On the afternoon of September 21, 2023, Dongpeng Beverage (Group) Co., Ltd. (605499.SH, hereinafter referred to as 'Dongpeng Beverage') held its 2023 semi-annual performance briefing. According to its semi-annual report, Dongpeng Beverage achieved operating revenue of 5.46 billion yuan, a year-on-year increase of 27.24%; net profit was 1.108 billion yuan, a year-on-year increase of 46.84%. Notably, sales revenue from Dongpeng Special Drink reached 5.135 billion yuan, accounting for 94.13% of total revenue. From the financial reports of the past two years, the revenue of Dongpeng Special Drink series products accounted for 94.66% and 96.24% of the company's total revenue respectively. As the domestic beverage market continues to expand in segmented tracks, Dongpeng Special Drink has managed to carve out a high-speed growth 'way out' with its big single product. (Image source: Dongpeng Special Drink)

It is understood that Dongpeng Beverage's product matrix includes not only the super big single product Dongpeng Special Drink, but also Dongpeng Big Coffee, Dongpeng Hydration, Sparkling Special Drink, sugar-free drinks, and packaged drinking water. For Dongpeng Beverage, the big single product strategy is undoubtedly a winning move, but for any company, long-term reliance on a single product is not a long-term solution. Despite the impressive growth in the semi-annual report, Dongpeng Beverage's stock price did not rise significantly after the report was disclosed. On September 21, its stock price closed at 182.41 yuan, with a total market value of approximately 72.23 billion yuan. As of the time of writing, its stock price has not returned to the 200 yuan range. Earlier, Dongpeng Beverage had consecutive shareholder reductions, which caused panic among investors. So behind the market sentiment, what 'soul test' is Dongpeng Beverage facing? At present, how to say goodbye to the 'big single product dependency' is of utmost importance. At a time when the beverage market is becoming more personalized and high-end, and competition is intensifying, how can innovation break through the 'involution'? In the future, what else can Dongpeng Beverage rely on to 'stay awake and fight' a new 'awakening' story...

Dongpeng Special Drink: 'Sitting Second, Aiming First' It's Time to Say Goodbye to the 'Big Single Product Dependency' The stock market may be disappointing, but the single product is thriving. According to NielsenIQ survey data, in the first half of 2023, Dongpeng Special Drink's sales volume share in China's energy drink market increased from 36.70% at the end of 2022 to 40.86%, ranking first; sales value share increased from 26.62% at the end of 2022 to 29.06%, ranking second. It can be seen that in the domestic market where industry growth is slowing, Dongpeng Beverage, 'sitting second and aiming first', still relies on its big single product to achieve high-speed growth in sales and profits, firmly holding the throne of 'beverage leader'. However, although Dongpeng Special Drink is Dongpeng's star card, in the view of industry experts, relying solely on this big single product to enter the future beverage market may not go far. The 'big single product dependency' carries multiple potential risks from the market, consumers, and competitors. (Image source: Dongpeng Special Drink)

Specifically, the energy drink track where Dongpeng Special Drink is located is highly competitive. Research and Markets data shows that by 2025, the global functional beverage market is expected to reach $173.23 billion at a compound annual growth rate of 7%. According to Euromonitor data, retail sales of energy drinks in China increased from 26.3 billion yuan in 2015 to 45.2 billion yuan in 2020, with a 5-year CAGR of 11.5%, leading the soft drink sub-sector, and its share in the overall soft drink sector increased from 6.7% in 2015 to 9.3% in 2020. Taking 2000 as a time node, before that, the most famous functional beverages in China were Jianlibao, known as the 'Oriental Magic Water', and Thai Red Bull, which entered China in 1995. The former is a sports drink, and the latter is an energy drink. Entering 2000, functional beverages began to seize the national beverage market, with multiple domestic and foreign brands forming a flourishing market pattern: foreign brands include Monster Energy, Hansen Natural, PepsiCo, Coca-Cola, Pocari Sweat, etc.; domestic brands include Red Bull Energy Drink, Lehu Vitamin Drink, Leba's 'Mizone', Nongfu Spring's 'Scream', Master Kong's 'Jinpao', etc. Among them, Red Bull entered the Chinese market with a strong advertising offensive and became the most well-known functional beverage brand in the domestic market; Mizone became deeply rooted in people's hearts through the 'vitamin water' concept and unique packaging. With the increase in functional beverage categories, consumer recognition has gradually improved. Nowadays, in addition to the aforementioned well-known brands, many new consumer brands and companies have also entered the energy drink track in recent years. For example, Genki Forest's brand Alien, national brand Panpan's Baofali, new brand Jijie, New Hope's female functional drink 'Instant Shine', tea brand tea soon, and plant-based drinks like 'One Whole Ginseng Water' have also entered the market. Foreign companies have also entered the domestic energy drink market to try to get a share. The American energy drink brand 'Monster' entered in 2016 and was once considered Red Bull's biggest competitor. Overall, the domestic functional beverage market continues to be highly competitive, with old and new brands such as Lehu, Mizone, Pocari Sweat, and Genki Forest chasing Dongpeng Beverage, which occupies a leading position in the industry. Relying solely on a single big product series, Dongpeng Beverage seems insufficient in the face of fierce attacks from competitors. Under internal and external pressures, the author believes that Dongpeng Special Drink's brand vitality has already aged to some extent. No matter how this big single product is innovated, upgraded, or iterated, it may have little effect. Changing thinking and timely choosing to say goodbye to the 'big single product' era of functional beverages and moving towards a diversified segmented market is the long-term solution. This may be a good start.

Creating the 'Second and Third Growth Curves' New Strategies Needed Amidst Enemies The empire of Dongpeng Special Drink was built by Lin Muqin, a Chaoshan native. Like his name, Lin Muqin has the diligent spirit of 'only by fighting can you win'. At the 2022 annual group summary and commendation conference, Lin Muqin publicly stated: 'In the next three years, we must cultivate and develop a second growth curve. We cannot have a lying-flat mentality. If we don't learn, and our abilities can't keep up with the company's development speed, we will be eliminated.' Here, the 2023 development strategy of 'comprehensive national development and cultivating the second curve' refers to building the 'Dongpeng Energy+' product matrix while investing resources to cultivate second-curve products, strongly supporting the development of new categories such as Dongpeng Big Coffee, Dongpeng Hydration, and olive juice, to cultivate new growth points for the company's future healthy and sustainable development. (Image source: foodtalks)

From a product perspective, one of the best solutions to spread risk is to find new growth points. Take Xiaomi's huge product strength, with a large model on one hand and car manufacturing on the other, as an example. From the initial mobile phones, TVs to a series of product layouts, Xiaomi's layout is committed to becoming a smart ecosystem platform, continuously extending its current ecosystem around user interaction. From the perspective of finding a new growth curve for the next decade, Xiaomi's entry into the smart car market also has more practical significance. Only high-value, high-potential products like smart cars can raise Xiaomi's long-term growth space. It can be seen that whether in terms of market size or profit level, Xiaomi's performance is quite outstanding. Dongpeng Beverage, known as the 'Xiaomi' of the energy drink industry, is also seeking new growth space. Among the many new products, Dongpeng Beverage has high hopes for 'Dongpeng Big Coffee'. Previously, when receiving institutional investor research, Dongpeng Beverage's vice president and board secretary Liu Lihua stated that Dongpeng Big Coffee would be the 'second curve' in 2023, with resources invested in key development. At present, this product, which entered the ready-to-drink coffee track in 2021, is the most successful case of segmented positioning in Dongpeng Beverage's development history. Since functional drinks and coffee have some overlap, this strategy seems to have a high chance of success. Both have 'refreshing' attributes, and consumers accept them easily. Unlike Dongpeng Special Drink, which targets drivers and workers, 'Dongpeng Big Coffee' targets urban white-collar workers who love instant and freshly ground coffee. This differentiated positioning helps Dongpeng Beverage break through. (Image source: Dongpeng Special Drink)

Although it is currently in the process of upward breakthrough, 'Dongpeng Big Coffee' also faces significant resistance. On the one hand, the domestic ready-to-drink coffee market has been growing continuously in recent years, and consumer awareness has basically formed. Dongpeng Beverage faces pressure from industry giants such as Starbucks and Luckin Coffee in the freshly ground coffee segment, making the development path not easy; on the other hand, benchmarking against industry leader Nestlé, whose bottled coffee has been lukewarm, also indirectly shows that 'Dongpeng Big Coffee' as a new growth point still needs to strengthen its competitive and integrated online and offline channel operation capabilities. Fortunately, Dongpeng Special Drink's consumer reach and channel layout have 'paved the way' for Dongpeng Big Coffee. Based on Dongpeng Beverage's investment in digitalization, the consumer connection and channel layout around one-code-one-product have also pointed the way for Dongpeng Big Coffee. In addition, Dongpeng Beverage has made many attempts and investments in the Chinese beverage market. In December 2021, Dongpeng Beverage launched a new energy drink 'She Neng' specifically for female target groups, claiming to be 0 fat and no added sucrose; in May 2022, Dongpeng Beverage launched a new product, Dongpeng Sparkling Special Drink; in January this year, Dongpeng Beverage officially launched a new electrolyte drink, 'Dongpeng Hydration', officially entering the electrolyte drink track. (Image source: Dongpeng Special Drink)

Unfortunately, these segmented products have not become explosive hits in the market. According to 2022 annual report data, sales revenue of other beverage products except Dongpeng Special Drink decreased by 14.23% year-on-year last year. It can be seen that amidst enemies, developing the 'second and third growth curves' is not easy. The author believes that Dongpeng Beverage needs time to explore consumer needs if it wants to extend from Dongpeng Special Drink to segmented fields. It is understood that in addition to developing the second curve, Dongpeng Beverage, with abundant funds, is also opening up industrial investment routes, which may be a new strategy beyond products. Dongpeng Beverage announced that it plans to invest in upstream and downstream high-quality listed companies in the domestic and foreign industrial chain through securities investment, with a total investment not exceeding 50% of its net assets in 2021, i.e., not exceeding 2.1 billion yuan.

Guard the Old Base, Do Well in Segmented Markets Advantages Stack Up to Open Up Future Imagination Space As we all know, product development requires time accumulation. Marketing can be high-profile and achieve miracles in a short time. With an advertising slogan highly similar to Red Bull's, 'Tired, sleepy, drink Dongpeng Special Drink', Dongpeng Special Drink became popular across the country. Even if there is suspicion of copying homework, at the same time, due to the trademark dispute between China and Thailand over Red Bull, Red Bull had no time to pay attention to Dongpeng Special Drink. Dongpeng Beverage's success is inseparable from heavy marketing investment. According to financial data, from 2020 to 2022, Dongpeng Beverage's sales expenses were 904.3 million yuan, 1.368 billion yuan, and 1.449 billion yuan respectively, showing an upward trend year by year. In 2022, sales expenses accounted for 17.04% of revenue. Among them, promotional and publicity expenses increased by 31 million yuan year-on-year, an increase of 3.81%. Around the customer strategy of '8 groups, 20 categories' key consumer groups, Dongpeng Beverage carried out integrated marketing communications, focusing on e-sports, driving, and sports groups, making strong efforts in marketing and placement channels through various TV drama placements, sports event sponsorships, and Douyin, Bilibili, etc., adhering to youthful marketing and committed to the needs of young consumers. (Image source: Phoenix Net)

Dongpeng Beverage's 'traffic-oriented' approach hopes to play with young people. For example, it has carried out in-depth cooperation with media such as China Central Radio and Television Station and Hunan Satellite TV, deeply embedding in four hit dramas including 'The Spirealm', 'Meeting You', 'Happiness to Ten Thousand Families', and 'Ice and Fire', two variety shows 'The Voice of Heaven' and 'Brave Us', sponsoring Han Hong's first online concert, and using new media platforms such as Xiaohongshu and Zhihu to voice high-frequency hard advertising, reaching target groups in all directions, committed to creating a new benchmark for youthful beverages. However, in stark contrast to the heavy marketing investment, from 2020 to 2022, Dongpeng Beverage's R&D expenses were 35.54 million yuan, 42.8 million yuan, and 43.75 million yuan respectively, not only far from sales expenses but also accounting for less than 1% of revenue. In terms of growth rate, in 2022, Dongpeng Beverage's sales expenses increased by 5.91% year-on-year, while R&D expenses grew by 2.23%. At the end of 2022, the company had 163 R&D personnel, an increase of 29 from 2021. Dongpeng Beverage obviously cannot escape the criticism of emphasizing marketing over R&D. For long-term development, increasing investment in product R&D and costs, and making breakthroughs in products can form brand stickiness. Blindly spending money on marketing while product quality is not guaranteed will create a false impression and eventually be abandoned by consumers. Moreover, increasing the weight of R&D investment and reducing marketing investment is the key to a company's long-term prosperity. Conversely, this undoubtedly also makes Dongpeng Beverage's future full of imagination space.

The future space worth imagining is that with Dongpeng Beverage's development plan for new segmented functional drinks based on Chinese herbs and fruits such as olive, astragalus, etc., being put on the agenda, this is an innovative move to integrate market hot elements into its main brands and product formats. True differentiated competition may become the 'third growth curve' for Dongpeng Beverage to completely transform and usher in a new round of takeoff. With new product R&D as its most important competitiveness, once Dongpeng Beverage builds new barriers in product R&D and innovation, combined with its long-accumulated channel layout of over 3 million active terminal outlets, it can completely carve out a path for segmented new products. As a comprehensive beverage group transitioning from a single category to multiple categories, although Dongpeng Beverage's high marketing expenditure in the past few years once formed a huge contrast with its almost negligible R&D investment, it has now increased R&D investment and will make achievements in the ecological construction of brand, category, and channel, such as building brand matrix, category matrix, and channel matrix, and will continue to upgrade brand youthfulness in response to the trend of younger main consumer groups. In Dongpeng's new vision, Dongpeng Beverage needs to develop on multiple fronts. However, the capital market and consumers will not leave Dongpeng Beverage too much time for transformation and takeoff. How to accelerate the process of R&D and new product launches, and how to efficiently innovate to break through the 'involution', is precisely the 'soul test' for Dongpeng Beverage Group at the moment. Whether to continue trial and error or start a new strategy, what Dongpeng Beverage needs to do is to prove that it not only has Dongpeng Special Drink, but also other sustainable profitable and growing beverage businesses.

References:

  1. Functional Beverages: Huge Market Meets Bottlenecks | Packaging Finance and Intelligence
  2. Exclusive Interpretation! 5 Trends in the 2022 Functional Beverage Industry, These Ingredients Are the 'New Favorites' | Zhihu
  3. Developing the Second Growth Curve, Is Dongpeng Beverage's Coffee Business Easy? | Xianji Net
  4. Xiaomi's Three Axes for Strong Growth: Dual-Brand Strategy, Channels, and Technology! | Sohu
  5. Many Hidden Concerns Unresolved, Is It Too Early for Major Shareholders to 'Divide the Cake'? | Southern Metropolis Daily · Aoyi Net