Three Squirrels set an unusual precedent when it went public on the Shenzhen stock exchange last Friday. Instead of having the chief executive or chairman ring the bell, it asked three people dressed as squirrels to officiate. They represented Xiaomei, Xiaokuo and Xiaojian – the widely recognised characters from the logo of the Anhui-based snack company, which sells products like crab-roe coated sunflower seeds and nuts.
The appearance of the cartoon characters for the bell-ringing ritual was a first in A-share history. It also said something about the Three Squirrels business model, which focuses on branding, marketing and distributing foodstuffs, as opposed to manufacturing them. In fact, it is a common approach for Chinese snack companies and it also sheds light on why there have been a spate of recent flotations in the sector.
At least 10 industry players have filed for initial public offerings or conducted one since the end of 2017. Among those in the queue are Bestore, Ganyuan Foods, Huawen Food and Liuliu Orchard. The long list partly reflects the size of China’s snack market, which is expected to reach Rmb3 trillion ($440 billion) in sales in 2020, or seven times the amount in 2006, according to the country’s Ministry of Commerce. However, it is also fragmented, with the top three players accounting for less than 5% of the pie, a statistic that signals the potential for consolidation.
Investors are cautious. “These companies usually adopt an asset-light approach to their business. They stick their labels on products that they do not produce themselves, and therefore have limited control over their goods,” Zhu Yue, executive director at Shanghai-based China Insights Consultancy, told China Business News.
Another concern is weak profitability. Last year the average profit margin for the industry was about 6.8%, and it had been declining for three consecutive years. Bestore and Three Squirrels – the two largest players with annual revenues of more than Rmb5 billion – recorded even lower profit margins than their peers. The crux of the problem is that many local snack brands rely on a handful of contract manufacturers to research and develop their products. “The market is suffering from widespread product homogeneity,” noted Sohu.com. That has led to limited brand loyalty among customers, which has also contributed to the margin squeeze.
The reliance on contract manufacturers (i.e. OEMS) also exposes the snack brands to greater reputational risks over food quality and safety issues. Last year Laiyifen was blasted for selling snacks in which plastic, hair and mouse droppings were found, reported Beijing News. The same report noted that the Shanghai-based company had got into similar trouble seven years earlier when a number of its contractors were found to be operating in unhygienic environments and failing to meet regulatory standards.
Like many of its peers, Laiyifen also saw its costs balloon in 2018, dragging its bottom line into a loss. The company attributed the surge in its costs to its aggressive buildout of new infrastructure to support omni-channel retailing. Indeed, the integration of online and offline purchases, and efforts to make it easier for customers to get their goods, have become an urgent issue for almost all the larger snack companies, especially as they have less room to differentiate their offerings through product quality.
Wuhan-based Bestore, a first-mover in digitising, says it will set aside 58% of the Rmb773 million it hopes to raise from an IPO this year for ‘smart retail’. Changsha-based Ganyuan Foods will plough 43% of its IPO funds into upgrading its distribution network, with a further 38% being spent on a factory in its home province Hunan (a sign that it wants to take more control of manufacturing quality).“If one industry player does an IPO, its rivals will immediately follow suit to ensure that they are on a level playing field,” observed Huxiu.com, a local news portal. “It is this anxiety that drives [snack] companies to IPO, to vie for access to the capital market.”
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