Click the image to register Source: Yunfeng Financial WeChat public account (majikwealth) Author: Weng Fang, You Fan Chen Jun finds himself increasingly unable to understand the tastes of today's young people. As a key member of the product R&D department at Want Want China, Chen Jun is responsible for the development of dairy products. His proudest achievement is the Want Want milk drink, which once achieved annual sales of over 10 billion RMB, a miracle in China's dairy industry. Those were the good old days that the entire company remembers fondly. However, in the past two years, no matter how hard Chen Jun's team works on new product development, and no matter how much praise the special concentrated milk and O-Pao fruit milk receive in blind taste tests, their market performance has been lukewarm. Worse still, the company's pillar product, Want Want milk, has inevitably entered a decline phase. The sales volume of Want Want China's dairy and beverages peaked simultaneously with the company's stock price. Data source: Company annual report, compiled by Yunfeng Financial. But his situation is not the worst. Want Want's Tmall flagship store once launched a special section called "Want Want You've Never Tried," which, to be honest, might as well be renamed "Want Want You've Never Heard Of." Most of the brands in that section are hard to find on the market, such as "Na Duoli," "Ai Yo," "La Ren," and "Baby Mama." What puzzles Chen Jun is that, despite being in the dairy industry, Dali Foods launched a soy milk drink called Dou Ben Dou last year, which became an instant hit upon release, generating over 200 million RMB in revenue in just two months. The capital market has also shifted its stance accordingly. Want Want's market value has nearly halved from its peak over several years, while Dali Foods, which went public only in 2015, has seen its market value double, once reaching 100 billion HKD—surpassing not only Want Want but also Master Kong, the former heavyweight in the Hong Kong-listed food and beverage sector. Data source: Youyu Stock APP The battle for supremacy in the food and beverage industry has entered a new round. The "Three Musketeers" of Taiwanese Food Speaking of the glorious days a decade ago, Wang Lin, who has worked on Master Kong's instant noodle production line for over 20 years, still can't help but smile. Back then, there were long anti-crowd barriers at the entrance of Master Kong's instant noodle factory, with wholesalers queuing from morning to night, ordering bags and bags of products. After entering the Chinese market in 1992, Master Kong took only three years to grow its revenue from 27 million RMB to 2.45 billion RMB, achieving a hundredfold growth miracle. The capital market did not let it down either. After its IPO on the Hong Kong stock exchange in 1996, Master Kong's stock price rose more than 50 times over the next decade or so, making it a true long-term consumer stock. Data source: Youyu Stock APP The other two Taiwanese food giants, Uni-President and Want Want, also performed impressively. Uni-President's green tea and iced black tea long dominated half of the freezer space in small shops, while Want Want's gift packs were the most desired gift for children during the Chinese New Year. At their peak in 2014, the combined market value of the three Taiwanese food giants exceeded 300 billion HKD, accounting for half of the food and beverage sector on the Hong Kong stock market, and their market value was once equivalent to three times that of Kweichow Moutai. But now, their market value is only one-fifth of Moutai's. As of February 9, 2018 close. Data source: Wind, compiled by Yunfeng Financial. Why can Moutai, also in the food and beverage industry, weather the plasticizer scandal and anti-corruption campaign to enjoy a second spring, while the three Taiwanese giants cannot replicate their former glory? In essence, it's about product competitiveness. Although the instant noodle industry is declining and puffed snacks are no longer the first choice for consumers, it was a completely different story in China 20 years ago. In the early 1990s, Master Kong, Uni-President, and Nissin, the founder of instant noodles, almost simultaneously entered the mainland market. The local competitors they faced were only bulk instant noodle cakes and "Huafeng," a brand now only found in nostalgic channels. At that time, the Chinese impression of instant noodles was Huafeng's simple bagged noodles with a seasoning packet of salt and MSG. To eat, one would soak the noodles in a large mug—it filled the stomach but was hardly tasty. Image source: Pixabay.com Nissin's representative was its proud "Chicken Ramen." According to the vision of Momofuku Ando, the creator of the instant noodle empire, this product, which sold well in Japan, should have been replicable overseas. But he didn't anticipate that the Chinese would not accept it at all—it was several times more expensive than Huafeng, yet the taste was very light. Although the noodle quality seemed better, it wasn't worth the price. In short, at that time, the demand of the Chinese people was in a transition period from "eating enough" to "eating well," and the most important factor was affordability. After tens of thousands of taste tests, Master Kong's product R&D department found that mainlanders love braised flavors and consider beef a relatively expensive meat, so they decided to focus on "braised beef flavor." At the same time, the seasoning packets were increased to three—"sauce packet," "powder packet," and "dehydrated vegetable packet"—which immediately made consumers feel it was generous and good value. But that wasn't enough. In 1993, CCTV aired the first Master Kong instant noodle commercial. At that time, the Chinese impression of TV commercials was still stuck on repetitive text and monotonous visuals. In Master Kong's ad, the springy noodles, large chunks of beef, chili, and rich soup—elements that were very novel at the time—made viewers' mouths water. Although the beef and soup in the ad would now be called "seller's show," the borderline marketing tactics, combined with the catchy slogan "Fragrant, delicious, and visible," left a deep impression on the audience. Master Kong's first instant noodle commercial in mainland China. Video source: Tencent Video. In terms of distribution channels, which are crucial in the FMCG industry, Master Kong also introduced a new concept—channel refinement.**** The company divided the market into urban and non-urban areas. In addition to nationwide regional divisions, urban markets were further divided into districts based on retail point distribution. In each district, distributors were selected to serve retail points, and company sales staff were assigned to assist distributors. In non-urban markets, areas were divided by business circles, with dedicated personnel responsible for terminal maintenance and promotion, setting different visit frequencies for different levels of retail stores. This meticulous and in-depth terminal layout allowed the company's products to penetrate not only the streets and alleys of cities but also every rural grocery store and the dining cars of every train route. A product that deeply understands consumer needs, combined with advanced and effective marketing tactics, and a precisely operating distribution system—this is the product competitiveness in the food industry, and it established Master Kong's dominance in China's instant noodle market. Thus, at its peak in 2013, Master Kong's instant noodle business revenue reached 25 billion RMB, a 1000-fold increase from 20 years earlier, accounting for half of the entire industry. Want Want's Alternative Product Competitiveness Want Want's rice cracker business took a different approach to win. Puffed snacks cannot be differentiated by flavor like instant noodles, so Want Want's senbei and snow rice crackers only enjoyed two good years after entering the Chinese market before being dragged into the "rice cracker war." In 1994, including Master Kong, over 200 food factories began producing various rice cracker snacks. Want Want's founder, Tsai Eng-meng, chose to respond with a desperate price war. He had used this tactic in the Taiwanese market in the 1980s, and this time in mainland China, Want Want again used the method of rapidly expanding factories, reducing production costs, and slashing ex-factory prices, cutting the price of rice crackers from 50 RMB/kg to 5 RMB/kg in one go. The ruthless price cuts sent other companies fleeing, and the market returned to Want Want's control. Being able to cut prices without compromising quality is also a major manifestation of product competitiveness in the food industry. In addition, Want Want's catchy and quirky ads are classic cases in the advertising industry. They are simple, easy to understand, down-to-earth, and also fun and memorable. The unconventional and self-expressive traits stood out among the many advertisements at the time, becoming a powerful weapon for Want Want's promotion. Image source: Tencent Video. Sailing Against the Current: If You Don't Advance, You Fall Behind However, today, these Taiwanese giants seem to have lost their sensitivity to changing consumer preferences and no longer have the wolf-like ruthlessness and determination to cut off their own arms. Although Want Want has repeatedly emphasized product innovation in its annual reports in recent years, the new sub-brands it has launched are still puffed snacks and candies—categories that people increasingly consider unhealthy. It even tried to enter the red ocean of instant noodles with an "Ai Yo" buckwheat noodle product. Excuse me? Isn't Master Kong's decline and struggle enough of a warning? It's not that instant noodles can't be made; in recent years, Korean instant noodles have become very popular in China. From Nongshim to Samyang, in 2017, Korean instant noodles saw their sales in China double year-on-year and firmly occupied the top spots in online sales. Image source: DT Finance. Take Samyang's Fire Noodles, for example. Its most famous feature is the "spicy" taste. In addition, it has a sweetness from Korean sauces and a chewier texture, which creates buzz and shareability. So, the demand of Chinese consumers, especially those in first- and second-tier cities, for leisure food has shifted from "eating enough and eating well" to "eating healthily" and "eating interestingly." Therefore, when Zhou Hei Ya launched its modified-atmosphere packaged products that ensure hygiene and freshness, its braised products could sell well nationwide. Three Squirrels, besides focusing on health, uses the cute squirrel mascot that calls customers "master" as a key weapon to win consumers' hearts. Looking back at the examples at the beginning of this article—Want Want's special concentrated milk and Dali's Dou Ben Dou soy milk. Both are major new products. The former still uses reconstituted milk, same as Want Want milk, an ingredient that has been exposed by many media as safe but not fresh, tasty but not healthy. Dali took a different path, not participating in the fiercely competitive milk market, but choosing soy milk, which Chinese people love but lack good products for, while repeatedly emphasizing green, healthy, and nutritious elements, thus achieving success. From being a leader in product competitiveness to a follower and then a laggard, Chinese consumers have upgraded, but the products of the three Taiwanese giants have downgraded. Product Innovation: A Double-Edged Sword Would the three Taiwanese giants completely deny being complacent? Uni-President China would be the first to protest. In previous years, Uni-President's instant noodle hit, Laotan Sauerkraut Noodles, achieved sales as high as 4 billion RMB, and in recent years, its high-end brand Tang Daren has been performing increasingly well. If it weren't for the emergence of food delivery platforms like Ele.me and Meituan, Uni-President might have had a chance to stage a comeback. But according to industry insiders, companies like Uni-President and Want Want have fallen into the trap of "blind innovation"—new products seem to be thriving, but they never make money. Take the beverage industry as an example. Uni-President once launched more than ten new products in a single year, including Chinese-style drinks like the Yin series, fruit and vegetable juices like the Weishike series, fruit juice drinks like the Yishang series, cold-brewed tea like Xiaoming Classmate, Assam small milk tea, ready-to-drink coffee like Yaha HEY series, and Langduo ready-to-drink coffee. Among these, only Xiaoming Classmate became a hit, while the others quickly disappeared. But because consumers are now very fickle, Xiaoming Classmate's life cycle lasted only two to three years. But at the same time, how much does such frequent product innovation cost? A new beverage product requires 60-80 million RMB in development costs, plus substantial marketing and channel resources. Therefore, Uni-President's R&D expenses reached 230 million RMB in 2016, accounting for 30% of its net profit that year. Yet its beverage business revenue actually fell by 13% that year, a decline even larger than Master Kong's 6% drop in beverage revenue. When innovation doesn't find the right direction and path, it becomes a stumbling block to performance. Dali's Counterattack In the past few years, articles analyzing the decline of the three Taiwanese giants often cite arguments such as "the inevitable result of consumption upgrading," "What defeated Master Kong was not Uni-President but Ele.me," and "When the middle market collapses and community economy arrives, the rise of niche players will create new business dreams." These arguments have some merit, but they fail to explain one question—Why can Dali Foods, also a large FMCG company, buck the trend and achieve a 100-billion-HKD market value? A single example can illustrate the point. When Dali launched Lehu in 2013, no one was optimistic about it. Although everyone knew that functional drinks would explode in China, with Red Bull already established, why would anyone buy Lehu, which even had a similar packaging? But the market overlooked two points: first, the low cost of a late-mover strategy, and second, the complex stratification of China's consumer market. Red Bull spent over a decade educating the market about the benefits of functional drinks, so when Lehu entered, it didn't need to pay the high cost of market education. And telling consumers why they need a product is the most headache-inducing task for Uni-President and Want Want in their product innovation. At the same time, Dali's distribution system cleverly avoided first- and second-tier cities and East China—where consumers have been spoiled by various brands and are very picky—while in third- and fourth-tier cities and rural markets, where Dali focuses, good value for money remains the key concern for consumers. Therefore, when Lehu, priced at half of Red Bull, made its debut, it quickly tore a small gap in the seemingly monopolized functional drink market. Within two years, Red Bull's market share dropped from 90% to 70%. Lehu's sales performance. Data source: Company annual report, compiled by Yunfeng Financial. When Dali Foods was questioned by short-sellers last year, a key point of contention was its ultra-low operating expenses—Master Kong and Uni-President's sales expenses account for nearly 30% of total revenue, while Dali's is only 15%; the three giants' net profit margin is only 5%-6%, while Dali's is 15%. This undoubtedly raised investors' suspicions. Dali's response revealed the secret to its rapid conquest of third- and fourth-tier cities and rural markets—by offering distributors a much higher profit margin than competitors through low ex-factory prices, Dali motivates distributors to voluntarily promote its products and bear some of the sales costs. Image source: Sanqian Data Lab. This approach is in line with OPPO and VIVO's model of selling phones offline, and the latter's success is also closely linked to the consumption upgrade in third- and fourth-tier cities. Master Kong and Uni-President's beverages are notoriously low-margin products, with distributors earning only a few cents per bottle, while selling a can of Lehu can earn over one yuan. Naturally, retail stores are more motivated to place Dali's products in prominent positions. Although the lower ex-factory price means the company loses some control over its distribution channels, compared to the rapidly captured market share, this loss is acceptable for Dali. The clever late-mover strategy, the focus on third- and fourth-tier cities, and the channel management that fully mobilizes distributors' enthusiasm—these together constitute the new product competitiveness in the food industry, and they also make Dali less vulnerable to the impact of e-commerce and niche foods than the three Taiwanese giants. Finding Your Own Battlefield It would be too simplistic to dismiss the once-dominant Taiwanese food giants with the phrase "consumption upgrade." In fact, what truly led to their downfall is that their once-proud strengths in product, channel, and marketing have all fallen behind the pace of market development.**** Although the stock prices of the three giants have performed well since 2017, the reason is not that their products have regained popularity, but rather that previous market expectations were very low, and there is a product price increase logic under the inflation cycle. These are clearly not the investment logic that a long-term consumer stock should have. In contrast, companies like Dali, despite issues such as insufficient channel control and difficulty in positioning products for first- and second-tier cities, have keenly captured the differentiation in the Chinese market, just like the three giants did in the 1990s, and built their own unique product competitiveness. Therefore, while traditional food giants are falling, they are rising against the trend and achieving 100-billion-HKD market values. So, for food and beverage companies, if they cannot have an unassailable product moat like Coca-Cola or Moutai, then finding the right market for themselves is the most important thing. The three Taiwanese giants did this when they moved from Taiwan to the mainland 20 years ago, and Dali is doing the same by focusing on third- and fourth-tier cities now. Disclaimer: This article is authorized by Yunfeng Financial Group Co., Ltd. to be published on this platform and does not constitute specific investment advice. Investors should note that investment involves risks.