China Consumer

Grabbing a bite

Pepsi acquisition shows allure of China’s online snack retailers


Pepsi: up for the challenge in China

Cinema operators have been some of the hardest hit businesses during the Covid-19 outbreak. Many have resorted to selling popcorn, soda and other treats online in a bid to recoup some of the losses from theatre closures and the delay of major film releases.

Sales of some of these munchies and nibbles have served as more than life-support – so much so in some cases that the cinema chains are planning to make them more than a sideshow in the future.

According to Euromonitor, a research firm, China’s snack market is set to exceed Rmb450 billion ($64.63 billion) by 2024, having logged a 7.3% compound annual growth rate between 2015 and 2019. This growing pie has prompted a rush of dealmaking, with at least 10 industry players filing to go public in the last two years.

It was against this backdrop that PepsiCo announced its acquisition of Hangzhou-based online snack retailer Be & Cherry from Haoxiangni Health Food for $705 million late last month. The transaction – the US beverage giant’s largest ever in China – came just six months after it purchased a 26% stake in the country’s second-largest health food producer, Natural Food International, which is best known for making powder products from ingredients such as black sesame, walnuts, goji berries and chia seeds.

The deal not only highlights Pepsi’s desire to double down on the Chinese snack market, but also its understanding that an online-to-offline, or omnichannel, strategy is imperative for success.

Since first arriving in China four decades ago, the owner of food brands such as Lay’s, Quaker and Doritos has built seven plants, six large-scale potato farms and 10 cooperation farms in the country, according to China Daily. But what it lacks is the infrastructure to distribute its snacks beyond traditional channels, as well as the real-time data on consumers that underpins commercial strategy and product development.

“Be & Cherry adds direct-to-consumer capability, positioning us to capitalise on continued growth in e-commerce, and a local brand that is able to stretch across a broad portfolio of products, through both online and offline channels,” Ram Krishnan, CEO of Pepsi in Greater China, explained in a statement.

Haoxiangni, the seller, will now focus on business lines including red dates and other local specialty agricultural products. “We aim to expand our value chain and supply chain, for the purpose of supporting rural revitalisation,” explained Shi Jubin, Haoxiangni’s chairman.

Founded in 2003, Be & Cherry sells a wide array of refreshments including nuts, dried fruits, meat snacks, baked goods and confectionery mainly through major e-commerce platforms in China. Its data-led approach and flexibility in sourcing have helped lift its revenue to Rmb5 billion last year. Be & Cherry contributed about three quarters of Haoxiangni’s revenues and all of its profit last year.

But the sale can be rationalised on two fronts. First, it enabled Haoxiangni to exit an investment with a 400% return (it bought Be & Cherry for Rmb962 million in 2016). Second, it was struggling to fund Be & Cherry’s offline expansion, whereas major rivals such as Anhui-based Three Squirrels and Wuhan-based Bestore have both replenished their war chests with IPOs recently (see WiC460).

Just a day after Be & Cherry was sold, Bestore debuted in Shanghai with its shares hitting the first-day gain ceiling of 44% – no small feat for a company deriving nearly half of its annual income from Hubei, ground zero for the ongoing coronavirus outbreak.

According to Guotai Junan, a local brokerage, Bestore is the only snack company in China to make a huge success of ‘New Retail’ so far. With 2,237 bricks-and-mortar points of sale, it earns 55% of its revenue offline, and 45% online. This balanced approach is applied in its supply chain, which spreads across 30 countries and over 2,500 suppliers says China Business Network.

While Three Squirrels, Be & Cherry and Bestore have all managed to tap fresh funds to cement their positions, China’s snack market is far from oligopolistic, Chongqing Commercial Daily says. The three firms made up about 22% of the total sales of snacks online last year, with Three Squirrels leading the pack at 11%.

A key reason is growing competition from an avalanche of new independent brands seeking to disrupt the market with creative advertising and novel offerings.

For example, Danshen Liang, a Shanghai-based label targeting affluent singles, has built a sizable following through focusing on the ‘singleton’ demographic. Its packaging features the image of a dog head – a play on the internet slang danshen gou (meaning ‘single dog’) among younger Chinese.

“We will continue to create new content revolving around single folk, creating something that they want to see so that our products always remain engaging,” Zeng Ruilu, founder of Danshen Liang (meaning ‘food for the singles’), told 36Kr, a tech news portal.

On the product side, the trailblazing brand has been concocting nuanced flavours for its potato chips (for instance, Japanese wasabi, Mediterranean sea salt, and even cola), which are sold at convenience stores, new-retail supermarkets, and likewise boutique retailers in tier-one cities.

The strategy has reportedly helped the two year-old start-up to raise a total of Rmb100 million in new investment in less than seven months as sales surged above Rmb200 million.

Meanwhile some of the older, more established players in the food and beverage sector have struggled to adapt and innovate. Huiyuan Juice logged back-to-back losses between 2011 and 2017, and by the end of 2018 its share of China’s juice concentrate market had fallen to less than 2%.

The Beijing-based beverage producer – once a coveted asset that Coca-Cola tried (and failed) to take over in 2009 – has failed to appeal to the younger generation because of old-school packaging and ineffective sales channels.

An expansion into agriculture, a capital-intensive move, depleted its resources too.

“Bold investments have led to overcapacity, and eventually, management issues, as well as a liquidity crunch,” Han Liang, an independent food and beverage analyst, told National Business Daily of Huiyuan’s troubles. On March 2 the 28 year-old company was finally stripped of its listing status in Hong Kong, following a year-long trading halt triggered by billions of yuan in bond defaults and a Rmb4.3 billion financial debacle engineered by its founder Zhu Xinli (see WiC454).

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