---
title: "Three Squirrels' Dead End"
description: "Amid the rise of new consumption, the snack food market has boomed, becoming one of the hottest sectors, with players enjoying the shortest growth path thanks to market dividends. However, as the race enters its mid-stage, players overly reliant on market dividends are experiencing accelerating pains, especially those engaging in blind expansion fueled by hot money, which is dragging them into a dilemma. This is mainly reflected in dependence on traffic dividends, frenzied SKU expansion and cross-sector moves, and a broad-brush approach to channels without a healthy profit model."
author: "让发生的发声"
publisher: "New Distribution"
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published: "2020-10-26"
language: "en"
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---

# Three Squirrels' Dead End

> Amid the rise of new consumption, the snack food market has boomed, becoming one of the hottest sectors, with players enjoying the shortest growth path thanks to market dividends. However, as the race enters its mid-stage, players overly reliant on market dividends are experiencing accelerating pains, especially those engaging in blind expansion fueled by hot money, which is dragging them into a dilemma. This is mainly reflected in dependence on traffic dividends, frenzied SKU expansion and cross-sector moves, and a broad-brush approach to channels without a healthy profit model.

Amid the rise of new consumption, the snack food market has seen a major explosion, becoming one of the hottest markets in recent years, and players in the track have gained the shortest growth path from the market dividend boom.
However, in the middle of the race, the pains of players who rely excessively on market dividends to formulate development strategies are beginning to accelerate, especially the blind expansion built on hot money, which is dragging these players into a dilemma.
This is mainly reflected in the dependence on traffic dividends, frenzied SKU expansion and cross-sector layout, as well as a broad-brush approach to channels without a healthy profit model. These phenomena are concentrated in the internet-famous player "Three Squirrels" in this track.
Since entering 2020, this eight-year-old internet-famous brand has been forming a strong contrast with the overall upward market. Slowing growth, rapid increases in various costs such as marketing expenses, major shareholders cashing out, and consecutive stock price declines have become high-frequency keywords in media coverage of Three Squirrels this year.
To further boost market confidence, Three Squirrels has been exceptionally active this year, launching category expansion, cross-sector moves, and strengthening dual-line layout, especially offline business coverage. However, market verification shows that these intensive actions have not become a breakthrough direction but have instead become redundant burdens in development. Judging from Three Squirrels' recent actions, shedding burdens seems to have become a new topic.
**-01-**
## **Under Full Pressure, Decline Hard to Hide**
Recently, Three Squirrels released its third-quarter report. In the first three quarters of 2020, the company achieved **total operating revenue of 7.23 billion yuan, a year-on-year increase of 7.7%, while third-quarter revenue fell 10.16% to 1.979 billion yuan.** Combined with past relevant indicators, Three Squirrels' revenue indicator has continued to lose ground.
In the first three quarters of 2020, Three Squirrels' revenue growth rate also dropped from 121% in 2015 to single digits, and in the third quarter of 2020 it even turned negative. According to Yiming Net, **from 2015 to 2019, Three Squirrels' year-on-year revenue growth rates were 121.00%, 116.47%, 25.58%, 26.05%, and 45.30% respectively.**
In addition to revenue growth turning from positive to negative, its gross margin has also been declining. According to Yiming Net statistics, in 2016, Three Squirrels' gross margin was 30.21%, but by 2019 it had fallen to 27.8%. According to the third-quarter report, during the reporting period, Three Squirrels' gross margin was 27%, down 2.1 percentage points year-on-year, and net margin was 3.7%, down 0.7 percentage points year-on-year. In the first half of 2020, the gross margins of Liangpin Shop, Yanjin Shop, and Lai Yifen were as high as 30.53%, 41.78%, and 43.63% respectively.
In terms of net profit, in the first three quarters of 2020, Three Squirrels achieved net profit attributable to parent company of 260 million yuan, a year-on-year decrease of 10.6%. In the third quarter, net profit attributable to shareholders of the listed company was 76.4484 million yuan, a year-on-year increase of 161.72%. Although there was some improvement, it is still not ideal.
From 2016 to 2019, its net profits were 237 million, 302 million, 304 million, and 239 million yuan, with growth rates of 169%, 25.35%, 27.7%, 0.16%, and -17.8% respectively. From the perspective of the revenue-to-profit ratio, it is also hard to be optimistic. From 2016 to 2019, its net profit as a proportion of total revenue was 5.36%, 5.44%, 4.34%, and 2.35%, declining year by year.
The report also mentioned that other income increased significantly compared with the same period last year, mainly due to government subsidies received by the company; investment income increased by 147.43% year-on-year, mainly due to increased returns from wealth management products.
Of course, it is worth noting that while Three Squirrels' revenue growth continues to slow, its operating costs are gradually increasing, from 1.493 billion yuan in 2015 to 7.345 billion yuan in 2019. In the third quarter of 2020, its operating costs were 5.28 billion yuan, a year-on-year increase of 10.9%, higher than the 7.7% growth rate of operating revenue, leading to a 2.1% decline in gross margin.
Among them, from 2016 to 2019, the ratio of selling expenses, administrative expenses, and other expenses to gross profit increased from 76.2% to 87.45%. Marketing expenses grew the fastest, from 918 million yuan in 2016 to 2.298 billion yuan in 2019. In the third quarter of this year, Three Squirrels' administrative expenses increased by 47.17% year-on-year.
Naturally, such performance is quickly reflected in the capital market. After the release of the new quarterly report, the stock price further declined.
**-02-**
## **The Spear and Shield Behind the New Urgent Slimming**
From various indicator data, it is not difficult to find that under the background of continuous increased investment in various costs, Three Squirrels has not achieved performance growth proportional to the investment. From another perspective, if it reduces various costs, performance growth will further decline. More importantly, continuous investment will inevitably further drag down gross margin. This also means that compared with other similar players, Three Squirrels' competitiveness is clearly insufficient.
Returning to the essence, it is not difficult to see the problems of Three Squirrels. **First, its strong dependence on the dividends of Taobao brands at the beginning of its establishment; second, blind expansion to scale up; third, its existing business model is difficult to adapt to market development, and instead becomes a long-term self-consumption.**
The combination of various factors has also caused Three Squirrels to fall into a dilemma. To break through in the second half, Three Squirrels must make changes. Since the second half of the year, Three Squirrels has also made slimming down a key development strategy, including cutting half of its SKUs and strengthening franchising to transfer costs and risks.
Before the earnings report, on October 19, the person in charge of Three Squirrels said in a media interview that it would cut 300 SKUs by the end of this year, which means its SKUs will be reduced by half, and also means it has overturned its original idea of full-category development.
The intention behind this self-amputation is clear: in the past few years, beyond categories such as nuts, Three Squirrels continued to expand SKUs, becoming increasingly comprehensive in categories, but most niche categories had input-output ratios that were not proportional, dragging down performance.
In the past few years, Three Squirrels expanded into multiple categories beyond core categories like nuts, with baking and meat products as core categories. Especially since 2020, it has jumped on new consumption trends such as instant food and pet economy. In the past six months, it successively established four wholly-owned subsidiaries: "Tie Gongji," "Xiaolu Lanlan," "Yanglege Maohai," and "Xi Xiaoque," entering categories such as instant food, infant food, pet food, and custom wedding gifts, rapidly expanding SKUs to over 600, leading to rapid growth in management and marketing expenses.
But it is worth noting that cutting half of the SKUs, while it may improve gross margin performance, will have a significant impact on overall revenue, and may also miss out on the dividends of category expansion.
Three Squirrels also issued an announcement stating that to meet its own business development needs, it plans to provide a total guarantee of no more than 300 million yuan to individual franchisees of Squirrel Small Stores, i.e., providing guarantees for individual franchisees to obtain financing from financial institutions.
Obviously, Three Squirrels is trying to activate franchise enthusiasm through financial and related policies. Behind this, besides the weak willingness of B-end to franchise, achieving alternative scale through expanding franchising is also Three Squirrels' biggest goal. Combined with the fact that cutting half of the SKUs will have a significant impact on overall revenue, this move can be described as killing two birds with one stone.
Previously, Three Squirrels set goals of opening 1,000 alliance stores, 200 feeding stores, and within five years opening 1,000 direct-operated stores and 10,000 alliance stores. But as of now, Three Squirrels has over 170 offline direct-operated stores and over 700 alliance stores. Obviously, from the actual implementation, there seems to be a gap, and the pressure is not small.
From an industry perspective, even with significant strategic adjustments, Three Squirrels faces a difficult road ahead. Online, Three Squirrels' rise relied on the dividends of Taobao brands. Whether in layout strategy or business strategy, it has long been centered on Taobao brands. But after the dividends of Taobao brands faded, Three Squirrels' strategy is difficult to quickly adapt to the macro market environment, which is also the ceiling of its online performance.
Offline, Three Squirrels is clearly half a beat slower than the overall industry trend. Therefore, the node at which it began to lay out offline channels was already a red ocean, making the offline path extremely difficult for Three Squirrels.
According to its first-half data, Three Squirrels' revenue still mainly comes from online, accounting for 84.54% of operating revenue, while feeding stores and alliance stores achieved revenue accounting for only 5.9% and 2.99% of total revenue respectively. Such performance is extremely unfavorable for Three Squirrels.
Data shows that in 2019, among the main channels for leisure snacks, online channel sales accounted for only 13%, while offline channels such as supermarkets and chain specialty stores accounted for as much as 75%. Of course, more importantly, the difficulty of offline layout will further erode its online profits.
## **-03-**
## **Market Up, Three Squirrels Down**
Whether from the current situation or future imagination space, Three Squirrels' current situation is not optimistic, and its passive position in the second half of the competition will become more obvious.
Combined with industry development trends, it is not difficult to see that Three Squirrels' difficulties may have just begun, because its decline forms an obvious scissors gap with the upward overall market.
In recent years, with consumption upgrading, new consumption, and the rise of Generation Z, the category structure of the leisure snack market has been continuously diversified and adjusted, with huge market growth potential. **In terms of scale, the annual output value of China's leisure snack industry increased from 193.1 billion yuan in 2004 to 1,992.5 billion yuan in 2019, with a compound annual growth rate of 16.84%.**
In terms of consumption amount and penetration rate, compared with the United States, the United Kingdom, Japan, and the global average, China's leisure snack market still has huge room for expansion. Data shows that in 2019, the per capita consumption of leisure food in the United States reached $153.6, the United Kingdom $106.5, Japan $89.8, while China only $14.2.
Compared with the overall promising prospects of the industry, it is clear that the core factor behind Three Squirrels' decline is its own problems. Looking back at Three Squirrels' development path over the past few years, it has taken scale as its primary development goal, continuously increasing multi-category layout, even cross-sector operations, and increasing marketing.
Naturally, within just a few years, it quickly entered the first tier in scale. But at the competitiveness level, it neglected the construction of the foundation. The hidden worry of profit shrinkage quickly surfaced.
Naturally, besides rising costs dragging down profit performance, the past few years have also caused Three Squirrels' strategy to lose focus, increasing uncertainty. Combined with financial data and the new strategic adjustment direction, Three Squirrels' rapid expansion in the past few years has also become a detour.
For Three Squirrels at present, how to catch up with the industry in terms of management and marketing costs, gross margin, etc., while ensuring scale, seems to be the most concerned indicator for the capital market.
However, judging from the current situation, the road for Three Squirrels to optimize various indicators through slimming down is not easy.
First, as leading brands have successively entered the capital market, competition among brands has become more difficult. Seeking new growth space is undoubtedly an inevitable trend for any industry to mature, and Three Squirrels is clearly going against this path.
Second, for Three Squirrels, breaking through the offline ceiling and gaining a firm foothold offline are crucial. Re-launching a brand with "nuts and dried fruits + selected snacks," which is already mature in market perception, makes it difficult to accurately find differentiation. Especially in the current consumer market where internet-famous attributes are increasingly important, creating a hit product from mature categories is even more difficult.
Source: Yiming Net (ID: yimingtmt), Author: Mugong


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