Source: Market Value List (ID: shizhibang2021) Author: An Jing

  • What made Toly Bread successful?
  • Why are its performance declining?
  • What difficulties is it facing?

Nowadays, bread in China has shed its Western food label and stands shoulder to shoulder with soy milk and fried dough sticks, becoming synonymous with breakfast. Behind this is the rapid development of China's baking food industry. As a leading domestic bread company, Toly Bread was listed on the Shanghai Stock Exchange in 2015, becoming the "first bread stock." Since its listing, both revenue and profit have maintained double-digit growth rates almost every year. But this momentum did not last. According to Toly Bread's latest 2021 annual performance report, its 2021 operating revenue was 6.343 billion yuan, a year-on-year increase of 6.38%, while net profit attributable to shareholders of the listed company was 764 million yuan, a year-on-year decrease of 13.51%. This is the first time Toly Bread has seen a decline in net profit since its listing. The official explanation for the profit decline is that labor costs increased compared to last year, raw material prices rose, and promotional activities with higher discount rates than last year. Is this the real reason for the profit decline?

What made Toly Bread successful? Before exploring the reasons for Toly Bread's performance decline, we need to understand how Toly Bread grew, that is, what built its moat. In 1995, Wu Zhigang retired from school. At the age of 60, he and his son Wu Xuequn opened a bread workshop in Dandong, Liaoning, named "Toly," which carried Teacher Wu's wish of "having students everywhere." Within just two years of opening, the bakery had established a firm foothold in the market. In 1997, the predecessor of Toly Bread, Shenyang Toly Food Co., Ltd., was established. After more than ten years of development, Toly Bread now has a high market share in Northeast China and other regions. How did Toly Bread go from a bakery to the first bread stock? The answer is high cost-performance ratio. Bread consumption scenarios are simply divided into two categories: leisure snacks and daily staple food. Among them, leisure snacks have no requirements for bread shelf life; short shelf life (3-6 days), medium shelf life (30-45 days), and long shelf life (6 months) are all acceptable. But daily staple food is generally dominated by short-shelf-life products, which is also Toly Bread's main product. Medium and long shelf life products are easy to preserve, have less urgent logistics time requirements, and have fewer restrictions on distribution range. Short-shelf-life bread requires high logistics efficiency, limited distribution radius, and thus limited sales scope. Generally speaking, daily food consumption is high-frequency behavior, and high-frequency consumption behavior is extremely price-sensitive. So, products with high market share in high-frequency consumer goods must have high cost-performance. And the path for FMCG manufacturers to ensure their products are cheaper than similar products is almost always through economies of scale. Specifically for short-shelf-life bread, there are four business models: First, on-site processing and selling in bakeries. Second, production in central factories and distribution to local or nearby cities and regions' supermarkets, convenience stores, etc. Third, production of semi-finished products in central factories, distribution to stores in the jurisdiction, and then processing and selling. Fourth, production in central factories, sales through e-commerce platforms, and distribution via cold chain logistics. The key to Toly Bread's successful market capture is that its products are cheaper than similar brands. The key to its low prices is the economies of scale under the "central factory + wholesale" model and an efficient supply chain system. Toly Bread's competitive advantages are mainly reflected in the following aspects: First, scale advantages dilute costs. Stable raw material supply; Toly Bread implements centralized pricing for bulk raw materials such as flour and oil. Focusing on several varieties, it reduces unit production costs through large-scale standardized production. Second, a sound and stable sales network. The national sales network is well laid out, with over 310,000 retail terminals established nationwide. It has established good cooperation with Yonghui, China Resources Vanguard, Walmart, RT-Mart, Hongqi Chain, Jiayayue, Xintiandi, Biyoute Chain, etc. Third, high-frequency logistics distribution ensures freshness and reduces return rates. Toly Bread basically delivers daily to large supermarkets, and can also deliver daily or every other day to smaller shops and community convenience stores. In contrast, most brands in the same industry deliver only once every three to four days. Fourth, production based on sales, flexibly formulating production plans according to market demand, reducing inventory, and improving inventory turnover. From 2015 to 2020, Toly Bread's inventory turnover rate averaged 24 times, compared to Bright Dairy's 7.5 times and Costco's 15 times, indicating a relatively high inventory turnover rate. With an efficient supply chain system, Toly Bread's performance was impressive. Since its listing, revenue and profit have maintained double-digit growth rates almost every year, and the stock price has been soaring. The change occurred in 2020. Although the stock price was still rising that year, hitting a high of 47.5 yuan, more than five times its listing price, internal risks were quietly brewing.

Financial skills cannot stop the decline Since 2020, Toly Bread's performance growth has become weak. In 2020, Toly Bread's operating revenue growth rate was only 5.66%, significantly slower than previous years, while net profit growth rate was 29.19%. On the surface, the nearly 30% net profit growth indicates stronger profitability or cost control, but in reality, it was driven by one-off events. First, during the pandemic, the state introduced a policy of phased reduction and exemption of social insurance fees, reducing operating costs and sales expenses by a total of 84.9147 million yuan. Second, the implementation of new fixed asset depreciation years significantly reduced depreciation expenses. Originally, Toly Bread's machinery and equipment depreciation period was 10 years. In 2020, it was extended to 10-15 years, citing that imported equipment from Germany, Japan, etc., is more efficient and has a longer lifespan, and different equipment applies different years, which is reasonable. In the adjustment of depreciation years for houses and buildings, Toly Bread was more "equal," raising all from 20 years to 40 years. Such accounting estimate adjustments can increase the year's operating profit by 54.9643 million yuan. Assuming that neither the exemption nor the depreciation adjustment occurred, without considering income tax, Toly Bread's net profit in 2020 would have been 743 million yuan, with a growth rate of only 7.71%. That is to say, in 2020, both revenue and profit growth rates were only single digits. Although Toly Bread's revenue growth had been slowing before, the lowest was 16.77%, with relatively stable growth. Entering single-digit growth is a strong signal of peaking. In 2021, the situation became even worse. According to the performance report, Toly Bread's 2021 operating revenue was 6.343 billion yuan, a year-on-year increase of 6.38%, and net profit attributable to shareholders of the listed company was 764 million yuan, a year-on-year decrease of 13.51%. The reasons come from two aspects: first, the high net profit base in 2020 due to social insurance fee exemptions; second, compared to 2020, there were more promotional activities and higher sales discount rates in 2021. Regarding social insurance exemptions, we still use the restoration method. Without considering income tax, after excluding the impact of social insurance exemptions, the 2020 net profit attributable to the parent company was 798 million yuan, and in 2021 it decreased by 4.26% year-on-year. On the other hand, with increased promotional activities in 2021, the revenue growth brought by sacrificing profit quality for scale was only 6.38%. In 2020 and 2021, revenue grew at single digits for two consecutive years, and net profit turned from single-digit growth to decline, all indicating that Toly Bread is facing a serious bottleneck. The sluggish revenue growth is partly due to the pandemic. For example, the rise of fresh food e-commerce under normalized epidemic prevention and control has reduced customer flow in offline supermarkets, and Toly Bread is relatively dependent on offline sales channels. More importantly, Toly Bread's demand market has changed, and its product competitiveness has changed.

How much imagination is left? Toly Bread's difficulties are manifested in two aspects: price and volume. First, in terms of price, can it move up a notch? That is, when there is pressure from raw material price increases, can it fully transfer costs to consumers? When there is no price increase pressure, does it have the ability to proactively raise prices without affecting sales? The conclusion is no. Bread is an optional food rather than a necessary food. The market is fully competitive, and substitutes are not limited to the same category of bread. Coupled with Toly Bread's own focus on cost-performance, the room for price increases is small, and price increases are generally passive due to cost pressure. From a data perspective, according to the World Food Situation report released by the Food and Agriculture Organization of the United Nations on January 6, 2022, the food price index in 2021 reached its highest level in a decade. Among them, vegetable oil and grain indices hit record highs. For Toly Bread, raw material prices account for about 60% of costs. The rise in bulk raw material prices such as flour and oil directly affects product costs. In the first three quarters of 2021, Toly Bread's gross margin fell by 3.7 percentage points compared to the full year of 2020, including both high discount rates and raw material price increases. The decline in gross margin can, to some extent, indicate that upstream cost pressure cannot be fully passed on. With price constraints, Toly Bread ultimately has to find a balance between profit scale and market scale. Second, geographically, can it expand beyond the north? Toly Bread was born in Northeast China. The Northeast and North China markets have always contributed about 60% of revenue and nearly 90% of profit. It can be said that the Northeast and North China markets subsidize the development of other regional markets. Currently, the Northeast and North China markets are mature markets with limited incremental space. Toly Bread must go national. The reality is that this process has been very difficult. Since 2016, the revenue scale in Central and South China has still been insufficient and has been loss-making for consecutive years. In 2020, almost all of Toly's subsidiaries in East China, Central China, and South China were loss-making. In the first half of 2021, the Shanghai subsidiary lost 9.8441 million yuan, the Jiangsu subsidiary lost 10.775 million yuan, and the Hainan subsidiary lost 8.0927 million yuan. Why does the "central factory + wholesale" model with an efficient supply chain system, which works well in the Northeast, fail in the South? The high cost-performance strategy does not work everywhere. For example, Xiabu Xiabu, known for high cost-performance, also faced obstacles in the South. Compared to the North, the South has a more developed economy and places more emphasis on food. Freshly made high-end chain bakeries are more popular among southern consumers than short-shelf-life packaged bread in supermarkets. At the same time, short-shelf-life bread of different brands in the South has already captured the market. Among them, Mankattan has been laying out in East China for many years, occupying a place in major supermarkets. FamilyMart and 7-Eleven have also launched their own private-label short-shelf-life bread. Compared to the northern market, which was a blank period for short-shelf-life bread, Toly's southward expansion directly entered hard mode. Even after years of unsuccessful southward expansion, Toly Bread has no intention of giving up this market. It is working hard in Jiangsu, which has losses as high as 10.775 million yuan, and Zhejiang, with losses of 503,500 yuan, building production bases to expand capacity. If the route is wrong, efforts may be in vain.

Conclusion With the development of China's economy, the increase in urbanization rate, and the accelerating pace of life, short-shelf-life bread as a breakfast staple is becoming more and more common. Toly Bread undoubtedly caught up with the rapid growth of the industry, and the efficient supply chain system under the "central factory + wholesale" model also built a moat for it. Changes in the times and market will not stop, and business models are not a one-time solution. After gaining a certain market share through rapid expansion, Toly Bread has also been trying to transform and expand new business lines, but the results have not been ideal. Control of the course is always the key factor for a company's long-term success, and it is also the most difficult part of business operations. It tests the vision and wisdom of the top leader. For Wu Zhigang and his son, the first half of the journey was precise, but now they are in a state of losing their way.

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