Click "Read Original" for details In 1992, Deng Xiaoping's southern tour to Wuchang, Shenzhen, Zhuhai, Shanghai, and other places sparked a wave of entrepreneurial fervor in China's history. Three years later, 60-year-old northeastern elder Wu Zhigang stepped down from the teaching platform. Despite his age, he was inspired to do something. At that time, bread was just emerging in China. Seeing that students loved it, he started a bread workshop named "TaoLi," focusing on fresh, healthy short-shelf-life products. Over the years, he steadily developed a "central factory + wholesale" business model. After gaining a foothold in Dandong, a border town along the Yalu River, he expanded to the provincial capital Shenyang and gradually dominated the entire northeastern market. In 2015, TaoLi Bread went public on the A-share market. The 80-year-old Wu Zhigang not only became the true "King of Bread in the Northeast" but also the oldest chairman in A-share history. TaoLi Bread's rise is inseparable from industry growth. From 2004 to 2019, China's bread industry grew at an average annual compound rate of 11%. The logic behind this is not hard to understand: as a staple food for Westerners, bread consumption in China remains low. In 2019, per capita consumption was only 1.9 kg, less than one-tenth of the US. Optimistically, this could be a potential market of hundreds of billions. However, despite industry growth, TaoLi Bread has faced difficulties in recent years. From 2016 to 2019, its revenue growth slowed for four consecutive years. The reasons are twofold. On one hand, short-shelf-life bread is a typical tough business. In the past few years, ex-factory prices have barely increased, and performance relied entirely on shipping more and more goods. On the other hand, expansion southward has hit obstacles. Unable to raise prices, TaoLi had to rely on volume. After listing and raising funds, TaoLi Bread began to move south. But this bread king, dominant in the north, struggled in the south. In 2019, its subsidiaries in East China, South China, and Central China almost all reported losses. Like most consumer goods, nationwide expansion has become a hurdle TaoLi Bread must overcome. But breaking through is clearly not easy.
-01- The Bread King's "Soft Landing" Rapid industry growth was undoubtedly key to TaoLi Bread's early expansion. In the 1980s, with reform and opening up, bread was introduced to the mainland from Hong Kong and Taiwan. In the 1990s, with economic growth, improved living standards, and the influx of Western technology, the bread industry began to develop rapidly. According to research reports from Western Securities, from 2004 to 2019, China's bread industry grew at a compound rate of 11%, faster than traditional FMCG categories like baijiu, beer, dairy, and condiments. Per capita bread consumption in China has also been rising, from less than 1 kg in 2008 to 1.9 kg in 2019, nearly doubling in 12 years. Based on shelf life, bread is divided into three categories: long-shelf-life (over 6 months), medium-shelf-life (3-6 months), and short-shelf-life (1-7 days). Long and medium shelf-life breads are positioned as leisure snacks, while short-shelf-life bread is positioned as a staple, often eaten for breakfast. In 2019, China's bread market was approximately 40 billion yuan, with long and medium shelf-life bread accounting for 35% and short-shelf-life bread 65%, a market of about 26 billion yuan. The rapid development of China's short-shelf-life bread industry is driven by three factors: First, since 2000, China's urbanization rate has risen from 37.66% to 60.6%. The accelerating pace of life has compressed breakfast preparation time, leading to a shift from eating at home to eating out. According to Western Securities data, in 2016, 66% of urban residents ate breakfast at home 2-3 times a week, down 11 percentage points from 77% in 2013. Second, with the rise of younger generations, acceptance of Western food has significantly increased. According to Western Securities data, in 2016, 50% of urban consumers preferred Western-style breakfast, surpassing those who preferred Chinese-style breakfast (42%). In 2019, bread ranked second among the most preferred breakfast foods in China, second only to baozi. Third, as consumers increasingly pursue health and taste, short-shelf-life bread with fewer preservatives will increasingly replace long and medium shelf-life bread. Currently, bread consumption in China remains at a low level. In 2019, per capita bread consumption was 22.2 kg in the US, 10 kg in Japan, and 7.6 kg in Hong Kong. In the future, with the advancement of these three substitutions (eating out instead of at home; bread replacing baozi, youtiao, and other breakfast items; short-shelf-life replacing long and medium shelf-life), the short-shelf-life bread market will undoubtedly continue to grow. Optimistically, this could be a potential market of hundreds of billions. However, despite industry growth, TaoLi Bread has fallen into trouble in recent years. From 2016 to 2019, its revenue was 3.305 billion, 4.08 billion, 4.833 billion, and 5.644 billion yuan, with year-on-year growth rates of 28.95%, 23.42%, 18.47%, and 16.77%, respectively, slowing each year.
-02- A "Hauler" Without Pricing Power Despite the large market, TaoLi Bread doesn't make money easily. In fact, short-shelf-life bread is a typical tough business. Although more consumers like it, their purchasing conditions are extremely demanding. First, convenience. A key reason consumers eat short-shelf-life bread is convenience. No one would go out of their way on the way to work just for a piece of bread. Second, freshness. Short-shelf-life bread has a shelf life of only a few days. If the time from production to shelf exceeds 2 days, it's unacceptable. Third, affordability. Breakfast costs are low. Even in first- and second-tier markets, a traditional Chinese breakfast of baozi, youtiao, eggs, and soy milk costs about 7-8 yuan. If eating bread, you'd also need milk, and after deducting the cost of milk, the space left for short-shelf-life bread is only about 5 yuan. Correspondingly, this imposes three requirements on companies: First, to make it convenient for consumers, companies must secure all supermarkets and small shops around consumers, building distribution channels down to the capillaries. TaoLi's approach is a combination of direct sales and distribution. KA customers and small and medium supermarkets in central cities are handled directly, while those in non-central cities are delegated to distributors. By the end of 2019, it had over 240,000 sales terminals nationwide. Second, to get products on shelves immediately after production, companies must build factories nearby. Where there is a market, there must be a factory. By the end of 2019, TaoLi Bread had established production bases in 18 regions nationwide, each covering a radius of 200-300 kilometers. In addition to building factories nearby, they must also ensure full delivery. Short-shelf-life bread delivery has three characteristics: because of the extremely short shelf life, daily delivery is required; because it's often eaten for breakfast, trucks must depart in the middle of the night; because of low density, each truck carries only a small amount. In short, they must work tirelessly from dawn to dusk. For companies, this is a significant expense. In TaoLi Bread's sales expenses, delivery costs are the largest item. From 2015 to 2019, they were 174 million, 306 million, 431 million, 582 million, and 709 million yuan, accounting for 48.33%, 55.74%, 56.94%, 58.26%, and 57.74% of sales expenses, and 6.79%, 9.26%, 10.56%, 12.04%, and 12.56% of total revenue, respectively. The ever-increasing delivery costs have clearly eroded TaoLi's profits. In 2019, its net profit was 683 million yuan, surpassed by delivery costs for the first time. That means for every 1 yuan of net profit, 1.04 yuan was spent on delivery. This is not a brand company; it's a hauler. Third, consumers' price sensitivity means product pricing cannot be too high, and room for price increases is limited. Companies can only "do things in a snail's shell." In fact, TaoLi's strategy is high cost-performance. In 2019, its bread product sales volume was 3.19 thousand tons, with sales revenue of 5.527 billion yuan, i.e., 8.65 yuan per jin, which is very cheap. Of course, this is the ex-factory price; retail prices are higher. In the past few years, TaoLi Bread's growth has relied entirely on volume growth. From 2015 to 2019, the sales growth rates of TaoLi's bread products were 25.02%, 29.47%, 23.49%, 18.08%, and 16.89%, while volume growth rates were 23.08%, 27.61%, 20.66%, 15.49%, and 18.83%, respectively. The changes are highly consistent. The average selling price increased only marginally, and even declined in 2019.
-03- Nationwide Expansion Hits Obstacles Since prices are hard to raise, whether TaoLi can continue to expand sales volume becomes key to its sustained growth. Therefore, after listing and raising funds in 2015, TaoLi began to move south, attempting to replicate its northeastern experience for nationwide expansion. But this process has not been smooth. In 2019, TaoLi's subsidiaries in East China, South China, and Central China almost all reported losses, with most losses widening compared to 2018. Shenzhen TaoLi, established in 2015, lost 5.377 million yuan (loss narrowed); Dongguan TaoLi lost 3.9544 million yuan (turned from profit to loss). Wuhan TaoLi, established in 2016, lost 12.9744 million yuan (loss widened); Jiangsu TaoLi lost 8.1022 million yuan (loss widened); Hefei TaoLi lost 4.9587 million yuan (loss widened); Guangxi TaoLi lost 4.049 million yuan (loss narrowed); Fuzhou TaoLi lost 5.9231 million yuan (loss widened); Xiamen TaoLi lost 5.3299 million yuan (loss widened); Nanchang TaoLi lost 4.4914 million yuan (loss widened). Shanghai TaoLi, established as early as 2000, also turned from a profit of 14.6552 million yuan in 2017 to a loss of 12.6882 million yuan. Why does this bread king, dominant in the north, struggle in the south? There are two main reasons. First, timing. More than 20 years ago, when TaoLi expanded in the north, it faced a relatively blank market. But today's short-shelf-life bread market is already crowded with strong competitors. As its performance growth slowed, Dali Foods, which urgently needed new growth points, also eyed the continuously growing short-shelf-life bread track. In the second half of 2018, Dali launched its short-shelf-life bread brand Meibeichen, deliberately choosing Fujian and Northeast as the first launch regions, officially declaring war on TaoLi. In just over a year, Meibeichen launched 52 SKUs and covered nearly 80,000 sales terminals. In 2019, when TaoLi's net profit growth fell to single digits, Dali's household consumption segment, which includes Meibeichen, saw revenue increase 41.6% to 2.657 billion yuan. In Dali's blueprint, Meibeichen is positioned as a future brand with a scale of 10 billion yuan. As a leading domestic leisure food and beverage company, Dali is known for its follow-the-leader strategy. Before Meibeichen, it had launched six well-known brands: Daliyuan, Haochidian, Kebike, Lehu, Heqizheng, and Doudouben, all achieving success in their respective fields. Such a strong opponent is clearly not easy to deal with. Also in 2018, the international baking giant Grupo Bimbo of Mexico completed the acquisition of Mankattan. As a direct competitor to TaoLi in the short-shelf-life bread field, Bimbo focuses on the North China market, while Mankattan operates in East China. With the combined strength of north and south, the threat has clearly become greater. In addition, well-known baking chain brands like Yamazaki and Paris Baguette have emerged, and convenience stores like FamilyMart and 7-Eleven have also launched their own short-shelf-life bread products. Second, economic differences. Compared to the north, the south is more economically developed, and southerners pay more attention to food. In the north, TaoLi's cost-performance strategy works well, but in the south, freshly made, higher-end chain bakeries are more popular. In fact, not only TaoLi Bread, but many northern food and beverage companies like Chengde Lulu and Xiabu Xiabu have encountered significant resistance when expanding south. Zhu Danpeng, a food industry analyst, believes that the south opened up earlier and has a better economy. Over time, the service standards are higher. Southern companies do better in quality, branding, service systems, and customer loyalty, making it easy for southern companies to go north but difficult for northern companies to go south. The north-south difference does exist. In the context where sales volume determines growth, the success or failure of nationwide expansion will undoubtedly determine TaoLi's future. But overcoming this hurdle is clearly not easy. Source: Consumer Group Original/Produced (ID: dudongcj) Author: Sun Yong