirrels' users made only one purchase, likely during major promotions like Double 11 and 618. Additionally, consumers exhibit high impulsiveness and non-purposeful consumption when purchasing snack foods, especially in offline channels. This unplanned purchasing behavior also gives "channels" a strong influence on brand sales. Channel recommendations and shelf placement more easily influence consumer purchasing behavior. Therefore, from the four points discussed above, for the snack food industry, seizing channels is the key for brand companies. Thus, we can also view Three Squirrels, Bestore, and Be & Cheery as "channel-based brands" that heavily rely on channels. So, what are the similarities and differences among these three channel-based brands?

1. Three Squirrels Rises on E-commerce Dividends; Old Brands Expand Online

Traditional FMCG channels include convenience stores, specialty stores, grocery stores, small and large supermarkets, hypermarkets, and other retail formats. But in recent years, e-commerce channels have stood out, with their share continuously increasing. Data from Bain & Company shows that the e-commerce channel achieved a compound annual growth rate of 35.1% from 2014 to 2018. Three Squirrels was one of the first companies to see the dividend of online e-commerce channels. Since its establishment in 2012, it began trying to become the leading snack food brand on Taobao. From its disclosed data, in 2016, 2017, and 2018, Three Squirrels' online revenue accounted for as much as 95.46%, 93.92%, and 86.67% of its main business revenue, respectively, and it had a high dependence on Tmall in its early days. In 2016 and 2017, Tmall channel revenue accounted for 63.69% and 52.78% of total revenue, respectively. After seeing the effectiveness of Three Squirrels' online differentiation strategy, old brands also followed suit to expand online. From Bestore's financial reports, its online business proportion was also highest for its brand Tmall flagship store, accounting for 53.48%, 54.46%, and 51.26% of online business in 2016-2018, respectively. Bestore's online platform revenue by transaction channel, main transaction content, and transaction amount, according to the company's IPO prospectus. In fact, the three giants have been trying to break free from dependence on a single channel and pursue an omni-channel layout. Online channels are centrally planned into B2B and B2C models: the former is manifested in Tmall Supermarket and JD self-operated warehouse models, while the latter is opening brand flagship stores on platforms. Bestore previously had an online store merchant distribution business, but later, to optimize channel management difficulty, it gradually stopped such business.

2. Online Channels Increasingly Crowded; Offline Becomes a New Battlefield

Additionally, online dividends are weakening, and offline has become a new battleground for brands. Bestore was the earliest to lay out in this regard, building an offline system of "direct-operated stores + franchise stores + delivery + key account group buying." Three Squirrels tried to replicate the former's path, launching direct-operated "Tou Shi Dian" (feeding stores), franchise business "Squirrel Alliance Stores," ToB supply capabilities like Retail Link and Squirrel Smart Supply, and expanding into supermarket channels. Be & Cheery landed later, attempting to open its first Be & Cheery · Snack Premium store last year, mainly entering the offline retail distribution network through Retail Link and New Channel. From the comparison above, it is not difficult to see that the three giants focus on building brand awareness online, while offline they use direct-operated and distributor networks to achieve scale. Taking this step is understandable. Besides the obvious ceiling of traditional e-commerce channels, there are significant differences in strategies among e-commerce channels. Over-reliance on a single channel can easily fall into the trap of "channel-specific products," which limits the potential for most channel-based brands to break out. But currently, except for Bestore, which rose through offline channels, Three Squirrels and Be & Cheery are still relatively early in their offline channel layout, with limited revenue contribution and profitability. In 2019, Three Squirrels' offline "Tou Shi Dian" and "Alliance Stores" together generated revenue of 798 million RMB, only 7.8% of total revenue. The gross margin of core categories also shows a clear downward trend, requiring more attempts in new categories. It is undeniable that for the three giants, the early dividends from Taobao and Tmall are gone, and channel competition is becoming increasingly homogeneous. To gain greater incremental growth, finding new channels is urgent.

-02-

From Taobao to Pinduoduo: The Channel Dividend Behind "So True"

When we discuss channels, we focus more on the possibility of new brands emerging from channels. In the traditional e-commerce era of direct competition between Alibaba and JD.com, following the channel dividend gave rise to Three Squirrels with a market value exceeding 30 billion RMB, and Be & Cheery, which was acquired by PepsiCo for 5 billion RMB. So, during Pinduoduo's rise, is there also an opportunity for new giant brands to emerge? In the face of low prices, no one can escape the "so true" law. According to Q1 2020 financial reports, Pinduoduo had 628 million active users in the last 12 months, approaching Alibaba's 726 million in the same period, and leaving JD.com (387 million) far behind. This is based on high growth rates: Pinduoduo's annual active users grew 41.8% year-on-year in Q1 2020, while Alibaba and JD.com grew only 11% and 24.4%, respectively. Moreover, from Q1 2018 to Q1 2020, Pinduoduo's annual active user quarter-on-quarter growth maintained a lead. Even though this growth has slowed recently, backed by WeChat's over 1.2 billion monthly active users, Pinduoduo's user scale ceiling is far from reached. For major platforms, slowing user growth is a negative signal, meaning rising customer acquisition costs. According to a study by Founder Securities, in Q4 2019, Alibaba's CAC (customer acquisition cost) was 824 RMB, while Pinduoduo's was only 85 RMB in the same period. Behind the high customer acquisition cost is another fact: the scale of first- and second-tier users has significantly peaked. In 2019, over 70% of Alibaba's new retail users came from lower-tier markets, including rural areas, and were penetrated through Taobao's low-price version. Reflected on brands, high platform customer acquisition costs mean a deteriorating competitive environment for brands. With the pool slowly expanding, the number of fish in the pool is increasing. For the three snack food giants, a single channel lacks sufficient incremental space; in contrast, coverage across multiple e-commerce platforms is more pragmatic. But interestingly, the three giants have turned a blind eye to the rise of Pinduoduo as a new channel. Compared to their mature layouts on Taobao and JD.com, none of the three brands has opened a store on Pinduoduo. Three Squirrels recently told 36Kr that it currently has no plans to enter Pinduoduo, Be & Cheery said "the reasons are complex," and Bestore has no related actions. Why this collective silence? 36Kr believes there are multiple reasons:

  1. First, e-commerce brands find it difficult to escape the "choose one of two" dilemma. With Pinduoduo's rapid rise, Alibaba and JD.com cannot sit idly by. The direct competition between platforms is intense, and leading brands, as the focus of competition, are crucial to the outcome of every major promotion.
  2. Second, Pinduoduo started with agricultural products, and its base users are highly price-sensitive. Coupled with policies of "0 commission" and "0 platform service annual fee," a large number of manufacturers and distributors that previously struggled to gain an advantage on e-commerce channels have flooded in, trading purely low prices for consumer awareness. The three giants do not have a clear price advantage.
  3. Third, Pinduoduo's "Costco + Disney" model is based on social gameplay to help manufacturers connect directly with consumers, which differs from the traditional product R&D models of the three giants, and supply chain adjustments will take time. The absence of the three snack food giants on Pinduoduo leaves room for new brands to rise. The food track is more likely to produce new brand opportunities than general consumer goods because the biggest issue is intense channel competition, and channel-based brands can only passively respond. When asked about Pinduoduo's strategy to attract brands, Huang Zheng admitted at last year's earnings call that competition among brands is currently very fierce. "Exclusivity is an important factor and will have a significant impact."

-03-

The Birth of Pin Brands

Pinduoduo, which started with agricultural product group buying, is now in a stage of penetrating from lower-tier cities to first- and second-tier cities, and transitioning from low average order value to high average order value. This requires a rich brand product ecosystem for support. The key to connecting users across all channels lies in building a full-category product system. Furthermore, although Pinduoduo's annual active users are growing rapidly, the value of existing users has not been fully tapped. The average revenue per user (ARPU) is not high, with an average annual spending per active buyer of only 1,842.7 RMB/year, far from Alibaba's 9,714.9 RMB/year in the same period. Not only is consumption frequency low, but for most Pinduoduo users, low price remains the main driver for orders. This low frequency is not due to low purchasing power but requires a new set of user market education logic. At the current scale stage, relying solely on new users to contribute GMV is clearly unrealistic. Agricultural products and small commodities have limited imagination space. There is a need for high-ARPU categories, especially leading products in those categories. From its investment in Gome, one can see Pinduoduo's desire to expand categories, and it is also increasing subsidies in high-ARPU categories such as beauty and apparel, 3C digital, and footwear. FMCG, especially snack foods, is also a choice to increase user value. Snack foods are marketing-heavy, and subsidies can more directly stimulate consumers to continue buying. Moreover, their strong sharing and topic-driven social attributes are more conducive to Pinduoduo expanding its user base. Snack foods include major categories such as nuts, braised products, puffed foods, and convenience foods. Unlike the three giants' solid Top 3 positions in some keyword comprehensive rankings on Taobao and JD.com, Pinduoduo is a completely different brand ecosystem, with international brands, manufacturers, food distributors, traditional brands, and new brands mixed together, making market competition fierce. (Note: JD brand merchants include self-operated flagship stores. The above rankings are as of 2020.6.1, excluding advertising placements.) In Q1 2020, Pinduoduo delivered results that exceeded industry expectations, with single-quarter GMV growing 99.1% year-on-year to 303 billion RMB. Food was an important growth source, with year-on-year growth of 72%. Huang Zheng also emphasized in the subsequent earnings call that Pinduoduo plans to drive further growth in food. Pinduoduo has been trying to build a platform branding system from two aspects: first, the New Brand Plan, supporting 1,000 factory brands and building a C2M model product circulation network connecting factories directly to consumers; second, for leading brands, through "hundred billion subsidies" to continuously subsidize best-selling items, enhancing consumers' perception of "genuine products" and stimulating subsequent purchases. In terms of membership systems, Pinduoduo has also launched brand black cards, money-saving monthly cards, and other brand strategies, as well as social means to stimulate repurchase. This has already shown results: Pinduoduo's annual orders per user increased from 26.6 to 33.7 year-on-year in 2019, but there is still a large gap compared to Alibaba and JD.com. Although its user scale is now sufficient to rival Alibaba, Pinduoduo and the latter are completely different ecosystems. Alibaba has the industry's richest brand pool and a new retail ecosystem covering online and offline, which is a considerable temptation for new brands; JD.com represents the premium lifestyle consumer market, supported by a strong self-operated logistics system for fast fulfillment; Pinduoduo's advantage lies in low-price bestsellers, strong penetration into lower-tier markets through social fission and C2M models. For Pin brands, the opportunity lies in exploring upstream resources, using "people find goods" to obtain social fission traffic, completing basic customer acquisition driven by high cost-performance, and converting from public domain traffic to private domain traffic such as WeChat official accounts, to obtain seed users with high repurchase rates.

-04-

New Opportunities for New Food Brands: No Longer Leisure

Looking back at the rise paths of Three Squirrels and Be & Cheery, it can be found that the nut category was an important breakthrough. After building brand awareness, they shifted to full-category, multi-brand layouts in leisure snacks. But currently, competition among major snack brands is fierce and homogeneous, making it difficult to replicate this brand rise path for today's Pin brands. Compared with other snack categories, nuts have the characteristics of high average order value, low processing level, and low food safety risk, which helps brands focus more on channel operations and rapid volume growth in the early stage. For rapidly changing e-commerce channels, this is key to survival. Due to shorter payment cycles in online channels, e-commerce-based brands often have stronger operational capabilities than traditional brands, with significantly better inventory turnover rates. Haoxiangni previously mainly sold through supermarket channels, with an inventory turnover rate of only 1.85 in 2016. After acquiring Be & Cheery, in 2017 and 2018, the inventory turnover rate quickly rose to 2.55 and 2.99. Another important point is that nuts themselves have low user education costs. "In the traditional food field, people are very cautious about eating," said Wang Yi, founder of Xiaohuangxiang. In his view, raw material inspection is the biggest pain point in food, which makes costs difficult to control. Of course, the rapid rise of nut distributors on Pinduoduo is largely due to differentiated product positioning. Without fancy packaging or brand premium, they mostly sell in bulk, replacing the previous offline multi-level distribution network. They establish a direct-to-consumer circulation channel through low prices. In other words, the former is doing nut consumption upgrading, while Pinduoduo is more of an online replacement for offline snack stalls. The first wave of snack food e-commerce brands since 2011 seized the dividend of e-commerce for full categories, especially basic food categories. Today, as e-commerce penetration reaches a bottleneck, there is more need to break out of the traditional snack product context, explore new scenarios for snack users represented by Generation Z, and find brand opportunities in niche categories. For new food brands, being defined as "leisure" is not a good thing because it implies low frequency and high substitutability. Daily nuts are a typical example. Three Squirrels alone had sales exceeding 1 billion RMB for this single product in 2019. Nuts have strong stockpiling attributes, with Q1 and Q4 being peak seasons and Q2 and Q3 starting to decline. How to convert low frequency to high frequency and explore new scenarios beyond leisure is very important, but the key to convincing taste buds is not just price; the core lies in the "healthy meal replacement direction." With this premise, we believe snack food brands can be divided into three stages: 1.0 stage: Basic snacks, meeting basic taste needs and defining the snack category; 2.0 stage: Channel-based snacks, born for channels, emphasizing channel marketing, far from consumers, and light on product R&D investment; 3.0 stage: Content-based snacks, targeting vertical scenarios, combining snacks with content, and serving segmented groups; Snack food category innovation includes three typical directions: one is scenario-based snacks, such as daily nuts, pocket sandwiches, girlfriend gift packs, and baby snacks; another is new-flavored snacks, such as vine pepper melon seeds and coffee-flavored Want Want; and another is functional snacks, such as plant-based meat snacks, daily dark chocolate, low-sugar/low-fat snacks, and meal replacement protein bars/cookies/shakes. The diversity of categories is an irreversible process, which will promote the rise of more new brands in non-nut categories. According to Qichacha data, from January to April 2020, 9,928 snack food-related enterprises were registered in China, with the most registrations in April at 4,723, up 63.9% month-on-month. Compared with last year, registrations from January to April increased by 30.7% year-on-year. In fact, capital is also driving this process. Since 2020, especially in the post-epidemic period, driven by consumer investment enthusiasm, food brands including Wangbaobao, A1 Snack Lab, Shizuren, and Xiaohuangxiang have received financing. In addition to polishing best-selling products, most financing this year has been before Series B, and generally with high valuations.

-05-

Summary

For most food brands, the Taobao ecosystem is still the first choice for new product launches. There are three main reasons:

  1. First, the Taobao ecosystem has a complete retail ecosystem distinct from JD.com and Pinduoduo, which may help brands gain access to omni-channel distribution opportunities.
  2. Second, the Taobao ecosystem itself has a base of deep e-commerce users, which gives brands more imagination space for per-customer value.
  3. Third, Pinduoduo still has a large number of low-priced products, and its ecosystem is not yet complete. But as user growth in the Taobao ecosystem gradually slows, leading brands are using their existing advantages to divide most of the traffic, making it increasingly difficult for new brands to stand out. New e-commerce channels represented by Pinduoduo are currently in the platform brand building period. The birth of Pin brands begins with channel user dividends and ends with supply chain resources. Just as e-commerce dividends gave birth to the billion-level Three Squirrels, and traditional channels gave birth to the billion-level Yanjin Shop, in new Internet channels, new food brands in the billion-level single-product category are growing. The e-commerce user dividends represented by Pinduoduo will grow a batch of new channel-based brands, which have the opportunity to approach leading brands and secure a place in multi-e-commerce channels and offline distribution systems. Source: 36Kr Pro (ID: Krtech36kr), Author: Yang Yafei