Image credit: Visual China

Blue Whale News, October 30th (Reporter Zhang Jinglun) On October 29th, Wufangzhai (603237.SH) released its third quarter report for 2024. In the first three quarters of this year, the company achieved revenue of 2.048 billion yuan, a year-on-year decrease of 15.20%; net income attributable to shareholders was 0.21 billion yuan, a year-on-year decrease of 12.80%.

Specifically for the just completed third quarter, the company's quarterly revenue was 0.467 billion yuan, a year-on-year decrease of 15.04%; net income attributable to shareholders was -23.0837 million yuan, a year-on-year decrease of 53.27%.

Looking at a longer period of time, Wufangzhai's performance growth has shown signs of slowing down. From 2021 to 2023, the company's revenue was 2.892 billion yuan, 2.462 billion yuan, and 2.635 billion yuan respectively; net income attributable to shareholders was 0.194 billion yuan, 0.137 billion yuan, and 0.166 billion yuan respectively.

In the secondary market, Wufangzhai's performance was also disappointing. As of the close of trading on October 30, Wufangzhai's stock price was 17.12 yuan per share, not only falling below the issue price but also dropping by more than 60% from its peak.

Under pressure in performance and a sharp drop in stock price, what's happening to the long-established brand Wufangzhai?

Public information shows that Wufangzhai was founded in 1921, mainly engaged in the research and development, production, and sale of glutinous rice food products. Its main products include rice dumplings, mooncakes, tangyuan, pastries, egg products, and other rice products. It was listed on the Shanghai Stock Exchange main board in August 2022.

As we all know, the flagship product of Wufangzhai is zongzi, contributing about 70% of the annual revenue. Wufangzhai started with zongzi, but the overreliance on zongzi, obvious regional characteristics, and seasonal limitations of the product have led the company's development to be constantly criticized.

According to the report data from Huajing Industry Research Institute, the growth rate of the Chinese zongzi industry market scale has gradually slowed down in recent years, from over 14% in 2016 to around 7% in 2023.

Obviously, Wufangzhai itself is also aware of its limitations. Chairman Li Jianping stated in 2018, "The zongzi circle is only so big, almost reaching the 'ceiling'. So we are very clear that to break through the ceiling, we must come out, not just making zongzi."

In order to reduce reliance on zongzi, Wufangzhai has also developed businesses such as mooncakes, meals, egg products, and pastries. However, to this day, the development of these businesses is still lukewarm.

In the first three quarters of this year, the revenue from its dining series decreased by 11.63% year-on-year to 0.1 billion yuan; egg products, pastries, and other revenue decreased by 11.67% year-on-year to 0.192 billion yuan. Only the mooncake series recorded an increase, with a year-on-year growth of 21.9% to 0.189 billion yuan. However, looking at a longer period, from 2021 to 2023, the revenue from Wufangzhai's mooncake products was 0.22 billion yuan, 0.239 billion yuan, and 2.28 billion yuan, with a relatively slow revenue growth rate. Moreover, similar to zongzi, mooncakes also have a strong holiday attribute.

Meanwhile, the "zongzi dependence syndrome" is on the rise. From 2018 to 2023, the revenue share of zongzi from Wufangzhai increased from 66.28% to 73.64%. In the first three quarters of 2024, the revenue from Wufangzhai's zongzi series reached 1.515 billion yuan, a decrease of 19.42% year-on-year, accounting for 73.98%.

Currently, the secondary growth curve of non-zong products that Wufangzhai is focusing on has yielded little results. How can Wufangzhai break free from the "zongzi dependence syndrome"? Can the mooncake series and more food innovation space under diversification open up?

Zhan Junhao, the founder of Fujian Huace Brand Positioning Consultancy, stated that for Wufangzhai to break away from the "zongzi dependence syndrome", the key lies in implementing precise single focus and multi-brand strategies. Firstly, Wufangzhai needs to adhere to its core business of zongzi, consolidate its leading position in the zongzi market through continuous optimization and innovation. At the same time, starting from this point, gradually expand into other sticky rice foods and traditional Chinese seasonal foods, forming a product matrix.

"Secondly, Wufangzhai should implement a multi-brand strategy to meet the needs of different consumer groups. For example, launching fashionable and convenient sub-brands for young consumers; creating refined and unique premium brands for the high-end market. In the mooncake series and other foods, Wufangzhai should also focus on innovation and differentiation, giving products unique cultural connotations and selling points to attract more consumers," said Zhan Junhao.

From the perspective of channel layout, currently, Wufangzhai's sales channels mainly include chain stores, e-commerce, supermarkets, dealers, and others. Among them, dealers are the main sales model for Wufangzhai, achieving a revenue of 0.743 billion yuan in the first three quarters, a year-on-year decrease of 15.56%. During the reporting period, the number of its dealers decreased, with a net decrease of 18 from the beginning of the year to 696. At the same time, revenue from the e-commerce sector decreased by 20.75% to 0.625 billion yuan year-on-year; revenue from supermarkets decreased by 8.6% to 0.248 billion yuan; revenue from chain stores decreased by 11.96% to 0.264 billion yuan.

Wufangzhai's offline stores include self-operated stores, co-operated stores, and franchise stores, among which the franchise stores use a distribution model for sales. At Wufangzhai's 2023 annual shareholders' meeting, the company stated that the future strategy is to focus on franchise stores with franchising as the main approach, allowing franchisees to 'make money' and achieve rapid business expansion.

Blues Whale News reporters noticed that since last year, Wufangzhai has been reducing the number of self-operated stores and shifting towards developing franchise stores. As of the end of June 2024, Wufangzhai had 443 offline stores, a net increase of 18 from the end of last year, but the number of self-operated stores decreased by a net of 10 to 102, and the co-operated stores decreased by 1 to 24. Throughout 2023, the number of self-operated stores decreased by a net of 26.

The entire dining industry is currently caught up in a battle for franchisees, from tea and coffee to fast food and hot pot meals, actively lowering the 'franchise threshold' and offering preferential policies to attract franchisees.

Industry insiders believe that for Wufangzhai, creating distinctive store products and positioning, as well as a workable store model, is crucial. After all, the length of the investment return cycle and the ability to make money are the core factors that franchisees consider when choosing a project.