China's condiment industry is entering a chaotic era where the most advanced and the most traditional business models coexist. How to arm oneself with new concepts is crucial for condiment companies.

-01-

"Seven things to start the day: firewood, rice, oil, salt, soy sauce, vinegar, and tea," of which condiments account for more than half, showing their importance. However, the condiment industry today is experiencing a "ice and fire" situation.

Haitian Flavoring's Q3 report shows that in the first three quarters of 2019, its operating revenue was 14.824 billion yuan, a year-on-year increase of 16.6%, and net profit attributable to shareholders was 3.835 billion yuan, up 22.5% year-on-year. As of the close on November 5, its market value was 314.053 billion yuan, far exceeding Baidu's 37.66 billion US dollars.

However, compared with Haitian, another MSG giant, Lotus Health, is not doing so well. On October 15, Lotus Health received the "Decision Letter" from the Intermediate People's Court of Zhoukou City, Henan Province. The court ruled to accept the restructuring application of creditor Guohou Asset against Lotus Health. This means that Lotus Health will face two outcomes: changing hands again or bankruptcy.

Zhang Ruimin once said: "There are no successful enterprises, only enterprises of the era." In the advancing tide of condiments, how can one keep pace with the times? What exactly is the competition in the condiment market?

-02-

Endogenous and Steady Condiment Market

If we pull apart the industrial chain of the condiment industry, we will find that it is quite similar to that of food manufacturing. The upstream mainly consists of raw material suppliers such as soybeans, wheat, and corn, which are then processed through fermentation and brewing to make various condiments. The downstream flows to consumers through catering channels, household retail, and industrial channels.

Geographical environment, climate, products, cultural traditions, and ethnic habits have led to differentiated tastes in China. "East sour, west spicy, south sweet, north salty" is a simple summary of this phenomenon.

At the industry level, this is reflected in the relatively obvious regional characteristics of the condiment industry. For example, Cantonese cuisine emphasizes "freshness," so light soy sauce and oyster sauce are often used to enhance freshness; Shanghai cuisine is mainly braised and stir-fried, so it prefers dark soy sauce and cooking wine.

The following figure provides a simple classification of the condiment industry, showing the variety and richness of condiments.

Yiou Catering has also sorted out the mainstream brands in the current condiment market. From the figure below, it can also be found that China's condiment market is still dominated by local brands. However, foreign companies have also been actively entering this market. Unilever China's food business adding brands such as Knorr and Skippy proves this, but the expansion of foreign companies in China's condiment market is still relatively slow.

Ye Qianyu, an analyst at Everbright Securities, believes that foreign companies mostly enter China's condiment market through acquisitions, but due to the regional characteristics of the condiment market itself, they face problems in the nationwide promotion of products after the acquisition, resulting in the industry's development showing more of an "endogenous and steady" form.

-03-

Competition in Condiments: Channel + Brand + Product

The vast land of China has created different consumer preferences, and rich consumption scenarios have also given rise to complex sales channels. Data from the China Condiment Industry Association shows that the three main sales channels for condiments in China are catering, household retail, and industrial, accounting for 4:3:3 respectively.

Channel is one of the main factors affecting condiment sales. Drucker wrote in "Managing for Results": "Distribution channels are often more important than the product itself. If the channel is chosen incorrectly, failure is inevitable."

Senior strategic marketing expert Zhang Ji said: "Condiment companies must build a complete channel structure based on width, length, density, and intensity."

First, condiment companies should start with the width of the channel, that is, choose the appropriate channel type according to their own strategic positioning.

Second, determine the level of the channel, that is, whether the product reaches the terminal through first-level, second-level, or third-level channels, which relates to the speed of the company's control over the channel.

Then there is the density of the channel, that is, the coverage of the channel, which relates to the intensity of the company's channel operation, and its essence is the convenience of the channel. Finally, the degree of control over the channel determines whether the company can build a competitive advantage.

Haitian's channel construction is highly commendable among condiment companies. Haitian adopts a two-tier sales system of distributors and sub-distributors. Unlike other companies, Haitian incorporates sub-distributors into its management system and rewards sub-distributors who successfully achieve sales targets, which also strengthens Haitian's control over the channel.

In addition to channels, brand is also key to competition among condiment companies. In recent years, consumers' brand awareness has been continuously improving, and their recognition of leading companies in sub-categories has been strengthening. We often think of Haitian when it comes to dark soy sauce, Lee Kum Kee when it comes to oyster sauce, and Totole when it comes to chicken essence. Therefore, how condiment companies build their brands and seize user mindshare is very important.

Finally, there is the product. Finding differentiated products may be the "shortcut to success." In the context of the chicken essence market becoming a red ocean, Hong Kong's Chef God Catering Group launched Chef God Bone Flavor, opening up a blue ocean in the bone and meat flavor condiment market. It emphasizes that it is made through advanced bone marrow extraction technology, and only simple processing is needed to give dishes the aroma of meat bones, which also increases distributors' interest in the product.

-04-

Condiment Market under Retail Catering

In the past decade or so, China's e-commerce channels have been thriving, but they have not had much impact or transformation on the condiment industry. Data from Kantar Worldpanel shows that e-commerce channels account for only 2.9% of total condiment sales, and it can be said that the condiment industry has been hovering on the edge of e-commerce.

Since 2018, internet giants have been competing to enter the catering industry. Meituan established the Kuailu business unit, and JD New Pathway announced its entry into catering B2B. China's condiment industry is entering a chaotic era where the most advanced and the most traditional business models coexist. How to arm oneself with new concepts is crucial for condiment companies.

Zhu Danpeng, a food industry analyst in China, said: "Most condiment companies have weak control over channels and lack direct contact with end users. By using big data to close the user loop, they can greatly improve their competitiveness."

-05-

Looking at Japan as a Mirror: The Future of the Condiment Market

If we compare with Japan's condiment industry, it is obvious that industry concentration will strengthen.

Taking vinegar as an example, data from the China Condiment Industry Association shows that in 2018, China's vinegar production was close to 5 million tons, but only 4 vinegar companies had an annual output of more than 100,000 tons. The CR5 (Concentration Ratio 5, used to describe industry concentration) of the vinegar industry was only about 16%, compared with Japan's 60%-80%, indicating that China's condiment industry still has strong integration opportunities.

In addition, compound condiments may become the next growth category. In recent years, the compound condiment market in China has achieved a compound annual growth rate of 15%, which is also a stage that Japan has experienced. Benefiting from the chain operation of catering and the convenience of retail, the hot pot base material category has developed rapidly in recent years, and Yihai International is one of the representatives.

Condiments are an indispensable part of everyone's life, with a very high repurchase rate, so this product is destined not to be eliminated. However, consumer needs are constantly iterating. How to meet the new needs of the new generation of consumers is also the key that condiment companies must consider.

Source: Yiou.com (ID: i-yiou)

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