Image source@Visual China
Text | New Consumption Finance Research Society
The transformation of the mainland beverage market is still accelerating. Recently, #3 yuan drinks are disappearing collectively# on Weibo hot search again. Historically, this is the fifth wave of price increases in the beverage industry.
In the past 2023, many well-known brands such as Master Kong, Coca-Cola, and Yakult have raised prices. The relevant hot search content shows that the retail price of the packaging in Master Kong's tea and juice series products has been adjusted from 3 yuan/bottle to 3.5 yuan/bottle, and the retail price of 1L has been adjusted from 4 yuan/bottle to 5 yuan/bottle.
The New Consumption Finance Research Agency understands that rising costs and performance growth pressure may be the main reason for Master Kong's price increase.
Master Kong's customer service previously responded to the media that due to the rise in raw materials and labor costs, the national retail price will be uniformly adjusted. Since the beginning of this year, sugar prices have continued to rise, with the sugar price index rising 9.8% in September compared to August, reaching the highest level since November 2010. Although the sugar price index fell by 2.2% month-on-month in October, it was still 46.6% above the level of the same period last year.
However, from the channel side, some supermarkets said that they did not receive a price increase notice from Master Kong, and in 2023, there will be no general price increase of many beverages in supermarkets, and they have been doing preferential discount activities, and the price of beverages will be relatively low, and the prices of some drinks are even decreasing.
From this point of view, it remains to be seen whether the product price adjustment can really drive the growth of Master Kong's performance.
After two consecutive years of declining profits, "picking up", can price increases drive performance growth?
Consumers have always been more sensitive to the price of beverages and have attached great importance to cost performance. Therefore, some experts believe that when adjusting the price of beverage products, in addition to considering the cost factor, brands also need to fully evaluate market acceptance and brand image.
According to the Frost & Sullivan report, the growth rate of China's beverage store industry has been significantly higher than that of the soft drink industry in recent years, and its market share has been rising. The majority of respondents said that the frequency of consumption of freshly made tea has increased in the past one to two years, while the frequency of consumption of soft drinks has decreased. This does not bode well for Master Kong, whose beverage business revenue accounts for 65% of the company's total revenue.
In fact, performance pressure is one of the important incentives for Master Kong's price increase. Judging from the 2023 semi-annual report, although Master Kong's performance has picked up, problems such as high marketing expenses and slowing growth of instant noodle business still exist.
In the first half of 2023, Master Kong achieved revenue of 40.907 billion yuan, a year-on-year increase of 7.04%, a net profit of 1.638 billion yuan, a year-on-year increase of 30.66%, and a gross profit margin of 30.47%, an increase of 2.25 percentage points year-on-year.
Among them, the revenue of instant noodles business was 13.950 billion yuan, a year-on-year increase of 2.97%, still lower than the growth level of 6.49% in the same period last year, the revenue of beverage business was 26.606 billion yuan, a year-on-year increase of 9.5%, the net profit increased by 18.06% year-on-year to 879 million yuan, and the gross profit margin of beverages increased by 0.52 percentage points year-on-year to 32.66%. In terms of revenue structure, the instant noodle business accounted for 34.1% of the company's total revenue, down 1.3 percentage points year-on-year, and the beverage business accounted for 65.0% of the company's total revenue, up 1.5 percentage points year-on-year. It can be seen that the beverage business has become the "main force" of Master Kong's revenue contribution.
In the past two years, due to the adverse effects of factors such as the "soil pit sauerkraut" incident, Master Kong has been mired in the dilemma of "increasing income but not increasing profits" for two consecutive years. Among them, the net profit in 2021 decreased by 6.39% year-on-year, and the decline in 2022 will reach 30.77%, and the gross profit margin will also continue to decline. Although Master Kong's performance will resume "double profit" in the first half of 2023, the growth rate is still lower than market expectations.
At the end of November 2023, Macquarie released a research report saying that considering the weak demand outlook and the continued rise in costs, it is expected to drag down the profit margin performance, so it lowered the net profit forecast of Master Kong Holdings from 2023 to 2025 by 10.9%, 15.5% and 16.3%, and lowered the target price to HK$12.5.
The bank pointed out that although the company's market share continues to increase, the overall demand for pasta and beverage products is still weaker than expected, and the net profit is forecast to only increase by 13.2% in the second half of the year, and the gross profit margin is expected to be flat year-on-year.
Therefore, some experts have analyzed that the food and beverage industry is currently facing challenges such as rising raw material costs and supply chain bottlenecks.
However, analyst Lin Yue believes that the price of freshly made tea is declining, and consumers are more willing to pay for cost-effective products, while bottled tea needs to attract consumers through product innovation.
The involution of the track intensified, and brands such as Master Kong met the test of innovation
Although the traditional FMCG brands represented by Master Kong have great channel advantages, in recent years, innovative drinks and convenience foods have emerged one after another, and the competition on the track has become more and more fierce, and these brands are also facing the pressure of category innovation and marketing innovation.
In order to balance the rising costs caused by the rise in raw material prices, Master Kong has launched a number of "high-end" products in recent years to improve gross profit. Among them, the high-end food category has launched product lines such as Tang Master, Soul Burning Mixed Noodles, and Speed Noodle Restaurant, and high-end drinks have also been launched one after another.
At the same time, under the overwhelming marketing offensive of various Internet celebrity FMCG brands, coupled with the negative impact of the Tukeng sauerkraut incident on product sales, Master Kong has also increased its marketing efforts to attract consumers' attention.
In the past two years, Master Kong has successively signed a number of first-line entertainment stars as product spokespersons, and later spent huge sums of money to title popular variety shows such as "Creation 101" and "This is Hip-hop 5". In addition, Master Kong has also co-branded a number of well-known IPs such as Disney and Douluo Continent, aiming to shorten the distance with young consumers.
Therefore, even in the two years of weak performance growth, Master Kong's marketing costs have been increasing year by year. From 2020 to 2022, Master Kong's marketing costs will be 14.151 billion yuan, 15.708 billion yuan, and 16.810 billion yuan respectively, with an increase of 6.72%, 11%, and 7.01% respectively.
Mapping by the New Consumer Finance Research Society
In the first half of 2023, Master Kong's marketing costs will be 9.019 billion yuan, a year-on-year increase of 10%, accounting for 22.05% of operating income.
In addition to launching high-end products, Master Kong has also launched a variety of new products. In October 2023, Master Kong launched "Ice Tea Beef Noodles", which aroused the curiosity and onlookers of many netizens.
In terms of beverages, it has also launched a new Chinese-style compound tea drink based on Da Hong Pao, Da Hong Pao Bottled Milk Tea, which is expected to become a strong contender for unified Assam milk tea. However, it is a pity that although there are frequent actions in marketing and new promotion, Master Kong's new products have not caused much splash in the market.
Taking the instant noodle business as an example, in 2022, Master Kong's high-priced bag noodles accounted for 42% of the sales of the instant noodle business, a decrease of 2 percentage points compared with two years ago. In the first half of 2023, the sales of Master Kong's high-priced bag noodles increased by only 1.56% year-on-year, and the sales in the instant noodle segment accounted for 42%, which was the same as the same period in 2022. The fastest growth in sales volume was low-priced crispy noodles, with an increase of 35.84%.
Zhu Danpeng, an analyst of China's food industry, said that after the entire convenience food industry enters the "involution", Master Kong will also face intensified competition with other brands. The rise in the company's marketing cost is in line with the current situation of competition in the entire industry, and it is more in line with the node that Master Kong is striving to consolidate the first brand of convenience food.
As a leading consumer goods company, Master Kong entered the Chinese market in the 90s of the last century. As a company that has been in the industry for more than 20 years, it has achieved today's market position, and its deep understanding of the food and beverage industry is indeed undoubted. However, if we talk about the long-term trend of performance, marketing is important, but in the end, it is a test of internal strength and a return to the essence of "people, goods and fields".