Weilong price increase, who stole your spicy strip freedom?

Image source @ Visual China

| Institute of Stings, author | Summer

Due to the rising cost of raw materials, spicy noodle companies such as Weilong and Spicy Prince have recently announced price increases, which has caused many people to lose the "freedom of spicy noodles". Some netizens said that the spicy strips that could not be eaten when they were young are also unaffordable when they grow up. The fact is that the head brands such as Weilong and Spicy Prince, which once cost 5 cents a pack at the entrance of the school, have now long been rid of cheap market positioning.

The Sting Institute observed that even before the price increase, the price of the 550g boxed spicy prince had reached 24.9 yuan. At present, the price of a kilogram of pork in the retail market is only about 12 yuan, and the price of spicy strips is twice that of pork, which must be called "huge profits". Another visible change is that the impression of "junk food" that is only sold to elementary school students in the small supermarket in front of the school is now everywhere in large supermarkets. Obviously, in the battlefield of competing for young consumers, the head spicy noodle brands have turned a new page.

From small workshops to industry leaders

According to Tianyancha data, there are more than 2,700 spicy noodle-related enterprises in the country, of which more than 800 are located in Shaanxi, accounting for 31% of the total, and nearly 500 are in Henan. However, the real development of spicy noodles into a business is the People of Pingjiang, Hunan.

In 1998, due to the flooding caused by the soaring price of soybeans, a group of small enterprises specializing in the production of dried sauce in Pingjiang were hit hard. Forced to make a living, some people tried to replace soybeans with lower-cost flour, so they accidentally produced a new product such as spicy strips.

In 2001, Liu Weiping and Liu Fuping two brothers saw the convenience of Transportation in Henan and the price advantage of flour origin, so they came to Luohe with their own spicy noodle business to start a business. In the same period, Zhang Yudong, a retired soldier, returned to his hometown of Pingjiang to found Yufeng Food, and later launched a spicy noodle brand called Spicy Prince, laying the groundwork for the spicy noodle market pattern of "Southern Yufeng and Northern Weilong". As the spicy noodles gradually occupied the small shops in front of the school, the spicy noodle empire of the Liu brothers gradually formed.

In May last year, Wei Long, the "spicy brother", took the lead in submitting a prospectus to the Hong Kong Stock Exchange, which aroused great concern in the market. Before submitting the prospectus, Weilong received a 3.56 billion yuan Pre-IPO round of financing jointly led by CPE, Hillhouse Capital, Sequoia China and Tencent Investment. After this round of financing, the industry once rumored that the valuation of Weilong has reached 70 billion yuan. At that time, the total market value of the three Squirrels, Good Shop and Qiaqia three A-share listed leisure food companies was only more than 60 billion.

The reason why capital is optimistic about Weilong is also very simple. As a snack brand that grew up with a generation of post-90s generations, Weilong's brand influence in the spicy noodle industry is almost dominant, and since the creation of the brand in 2001, Weilong has established 22 business areas and a complete omni-channel sales and operation network after more than 20 years of development. According to the prospectus, in terms of retail sales in 2020, Weilong ranked first with a market share of about 5.7% in the segment of spicy snack food, which is 3.8 times that of the second place in the industry, and the market share of seasoned noodle products and spicy leisure vegetable products is the first.

The absolute industry position has also brought excellent performance data to Weilong. According to its prospectus data, from 2018 to 2020, Weilong's total revenue was 2.752 billion yuan, 3.385 billion yuan and 4.120 billion yuan, respectively, and the revenue growth rate in 2019 and 2020 reached 23% and 21.71% respectively. According to the Frost & Sullivan report, the compound annual growth rate of China's snack food industry during the same period was only 4.1%. The high growth of Weilong's performance is enough to make the capital crazy, at that time, there was news that some investors wanted to participate in Weilong's Pre-IPO round of financing was directly rejected, which shows the hardness of Weilong's "spicy brother".

The "profiteering" business of internet celebrity spicy strips

Take out a pack of spicy strips to see, in addition to other additives such as soybean oil, flour and spices, the ingredient list is not special about the raw materials for making spicy strips, and it seems that the "profiteering" space of spicy strips can be imagined in connection with its terminal price of more than double the pork. This can also be seen from Weilong's performance data.

According to the data, the gross profit margin of Weilong from 2018 to 2020 was 34.7%, 37.1% and 38% respectively, and the corresponding net profit was 476 million yuan, 658 million yuan and 819 million yuan, respectively. Among them, the net profit margin in 2020 was 19.9%, higher than the average net profit margin of about 10% of China's snack food industry in 2020 in the Frost & Sullivan report. The reason why Weilong has been able to maintain a high profit margin is due to the low cost of raw materials and packaging for cheap snacks such as spicy strips, and the prospectus shows that Weilong's raw material costs and packaging material costs account for 27.8% and 13.5% of total revenue in 2020, respectively.

This is also worth asking another question, how did the 5-cent-dollar Weilong become a "profiteering" business step by step? This has to start from weilong's brand transformation.

At the beginning of its birth, this cheap snack was almost always produced in small workshops, so the hygiene situation was worrying and the lack of industry standards, so it was labeled "junk food" very early. In 2005, at the "3.15 Party", the underground black workshop producing spicy strips was exposed, and the scandal of poor production environment, unhygienic materials, and the addition of prohibited additive mold busters was made public, deepening consumers' negative impression of spicy strips. At this time, Weilong stood out because of the large-scale layout in advance, spending millions of dollars to build factories, introducing European production lines, and adopting fully automatic packaging machines.

Since 2010, Weilong has gradually become aware of the communication problem between the brand and young consumers, so it has invited Zhao Wei and Yang Mi to endorse the Weilong brand and "kissing mouth roast" and "kissing bean curd" and other series of products. In 2014, social media was in full swing, and Wei Long had a traffic password because of an "accident". At that time, Weilong had just expanded its production capacity and invited a professional team to shoot the spicy noodle workshop. Later, the photographer casually posted the photo on the Internet, and the result was less than a day, attracting millions of netizens to come to watch, which made Wei Long realize the great charm of event marketing.

In 2016, when Apple's mobile phone was still the most sought-after social currency, Weilong produced a series of advertisements that imitated Apple's style, using technology products to package spicy strips as cheap snacks to produce a high-end image. In order to match the communication effect of online advertising, Weilong even imitated the design and display style of Apple stores offline, put spicy strips in the glass display cabinet, and opened an "apple-style" spicy noodle store.

It was also from this time that Weilong upgraded the packaging of the traditional red and black color to a high-grade sense of "frigidity" wind with black and white gray tones, which not only made the appearance of the product look clean and hygienic, but also enhanced the overall image of the brand. Since then, Weilong has used event marketing from time to time to attract the attention of the whole network, or launched a variety of co-branded packaging products in the form of IP co-branding, and slowly became the most topical Internet celebrity brand. Not long ago, Weilong was suspected of playing pornographic edge balls because of the advertising slogans such as "about it", "thief big" and "tough" on the outer packaging of the product, and was involved in the investigation by the regulatory authorities, and related products were also removed from the shelves of the e-commerce platform, which shows that it has appeared in marketing "too strong".

It is worth mentioning that the emphasis on marketing is also reflected in Weilong's performance data. According to the prospectus, from 2018 to 2020, Weilong's sales expenses were 235 million yuan, 281 million yuan and 371 million yuan, respectively. Among them, the promotion and advertising expenses were 26.809 million yuan, 30.82 million yuan and 46.658 million yuan respectively, and the growth rate of advertising expenses increased significantly from 15% in 2019 to 51.4% in 2020, and by the first half of 2021, Weilong's sales expenses have reached 263 million yuan, an increase of 54.47% year-on-year. Weilong fell into the traffic trap like other Internet celebrity brands, but this also supported Weilong's "profiteering" business.

Spicy strips are the "originators" of new consumption?

As the industry leader, Weilong is doing "profiteering" business, but it is not happy. After failing its initial listing application in May 2021, Weilong again submitted the form to the Hong Kong Stock Exchange and successfully passed the listing hearing. Although the listing is imminent, investors still have many doubts about the value of Weilong's "spicy first share".

From 2001 to the present, Weilong has sat firmly in the first position in the industry for more than 20 years, but it has still not changed the dilemma of a single product. According to the financial report data, from 2018 to 2020, the income of Weilong spicy noodle products accounted for 78.6%, 73.1% and 65.3% of the total revenue, respectively, even if the proportion has declined, but the spicy noodle products are still the revenue pillar of Weilong.

Weilong, which started from occupying small shops, still relies on offline dealers in sales channels. According to the prospectus, from 2018 to 2020, the revenue of Weilong's offline channels was 2.519 billion yuan, 3.134 billion yuan and 3.739 billion yuan, accounting for 91.6%, 92.6% and 90.7% of the total revenue, respectively. In terms of dealers, as of the end of June 2021, Weilong has signed a total of 2,150 dealers, covering more than 625,000 retail terminals, of which 80% are located in lower-tier cities. To put it simply, although Weilong has made a makeover and refreshed its brand impression in the minds of young users in the form of a "new consumption" brand, various small shops located in lower-tier cities still control the lifeblood of Weilong.

In addition, the competition in the same industry that belongs to the snack track cannot be ignored. In recent years, while Weilong eats the old money, listed snack companies such as three squirrels, good shops, and yanjin shops are expanding the spicy strip category. In 2017, three squirrels launched the "about spicy" series of products, selling 4.8 million copies in 7 months; Liangpin Shop launched the main creative and interesting lipstick spicy strip series in 2018; in 2019, Yanjin Shop integrated coarse grain raw materials and launched the "Little New Prince" series with the main health concept, and by 2020, The spicy strip business of Yanjin Shop has achieved revenue of 50.4379 million yuan.

It should be noted that although Weilong has occupied the first position in the market share of the spicy strip track for a long time, the overall pattern of the spicy strip market is still highly fragmented. According to the Frost & Sullivan Report, the market share of China's top five spicy snack food companies in terms of retail sales in 2020 is 10.7%. While facing the challenges of big brands such as Spicy Prince, Three Squirrels, Liangpin Shop and Shiojin Shop, Weilong also faces the continuous division of small and medium-sized brands such as Pigeon Pigeon, Flower Butterfly, Xian Ge, Lin Sister, and Genji in the low-line market.

From the perspective of industry development, there is still a lot of room for growth in the future of the spicy strip track, which is good news for the "spicy strip brother" Weilong. According to the "Analysis Report on the Development Trend and Investment Profitability of China's Spicy Noodle Industry from 2020 to 2026" released by Zhiyan Consulting, the market size of the spicy noodle industry in 2019 was 65.1 billion yuan, with a compound annual growth rate of 8.59%. By 2026, the market size of China's spicy noodle industry is expected to reach 94.9 billion yuan.

In the process of continuous expansion of the industry scale, Weilong with its leading brand market appeal and the advantages accumulated in the terminal sales channels, it is easier to continue to consolidate the advantages in terms of market share and coverage, and with the successful listing with more sufficient funds, Weilong will also have the opportunity to improve the single problem of products and try to find a new growth curve outside the spicy strips.

Looking back at Weilong's road to fame, it can be found that it tried the gameplay routines of the new consumer brand in advance. From the main product quality to the sense of brand seniority, and then increase the price of the product, and even through continuous marketing actions in the later stage, attract the attention of young consumers on social networks, Weilong, which sits on the image of "net red hot strips", shows that it is not inferior to the brand building power of any new consumer brand. The cost of brand upgrading is naturally transferred to the price of the product.

Therefore, when the price of raw materials rises, Weilong, which maintains a high gross profit, quickly passes on the floating cost to the consumer. This action also precisely shows that it is not the raw material supplier that robs consumers of "spicy noodle freedom", but the spicy strip itself. To take a less appropriate example: most people actually have a hard time tasting the spicy strips that appear in a box of twenty dollars, and what is the specific difference in taste between the original 5 cents a pack of spicy strips, but the reality is that consumers are willing to pay more for the same product experience, and the premium is derived from the value experience created by the brand.