In a noodle

With you in an instant

If Beyonce can’t convince Americans to drink more soda, who can? That’s a question being asked by analysts after PepsiCo – which signed the pop diva to appear in its ads – sold fewer carbonated drinks in the second quarter in North America than a year ago. Its rival Coca-Cola reported something similar. In fact, per capita consumption of carbonated beverages has been slipping steadily in the US since 1998 amid concerns that sugary drinks fuel weight gain.

In China, two food producers are struggling to compete in another market that seems to have stalled. As WiC has chronicled previously, Master Kong and Uni-President have been locked in battle in the instant noodle industry. Master Kong, owned by Taiwan’s Tingyi, is still the leader in the segment, controlling over 56% of instant noodle consumption. But Uni-President has been catching up, especially after its Pickled Vegetable Beef Noodle became a runaway hit in 2011. That one product generated annual sales of Rmb4 billion ($653 million) last year, helping Uni-President grow its market share from 9.5% to 13.5% in 2012 (see WiC154).

But fast forward a year and all is not well with Uni-President. Although the Taiwanese food conglomerate’s Hong Kong listed unit announced that revenue rose 14.6% in the first half of its financial year to Rmb12.2 billion, its net losses at the instant noodle division reached Rmb60.3 million.

“There is no reason for costs to go up so fast because so far this year the price of palm oil was down and the price for flour has also stabilised. In general, cost pressure in the instant noodle industry is not great,” a company critic told China News Net.

So what happened? Analysts reckon that the losses are due to aggressive expansion of Uni-President’s instant noodle business. Even though noodles contributed more than Rmb3.8 billion in sales in the first half of the year (up 10.4% from a year ago), other costs – mostly in marketing and distribution – have grown at a faster pace.

“Compared with Master Kong, Uni-President’s distribution channel is a lot weaker. So in order to increase market share, Uni-President has been adding distribution not only to large supermarket outlets but also in the countryside, which is much more scattered and requires significantly more investment in human resources. That explains why costs for Uni-President have gone up so much,” food business researcher Zhu Danpeng told 21CN Business Herald.

Onlookers have also pointed out that it isn’t the first time that Uni-President’s instant noodle business has slipped into the red. In 2009 and 2010, the segment lost Rmb12.6 million and Rmb69 million respectively. Analysts say the breakout success of Pickled Vegetable Beef Noodle was the only reason the trend was previously reversed but Master Kong and other rivals then released products to compete against the new bestseller. In the first half of 2011, Pickled Vegetable Beef Noodle sales jump 220% from the year before. But by the second half of the year, growth had tapered off to (a still perky) 51%.

“Instant noodle is a market that requires constant innovation because consumers’ tastes are always changing. These days, between the launch of a new product to its decline is as little as three years, and that’s already very good. It’s clear that Uni-President’s Pickled Vegetable Beef Noodle has passed its peak,” says Zhu. “Uni-President is spending too much time on this one flavour when it should be developing new products in the pipeline to replace it.”

Demand for instant noodles hasn’t been growing much either, with AC Nielsen data showing sales as a whole rising only 4.5% in the first half of the year, significantly lower than last year. This suggests that the market may have reached saturation point, says CBN. But the Lex column in the Financial Times had better news for noodle bosses this week, by predicting that sales will grow faster in future. The reason? Market research suggests that Hongkongers (a natural proxy for better-off Chinese) are consuming 5kg (or 50 packs) of instant noodles annually. That’s significantly more than the 30 packs a year being warmed up by the mainland Chinese. The premise is that the gap will close once mainlanders get wealthier and more time-constrained. Uni-President will be hoping so too…

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.