Notably, while the consumer sector is struggling, supermarkets are turning a corner.

Consumer Sector Plunges Around the May Day holiday, many listed companies released their Q1 2022 financial reports, with striking data. The most notable consumer giant to "explode" was Yihai Kerry (300999.SZ), whose performance dropped sharply. On the morning of May 5, its stock opened more than 10% lower, and its market value fell below 250 billion yuan, nearly halving from its peak.

How bad was this report? Yihai Kerry's Q1 2022 report showed revenue of 56.5 billion yuan, up 10.68% year-on-year; total profit of 660 million yuan, down 76.51% year-on-year; and net profit attributable to shareholders of 110 million yuan, down 92.71% year-on-year.

According to Gelonghui's analysis, Yihai Kerry was officially listed in October 2020, setting a record for the largest IPO on the ChiNext board, with its stock price soaring 118% on the first day, pushing its market value above 300 billion yuan. Subsequently, driven by capital speculation, its market value once surged to 800 billion yuan, ranking 11th in A-share total market value, surpassing core blue-chip stocks like Midea Group and Haitian Flavoring.

The sharp performance decline was mainly due to the Russia-Ukraine conflict and weather impacts, causing unprecedented surges in the prices of Yihai Kerry's main raw materials, leading to significantly higher product costs. The company had to raise prices to cope, but this did not fully cover the rise in raw material costs, and its gross margin fell notably year-on-year.

Besides Yihai Kerry failing to withstand the pressure, the condiment industry also struggled amid repeated pandemic outbreaks, weak consumption, rising raw material prices, and intensified competition. Haitian Flavoring reported Q1 2022 revenue of 7.21 billion yuan, up 0.72% year-on-year, while net profit fell 6.36% to 1.83 billion yuan. Fuling Zhacai's 2021 revenue grew 10.82% to 2.52 billion yuan, but net profit fell 4.52% to 742 million yuan.

There are two reasons for the overall weakness in the grain and oil sector: first, repeated pandemic outbreaks affected logistics, terminal sales, and catering, while economic weakness dampened consumption; second, the grain and oil market has low entry barriers and is highly susceptible to raw material costs, leaving companies with shallow moats and vulnerable to profit crashes.

As commodity prices for palm oil, soybean oil, and others rose, food companies faced cost pressures. A representative example is the baking industry, where raw material prices increased. In November last year, Angel Yeast announced price hikes for some products, and the same month, Snowsky Salt announced a 10% increase in ex-factory prices for small-pack salt, with industrial salt prices rising 30%-50%.

A flour distributor told Ling Shou that since the second half of last year, all product lines have seen price increases, which triggered stockpiling by downstream buyers and consumers before the hikes, and another wave of stockpiling before the pandemic outbreak this year.

Rising upstream raw material prices inevitably squeeze downstream companies' profit margins. According to financial reports, Taoli Bread's operating costs in 2021 rose 11.84% to 4.67 billion yuan, with gross margin down 3.69 percentage points, mainly due to increased production costs from higher raw material prices. This trend of rising revenue but not profit also spread to other food and related companies.

Three Squirrels' Q1 2022 report showed revenue of 3.09 billion yuan, down 15.85% year-on-year, and net profit attributable to shareholders of 161 million yuan, down 48.75%. For the full year 2021, Three Squirrels' revenue was 9.77 billion yuan, down 0.24% year-on-year.

Three Squirrels is not an isolated case. Dali Foods and Yanjin Pu Zi saw revenue growth of 6.4% and 16.47% in 2021, respectively, but net profit declined or even turned to losses. Dali Foods' net profit fell 3.2% to 3.73 billion yuan, while Yanjin Pu Zi's net profit fell 37.65% to 151 million yuan.

Consumer companies saw both net profit and market value decline. To offset cost pressures, they had to raise prices, with increases ranging from 5% to as much as 20%. Such passive price hikes due to cost increases are like "drinking poison to quench thirst." The real solution may lie in adjusting market strategies, such as increasing revenue and reducing costs, or streamlining product lines.

No Hope for Self-Rescue? Another logic behind the grain and oil performance slump is that pandemic prevention measures have significantly impacted restaurant businesses, and companies heavily reliant on offline catering channels for revenue have suffered accordingly. Compared to 2021's catering revenue of 4.69 trillion yuan and 2019's figures, industry growth has nearly stalled.

In contrast, Haitian Flavoring, as a leading condiment company, primarily sells through retail and catering channels. Although there is no clear breakdown, at its 2021 performance meeting, management openly stated that "due to the pandemic, the proportion of catering channels has declined slightly in the past two years."

Additionally, new consumer groups are increasingly pursuing healthy eating habits, shifting toward "less oil and less salt." With catering demand hit and household demand for soy sauce and other condiments waning, company performance is inevitably affected.

Under multiple pressures, grain and oil companies are eyeing the new trend of pre-made dishes as a breakthrough. Haitian Flavoring and Hengshun Vinegar have both stated in their financial reports that they are actively developing and laying out pre-made dish product lines. Zhongjing Food also said it has launched pre-made dishes focusing on "shiitake mushrooms + home-style dishes." Yihai Kerry is no exception, having launched hot pot base, snail noodles, and seasoning packets to add high value.

From an industry perspective, although pre-made dishes and condiments are relatively close, condiment companies have some advantages in entering pre-made dishes, but it is not easy to gain a share. First, condiments are a traditional industry with long new product development cycles, and after R&D, they face fierce competition in a mixed market, with no guarantee of short-term performance gains and significant R&D costs.

Haitian Flavoring's report shows R&D expenses of 772 million yuan in 2021, while Zhongjing Food's R&D investment was 32.42 million yuan, up 25.77% year-on-year.

In fact, pre-made dishes, as a low-barrier industry, have attracted many players. In 2020, as many as 13,000 new pre-made dish companies were registered in China, and in the first half of last year, over 70,000 companies were in operation. Weizhixiang, as the "first pre-made dish stock," has not performed prominently since listing, with 2021 net profit of 122 million yuan, down 1.36% year-on-year.

The more players, the more severe the industry's internal competition, leading to price wars at the retail end and further squeezing profit margins of related product lines.

Moreover, in this fierce competition, grain and oil companies lack advantages. Pre-made dish operations differ significantly from condiments, including central kitchen teams, product differentiation, R&D, marketing, and supply chain logistics, all of which are major challenges for new entrants.

The predicament of grain and oil companies is also a challenge for most consumer goods companies. Their profits are declining, and stock prices are weak. The last cliff-like decline in consumer goods stocks was in 2013, and it took three years to emerge from the "darkness."

At that time, most consumer goods industries still had extensive distribution networks, allowing them to push inventory onto distributors to maintain profit growth during economic fluctuations. Today, that approach is no longer viable and can backfire, causing sharp net profit fluctuations and distributor contract terminations.

Supermarkets Recover Notably, while the consumer sector is struggling, supermarkets are turning a corner.

Last year, under the impact of multiple pandemic outbreaks and normalized prevention measures, most retail supermarket companies saw declining revenue and profit growth: on one hand, retail channels were severely diverted, with the retail pie being split by community group buying, front warehouses, and vertical brand chains; on the other hand, companies' own online channels were weak, and digitalization efforts were ineffective.

After a year of exploration and efficiency improvements, some supermarket companies returned to growth in Q1 2022.

According to data from Hithink Flush, the supermarket sector's overall revenue in 2021 was -3.6% year-on-year, and net profit excluding non-recurring items was -331.3%; in Q1 2022, revenue grew 0.2% year-on-year, and net profit excluding non-recurring items grew 68.7%. In comparison, according to the National Bureau of Statistics, total retail sales of consumer goods in Q1 were 10.87 trillion yuan, up 3.3% year-on-year. Online retail sales nationwide were 3.01 trillion yuan, up 6.6%.

Supermarkets like Jiajiayue and Hongqi Chain outpaced the overall consumer market, even exceeding online growth rates.

Among the eight companies that have released Q1 2022 reports, half saw revenue growth, with Jiajiayue leading at 8.32% year-on-year. Its report explicitly stated that the better-than-expected performance was mainly due to improved efficiency in new store cultivation, with digitalization, personnel flow, supply chain optimization, and store optimization all contributing, potentially leading to both profit and expansion growth.

In Q1 this year, under pandemic conditions, supermarkets' main essential products played a role in ensuring supply, with residents stockpiling and local government procurement boosting supermarket performance. Additionally, the Spring Festival fell during this period, traditionally a peak season for supermarkets, contributing to growth.

Second, external competitive pressures on supermarkets eased. In Q1, community group buying significantly retreated, with internet giants adjusting, shrinking, and laying off staff in this business. The previous model of burning cash to lower prices and rapidly expand market share to outlast competitors proved to be a severe internal drain. As capital paid the price for this simplistic business model, supermarkets survived the price war, leading to increased revenue and gross margins in Q1.

Finally, the rise in CPI contributed. According to the National Bureau of Statistics, in Q1, the national consumer price index (CPI) rose 1.1% year-on-year, with urban areas up 1.2% and rural areas up 0.7%.

Specifically, food, tobacco, and alcohol prices fell 1.3% year-on-year. Within this category, grain prices rose 1.7%, fresh fruit prices rose 6.9%, pork prices fell 41.8%, and fresh vegetable prices rose 3.7%. Due to pandemic and weather factors, fresh vegetable prices in March turned from a 0.1% decline in February to a 17.2% increase.

A rising CPI is beneficial for supermarket same-store sales growth, especially as fresh produce, fruits, and vegetables—which account for the largest share of supermarket categories—saw price increases, boosting supermarket revenue and performance.

Of course, steady performance growth is not solely due to external factors. In their strategies, supermarkets like Yonghui and Hongqi Chain have actively invested in omnichannel transformation while strengthening national supply chain capabilities. In refined operations, they are deepening private label and pre-made dish layouts to improve gross margins.

Perhaps spring is already on the way for supermarkets, while consumer goods remain in the "darkness." But to rush toward dawn, the only way is to reduce costs while providing consumers with better experiences and more targeted products with higher efficiency.

This may be the only way out during an economic downturn.

Source: Ling Shou (ID: lingshouke)

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