Source: Matrix Partners China (ID: matrixpartnerschina), Author: Matrix Partners China Editor

These days, Lao Gan Ma and Tencent are at odds, with Lao Gan Ma claiming it doesn't need advertising, calling itself a magical and versatile sauce.

With consumption upgrading and the faster pace of life, our craving for flavor is increasing. Babies have over 10,000 taste buds, but adults only have about 5,000. The decline in taste sensation further fuels our passion for umami and spiciness. From the initial salt and MSG to soy sauce and chicken bouillon that provide both umami and saltiness, these have begun to partially replace traditional seasonings.

As regions resume work and production, people are flocking back to restaurants (except in Beijing). Based on my several experiences, I've noticed that menus are getting thinner, even at some decent brand restaurants.

Of course, the thinning menu is not caused by the pandemic but is a trend that has been ongoing for a few years. Are restaurants getting lazier? Or are skilled chefs becoming scarcer?

The answer lies in compound seasonings, a new development in an era of rising labor costs where industrial production replaces manual work.

The MSG, salt, sauces, and vinegar we commonly use are all single seasonings, targeting only one flavor. Compound seasonings are mixtures of two or more seasonings, further processed to have a special flavor. For restaurants or individuals, cooking only requires putting a large pack of compound seasoning and ingredients into the pot, without needing a chef to control the cooking process. This is a boon for chain restaurants (like Kungfu) and post-90s generation who are not good at cooking.

Specifically, compound seasonings cover a wide range, including the already common chicken bouillon, Western-style compound seasonings, hot pot base, Chinese-style compound seasonings, and Japanese/Korean styles, totaling five major categories. Among them, hot pot base and Chinese-style compound seasonings are tracks with excellent growth potential. Chinese cuisine is profound, and many potential categories are yet to be developed.

Hot pot and Sichuan cuisine fired the first shot. As hot pot restaurants and Sichuan restaurants swept the nation, compound seasonings for Sichuan specialties have seen significant development. Dishes like boiled fish, pickled fish, maoxuewang, mapo tofu, and yuxiang shredded pork are natural soil for compound seasoning growth. This gave birth to Yihai International (mainly hot pot base, originally a subsidiary of Haidilao) with a market cap of HK$83.2 billion, and Teway Food (with more diversified products) with a market cap of RMB 34.1 billion.

Currently, apart from chicken bouillon, the compound seasoning market remains highly fragmented, with the top two companies holding only 7% market share combined, unlike single seasonings (like soy sauce) where concentration is already high. This indicates high growth potential.

Let's take a look at the compound seasoning business.

-01- Compound Seasonings on the Eve of Rise

China is a culinary powerhouse. Single seasonings like soy sauce are widely used in cooking, with penetration close to 100%. MSG, as an early-introduced, industrially produced single seasoning, has penetration close to 80%.

However, compound seasoning penetration is still low. Only chicken bouillon started early, with penetration at 64%. Hot pot base (not only for hot pot but also for cooking some dishes) and Chinese-style compound seasonings have lower penetration rates of 35% and 9%, respectively. These two segments have the broadest prospects.

Compared to Japan and South Korea, according to Euromonitor data, compound seasonings account for 26% of China's total seasoning market, while Japan and South Korea's seasoning markets are primarily compound seasonings, with penetration around 50%. In terms of per capita consumption of compound seasonings, in 2017, China's retail per capita consumption was 4.3 kg/year, still three times growth space compared to the Japan/Korea average of 13.99 kg/person.

Additionally, in Japan, soy sauce and salty compound seasonings grew simultaneously after the 1970s, then showed a substitution relationship. Soups and barbecue sauces are compound seasonings made from soy sauce, with added ingredients for further processing, making them more convenient to use.

From the growth of Japanese soy sauce leader Kikkoman, soy sauce revenue was basically flat from 2001 to 2008, with a CAGR of -0.3%, but salty compound seasonings had a CAGR of 10.1%. By 2009, the market size of soy sauce derivatives in Japan had surpassed soy sauce itself, achieving a transition from single to compound seasonings.

In today's China, per capita soy sauce consumption still has significant room to rise compared to Japan's peak, and it is in a stage where soy sauce is rapidly climbing and compound seasonings are starting to take off.

From a dish perspective, changes in cuisine often give rise to new seasoning giants. Currently, hot pot and Sichuan cuisine have fired the first shot. Hot pot is hailed as the "first track in the catering industry" because it doesn't require chefs, is highly standardized, and has higher sales per square foot and gross margins than other catering forms. Hot pot directly spurred the growth of the hot pot base market. E-commerce data shows that hot pot base, curry, and pickled fish seasoning are the top three compound seasonings.

After hot pot, Sichuan cuisine is second, Cantonese cuisine third. New industry opportunities in seasonings generally come from changes in cuisine or demographic shifts, and major cuisines must have major products. For example, hot pot created demand for base, leading almost every hot pot base company to grow.

From a market perspective, compound seasonings mainly target two markets: one is individual consumers (C-end retail), and the other is chain restaurants (B-end market).

As the post-90s generation ages, they are starting families and entering the kitchen, but their pace of life is faster, leaving little time to learn cooking skills. This drives the penetration of compound seasonings at the household level.

From Japan's experience, the proportion of housewives has been declining since the post-war period, young people are delaying marriage or not marrying at all, and the proportion of single-person households has risen (from 3% to 35%). This is exactly what is happening in China.

The advantages of compound seasonings meet this demand: convenience and ease of operation, without needing to learn how to control heat or ratios of various seasonings. Take steamed pork with rice flour as an example: a young person who can't cook at all just needs to mix a whole pack of seasoning with ingredients, saving the tedious steps of mixing soy sauce, Sichuan pepper, pepper powder, scallions, ginger, cooking wine, cilantro, oil, etc.

Demographic shifts not only affect C-end retail but also bring prosperity to the B-end market. First, with the arrival of an aging society, labor costs are rising, and excellent chefs are becoming scarce. Many chain restaurants or small restaurants are no longer willing to pay high prices for a full kitchen team.

At this point, the motivation to replace professional chefs with general service staff using compound seasonings strengthens, significantly improving cooking efficiency and reducing operating costs for catering businesses.

In fact, since 2017, the growth rate of catering outlets has slowed, and this year's pandemic has made it worse, with the most significant impact on small and medium-sized restaurants.

According to Euromonitor data, the growth of China's catering outlets remained above 5% in 2016 and before, but a surge in the real estate market in 2017 brought sharp rent increases, and the growth rate of outlets declined to 4.3% and 3.5% in 2017 and 2018, respectively.

In 2017, the number of restaurant closures nationwide was 91.6% of openings, and the average lifespan of closed restaurants was 508 days. With increased operational pressure, a complete chef team will become a feature of mid-to-high-end restaurants in the future.

Another trend in the catering industry is the increase in chain penetration. But chain operation first requires standardization. If dishes cannot achieve standardized taste and quality, opening new stores will be very difficult. So we can see that in the highly standardized hot pot track, a company like Haidilao has emerged with a market cap of HK$173.3 billion, while other Chinese cuisine tracks struggle to produce such large companies.

However, with R&D breakthroughs in compound seasonings, some dishes can gradually be standardized, not limited by chef training, meeting the rigid demand for rapid expansion of chain restaurants. Fast-food chains like Kungfu directly put compound seasoning and ingredients into steamers for their signature pork rib rice.

Additionally, the explosion of the delivery market and high demands on delivery timeliness have forced restaurants to improve cooking efficiency, which also requires higher standardization.

From developed countries, Japan's compound seasoning penetration went from 0 to 50%, the US from 0 to 50.8%. China's coastal and first-tier cities are expected to reach around 35%. The absolute value is low because Chinese cuisine is vast and profound, and chefs have a certain irreplaceability in many dishes.

-02- A Market with Many Players

Apart from chicken bouillon, compound seasonings are still in early stages, with various companies showing their skills, and a chaotic battle is inevitable.

Among the five major tracks, in mature tracks like chicken bouillon, the leader Totole has already captured 40%, and the pattern is basically set, leaving little opportunity for new companies. But the CR3 of hot pot base is less than 20%, with Yihai International, Hong99, and Teway Food holding 10.08%, 6.21%, and 3.53% respectively. Combined with the track being large enough (market size over 30 billion, growth rate 15%), there is still much to do.

The Chinese-style compound seasoning market remains highly fragmented, with the leader Teway Food holding only 2.82%. Hot pot base and Chinese-style compound seasonings are the two most promising tracks. If the market grows at an average rate of 13% over the next five years, and the leading companies' market share reaches 17% (hot pot base) and 7% (Chinese-style compound seasonings) respectively, the leaders in both tracks have four times growth space.

Thanks to the nationwide expansion of hot pot and Sichuan cuisine, the two current leaders, Yihai International and Teway Food, originate from Chengdu and Chongqing, respectively.

Yihai International and Teway Food are typical representatives of the compound seasoning track. Yihai originates from the catering brand Haidilao, while Teway does not operate catering stores and started entirely from food processing.

Yihai was initially established because after Haidilao opened over a dozen stores, the original single-store sauce-making model could no longer meet demand. In 2006, they invested in the first hot pot base production line in Chengdu, and the following year began supplying hot pot base products to independent third-party distributors.

In 2012-2013, as Haidilao's store count exceeded 100, the organizational structure became bloated and administrative efficiency declined. Management converted functional subsidiaries into independent companies, and Yihai International was formally established, listing on the Hong Kong Stock Exchange in 2016. By 2018, Yihai's business outside Haidilao accounted for more than half.

Yihai's chairman and CEO is Shi Yonghong, one of Haidilao's founders. His division of labor with Zhang Yong was clear from the start: Shi was responsible for ingredients, base, kitchen, and supply chain management, while Zhang managed front-of-house and service. Yihai's entire management team worked at Sichuan Haidilao in their early years, rising from the bottom.

Because it originates from Haidilao, Yihai's revenue mainly relies on hot pot base, also covering Chinese-style compound seasonings and newly developed convenience foods (self-heating hot pot, etc.). In 2019, these three main products accounted for 65.7%, 9.2%, and 23.3% of revenue, respectively. The expansion of Haidilao's catering stores provides stable support for Yihai's performance.

In terms of sales system, Yihai adopted Haidilao's classic "master-apprentice system," replacing the general assessment method based on sales target achievement. Performance commissions are now linked to the profit of the responsible business unit. For example, authorized sales partners can cultivate their own assistants, who can split into "apprentice partners," contributing to and sharing the profit of the "master partner's" business unit. This allows "master partners" to develop business beyond their original regions, motivating sales personnel to explore lower-tier channels.

Compared to Yihai International, Teway Food has a higher proportion of Chinese-style compound seasonings. Hot pot base and Chinese-style compound seasonings account for 49.1% and 28.1% of revenue, respectively, with the rest including sausage and bacon seasoning, chicken bouillon, etc.

Teway Food is based on Sichuan cuisine and is a typical seasoning giant born from cuisine changes. In 2016, Teway's new products were mainly hot pot base. In 2017 and 2018, it began to tilt toward Chinese-style compound seasonings, investing main resources in the "Haorenjia" seasoning brand.

Teway has always followed a big single-product strategy with dual-brand rotation: "Dahongpao" hot pot base and "Haorenjia" Chinese-style compound seasonings (including pickled fish, Xinjiang big plate chicken, mapo tofu, crayfish, etc.), with prices in the mid-range of market pricing. The big single-product strategy helps the company quickly expand markets, enhance scale advantages, and accumulate brand momentum.

In terms of channels, Teway has also begun to emphasize C-end e-commerce, using Double 11 promotions, participating in live-stream e-commerce, and collaborating with Viya to create hit products.

Food safety is particularly important in the food sector. Teway was involved in the "toxic beef fat" incident in 2013, when an upstream supplier had quality issues with beef fat, causing significant negative impact on Teway.

Since 2015, Teway has begun to focus on the customized catering seasoning market. Because Teway does not have its own catering brand stores, this business model is naturally viable. Customized catering seasoning involves developing products according to customer needs, mainly for mid-to-high-end catering chains that require high taste stability, covering not only chain hot pot but also malatang, mala xiangguo, fast food, etc.

Teway's chosen path is somewhat like Japan's Ajinomoto. Ajinomoto was founded in 1909, starting with MSG production, then expanding into compound seasonings, frozen foods, and other industries. Ajinomoto's customized seasonings have grown well, providing consumers with prepared seasonings according to different countries' or regions' dietary cultures and taste habits.

For example, Ajinomoto launched Sajiku flavored flour products in Indonesia, which can be mixed with flour and coated on chicken to make flavored fried chicken. Cook Do products provide seasonings for Chinese dishes in Japan, such as mapo tofu and twice-cooked pork seasonings, with rapid growth.

Especially under the impact of the COVID-19 pandemic in 2020, the catering industry's concentration will accelerate, and the chain trend becomes more pronounced. Compared with Yihai International, Teway is developing faster in this area. Customized catering seasoning has characteristics of high stickiness, emphasis on unique flavors, and scale effects. Once orders are generated, they are relatively stable, but R&D strength is required.

As analyzed above, the compound seasoning market is still fragmented, with many players. There are many companies with models represented by Yihai and Teway.

Companies like Yihai that start from catering brands, such as Xiaolongkan (Sichuan-Chongqing hot pot), Little Sheep (traditional Mongolian mutton hot pot), and Xiabuxiabu (new fashionable small hot pot), have all entered the hot pot base and compound seasoning market, developing third-party retail businesses.

Companies like Teway that start from food processing and supply some catering stores number over 600 in Chongqing alone. According to Guosheng Securities' grassroots research, these 600+ companies form a pyramid structure, with most being small hot pot base factories with revenue in the tens of millions. Companies with revenue above 1 billion are only large factories like Yihai and Hong99, while companies with revenue between 100 million and 1 billion are in between.

From a food safety perspective, it is common for small factories to lack formal quality control personnel, and nearly 400 hot pot base factories have no product testing laboratory. The local market is still enjoying the dividends of high growth in the hot pot industry, and competition is not yet fierce. Many regional catering brands also have their own production facilities for making base.

Clearly, this market is still in its early stages. At this stage, quality companies should quickly expand their territory and capacity based on products to seize the first-mover advantage. The general food and beverage industry typically goes through the following development stages: first, volume growth (compound seasonings are in this stage); then, volume and price rise together (basic seasonings like soy sauce and vinegar are in this stage); then, stable volume with price increase (e.g., pickled vegetables); and finally, volume decrease with price increase (e.g., baijiu, beer).

In the future, what will happen is roughly that industry supply will lead to overcapacity and intensified competition. At the same time, industry regulatory standards will become stricter, and the catering industry's requirements for upstream compound seasonings will increase, accelerating industry elimination and consolidation, ultimately leaving quality companies.

-03- Where Are the Opportunities for Startups?

Are compound seasonings suitable for startups?

The answer is yes, but the market itself needs cultivation.

Since compound seasonings directly determine dish flavor, there is a need to constantly update flavors to meet consumer demands. Therefore, product life cycles are shorter than traditional seasonings. Companies need a rich product line and the ability to continuously iterate.

Chinese cuisine has many styles. According to Frost & Sullivan data, in terms of revenue share of compound seasonings, hot pot and Sichuan cuisine are the largest, accounting for 13.7% and 12.4%, respectively. Cantonese and Jiangsu-Zhejiang cuisines have lower development, with revenue shares of 8.2% and 6.3%. Other cuisines account for less than 5%. Different compound seasonings can be produced for different cuisines.

The production process of compound seasonings is not difficult; it's simpler than soy sauce. Essentially, it's mixing various ingredients, and upstream raw materials are not a barrier. The real barrier lies in the formula. For hot pot base, some companies make it delicious, others don't, requiring R&D strength.

On the other hand, the production volume of compound seasonings is an order of magnitude smaller than single seasonings (like soy sauce), so scale effects are weaker. Combined with the above points, few large seasoning companies are willing to focus on this market. For example, soy sauce leader Haitian Flavoring & Food has not paid much attention to this market.

However, the gross margin of compound seasonings is still attractive. Even without fully releasing scale benefits, it is close to 40%, lower than Haitian's, but quite good among consumer goods.

Currently, no giant has emerged in this field that can make consumers specify a brand. This gives startups the opportunity to quickly create hit products.

In our view, there are roughly two paths for entrepreneurship in this field:

One is to find the next big single product with a market capacity of over 10 billion, like chicken bouillon or hot pot base, and then cultivate it deeply, increase penetration, and become a category champion.

Currently, fish seasonings have this potential. Classic dishes like pickled fish (including derivatives like pepper fish) have basically completed market education and could become a larger single product after hot pot base. For example, the listed Jiujiu (Tai Er pickled fish) has a total market cap of HK$18.5 billion, but only accounts for 4.4% of the segment. It is estimated that China's pickled fish market will have a CAGR of 33.7% from 2018 to 2024.

Such companies often start regionally, supplying B-end restaurants, with stable customers and cash flow, then create C-end hit products through e-commerce, nationalize, and then radiate to other regions offline.

But offline expansion will definitely encounter resistance, so product selection is very important. Because tastes vary greatly across China, products that sell well in Sichuan may not work in Shanghai. If offline distribution doesn't sell well, it's hard to persist. So starting with e-commerce is almost the only path.

The other is a platform-type company, similar to Three Squirrels, which may not even need to build its own factories. The core lies in insight into young consumer needs and operational capability. Because there are many cuisines and too many sub-categories of compound seasonings, targeting the convenience needs of young people cooking, platform companies can first create one or two hit products, then quickly expand horizontally across categories.

Each single product's market space may not be very large, for example, a few hundred million in scale, but together they can be considerable.

From a horizontal expansion perspective, growing through mergers and acquisitions is also an option for regional compound seasoning leaders. Since gross and net margins are good and cash flow is stable, using capital leverage to acquire other sub-categories is a good choice. Each acquired company adds a flavor, and if the eventual giant operates and integrates well, it will be of high quality.

The trend of leading seasoning companies developing into platforms is basically established. Whether it's overseas Ajinomoto (starting from MSG) or Kikkoman (starting from soy sauce), they all eventually move toward category diversification and market internationalization. Domestic single seasoning companies, such as Haitian from soy sauce to oyster sauce and sauces, and Zhongju from soy sauce to chicken bouillon, chicken powder, oyster sauce, and cooking oil, are also diversifying categories.

However, it's worth noting that single seasoning giants like Haitian do not pay much attention to the compound seasoning market. Because products like soy sauce can be very large in scale, spread offline with high sell-through rates, and have higher gross margins. This logic is different from compound seasonings, so the danger of giants entering is much smaller.

Summary:

Overall, on one hand, as the post-90s generation starts families, the demand for convenient cooking increases; on the other hand, as restaurant chain penetration rises and labor cost pressure grows, the demand for standardization surges. Together, these are the core drivers for compound seasonings.

Chinese cuisine has many styles and is profound, with many market gaps waiting to be explored. Whether this industry eventually develops into a pattern of one superpower with multiple strong players or a duopoly, it will drive countless new opportunities.