The future of the soft drink industry will no longer feature 'one hit product per category,' but rather 'a hundred flowers blooming across different categories,' with shorter overall lifecycles and increasingly sustained hit products. **-01- Development of the Soft Drink Industry: After the Wave, a Hundred Flowers Bloom Soft drinks (also known as non-alcoholic beverages) are natural or artificially formulated beverages with an alcohol content of less than 0.5%. At the end of 1978, Coca-Cola re-entered the Chinese market, marking a milestone in the industrialization of China's beverage industry. Since then, the soft drink industry has entered a forty-year period of flourishing: categories have continuously expanded, and hit products have emerged one after another. To date, the soft drink industry has experienced five waves, corresponding to the five major categories of carbonated beverages, bottled water, tea beverages, fruit juice beverages, and functional beverages. After each wave, product categories and scale have rapidly increased: Coca-Cola has become a phenomenal mega-hit product worth over 100 billion yuan; Wahaha and Nongfu Spring both have products exceeding 10 billion yuan. In recent years, the emerging 'near-water' beverages, represented by Uni-President's Hai Zhi Yan, have quickly captured a 30 billion yuan market space. The future trend of the soft drink industry lies more in the breakout of individual products amidst a hundred flowers blooming. At present, the soft drink industry has become a large industry with sales exceeding 400 billion yuan (based on ex-factory prices), while categories continue to expand, and various sub-sectors have developed to a relatively balanced state. For the soft drink industry, two trends are common: upgrades in processing and packaging make products easier to store and more convenient; products are becoming more nutritious and healthier. Early carbonated beverages have seen their share of soft drinks decline, replaced by tea beverages, fruit and vegetable juices, and plant protein beverages. The soft drink industry has long passed the era of 'one trick works everywhere.' With the proliferation of street-side shops, convenience stores, and the rise of tea shops, the beverage industry has entered a stage of fierce competition. While the number of competitors has increased, the industry track has also expanded, further raising the ceiling of category space. -02- China's Soft Drink Market: A 1+5+N Pattern In 2017, China's soft drink market retail scale was 560 billion yuan, a year-on-year increase of 2.3%. A horizontal comparison reveals that China's beverage market is currently divided among many players, forming a 1+5+N pattern based on market share by category: bottled water holds a dominant position with multiple strong competitors; plant protein beverages, tea beverages, fruit juices, carbonated beverages, and sports energy beverages are all major sub-categories. Among them, bottled water has the largest share at 28.2%, followed by protein beverages, tea beverages, fruit juices, and carbonated beverages. Although coffee is growing rapidly in the Chinese market, packaged coffee beverages still account for a relatively small share. Additionally, due to the vast number of products in the soft drink market, upgrades and derivatives from existing categories have spawned more categories, such as the recently popular 'near-water' beverages and tea drinks featuring sugar-free selling points. -03- Bottled Water Market: Industry Enters Maturity, Price Increases Still Expected In 2018, China's bottled water market reached 190 billion yuan, with a CAGR of 11.1% from 2013 to 2018. The official definition of bottled water is water sealed in bottled containers that meet food safety standards and relevant regulations, suitable for direct drinking, and containing no sugar. Currently, mainstream bottled water on the market can be divided into four categories: purified water, natural water, mineral water, and natural mineral water. Since 2000, branded bottled water has grown rapidly: the first domestic mineral water manufacturer was Qingdao Laoshan, established in 1930, while the first bottle of C'estbon purified water in the domestic market was launched in 1989. Due to the long history of water beverages, the early development of bottled water laid a long groundwork for the prosperity of the early 21st century. After 2000, Nongfu Spring, Coca-Cola Ice Dew, Master Kong Mineral Water, and Ganten Baishuishan all entered the market. Starting in 2006, high-end products represented by 5100 Tibet Glacier Water and Kunlun Mountain rose rapidly. Currently, the overall industry growth rate has slowed, and the industry pattern is characterized by oligopolistic competition: in 2018, the growth rate of China's bottled water retail sales fell to around 8%, with overall growth slowing and the industry entering a mature phase. Although per capita consumption of bottled water in China still has room for improvement compared to the world average, considering the large consumption of barreled water in China and the prevalence of drinking direct or boiled water in rural markets, industry growth may continue to maintain single-digit growth. At present, China's bottled water industry is highly concentrated (CR6>80%), with the top three brands—Nongfu Spring, China Resources C'estbon, and Ganten Baishuishan—accounting for over 50% of the market share. However, structurally, China's bottled water landscape is not yet stable. The reason is that although bottled water has grown into the largest sub-sector of soft drinks, the average selling price of bottled water in China is about 40-60% lower than in Japan and the United States. Consumers do not deliberately choose brands when purchasing bottled water, and the product's pricing power is weak. Therefore, the moats of the top brands mainly rely on strong distribution channels, and brand recognition for low-priced products is limited. In the future, as the industrial structure shifts upward, companies' pursuit of high gross margins, coupled with improved consumer awareness, is expected to continue advancing the premiumization process. -04- Plant Protein Beverages: Fragmented Industry, Players Positioned in Each Segment The industry is fragmented, but categories are concentrated. Statistics show that among plant protein beverage manufacturers above a certain scale, the top six manufacturers account for 85% of total production, with categories including walnut milk, soy milk, coconut juice, almond milk, and peanut milk. In the plant protein beverage industry, manufacturers basically use core products to capture market share, such as Six Walnut, Chengde Lulu, and Weiwei Soy Milk. The several sub-categories of plant protein beverages are niche markets under the broader soft drink market, with relatively small scales. Compared to the market sizes of carbonated beverages, fruit juices, tea beverages, and bottled water, plant protein beverages as a whole have become a significant sub-sector of the soft drink industry, but due to the many categories, each category accounts for a very small share of the overall industry. For example, Coca-Cola and Pepsi occupy over 80% of the carbonated beverage market, while the largest plant protein beverage company, Yangyuan Zhiyin, holds only a 7% share. -05- Industry Barriers: Easy to Defend, Hard to Attack, Three Major Features Build Solid Barriers Looking at the current domestic plant protein beverage industry landscape, major or super products are all produced by domestic companies, with local characteristics, such as red-can herbal tea from Guangdong, walnut milk and almond milk from Hebei, and coconut juice from Hainan. International brands are rare. Early entrants in the industry have used years of accumulation to gain a positioning advantage in consumer minds, forming high barriers invisibly, making plant protein beverage hit products easy to defend and hard to attack. Barrier 1: Specific raw material sources create distinct local characteristics. Due to the uniqueness of flavor and raw material sources, the plant protein beverage industry has always shown obvious regional characteristics. For example, Lulu Almond Milk uses raw materials from Hebei, Six Walnut uses raw materials from Xinjiang, Yunnan, and the Taihang Mountains—the three golden walnut production areas—and Coconut Palm coconut juice uses coconuts from Hainan. After long-term cultivation, local consumers have developed relatively high loyalty. Local characteristics serve as defense, making 'cities' easy to defend and hard to attack. Due to distinct local features and absolute market share in sub-sectors, plant protein beverage profitability is generally strong. At the same time, the proportion of loss-making plant protein beverage companies has been declining in recent years. Taking Yangyuan Zhiyin and Chengde Lulu as examples, their net profit margins in 2017 were 29.8% and 19.8%, respectively, even higher than most mid-to-high-end baijiu. Yangyuan Zhiyin's ROE in 2017 was as high as 34.7%, ranking first among listed companies in the beverage manufacturing industry. Chengde Lulu's ROE in 2017 was 19.8%, also among the top in the industry. Although ROE has declined in recent years due to the expansion of asset scale reducing asset turnover, the net sales margin has steadily climbed. Core products can bring continuous and stable cash flow to the company, making them truly 'cash cows.' Barrier 2: Channel is King: A reasonable channel is a prerequisite for expansion. For FMCG, the importance of an effective channel model is very significant. Consumers need products to be within reach, and the importance of channels to companies is to enable consumers to easily buy products once they have a demand. Taking Yangyuan Zhiyin's channel as an example, with Hengshui as its base, it radiated to county-level markets in Hebei and surrounding areas, quickly completing merchant recruitment in over 100 county-level markets. Then, starting in 2008, the company began to enter Henan, Shandong, Sichuan, and other regions through a rolling replication model, and has now achieved sales of over 1 billion yuan in each. Today, the company is gradually moving from third- and fourth-tier cities to first- and second-tier cities, aiming for deep nationalization. Barrier 3: Clear positioning in sub-segments, deep binding of upstream and downstream industry chains. Plant protein beverages have relatively obvious characteristics of a weak industry with strong brands. The plant protein beverage industry as a whole has no leading brand, but under the main sub-categories, there is a situation of one dominant player. For example, Six Walnut, Chengde Lulu, and Hainan Coconut Palm each hold over 90% market share in walnut milk, almond milk, and coconut juice, respectively, and their products and brands have become synonymous with their respective industries. Other industries such as peanut milk and soy milk also show oligopolistic patterns. We believe that for these major sub-sectors, entry barriers for small companies are extremely high, and large companies that have already achieved scale (such as Yili, Mengniu, Dali, Huiyuan, etc.) may enter as followers, but they will first test the waters with composite plant protein beverages, soy milk, etc. For walnut milk, almond milk, and other almost completely monopolized industries, the probability of these potential competitors seizing market share in the short term is low. -06- Carbonated Beverages: Stable Industry Pattern, Extremely High Entry Barriers for New Entrants With a long history, the industry has entered a mature phase. The origin of carbonated beverages can be traced back to the 1880s, and Coca-Cola first entered China in 1927, making China Coca-Cola's largest overseas market in just over a decade. In 1948, Coca-Cola left China, and then with the restoration of diplomatic relations between China and the United States in 1979, Coca-Cola and Pepsi successively entered the Chinese market. After decades of development, China's carbonated beverage industry has now reached a scale of about 60 billion yuan, with the two giants holding over 90% of the market share. With the founding of New China, policies on foreign investment introduction were not fully implemented, and the domestic carbonated beverage industry once occupied the domestic market. The former Asian Soda, Shanhaiguan Soda, Northeast Bawangsi Soda, Beijing Beibingyang Soda, Shandong Laoshan Cola, Wuhan No.2 Factory Soda, Shanghai Zhengguanghe Soda, Guangdong Shaolin Cola, and Sichuan Tianfu Cola were collectively known as the 'Eight Major Sodas.' However, due to the lack of management experience and brand protection awareness among domestic enterprises at that time, many national brands were acquired by foreign brands, leading to the loss of original markets and channels, and the brands were gradually shelved. Endogenous industry growth has stagnated. From an industry scale perspective, China's carbonated beverage market began to decline in 2012, and although growth has fluctuated since then, slowing or stagnant growth has become the norm. At present, the domestic businesses of the two cola giants have matured, adopting a production model of importing concentrate and local bottling to minimize production costs. Currently, the carbonated beverage industry is basically divided between Coca-Cola and Pepsi, whose channel advantages, brand advantages, and cost advantages from economies of scale create extremely high barriers for later entrants. Currently, Coca-Cola and Pepsi have global market shares of 40% and 20%, respectively, but in China, they can reach 70% and 25%. Category innovation continues, with domestic brands launching differentiated counterattacks. Given the stagnation of overall industry growth, carbonated beverage manufacturers are introducing new products, from flavor changes (such as sugar-free, cherry blossom, white peach flavors) to product updates (such as carbonated coffee). However, due to consumers' deep-rooted recognition of major brands and flavors, new products have been unable to break through in sales. In recent years, domestic brands such as Beibingyang and Wuhan No.2 Factory have returned to the public eye, challenging the traditional cola giants by offering nostalgic products or redesigned, more fashionable packaging. In 2017, Beibingyang's sales reached 600 million yuan with a net profit of 220 million yuan, and in 2018, it continued to see revenue growth of over 30%. In the future, it is expected to carve out a portion of the vast market. -07- Tea Beverages: Positioning 'Cup Fresh Tea' as Healthy Japan experienced a consumption downgrade in the 1990s: at that time, Japan had just ended 30 years of high-efficiency development known as the 'Japanese speed,' macroeconomic growth slowed, the demographic dividend disappeared, and externally, it faced trade pressure from the United States. Nowadays, Japanese society has entered an era of low desire, with both consumption downgrade and consumption upgrade coexisting. The consumer group is shifting to a new generation (from male to female, from over 40 to under 30). Although China's current consumption situation and social demographic structure are not comparable to Japan's at that time, growth has already shown signs of fatigue. From the characteristics of Japan's soft drink consumption at that time, improvements in both supply and demand expanded the industry space, rapidly increasing the scale of various beverage industries. Demand-side drivers: Tea drinking culture and the pursuit of health create vast space for tea beverages. In 2017, Japan's tea beverage industry reached 939 billion yen (approximately 60 billion yuan), with sales higher than coffee beverages and carbonated beverages. Although new beverage varieties have emerged in recent years, the three major categories occupying the mainstream of Japanese beverage consumption are still tea beverages, coffee beverages, and carbonated beverages, together accounting for nearly 70% of the soft drink market. The vast scale of Japanese tea beverages is based on the prevalence of tea and coffee culture in Japan, and the popularity of PET packaging and the rise of convenience stores have also boosted tea consumption in Japan. In addition, in the 1990s, the food and beverage sub-sectors continued to upgrade toward health, such as low-alcohol alcoholic beverages and low-salt organic soy sauce. Japanese sugar-free tea beverages, in line with the health trend, saw rapid growth in product consumption. According to estimates by Japanese beverage giant Ito En, the proportion of green tea converted to beverages in Japan has increased from 20% to 30%, showing rapid growth. Compared with Japan, China's per capita consumption still has significant room for improvement. Supply-side drivers: Numerous participants expand the industry track, and industry chain support promotes efficiency improvement. On the demand side, there is a broad consumption base, and the continuous influx of supply-side participants has also boosted the industry's development. At the end of the last century, traditional Japanese companies entered the soft drink industry one after another, significantly expanding the industry: in the late 1980s, traditional beverage giant Ito En successively invented canned oolong tea and canned green tea; in the early 1990s, Suntory's 'Haruna Factory' for soft drinks was completed, and the same year, canned coffee 'BOSS' was launched. At the same time, with the liberalization of 500ml PET packaging bottles and the popularization of vending machines, soft drink products have been able to enter consumers' sight more conveniently. With the continuous enrichment of products, the overall marketing pace of the industry has accelerated, consumer minds have been continuously reinforced, and the industry has expanded significantly. After comparing with Japan's soft drink development, we have sorted out the development history of China's tea beverages. After research and review, we found that China's tea beverage era can be divided into three major stages, corresponding to three types of products that were or are distinctive at the time: iced tea series focusing on coolness and thirst-quenching, ready-to-drink tea series emphasizing IP and personality, and cup tea series focusing on freshness and health. Tea Era 1.0 (1995-2011): Category startup period, 'Kangtong' dominated iced black tea hit products. As an important branch of the soft drink industry, tea beverages once played a significant role in the third wave of the beverage industry. In the early 1990s, Hebei Xuri Group's 'Xurisheng Iced Tea' pioneered packaged ready-to-drink tea beverages, reaching peak sales of 3 billion yuan and becoming the first hit product in the tea beverage industry. Subsequently, Uni-President Iced Black Tea and Master Kong Iced Black Tea were launched in 1995 and 1996, respectively, gradually dominating the entire tea beverage industry. Later, beverage giants such as Coca-Cola and Nestlé also laid out tea beverages, but hit products were lackluster. At that time, tea beverages mainly focused on coolness and thirst-quenching, with insufficient pursuit of individuality. With the rise of other soft drink categories, the growth of iced black tea series stagnated. In 2011, Uni-President's tea beverage growth was only 0.2%, and although Master Kong's beverage series had support from products like milk tea, overall growth declined significantly. Tea Era 2.0 (2011-2017): Ready-to-drink tea ushers in new changes, 'youthfulness' is the key direction. After years of development, tea beverages, having formed the 'Kangtong' iced tea hit products, were gradually overtaken by other categories. In 2011, due to the rise of fruit juice beverages, the tea beverage market grew slowly. Nielsen data shows that in 2011, tea beverage (excluding milk tea) annual sales grew by nearly 0.2% year-on-year. Beverage giants began to seek new growth points. In 2011, Nongfu Spring took the lead in launching 'Oriental Leaf' featuring 'zero calories.' Although it caused a sensation at launch, its development in subsequent years was lukewarm. In 2015, 'Xiaoming Classmate' burst onto the scene, selling over 500 million yuan within half a year. Subsequently, Nongfu Spring's 'Tea π' was launched and quickly achieved sales of 1 billion yuan. Correspondingly, from 2015 to 2016, Uni-President and Master Kong beverages both saw varying degrees of recovery. New Tea Era 3.0 (2017 to present): 'Cup Fresh Tea' becomes a new fashion. Street-side tea shops represented by Heytea and Naixue Tea successively launched 'milk cap tea' made with pure tea as the base, quickly sweeping the streets. Uni-President Group began laying out the new category 'refrigerated tea' in 2018, launching the 'Tea·Shunxian' series, using packaging similar to cup milk tea, capturing consumers with 'refrigeration' and 'freshness.' Xiangpiaopiao launched 'MECO Honey Valley Fruit Tea' in the second half of 2018, and with strong brand influence and precise positioning, sales exceeded 200 million yuan within half a year. In the new tea era, products focus not only on individuality but also lean toward fresh taste and health. In the new tea era, whether it is street-side tea shop brands or packaged tea beverage products, quality/positioning/pricing/channels are all important drivers of product growth. In the future, the tea beverage industry will remain an important sub-sector of the soft drink industry. In future soft drink industry competition, the importance of brands will be unprecedented, and the emergence of hit products will depend on more precise positioning based on changes in the main consumer group. The future of the soft drink industry will no longer feature 'one hit product per category,' but rather 'a hundred flowers blooming across different categories,' with shorter overall lifecycles and increasingly sustained hit products. Source: Caitong Securities Tips will be paid 400-2000 yuan once adopted.