The Zhitong Finance App learned that Huachuang Securities released a research report stating that while keeping up with the short-term boom in the casual snack industry, we should also see this round of channel changes led by Douyin and mass sales. It is a litmus test for corporate brands and a catalyst for improving supply chain efficiency. The long-term effect of enterprises will be even more important in the future. The long-term competitiveness of enterprises that have actively followed the trend has actually increased, and growth can be seen in the longer term. On the target, Yanjin and melon seed category leaders (002557.SZ), which continue to strengthen their competitiveness, actively focus on the channel expansion potential of Jinzi (003000.SZ) and Ganyuan (002991.SZ), and the performance of Squirrel (300783.SZ) after the restructuring of the business model.

The main views of Huacheng Securities are as follows:

Three rounds of channel transformation: from channel accumulation, brand catch-up, to supply chain efficiency improvement

There is a trillion-dollar casual snack market, but the taste iteration is fast, and the entry threshold is low. It is difficult to increase the quantity of single products due to the dispersion of supply and demand, and it is also difficult for enterprises to build a brand by binding to a single category; second, it can delay consumption and has many SKUs, and is also more suitable for online and vertical stores, and the types of channels are relatively diverse. As a result, most companies are sensitive to changes in traffic, and the sector is more like a testing ground for channel innovation. Specifically, from the supermarket era before 2013, companies such as Dali/Wangwang/Qiaqia completed pioneering channel accumulation, to the e-commerce era in 2014-2019, when emerging brands such as Squirrel/Baicao entered the market with light assets to take over the corner, to channel diversification and the rise of cost-effective demand since 2020, which forced enterprises to improve the efficiency of their supply chains.

Mass marketing, Douyin: a litmus test for corporate brands, a catalyst for improving supply chain efficiency

Just like the rise of overseas discount channels, rapidly expanding channels such as mass marketing, Douyin, and Pinduoduo are essentially supply chain optimization driven by channel transformation from the bottom up. In this process, to a certain extent, “de-branding”, which is accompanied by the convergence of quality and safety endorsements and premiums, also forces enterprises to achieve the extreme at both ends of the brand or supply chain, and the long board effect will become even more obvious.

1) Mass sale of snacks: The discount store model is a long-term trend. The retail dividend can still be expected for at least 1-2 years, and shoulder and waist brands will benefit even more. Since the second half of 2023, the integration of the industry has accelerated, and the pattern of the two strongest companies, the Very Busy Department and the Wanchen series, have already been decided. What is simultaneously widening the gap in the number of stores is the continuous differentiation of operating capabilities, reflected in front-end franchisee store development subsidies and supporting services, back-end supply chain lifeline optimization, terminal product selection and price concessions.

In terms of supplier selection, mass-selling snacks must face a balance between brand product quality assurance and white brand products to increase profits. In a context where the low price positioning is gradually being recognized and the competitive dimension is moving to a higher level, it is expected that the share of liquid products in SKUs will decline, the share of brands on the shoulder and waist will increase, white brands with poor quality efficiency will be eliminated, and try to cultivate their own brands. As far as upstream suppliers are concerned, considering the expansion of downstream stores and SKU increases, the distribution dividend can still be expected for at least 1-2 years, and while strengthening cooperation with leading brands, continuing to refine the supply chain and internal brand strength, the channel dividend can be extended to a longer period of time.

2) Douyin e-commerce: Based on strong supply chain capabilities, with strong brand strength as a bonus, traffic dividends can only be fully shared. Currently, Douyin is still the strongest online channel. Although brands can only continuously try and error to optimize customer base tags and increase traffic conversion rates, Douyin rules also indicate that the dividend gripper is still internal: on the one hand, brands with supply chain and price advantages can get more traffic inclination under the guidance of “price power”; on the other hand, after launching cost-effective products, it can effectively reduce talent commission rates/increase the proportion of organic traffic. At the same time, they can get support from commission-free product cards and use scale effects to dilute fixed costs, thereby increasing profit levels.

Enterprise inventory: consensus and differentiation, path gradually becoming clear

Huachuang Securities said that under changes in external channel traffic, the current omni-channel layout and major category focus have become industry consensus, and combined with their own endowments, the two types of enterprises have shown a certain differentiation:

1) Traffic companies (Yanjin, Squirrel, Liangpin, etc.): Strengthen the supply chain, refine coping capabilities, and actively embrace change. Currently, traffic companies are undergoing the most drastic transformation, from tightening the boom to omni-channel layout, from expanding traffic dividends in multiple categories to focus on large single products to aggregate the supply chain and shape brand power. At the same time, supply chain reform to improve efficiency and reduce production costs is the driving force for entering any channel, and it is also a top priority in this round of transformation.

Through the optimization of the entire procurement-production-logistics-management chain, the current transformation pioneers have achieved remarkable results. The labor efficiency of Yanjin has improved dramatically in 23 years, and the average price of squirrel products has been reduced, but profitability has remained stable after restoration. Furthermore, cost efficiency optimization does not mean “low end,” but rather an objective basis for broadening the price band. Just as Yanjin launched the “Big Devil” and “Egg King” independent brands, which complement each other with cost-effective products, there is room for progress and retreat.

2) Big single product companies (Qiaqu, Jinzi, Ganyuan, etc.): Focus on brand power, channel expansion and quality improvement, and adapt to changes without change. Such companies bind larger categories to occupy consumers' minds, and use large single products as the lead to increase investment and retail sales. Negotiate and Ganyuan actively expanded the nut category based on its original dominant business, and Ganyuan's organizational structure was adjusted to quickly expand through multiple channels. Chinese snack companies such as Jinzai and Weilong broke through from white cards by continuously improving product automation and standardized production levels. After listing, they were enriched with strategic resources, which immediately greatly increased their spending and expanded their category/high-potential channels in an orderly manner.

Future direction of the industry: Unleashing the potential of leading brands in segmented categories, and phased downsizing to reap share will nurture new opportunities in the consumer goods industry

Just as companies with brand power, such as the snack company Three Squirrels, the high-end tea drink Kicha, and Nai Xue's Tea, take the initiative to cut prices and expand their share in exchange for price, behind it is strong support for measures such as optimizing supply chain efficiency, refining store models, and reducing digital costs and increasing efficiency. However, the scale effect and consumer data accumulation after price reduction and volume can also feed back cost efficiency optimization. Huachuang Securities believes that snack companies can be viewed as pioneers in the industry. With the advent of an era of low growth, if products with brand power take the initiative to lower their position, they will cause a downsizing attack in competition, which also means new industries and investment opportunities.

Risk warning: Channel expansion falls short of expectations, risk of price compression in downstream channels, large fluctuations in raw material prices, and possible errors in channel information.