Benefiting from consumption upgrades, the overall performance of the food and beverage industry this year has maintained a relatively significant growth trend. According to the third-quarter report, 63 of the 89 companies in the industry achieved year-on-year growth in net profit attributable to the parent company, accounting for more than 70%. With the industry recovering in 2017, what changes will occur in 2018? Ping An Securities has proposed ten predictions for the food and beverage industry in 2018. Prediction 1: The upward channel for famous liquor is about to close Fragmented channel integration is extending the life cycle of major products. In recent years, the industry is accelerating change. Ejiupai, 1919, and Jiuxian.com are rapidly integrating fragmented channels. For example, Ejiupai announced it has obtained exclusive agency rights for Gujing Gongjiu in all prefecture-level cities in Jiangsu, and stated it will accelerate development by sharing online resources and opening a more collaborative logistics system, with expected transaction volume of 10 billion yuan in 2017. Wang Yao, Chairman of Yanghe, also visited the headquarters of 1919, which is now focusing on increasing store density after rapid expansion. In addition, old products such as Yanghe Blue Classic, Kouzi Jiao 5 Years, and Gujing Gongjiu Nianfen Yuanjiang, which have been on the market for over 8 years, continue to maintain double-digit growth. The life cycle of baijiu single products beyond Maotai, Wuliangye, and Jiannanchun is gradually extending, and "a fat man can be toppled in three years" is no longer an industry rule. The baijiu class is solidifying. Channels are flatter and more modern, and single-product scale is larger, significantly reducing industry and company volatility and accelerating the fast-moving consumer goods (FMCG) model in the baijiu industry. Correspondingly, competitive advantages common in FMCG, such as brand and scale, are gradually solidifying in the baijiu industry. In other words, for some distilleries, the upward channel for brands and products is about to close. Source: WIND Prediction 2: Yili aggressively enters the soy milk market, showcasing its FMCG platform value Category diversification is the expansion path for food leaders. Looking at the growth paths of international food giants like Danone and Nestlé, they typically start with a single category, establish leadership through scale advantages and deep channel coverage, and then diversify into related categories. From the perspective of multi-category synergies for food leaders, the core lies in the realization of channel value. New categories are distributed through existing category channels, achieving cost efficiency and effective investment, thereby achieving higher net profit margins than single categories. Yili's channel value is gradually emerging, moving towards a health food platform. Although Yili's business is limited to dairy products such as liquid milk, milk powder, and ice cream, its long-term plan is to build an industrial platform with dairy as the core, extending appropriately into related health food businesses and synergistic businesses. Currently, Yili has become the leading liquid milk company. Its flat channel system, cultivated over many years, makes distribution efficiency superior to many domestic food leaders. The product attributes of room-temperature milk are similar to many food categories, and the channel has strong extensibility, giving the company the potential to become a food platform. Earlier, at the end of 2014, the company launched a non-dairy walnut milk beverage, entering the walnut milk market dominated by Six Walnuts, and achieved revenue of about 500 million yuan in 2016. Recently, the company launched the soy milk product "Zhixuan," which is expected to carve out a place in the soy milk market where there is no strong brand. Prediction 3: Compound seasonings become the new growth engine for the seasoning industry Compound seasonings are more professional than single seasonings like soy sauce and vinegar, meeting more segmented personalized needs and reducing cooking difficulty. Currently, with the industrialization of the food industry and the rapid expansion of chain restaurants such as Haidilao and Grandma's Home, compound seasonings have broader development space. At present, there is no absolute leader in compound seasonings, and industry leaders are actively positioning themselves. For example, Haitian's latest capacity plan proposes to expand compound seasoning capacity (excluding soy sauce, seasoning paste, oyster sauce, and vinegar) from 7,000 tons to 407,000 tons by 2023. With accelerated capital inflow, compound seasonings may see accelerated growth in 2018, becoming the new growth engine for the seasoning industry. Source: WIND Prediction 4: B-end becomes the strategic entry point for food and seasonings Benefiting from consumption upgrades, the rise of the catering industry, and increased downstream concentration, the B-end may become the next important strategic entry point for food and seasonings. Compared to C-end users, B-end users:

  1. Can more professionally identify product quality and focus more on cost-performance ratio;
  2. Pay more attention to cost when purchasing food and seasonings;
  3. Have greater product stickiness; restaurant recipes are relatively fixed and will not change for a period, and with the flow of users (chefs), product usage habits will be carried to other places. These characteristics determine that B-end users have stickiness in product use, and developing B-end users is easy to defend but difficult to attack. Early development is difficult, but once broken through and with normal maintenance, sales will quickly rise and stabilize. Especially breaking into chain restaurants and convenience stores has strategic significance. In 2017, Zhongju Hi-Tech's seasonings accelerated penetration into the catering industry, with catering growth of about 20% in 2017; Anjing Food's hot pot ingredients are supplied to chain restaurant customers Haidilao and Xiabuxiabu; Sanquan Food's fresh food 2B business saw volume growth, supplying to Shanghai Xingbianli, Xinyitian Convenience Stores, and other convenience stores; Dabeinong's feed shifted from dealer distribution to direct sales to large-scale pig farms. This trend will continue and become more significant in 2018. Source: Frost & Sullivan Prediction 5: State-owned enterprise reform promotes improvement in the beer industry pattern; total beer volume decline narrows, but long-term outlook remains pessimistic This year, the recovery of major products combined with extended hot weather improved industry prosperity, and the impact of imported beer weakened, reducing the adjustment pressure on domestic beer. In the long term, under the background of an aging population, the main beer-consuming population is decreasing, and new products like premixed drinks are diverting young people seeking personalization, so total beer volume may continue to decline. When in distress, one seeks change; state-owned enterprise reform may help improve the beer industry pattern. Since 2014, the industry has been in a downturn due to declining prosperity and the impact of imported beer. Looking ahead, the improvement path for the beer industry lies in product premiumization and easing of peer competition, both of which depend on improving the competitive landscape. Currently, the industry's 3+2 pattern is set, with CR5 (industry concentration rate) as high as 73%. Continuing the strategy of low-price share grabbing is unlikely to work. The case of Chongqing Brewery has opened a new perspective for the industry. In the future, leading enterprises may shrink their battle lines and focus on advantageous markets or major brand integration, which could become an industry trend. This year, China Resources and Yanjing closed factories and some products raised prices, possibly indicating this trend. Conventionally, in a market-oriented environment, the integration of China's beer industry should be faster than it is now. The slow progress may be more due to the high proportion of state-owned capital in the beer industry, where inefficient decision-making mechanisms and non-market-oriented interest considerations hinder industry clearing. Looking ahead, the acceleration of state-owned enterprise reform may have a cumulative impact on the industry pattern. One possibility is that Yanjing, which is relatively passive in defending the Beijing and Guangxi markets, may be acquired by strong brands; another possibility is that state-owned enterprise reform improves corporate incentive mechanisms and releases management rights, making factory closures by China Resources, Tsingtao, and Yanjing smoother. Source: WIND Prediction 6: Premixed drinks make a comeback, returning to the fast growth track Driven by demographic shifts and preference changes, low-alcohol beverages will gradually divert part of the beer market, with growth space still tenfold. In 2014-2015, industry demand suddenly exploded due to consumers' "trying new things," leading companies and channels to misjudge the market space for premixed drinks, resulting in serious channel inventory problems. In 2016-2017, the market digested historical inventory and continued to squeeze out followers. Currently, the industry's destocking cycle has ended. Although business growth is slow, it is sustainable. In 2018, the industry is expected to return to the fast growth track, with surviving leading companies being the biggest beneficiaries. Source: Euromonitor Prediction 7: Domestic wine ushers in a bottom reversal The wine market is recovering, but imported wine is squeezing the share of domestic wine. Since 2012, industry demand has been weak, but the industry bottomed out in 2014. Imported wines with quality and cost-performance advantages continue to harvest the incremental wine market, causing sluggish growth for domestic wine. From January to October 2017, wine production decreased by 9.7% year-on-year, while wine imports increased by 19.7% year-on-year. Multiple favorable factors may bring a turning point for domestic wine in 2018.
  4. After years of deep adjustment, domestic wine demand has gradually shifted from business and gifts to personal consumption, and prices have become more affordable, leaving little room for further squeezing. For example, the leading company Changyu's wine ton price fell from 55,700 yuan/ton in 2012 to 37,400 yuan/ton in 2016.
  5. Due to natural disasters in Europe and the California wildfires, the International Organisation of Vine and Wine predicts that world wine production in 2017 will decrease by 8% compared to 2016, the lowest since 1961. Rising overseas wine prices are expected to create a better market environment for domestic wine development.
  6. Leading domestic wine companies Changyu and Great Wall both had major management changes in 2017, and they have reorganized their brands and strategies through differentiated price increases and cutting product codes. Considering these three aspects, the downgrade of domestic wine products may have been completed, and rising overseas wine prices provide a better market environment for domestic wine. Improvements in the mechanisms and channels of leading enterprises enhance development momentum, and it is expected that revenue growth of domestic wine companies may accelerate in 2018. Source: WIND Source: Ping An Securities Research Institute, WIND Prediction 8: Juewei's 9,000 stores weave a dense network, new categories "enter the kitchen and onto the dining table" Looking at the development of leading leisure braised products brands Zhou Hei Ya and Juewei, both achieved rapid expansion by continuously optimizing and enriching the "full variety + multiple flavors" product structure to meet the needs of different consumer groups and consumption scenarios. Currently, Juewei has nearly 9,000 stores and is still expanding at a rate of 800-1,200 stores per year, making it one of the companies with the most stores in the food and consumer goods industry. In comparison, 7-Eleven has about 2,000 stores in mainland China, and KFC has about 4,800. Juewei franchise stores are deeply rooted in communities, close to consumer groups, mainly located on streets near schools and communities, and consider store planning to achieve a reasonable layout of new and existing stores, with good accessibility and convenience. It is estimated that in major cities across regions, Juewei's store density is about 50,000-100,000 people per store. The dense store network is close to consumers to a large extent, forming scale and brand effects. Currently, the dense network woven by Juewei's 9,000 community stores is highly commercially valuable. Compared to convenience stores, unattended shelves, and chain restaurants, it has greater scale effects and targeting of family dining tables. In the future, more and more categories, such as other meat products and crayfish, may "enter the kitchen and onto the dining table" through this dense network. 2018 may be the year to verify the value of Juewei's channel network. Prediction 9: Seasoning leaders accelerate M&A and integration Seasoning leaders are accelerating M&A and integration, using existing channel networks and brands to expand categories: Considering the development stage and competitive environment of the seasoning industry, the current market is over 200 billion yuan with low concentration and a relatively loose competitive landscape. Leading enterprises are still in the expansion stage. Platform companies' M&A and integration is a major industry trend, using existing channel networks and brand power to expand horizontally and open up market value space, including many small categories such as cooking wine, vinegar, and compound seasonings. In January 2017, Haitian (Jiangsu) acquired 70% equity of Zhenjiang Danhe Vinegar Industry Co., Ltd. for 40 million yuan. Danhe Vinegar lost 427,000 yuan in the first three quarters of 2016, but Haitian's interim report disclosed that it turned losses into profits. It is expected that in 2018, Haitian may conduct M&A and integration in more areas of seasonings. Source: Company official website Prediction 10: 2018 is the first year of new retail layout for traditional food and beverage companies The concept of "new retail" was hot in 2017. Internet giants laying out offline retail stores has become a mainstream trend, and traditional food and beverage companies are also exploring their own "new retail" paths. For example, Sanquan installed fresh food machines in office buildings; Yili and Mengniu entered community unattended convenience micro-stores; Want Want announced the deployment of a thousand smart vending machines to build a large-scale vending machine ecosystem; Wanglaoji announced its entry into herbal tea physical stores, planning to open 3,000-5,000 stores nationwide in four years. The significance of new retail layout for traditional food and beverage companies is that both unattended shelves and offline stores will be nodes in the offline channel network of food companies, bringing them closer to consumers. On one hand, they provide new traffic entry points for company products; on the other hand, they provide new consumption scenarios and enhance consumer shopping experience. 2017 was a year for traditional food companies to explore new retail paths, and 2018 may be the first year of explosive new retail layout. -END-