Source: Daochang Qiu
Brand marketing and financial management seem to be two areas that do not intersect, but if brand people want to strengthen their understanding of business, they must broaden their knowledge boundaries, grasp the fundamentals of business operations, tap the underlying driving factors of enterprise growth, and explore the way to evergreen.
Recently, many companies have released financial reports one after another, so we can dismantle how to understand the strategy from reading the financial report to understanding the strategy in one article, and find some solutions to the brand based on financial thinking.
Supply, production, marketing, people, finance, materials, the enterprise is a complex business entity. Warren Buffett said, "Financial reports are the language of communication between companies and the outside world."
No matter what industry it is located in or what stage of development it is in, the daily business activities of an enterprise can be abstracted into a process of "starting from cash and returning to cash", which is reflected in the three activities of enterprise operation, investment and financing.
The results of these three activities are reflected in the core three statements of the financial report, namely the balance sheet, the income statement and the cash flow statement.
We can have a big grasp of the enterprise situation at a macro level through the three tables, and then do a local in-depth analysis:
1) Find the historical performance growth point of the enterprise
Through the growth point of enterprise performance, the underlying driving factors of enterprise growth are explored, and the deeper reasons are excavated through the way of volume and price splitting: whether it is brought about by the growth of shipments (new product launches, channel expansion or the industry is in the growth period), or the price increase (product price increases, raw material labor costs rise, terminal supply exceeds demand, and becoming a high-end brand has higher pricing power, etc.).
Generally speaking, if it is the performance growth caused by the increase in sales, the revenue growth rate is often greater than the profit growth rate, and if it is the performance growth caused by the increase in product prices, the profit growth rate is often greater than the revenue growth rate.
In 2022, with a gradually decreasing discount, with an average unit price of 16 yuan a cup, Luckin not only exceeded 10 billion yuan in revenue, but also achieved the first annual profit in history. At this time, the driving factor of Luckin's performance growth is the increase in product prices.
Recently, Luckin Coffee announced its 23-year annual financial report, with a net income of 24.903 billion yuan in 23-year, a year-on-year increase of 87.3%. But the reasons for the performance growth at this time are different from those presented in Luckin's financial report in '22.
If we break down the financial report, we can see that the average monthly trading customers of Luckin were 48.37 million, a year-on-year increase of 124.1%, the total number of stores was 16,248, the net number of new stores was 8,034, a year-on-year increase of 97.8%, and the profit was 3.026 billion yuan, a year-on-year increase of 161.7%. Revenue has increased significantly, the average number of monthly customers has increased, the number of stores has increased, and at the same time, net income is greater than profit.
This shows that Luckin mainly through the increase in sales brought about by the increase in revenue, in addition to the increasing acceptance of coffee by the Chinese people, more important is the endogenous growth of Luckin - the introduction of new products to expand production and expand store sales channels.
2) Mining key business data
Find out the business model, profitability, etc. of the company, and compare it with the same industry to further judge the company's fundamentals, and judge whether the future performance of the company exceeds expectations, meets expectations or falls short of expectations:
(1) The business model of the enterprise - how to make money
(2) The core competitiveness of the enterprise - how to ensure continuous profit
(3) The company's future development strategy - it will make money from there in the future
For example, the proportion of R&D expenses in technological innovation enterprises is worth paying attention to, in the consumer goods industry, it is necessary to pay attention to dealer data, and manufacturing enterprises need to pay more attention to the efficiency of production capacity.
Relatively speaking, the manufacturing industry is a large format with economies of scale, with the larger the scale, many fixed costs can be diluted, even if the cost of raw materials or labor rises, the cost can also be passed on to downstream B-end customers, to avoid their own profit margins being compressed. However, the stores of the C-end business are separate economic models, and the store rent and store staff costs are fixed costs, which is difficult to form economies of scale.
The average price of Naixue's tea products, as the "first share of tea drinks", is nearly 30 yuan, although it will achieve annual profit for the first time in 2023, but even if the price reduction has not been able to bring about an increase in sales, it needs to rely on reducing costs and increasing efficiency, while another giant, Michelle Bingcheng, can lead the way with a product unit price of 6-8 yuan, why is this?
The core lies in the difference in business models. Naixue's tea is a direct sales model, while Mixue Bingcheng is mainly a franchise model, with more than 20,000 offline stores.
The main source of income of Mixue Bingcheng under the franchise model is not the franchise fee and profit sharing, but the supply chain business of raw materials. "Sell all kinds of ingredients, packaging materials, equipment and facilities, operating materials and other products required for making ready-made drinks and ready-made ice cream to franchisees...... Since its establishment, the company's main business, that is, the main products, has not undergone major changes" (from the prospectus of Mixue Bingcheng).
In this way, Mixue Bingcheng is a manufacturing enterprise with a complete factory and warehousing system. This is the key to the continued bright financial report of Mixue Bingcheng - the track determines the ceiling of the enterprise, and the business model determines the profitability of the enterprise.
3) Fundamental analysis
At this point, we can grasp 80% of the fundamentals of the enterprise. The fundamentals of a company are generally divided into the following four situations:
(1) The fundamentals are good, and the future performance is still expected to grow
From the financial data, it is reflected in the positive net cash flow, which can generate operating cash inflow, and the resources required by the enterprise to achieve long-term can be guaranteed. Such an enterprise can continue to create value and can be called a good enterprise.
(2) Enterprises are in difficulty and facing risks
There are a number of scenarios for this. It is common for a business to have an operating cash inflow, but the business is in a loss-making state. When enterprises are faced with risks, they need to focus on improving the profitability of products, such as reducing costs, increasing product prices, and increasing market investment to increase sales.
In 2021, Haidilao's revenue will be 41.1 billion yuan, with a performance increase of 44%, but a net loss of 4.16 billion yuan. According to the recently released positive financial forecast for 2023, Haidilao's annual revenue in 2023 is expected to be no less than RMB 41.4 billion, and net profit will be no less than RMB 4.40 billion. Relying on the increase in turnover rate and the improvement of operational efficiency, Haidilao has gradually developed for the better.
(3) There is no conclusion for the time being
Enterprises in the early stage of industry growth, following the rapid growth of the industry, can generally have good performance. Such as the mobile phone industry in previous years, and now the automotive electronics industry. However, whether enterprises have accumulated a certain competitive advantage can only be seen when the growth rate of the industry slows down and the market competition is fierce.
(4) The past performance is very good, but there is no future for the future
Why is this happening?
The above-mentioned enterprises that have not been concluded for the time being have experienced rapid growth, although they have grasped the dividends given by the times, but the overall efficiency has not appeared. After the big waves, the sustainable growth of enterprises has encountered bottlenecks, and it is impossible to pass through the cycle and achieve steady and long-term results.
After mastering the analysis method of corporate fundamentals and gradually establishing business thinking, brand traders began to see deeper and farther.
Financial thinking is the support point of operation and management, financial decision-making directly affects the brand's investment strategy, market budget and resource allocation, and it is very important for the growth of brand marketers to open up the two pulses of financial management knowledge.
With the help of financial thinking, brand traders have a better understanding of corporate strategy.
(1) About "Strategic Positioning"
How does a company's strategic positioning and its financial numbers interact?
Michael Porter, who is recognized as the father of competitive strategy in the business management industry, pointed out in the book "Competitive Strategy" that enterprises have three major competitive strategies: total cost leadership strategy, differentiation strategy, and concentration strategy.
Total cost leadership strategy, the company's products are no different from the products of other companies, but the company strives to reduce production costs, so that their products have a greater price advantage, that is, small profits but quick turnover.
Enterprises that use this strategy are the leaders of the market, they occupy a large market share, have a basic competitive advantage, maintain an absolute leading position in the market for a long time, and sometimes even give up secondary users, forming a competitive advantage with the lowest total cost in the industry.
For example, Coca-Cola has compressed the total cost to the extreme in terms of brand value, production capacity scale, channel depth, logistics capacity and other aspects.
Nowadays, with "oversupply" and "overcapacity", the demand of the market is becoming more and more segmented with the development of the market. This is where the differentiation strategy comes in.
The products of the differentiation strategy have the pursuit of technology or aesthetics, have absolute industry advantages, and are common in the market development period, focusing on meeting a specific demand and pursuing a unique competitive advantage.
Even if there are already local companies doing Coke, they have achieved 100 million revenues, but JDB chooses not to compete with Coca-Cola on the track of Coke, not to cater to demand, but to create demand, focusing on "afraid of fire, drink JDB", and first focus its sales channels on the catering market, focusing on restaurants where people eat, and then leading demand.
In the mature stage of the market, the demand for the public has basically been developed by the differentiation strategy, and the brand has cut into the measurable market segment that does exist, and achieved the two advantages of low cost and uniqueness at the same time in a small range of absolute fields. This is the concentration strategy.
In recent years, Oriental Leaf and Suntory's zero-sugar drinks are typical centralized strategy successes, serving a small group of people who love to drink flavorful beverages but are afraid of gaining weight.
In an era of explosive competitive growth, companies are in an advantageous position over their competitors – this is what we call strategic positioning. Then, the company's resources are allocated around this positioning, which is effective.
In order to better cope with the pressure of market competition, brand traders must learn to scientifically analyze their own cost composition and key factors that affect profits, and at the same time find the core ideas and key links of cost control.
Retail giant Walmart adopted a total cost leadership strategy and implemented it correctly, and eventually went from strength to strength. Walmart adheres to the strategic positioning of "Consistent Price Every Day", that is, all products are sold at the lowest price in all regions all year round. In order to achieve this, Wal-Mart has taken various measures to reduce the circulation cost to the lowest in the industry and keep the price of goods at the lowest price line in the procurement, inventory, sales and transportation of goods. We are trying to keep the ratio of expenses to operating income at the lowest level in the industry in all aspects, so that it can obtain a low-cost advantage in daily management that its competitors cannot match.
The basis of brand building is positioning, which determines a brand's ability to compete in the market. The fundamental achievement of the enterprise is to occupy this positioning, through positioning, it can establish an advantageous position for the competition, and let the company's resources be configured around the positioning. If this positioning is not obtained, other achievements such as revenue and profits will be short-lived, and sooner or later they will be harvested by other brands.
(2) On "moat" and "scale effect"
Whether it is the rapid scale expansion in the growth period or the steady operation in the mature stage, in order to develop in the long run, enterprises must have a full understanding of the top-level design of the strategy and create a sustainable strategic driving force.
The essence of strategy is to find a moat, that is, to build competitive barriers.
What is a "moat"?
Many people will think that it is the core competitiveness, but the core competitiveness is short-term and has the possibility of being imitated.
In the book "Warren Buffett's Moat", there is a dismantling of the "moat":
In another book, "Corporate Strategic Game: Unveiling the Competitive Advantage", we can get a more in-depth view of what exactly is a company's moat, scale effect, and how scale effect is calculated.
What is the scale effect, and the larger the market and population covered, the easier it is to form economies of scale?
In the past two years, local enterprises such as Daily Youxian have closed down one after another, and the Hema industry, which is backed by big trees, has encountered a crisis. One of the main reasons for this is that there is no way to create economies of scale by covering more areas. It can be seen that the scale effect does not look at the size of the overall scale, but looks at the input-output ratio of the fixed assets of the enterprise.
1) For manufacturing enterprises, a large amount of capital expenditure needs to be invested in the construction of factories and production lines, and fixed assets such as heavy assets account for a large proportion. The establishment of scale effect is manifested in the higher and higher income and gross profit brought by each (vertical) investment, and whether the (horizontal) production ratio is higher than that of peers. Here, competitive barriers are economies of scale brought about by supply-side cost barriers.
For example, Microsoft develops the Windows operating system, which requires very high fixed costs, because it needs hundreds of millions of funds to feed the R&D team, and any company that intends to imitate Microsoft cannot avoid such large fixed costs, but Microsoft has economies of scale, almost every computer has to install a TA system, and the cost is very little spread over each product.
Luckin's successful model is not only a low-price strategy and explosive product thinking, but also a continuous and efficient operation to achieve cost economies of scale, which is also one of the successful magic weapons.
Luckin has a vertically integrated supply chain model, and since 2021 it has become one of the largest importers of green coffee beans in China. Unlike most coffee brands on the market that directly purchase roasted cooked beans, Luckin purchases green coffee beans and roasts them through its own roasting base, eliminating the 20-30% premium of the channel from green beans to cooked beans, and the large-scale purchase of green beans also gives Luckin a greater premium in the upstream. At the same time, Luckin's in-depth involvement in the upstream of the industrial chain also ensures the high quality and long-term stable supply of raw materials, and improves the ability to control the cost of raw material procurement.
2) For consumer enterprises, sales expenses account for a larger proportion of the cost composition, including sales staff costs, advertising investment expenses, etc. Among them, the personnel cost is changing, but the advertising cost is fixed, although it is not completely fixed, and the advertising cost needs to be invested first or continuously invested to see the effect, so the advertising cost and publicity cost are the real fixed costs.
In the early stage, the advertising cost was high, and the brand effect gradually appeared in the later stage, and the scale income was stable or even declined. The production ratio of consumer enterprises is the increase in product revenue and overall profit margin brought by every dollar of advertising money, and the competitive barrier can be expressed as customer loyalty on the demand side.
Using this logic, substitute for the industry in which we live:
1) If the entry threshold of the industry is low, the homogeneous competition is serious, and it is difficult to establish barriers, such as the catering industry. At this time, the brand needs to fight tactics, fight operations, reduce operating costs, management costs, and can also create characteristics and establish brand effects, such as Haidilao to win with service, Banu hot pot to put forward "productism", instigating hot pot to focus on the happy atmosphere of young people;
2) There are barriers in the industry, and the barriers in the industry are often multi-dimensional comprehensive competition such as technology iteration + product + channel. In recent years, the most effective measure is to create large single products, Proya has increased investment in R&D and product efficacy promotion, created a popular morning C and evening A, and improved user experience and reputation through advertising investment, creating a moat.
Brand traders need to know exactly where they are, because economies of scale do not equate to scale. Economies of scale are the fact that companies that blindly expand are prone to losing their competitive advantage in the end. JDB also hoped to become the leader of the beverage industry more than ten years ago and expand its business scope to a variety of beverages, but Coke could not compete with Coca-Cola, and green tea and black tea could not compete with brands such as Master Kong, so it began to stick to its position as the leader of the herbal tea category.
For a business to grow sustainably, it needs to create a strategic driver. The essence of the strategy is to establish competitive barriers and form economies of scale. The scale effect has a certain scope of action, and the scope of action under different businesses is different. Find out what the competitive barriers are in your industry, and then build them with all your might.
(3) About "brand indicators"
For a long time, brand measurement indicators such as "awareness", "exposure", and "social media index" have no predicted or retrospective relationship with financial returns, and because of this, brand marketers have been unable to reliably correlate their work results with the company's business and financial performance.
In recent years, marketing methods such as effect delivery and live streaming have become the dominant way for enterprises to connect with consumers. But this investment is only taking into account short-term outcomes such as sales, and is crowding out brand-building activities with longer-term value. As a result, the value of the brand's efforts is diminished.
With financial thinking, brand marketers can finally abandon the metrics that track high costs but do not significantly improve financial performance, and choose brand growth strategies based on expected ROI, accurately quantifying and predicting the impact of brand value growth on financial metrics. For example, if the brand invests X%, the brand value increases by X%, and the return on income from investment increases by X%.
In the past, most of the time, the KPI goals of the company were determined by the personal will of the leader, and it was possible to lose strategic direction and blindly pursue short-term revenue. Because long-term and in-depth construction is difficult to quantify through a short-term number.
Business success is not equal to a single revenue growth, there are multiple definitions, and the underlying capabilities such as corporate strategic positioning and strategy execution capabilities need to be covered under the big goal of business success, and need to be dynamically adjusted according to the development of the industry.
Now, many businesses are starting to replace KPIs with OKRs, and the O of OKRs is a sign of specific business success, replacing rigid numbers with real business success. By distinguishing between business success goals and values, the company can be liberated from the short-term entanglement in front of them, think about the actions that can really achieve the goals, and avoid the problem of "good performance, the company will fail" in the past, which is also the most effective improvement of OKR to KPI methods.
With OKR, the brand marketing department is no longer a department that simply assists sales, and there is no need to simply look at the achievement rate of the sales department to determine the work results, but can find the connection point between strengthening its own work content and the company's short-term and even long-term goals, and more firmly and clearly define the main line of work, so that brand building and effect marketing can be happy and win-win.
summary
Financial thinking is the support point of business management, with the methodology of reading financial reports, you can understand the assets, liabilities and owners' equity of the enterprise, the income, cost and profit of the enterprise within a certain period of time, which is very important for brand marketers, because they directly affect the investment strategy, market budget and resource allocation of the brand.
By opening up the two veins of financial management knowledge, brand traders can continuously and rhythmically iterate on strategic iteration under the strategic layout of the enterprise, and form a complete system to promote the sustainable growth of the organization.