Snack sales were buoyant in the US during the pandemic as consumers worried less about their waistlines and munched away at home to counter stress and boredom. PepsiCo’s snack unit Frito-Lay has been setting the pace, for instance, with revenues from its North American business reaching $4.5 billion in the first quarter of this year, not too far back on beverage sales of $5.4 billion.
Nevertheless some of the biggest listed snack firms in China have been struggling. Bestore announced last week a 14% increase in first-quarter revenue to Rmb2.9 billion ($437.3 million). However, net profit fell slightly to Rmb93 million because of higher logistics and warehousing costs as a result of the Omicron outbreaks.
Bestore founder Yang Hongchun opened his first store in Wuhan in 2006. At first he doled out free samples, hoping he could convert these folk into actual purchasers. After four months Yang had lost his initial capital. Refusing to accept defeat, he sold his house to keep the company afloat.
Then he decided to switch tack. He updated the storefront, making it sleeker. He rebranded his snacks as “leisure food”. Understanding that cutting prices wasn’t going to be a viable approach, he decided to position his products in the higher-end segment, spending money on branding and marketing. In 2020, Bestore went public in Shanghai.
“It is impossible to create a business for everyone, and it is impossible to please everyone,” Yang said at the time. Yang wasn’t the only one eyeing the enormous potential of China’s snacks market. Rival Three Squirrels, which has built a brand around ‘forest foods’ like nuts, dried fruit and tea, started operations in 2012. It has focused solely on e-commerce sales, while Bestore relies on both online and offline sales. As of the end of last year, the company had 3,000 retail stores around the country, most of which are franchised. Nevertheless, online sales still contributed the majority of Bestore’s revenues, at Rmb1.8 billion, or 53% of the total.
Bestore’s customers are largely women and children. To that end, it has launched a sub-brand Xiao Shi Xian that targets young kids. Knowing that parents are worried about child obesity and dental problems, it offers low-sugar bunny lollipops made with hawthorn berries (combining a tart and slightly sweet taste). There are milk candies fortified with calcium too.
For the health conscious, Bestore now has a line in meal replacement products as well. Another line of snacks caters to diabetics. Its fruit products are now made without additives; all of its dried nuts are seasoned with sea salt and herbs; and synthetic food additives have been replaced with herbal ingredients like monk fruit, sweet glycoside and stevioside and other natural spices.
Customers are more demanding when it comes to quality, nutrition (and even packaging) if they are being asked to pay a premium. On Heimao, a platform that publishes consumer gripes, there are over 1,000 outstanding complaints about Bestore’s products.
The problem, says FoodTalks, a food industry news site, is that Bestore doesn’t operate its own factories. Instead, it relies on third parties to manufacture all of its products. That’s a risk in situations where quality control systems need improvement. And like many Chinese enterprises, the company devotes relatively few resources to R&D. Last year, it spent just Rmb39.6 million, or less than 0.5% of its operating income on that activity. “[Yang is] So eager to gloat about Bestore being a high-end brand but he chooses to spend the money on marketing instead of R&D. Yang has committed the biggest taboo in the food industry,” warns FoodTalks.
Three Squirrels also recently reported a 16% decline in first-quarter revenue to Rmb3.1 billion. Net profit nosedived to Rmb160 million – half of that earned in the same period last year. After the announcement, the company’s shares fell for two consecutive days, wiping out Rmb2.8 billion in market value.
“At least Bestore’s poor performance has to do with its offline sales, which is excusable because of the recent Omicron outbreak. But Three Squirrels mainly focuses on online distribution. No one could have foreseen such a big loss,” Liu Ming, an investor, complained to Xiaoxiang Morning Herald.
© 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.