Consumption upgrade will not kill instant noodles; it will only eliminate outdated products and drive structural upgrades in the industry. Only companies daring to change can enter the next era of instant noodles.
How long has it been since you last ate instant noodles? For many, the answer might be six months, a year, or even longer. So when Huang Lei took out a jar of pickled cabbage and made a bowl of instant noodles in the Chinese version of "Midnight Diner," it felt utterly out of place.
People who don't eat instant noodles might instinctively think the industry is declining, and that's indeed the case—in China, instant noodle sales have fallen for four consecutive years, dropping 5.7% last year. But not all instant noodle companies are in the same boat: Industry leader Master Kong's instant noodle business fell 10.34% year-on-year last year; Uni-President's instant noodle business grew 8.6%; Japanese brand Nissin is optimistic about the Chinese market and plans to spin off its China instant noodle business for a Hong Kong listing.
The instant noodle market is undergoing upheaval—some are struggling amid the overall decline, while others are seeking opportunities to rise against the trend.
1 Uni-President's Upgrade Battle
In 2016, Uni-President's financial report was not pretty.
Revenue was 20.985 billion yuan, down 5.1% year-on-year; net profit was 607.3 million yuan, down 27.2%. Such performance would be a failed year for any company. But the instant noodle business results might have given Uni-President some comfort—revenue grew 8.6%, and market share rose to 21%.
Uni-President made many attempts to catch up with Master Kong.
The War of Pickled Cabbage and Ham Sausages
In 2008, Uni-President launched a product that tried to change the industry: Laotan Sauerkraut Beef Noodles. The sauerkraut flavor was a flagship product decided after long R&D and trial and error, targeting Master Kong's Braised Beef Noodles. Through channel distribution, ground promotion, and TV ads, Uni-President made the concept of "sour and refreshing" deeply rooted in consumers' minds, successfully turning Laotan Sauerkraut Beef Noodles into a hit.
By 2010, this flavor offensive peaked, with Laotan Sauerkraut Noodles sales exceeding 4 billion yuan, dominating the domestic market, and Uni-President's instant noodles ended two consecutive years of losses.
Master Kong, whose market was taken by Laotan Sauerkraut Beef Noodles, responded with the same flavor, but Uni-President had already secured a place in consumers' minds through advertising, firmly holding over 60% of the same flavor segment. Sauerkraut flavor also became the second-largest category in instant noodles, accounting for nearly one-sixth of the market share.
To compete for market share, Master Kong pulled out a killer move—giving away a ham sausage with each box of instant noodles, forcing Uni-President to respond in kind. This ham sausage war lasted over a year, and the two companies used up more than 4 billion ham sausages. That year, Chinese consumers ate 46.2 billion packs of instant noodles, an average of 34 packs per person.
The price war had immediate effects. As ham sausages raised costs, Uni-President's performance quickly suffered. In 2014, Uni-President's instant noodle business lost 93.575 million yuan, down 34% year-on-year.
Realizing market changes and the cruelty of competition, Uni-President began to shift strategy, no longer competing on market share with low prices and gifts, but targeting the high-end instant noodle market. In September 2014, Uni-President Chairman Lo Chih-cheng announced: "The inflection point for instant noodles has arrived; price competition should turn into value competition."
The Surprise Troops: Tang Daren
The vanguard of value competition was Tang Daren, launched in the same year as Laotan Sauerkraut. It's a Japanese-style instant noodle with a light flavor, selling point being the nutrition and taste of the soup.
At the time, consumers accustomed to red-oil rich soups didn't take to Tang Daren, but Uni-President didn't give up on it. On one hand, they insisted on not lowering prices; on the other, they insisted on in-store displays, with one Tang Daren facing for every two Laotan Sauerkraut facings.
After six years of silence, the younger brother Tang Daren finally got its chance in 2014. In the second half of the year, Uni-President abandoned the price war with Master Kong and began upgrading to the market above 5 yuan, launching Gemian and Champion List as new products, forming a high-end product matrix with Tang Daren.
While instant noodle production and sales continued to decline, Tang Daren contributed huge growth energy to Uni-President. From 2014 to 2015, Tang Daren grew over 100% for two consecutive years, with sales exceeding 500 million yuan.
In the 52 weeks before September 2016, Tang Daren alone contributed 77.3% of Uni-President's instant noodle sales growth.
Competing for High-End Noodles
In the market above 5 yuan, Master Kong only launched Aixian Dacan in 2014 to counter Uni-President's competition, and only last year decided to abandon the low-priced bagged noodle market, pushing high-priced products like Black Pepper and Soup Master , inviting Li Yifeng, Yang Yang, TFboys and other stars as spokespersons, falling behind in the high-end race. Currently, new products account for less than 10% of total instant noodle revenue.
When it rains, it pours. In 2014, Ting Hsin was hit by the "gutter oil" scandal, with its subsidiary Cheng I Food Company exposed for mixing feed oil into its oil products. This not only led to the shutdown and dissolution of Taiwan Master Kong but also affected Master Kong's image in mainland China.
Master Kong's revenue and net profit have declined for five consecutive years, and its market value has shrunk by over 90 billion Hong Kong dollars during this period, like a lyric: "Living in experience until the building collapses."
After tasting the sweetness of high-end positioning, Uni-President continued to innovate in high-end products. In 2016, Tang Daren launched new flavors, reaching 8 varieties; new products Duhui Xiaoguan and Xiangban Yicheng drew inspiration from Lanzhou beef noodles, Chongqing Wanza noodles, and Wuhan hot dry noodles in ingredients and flavors; the relaunched Manhan Dacan took on the task of breaking the 15-yuan price line.
Despite being at the forefront of transformation, Uni-President is still trying to break through with new products.
2 Who Is Squeezing Instant Noodles?
According to statistics from the China Cuisine Association, in 2016, China's online food ordering users reached 256 million; the national food delivery market exceeded 160 billion yuan, with growth of 33%. On March 19 this year, Meituan announced that its food delivery business completed over 10 million orders per day.
The period of rapid growth in food delivery orders coincides with the consecutive decline in China's instant noodle sales. It can't be said that food delivery completely took over the instant noodle market, but its impact is enormous.
The emergence of food delivery caters to young consumers' pursuit of quality and health, seizing part of the instant noodle market. But instant noodle consumption scenarios are spread across the country—shared rentals, school dorms, construction sites, green train cars, stations, hospitals, etc. Among these, only shared rentals and school dorms overlap with food delivery scenarios.
Food delivery is not the only thing taking away the instant noodle market. From 2010 to 2015, the total number of convenience stores in China increased from 21,000 to 44,000, a growth of 115%. 7-Eleven and Lawson are replacing scattered mom-and-pop shops and small stores. Although they are channels for instant noodles, they also offer fresh food like buns, bento boxes, and oden, which are enemies of instant noodles.
This is also why Uni-President is pushing high-end products—not only to shake off Master Kong but also to keep up with enemies outside the industry. Compared to Master Kong, Uni-President is much more familiar with this outside enemy, the convenience store—it is the operator of 7-Eleven in Shanghai and Taiwan.
The instant noodle industry felt the trend of consumption upgrade earlier than other industries , and as early as 2013, before the food delivery war began, market growth had already slowed. Consumers no longer wanted instant noodles as lunch; food delivery, convenience stores, and more new things just happened to provide suitable alternatives. This is a consumption upgrade happening around us, arriving earlier than per capita GDP exceeding $8,000.
Will Consumption Upgrade Kill Instant Noodles?
A third-party survey of young consumers shows that over 50% of consumers position instant noodles as a midnight snack. What should a perfect midnight snack look like? It should be exquisite and warm, whether after a tiring workday or in a lonely cold night, providing the comfort of delicious food.
The instant noodle market was once an incremental market. Uni-President and Master Kong eliminated 90% of competitors through channel and price wars, with low margins and high volume being the common tactic over the past decade. When the incremental market turns into a stock market, meeting higher-level needs and improving profit margins become the survival rules for instant noodle companies.
Consumption upgrade will not kill instant noodles; it will only eliminate outdated products and drive structural upgrades in the industry.
▲ When the instant noodle market declined, the food delivery market exploded, and food delivery affected the instant noodle market to some extent.
3 Climbing Over the Wall of Prejudice
In Japan, South Korea, and Hong Kong, where per capita GDP is higher than mainland China, instant noodles have not disappeared; instead, per capita consumption is higher than in mainland China.
With the boost of film and TV dramas and rich flavors, Japanese and Korean instant noodle brands are conquering the Chinese market. On May 17 this year, Nissin submitted a listing application to the Hong Kong Stock Exchange for its China business. Six days later, Nissin's factory in Pinghu, Zhejiang, was completed, marking its 9th factory in mainland China and Hong Kong.
The competition from foreign instant noodle brands makes declining Chinese instant noodle companies even more restless, and Uni-President and Master Kong chose to fight back: Master Kong did product placement in the TV drama "Ode to Joy 2," while Uni-President placed a big sauerkraut jar in the Chinese version of "Midnight Diner."
This sauerkraut jar not only embarrassed viewers but also reflected the awkwardness of Chinese instant noodle companies to some extent: The prices of new products have gone up, but making instant noodles cross the prejudice and become a staple food on par with rice and steamed buns is a long and difficult road.
Instant noodles in China have been overly "demonized," bearing too many unfounded accusations: "takes 32 days to digest," "packaging contains wax," "high oil and salt"...
The completely different treatment of instant noodles in Japan, South Korea, and Hong Kong might offer some lessons for domestic companies: Through technological improvements, they can enhance the health and safety of instant noodles, provide more flavors to consumers, eliminate consumer prejudice, and make instant noodles a delicious food fit for the dining table.
The wall of prejudice is too high and thick. Crossing it requires instant noodle companies to continuously make changes in raw material procurement, product R&D, process control, supply chain, and brand marketing, and to transform consumer mindsets with industry strength. It is foreseeable that for some time, even without negative news, consumers will still have doubts about the health and safety of instant noodles.
At the beginning of "A Tale of Two Cities," Dickens wrote: "It was the best of times, it was the worst of times."
Such a contradictory environment is exactly what instant noodle companies face. The high-end trend will make some companies lose competitiveness and allow others to transform. Instant noodles will not die; only companies daring to change can enter the next era of instant noodles.
Source: Business Model Observer (ID: moshiguancha) -END-