---
title: "Sales Decline, How to Grow Profits?"
description: "When sales decline, can profits still grow? Many may doubt it, but examples like Uni-President's Liu Xinhua and China Resources Beer's Hou Xiaohai show it's possible, with Uni-President seeing profits rise 192% despite a slight sales drop. This article explores the 'growth dependency' of Chinese companies, the pressures squeezing profits, and strategies for structural and cost improvements."
author: "刘春雄"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2016-08-12"
language: "en"
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---

# Sales Decline, How to Grow Profits?

> When sales decline, can profits still grow? Many may doubt it, but examples like Uni-President's Liu Xinhua and China Resources Beer's Hou Xiaohai show it's possible, with Uni-President seeing profits rise 192% despite a slight sales drop. This article explores the 'growth dependency' of Chinese companies, the pressures squeezing profits, and strategies for structural and cost improvements.

Preface: "Sales are down, can profits still grow?" Many people's first reaction might be "unbelievable," "impossible," or "very difficult."
"Very difficult" is true; if you don't believe it, look at Uni-President's Liu Xinhua and China Resources Beer's Hou Xiaohai, who have achieved this. Among them, Uni-President's sales declined by over 1%, but profits rose by 192%.

**Growth Dependency**
"If sales growth is zero, do profits grow or decline?" Many might think profits stay the same. Actually, in most cases, profits decline. This is because Chinese companies have long suffered from a growth dependency.
What is growth dependency? It's when a company relies heavily on sales growth; once growth stops, major problems immediately arise. It manifests in two forms: one is the alternating growth of sales and costs; the other is the alternating growth of sales and the break-even point.

**Alternating growth of sales and costs:** Sales growth → cost increase → sales growth → cost increase...
**Alternating growth of sales and break-even point:** Sales growth → break-even point rises → sales growth → break-even point rises...
If sales stop growing, what happens? We find that although sales stop growing, costs continue to rise, and the break-even point continues to rise—this is inertial growth. Unless there are major changes in cost structure and product mix.
Back to the earlier question: if sales growth is zero, how do profits change? For Chinese companies trapped in growth dependency, profits typically decline.

**If sales drop 10%, how much do profits drop?**
Another question: if sales drop 10%, how much do profits drop?
Some might say, considering the growth dependency above, profits would definitely drop more, maybe 20% or 30%.
In reality, most companies see profits fall by more than 50%, and some even go straight to losses. If sales drop 15%, it's basically safe to say there will be widespread losses.
Why such a judgment? Product gross margin initially covers expenses; only after expenses are covered does net profit form. So, beyond the break-even point, gross margin becomes net profit. In other words, profit is contributed by marginal profit.

**Squeezed Profits**
Companies now face unprecedented operational difficulties, with profits under pressure from three aspects.
First, the pressure of stagnant or declining sales. Industry sales have peaked; it's lucky if they don't decline, and declines are normal. Additionally, new channels, including online channels, are increasing, diverting sales. The larger the traditional company, the greater the impact.
Second, the pressure of rising expenses. Labor costs are certainly rising; haven't channel costs also risen? In the past, the human wave tactic was used because labor costs were low. Now that the human wave tactic is no longer used, channel control is weakening.
Third, e-commerce disrupts the price system, putting pressure on gross margins.
Under these circumstances, even if sales don't decline, profits may still fall.

**Where Do Profits Come From?**
Profits, simply put, come from three major factors: first, scale, i.e., sales volume; second, costs and expenses; third, structure, i.e., product mix.
Now, the first factor is hard to change; what can be done is to change the other two factors, namely **structure and cost**.
There's a saying: how to achieve qualitative change? One is the well-known "from quantitative to qualitative change," and the other is structural change bringing qualitative change. For example, carbon can be graphite or diamond; the difference is structure.
Earlier mentioned Uni-President's Liu Xinhua and China Resources' Hou Xiaohai; their main contribution is continuously launching product upgrades, i.e., big single products, which not only maintained sales, preventing a sharp decline, but also created profits.
For example, Hou Xiaohai promoted China Resources' "Brave the World" (勇闯天涯), with annual sales of 4 million tons, making it the largest single product in the domestic market and a high-margin product.
Another example is Uni-President's Liu Xinhua, who not only launched the big single product Laotan Sauerkraut Noodles but also quietly positioned Tang Daren (汤达人) and Xiao Ming Tong Xue (小茗同学). It is these upgraded new products that brought profit growth.
Liu Xinhua and Hou Xiaohai's brilliance lies in the fact that before sales declined, they had already proactively arranged product upgrades; now these are just taking effect, showing their foresight and vision.

**How to Reduce Costs in a Different Way?**
Labor costs have been rising; how can costs be reduced? Now that products are upgrading, costs cannot be cut from raw materials.
In fact, traditional companies can find ways to reduce costs by leveraging internet tools or thinking.
First, reduce channel costs. Traditional marketing has always used the human wave tactic and deep distribution. Now the "provincial distributor" is making a comeback, and second-tier distributors are returning, meaning the human wave tactic and deep distribution can no longer be sustained. However, without deep distribution, terminal shelf placement rates decline, and new product promotion becomes more difficult.
How can we do deep distribution well without the human wave tactic? I think the internet provides exactly such tools. There are two existing tools: **one is visit-sales software; the other is the B-end e-commerce ordering system.** By leveraging internet tools, efficiency improves, personnel are reduced, and with the big data from backend systems, problems can be precisely identified, preventing salespeople from wandering aimlessly every day.
Second, use internet thinking for organizational transformation. Because labor costs rise and management difficulty increases, traditional functional organizational structures are extremely inefficient, especially the widespread middle management, which neither makes decisions nor executes, purely serving as a "top-down and bottom-up" communication role. Information transmission is precisely the internet's advantage. So, companies like Haier, with only 70,000 employees, laid off over 10,000 middle managers and created a micro-enterprise structure. The "three-person team" of the online brand Handu Yishe, and the "from corporatization to platformization" approach that distributors are now promoting, are all ways to save costs through **organizational restructuring**.

## Extended Reading:
**Uni-President Revenue Declines: Star Beverages Drag**
Although the instant noodle segment performed well, Uni-President failed to achieve revenue growth in the first half of the year, especially with the beverage segment, which accounts for the largest share of revenue, seeing a nearly 10% year-on-year decline. The short lifespan of star beverage products and the constant emergence of competitors are also testing the future growth of Uni-President's most proud beverage business.
Uni-President's interim report shows that first-half revenue was approximately RMB 11.713 billion, a slight year-on-year decline of 2.4%; gross profit fell 4.6% to RMB 4.3245 billion; gross margin also declined from 37.8% in the same period last year to 36.9%. However, as with the full year last year, thanks to the tilt toward high-end product structure, profit attributable to equity holders rose 12.9% to RMB 775.2 million in the first half. Although it grew, it was less than the 192.26% year-on-year growth in 2015.
By business segment, Uni-President's instant noodle and beverage businesses were like sun and rain. In the first half, instant noodle revenue was RMB 4 billion, up 9.8% year-on-year, with market share reaching 20.8%, up 2.8 percentage points from the same period last year.
However, institutional analysis suggests that the first-half instant noodle business benefited mainly from increased market share and the strong performance of Tang Daren. But, because Master Kong's classic series will affect Uni-President's market share growth space, institutions expect the instant noodle business to normalize in the second half.
Compared to the recovery in instant noodles, beverages became an unfavorable factor affecting Uni-President's revenue. In the first half, beverage revenue was RMB 7.448 billion, down 8.2% year-on-year. In 2015, beverage revenue was RMB 14.051 billion, a slight increase of 0.3% from the previous year.
From slight growth to decline, why would Uni-President, a benchmark in the beverage industry, see revenue decline in a business that was already strong? Uni-President attributes the cause to abnormal weather in the second quarter, namely lower summer temperatures and more rainfall. Additionally, beverage market growth slowed in the first half of 2016. Nielsen data shows that overall beverage market sales grew 2% in the first half, with growth continuing to slow.
Beyond industry reasons, the uneven development of Uni-President's beverage categories also affected revenue growth. Tea beverages, represented by the new product "Xiao Ming Tong Xue," recorded revenue of RMB 3.737 billion in the first half, up 13.6% year-on-year, but juice business revenue was RMB 1.67 billion, compared to RMB 2.735 billion in the first half of last year, and last year's first-half juice maintained 26.3% year-on-year growth.
It's worth noting that in last year's interim report, Uni-President emphasized: "Hai Zhi Yan (海之言) saw high-multiple growth in the first half of 2015, making Uni-President's juice business outperform the national overall juice growth." This year's first half, however, the star product Hai Zhi Yan did not perform well.
"To pursue long-term brand value and profit maximization, we adjusted the sales pace of Hai Zhi Yan in the first half of this year, making phased shipment adjustments." Uni-President described this in its interim report but did not specify how the adjustment was made or its impact. Beijing Business Today subsequently interviewed Uni-President, and the company responded: "According to Hong Kong Stock Exchange regulations, we cannot disclose information beyond the financial report."
Institutions had already anticipated the adjustment in Hai Zhi Yan's sales pace and the decline in sales. Analysts at CICC had said they expected Hai Zhi Yan to decline 20%; Morgan Stanley analysts mentioned in a February report that Hai Zhi Yan's growth had slowed.
An unnamed industry insider also pointed out: "The survival rate of new beverage products is low because consumer tastes are changing rapidly. Furthermore, Hai Zhi Yan became the representative of the light beverage subcategory, but then Coca-Cola, Suntory, and other brands joined the category, and similar tastes have become a characteristic of light beverages, making them less attractive to consumers." In the insider's view, this also places new demands on Uni-President's product update speed and product strength; if star products don't hold up, the beverage segment will inevitably fluctuate.

At the request of our distributor friends, the fourth B-end e-commerce inspection class of this public platform will visit Nanjing and Hangzhou from August 15-18 to inspect Qianmi.com and Alibaba Retail Link. Distributors interested in transformation can join us for on-site inspections:

Activity process:
Time: August 15-18
> 15th: Check in at designated hotel in Nanjing; 16th: Visit Qianmi.com, then take high-speed rail to Hangzhou in the afternoon; 17th: Participate in the "FMCG Distributor B2B Transformation Exchange Summit";
> 18th: Visit Alibaba Retail Link in Hangzhou;

**Distributor friends interested in transformation are welcome to join us to learn and inspect on-site:**

**Organization format**
1. Company visit
2. Actual market case visit
3. On-site explanation
4. One-on-one communication

Participating distributors only need to pay a registration fee of 200 yuan.
Other expenses are self-covered.
Note: This inspection is limited to distributors.

**Interested distributor friends can register by long-pressing the QR code below.**
**When adding, please note: "Fourth Registration".**

**Non-participants, please do not disturb.**

**Group photos from previous inspections:**
**3rd B-end e-commerce inspection group photo, from top to bottom: Yunbao Shangmeng, Weijie City Distribution, Wanshang Yizhan.**
**2nd B-end e-commerce inspection group photo, from top to bottom: Jinhuobao, Caiba, Yishang.**
**1st B-end e-commerce inspection group photo, from top to bottom: Piduoduo, Beiquan, Yishang.**

-END-

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