How will Three Squirrels turn its billion-dollar dream into reality? After achieving the "small goal" of exceeding 10 billion yuan in revenue in 2019, Three Squirrels has set a new target. On May 21, Three Squirrels responded to investor inquiries, stating that its main focus for the next 10 years will be a digital strategy. The day before, Three Squirrels founder and chairman Zhang Liaoyuan stated that the company aims to hit the 100 billion yuan target in the next decade. This implies that Three Squirrels' annual revenue growth should average above 25%. Although Three Squirrels' revenue has grown at an average annual rate of 50% since 2016, industry insiders believe that the leisure snack market, its main focus, has reached its growth ceiling, making it difficult to maintain high-speed growth. Additionally, Three Squirrels' net profit attributable to shareholders has long hovered between 200 million and 300 million yuan. How will Three Squirrels turn its billion-dollar dream into reality? -01- After 10 Billion, Aiming for 100 Billion At the 2019 annual shareholders' meeting, Zhang Liaoyuan stated that in the next 10 years, Three Squirrels would strive for the 100 billion yuan target. Industry insiders believe that Three Squirrels' confidence in setting the 100 billion yuan goal stems from having already achieved the 10 billion yuan target and leading far ahead of other snack brands in the industry. In 2016, Three Squirrels proposed achieving the 10 billion yuan target by 2020. On December 3, 2019, Three Squirrels announced it had completed the target one year ahead of schedule, becoming the first enterprise in China's leisure food sector to exceed 10 billion yuan in revenue. In 2019, Yanjinpuzi's revenue was only 1.399 billion yuan, Haoxiangni's was 5.961 billion yuan, and Liangpinpuzi's was 7.715 billion yuan. In comparison, established giants Dali and Want Want took 23 and 16 years respectively to break through 10 billion yuan in revenue from their founding. Bao Yuezhong, a fast-moving consumer goods retail expert, believes that by riding the wave of internet dividends, Three Squirrels' journey from 0 to 10 billion yuan in revenue was not difficult, but growing from 10 billion to 100 billion yuan cannot rely solely on nut and snack products. Zhang Liaoyuan also realized that to move toward the 100 billion yuan goal, Three Squirrels needs to break through business bottlenecks. He said, "The 100 billion yuan goal requires us to lay out plans in different tracks. In the past two years, under the omni-channel ecosystem, new brands have been born faster, but the underlying logic is basically the same. By laying out multiple brands, we can replicate our successful experience in existing fields in terms of categories and channels, breaking through our own development ceiling." In fact, Three Squirrels has already begun to expand beyond nuts and snacks. From March to April this year, Three Squirrels completed the industrial and commercial registration procedures for 9 subsidiaries and 1 sub-subsidiary. The total registered capital of the 10 companies exceeds 300 million yuan, with business scopes including supply chain, logistics, computer software and hardware development, general merchandise, wedding services, infant and child products, and pet food. In an announcement, Three Squirrels stated that investing in wholly-owned subsidiaries aligns with its strategic planning, representing the transformation and empowerment of its existing advantages and resources in new fields, further enhancing overall operational capabilities and innovation and R&D capabilities. At the same time, the expansion into new fields provides new opportunities for Three Squirrels to cover more consumer groups. Regarding how it will implement the 100 billion yuan goal, a relevant person in charge of Three Squirrels said in an interview with a Beijing Business Today reporter that in the next decade, Three Squirrels will deeply advance its digital strategy. First, achieve digitalization of the entire supply chain from raw materials to factories to logistics to retail to consumers, building an infrastructure for leisure snacks under China's new infrastructure background through a digital system. Second, build digital marketing. Today is no longer the era of TV advertising; users spend very little time on TV, with most time consumed on platforms like Douyin and Kuaishou. Therefore, in the future, we will build a digital marketing middle platform. -02- Four Years of Stagnant Profits It is worth noting that during the three years from 2016 to 2019, although Three Squirrels' revenue doubled, net profits remained stagnant. Data shows that in 2016, Three Squirrels' revenue was 4.423 billion yuan, with net profit attributable to shareholders of 236.5 million yuan; in 2017, revenue was 5.554 billion yuan, with net profit of 302 million yuan; in 2018, revenue was 7.001 billion yuan, with net profit of 303.9 million yuan; in 2019, revenue was 10.17 billion yuan, with net profit of 238.7 million yuan. In comparison, from 2016 to 2019, revenue increased by over 5 billion yuan, but net profit attributable to shareholders increased by less than 10 million yuan. In response, Three Squirrels explained that due to strategies such as product upgrades, enhanced marketing, and omni-channel advancement to acquire new users and expand market share, expenses have increased. According to financial reports, in the first three quarters of 2019, Three Squirrels' total operating costs were 1.917 billion yuan, 3.119 billion yuan, and 4.757 billion yuan, accounting for 66.80%, 69.14%, and 70.08% of total operating revenue, respectively. A Beijing Business Today reporter's investigation found that Three Squirrels' product discounts have become increasingly normalized. On May 21, in Three Squirrels' Tmall flagship store, almost all products, including new products, enjoyed various promotional offers. Offline, the reporter visited multiple times and found that Three Squirrels promoted products at discounts as low as 50% off. In the view of industry insiders, Three Squirrels currently leans toward a development strategy that prioritizes revenue over profit and scale first. Comparing Liangpinpuzi, Yanjinpuzi, Haoxiangni, and Three Squirrels, it can be seen that Three Squirrels' gross margin has remained at a relatively low level. Data shows that from 2015 to 2019, Three Squirrels' gross margins were 26.9%, 30.2%, 28.92%, 28.25%, and 27.8%, respectively. During the same period, Haoxiangni's gross margins were 40.11%, 33.73%, 29.04%, 28.48%, and 27.62%; Liangpinpuzi's gross margins were almost all above 30%; Yanjinpuzi's gross margins were almost all above 40%. In fact, this "scale-first" approach is not unique to Three Squirrels. Tuniu and Pinduoduo also follow this model. Data shows that from 2011 to 2013, Tuniu's revenue was 765 million yuan, 1.12 billion yuan, and 1.962 billion yuan, with a compound annual growth rate exceeding 60%. However, net profits were consistently negative, with losses of 123 million yuan, 107 million yuan, and 139 million yuan from 2011 to 2013. Bao Yuezhong stated that the advantage of the scale-first development model is that when a company's revenue far exceeds that of competitors, it further strengthens its leading position and can quickly become a national brand. -03- Heavier Asset Model "Using the advantage of scale first can tell a good story in the first half, but to achieve the 100 billion yuan goal, you need to show some 'real skills'," said an industry insider. In fact, after going public, Three Squirrels' business model is gradually shifting from an asset-light to an asset-heavy model. This is mainly reflected in Three Squirrels opening offline stores at the front end and extending to the supply side at the upstream of the industry chain at the back end. Zhang Liaoyuan stated that to break through growth bottlenecks, it is necessary to rely on independent innovation and omni-channel marketing. In the future, the store management system will be restructured, and a digital store operation system will be built, hoping to achieve overtaking on curves. During the pandemic, offline stores in various industries were impacted, but it did not affect Three Squirrels' pace of store openings. During the May Day holiday alone, Three Squirrels opened 68 new stores in places like Shanghai, covering 45 cities, with the number of alliance stores exceeding 370. Including self-operated feeding stores, Three Squirrels' offline stores have exceeded 400. According to the plan, the total number of Squirrel Alliance stores this year will strive to exceed 1,000, and the total number of feeding stores will strive to exceed 200. Alliance stores are franchise models, where Three Squirrels is not responsible for rent or salary costs; however, feeding stores are all self-operated, with employees being its own, located in high-tier cities and core business districts, with an average store area of 200 square meters. Wang Yongping, a market operation expert at the Ministry of Commerce and president of the Commercial Real Estate Committee of the All-China Federation of Industry and Commerce, believes that the average rental price for stores in first-tier cities like Beijing and Shanghai is 6 yuan/day·square meter, while in Tianjin, commercial store rents are lower, about 3 yuan/day·square meter. Based on this, the annual rent for a Three Squirrels feeding store in Tianjin is about 220,000 yuan, and the rent for 200 stores is about 43 million yuan. In addition to front-end layout, Three Squirrels is also accelerating its back-end layout in the industry chain. On December 26, 2019, Three Squirrels reached an agreement with the Wuwei Municipal People's Government to invest in the construction of a health food alliance factory project in the Wuwei Economic Development Zone. It is reported that the total investment in this project is 2.06 billion yuan, constructed in two phases: the first phase will add 11 food alliance enterprises, and the second phase will add 25 food alliance enterprises. Continuous heavy asset investment has led to increased costs and expenses. Financial reports show that in 2019, Three Squirrels' operating costs reached 7.345 billion yuan, a year-on-year increase of 46.22%, higher than the revenue growth rate of 45.3%. Among them, sales expenses increased from 1.461 billion yuan in 2018 to 2.298 billion yuan in 2019, a year-on-year increase of 57.31%. "Three Squirrels is accelerating its heavy asset model layout at both ends, with significant investment in the short term, meaning that Three Squirrels will continue to see revenue growth without profit growth," said Xu Xiongjun, a strategic positioning expert and founder of Jiude Positioning Consulting. Source: Beijing Business Today, Authors: Bai Yang, Li Zhenxing