Edible oil market growth stalls, industry seeks new profit points through diversification
Yihai Kerry, which started out as a major grain and oil enterprise, is advancing into a comprehensive food company. Recently, it added a dairy product sales business in China. In addition, Yihai Kerry stepped up its involvement in condiments earlier this year, further expanding its diversification map.
As the market scale of its core grain and oil business stagnates and profits are continuously diluted, the leader in the edible oil market has begun looking for its next profit support point. However, rice, flour, condiments and household chemical products are all still in the early stages, and Yihai Kerry has yet to truly benefit from them.
Diversification accelerates
After successively entering the rice, flour and condiment markets, Yihai Kerry's diversification map continues to expand. Recently, a New Zealand milk product called New Milk was launched on e-commerce sites including JD.com, Yihaodian and Tmall. Notably, this milk product is sold bundled with Arawana, and promotional activities offering a pack of New Milk free with the purchase of Arawana peanut oil have appeared on e-commerce sites such as JD.com and Tmall.
In fact, a look at public records shows that Arawana and New Milk belong to the same company, and under arrangements by its parent company, Yihai Kerry has begun to enter the dairy products sector in the Chinese market. Last year, Yihai Kerry's parent company Wilmar International, on the basis of holding a 10.1% stake, acquired all shares of Goodman Fielder, Australia's largest listed company, in cash at AUD 0.65 per share. Records show that Goodman Fielder is the largest food and edible oils supplier in Australia and New Zealand, with a large portfolio of food brands covering all categories from breakfast, lunch to dinner and snacks. Among them, New Milk, New Zealand's number one milk brand, was the first to enter the Chinese market.
"At present, China has signed free trade agreements with Australia and New Zealand. In the future, Wilmar International will gradually introduce other Goodman Fielder products, and the mature sales channels Yihai Kerry has built in China will pave the way for other products. In the future, Yihai Kerry will also break its fixed image as a grain and oil producer through this." A person close to Yihai Kerry told a Beijing Business Today reporter.
Beyond its traditional rice, flour, grain and oil main business, Yihai Kerry is continuously extending its industry chain. In January this year, Yihai Kerry formally signed a contract with Wanzhuang Food Industry Co., Ltd. to jointly build Yihai Kerry's first soy sauce production line. The plant is expected to be completed and put into operation next year, and Yihai Kerry is also transforming from a raw material supplier for soy sauce producers into a soy sauce producer.
In addition, also in January this year, the Pringles potato chip production line of Yihai Kerry Kellogg's, a joint venture between Yihai Kerry and Kellogg's, was officially put into operation in Jiangsu, marking the landing of Yihai Kerry's snack food strategy. Even earlier, in 2013, Yihai Kerry's household chemical brand Jiejing was quietly launched, with products including laundry soap, laundry detergent and dishwashing liquid.
The above-mentioned person further said: "Judging from the trajectory of Yihai Kerry's existing industrial development, diversification first unfolds by extending the industry chain around the rice, flour and oil business, and in the future it will make more and more cross-industry forays."
Main business hits a bottleneck
In fact, Yihai Kerry's expansion of new businesses also fits the company's strategic transformation direction. Previously, Mu Yankui, vice chairman of Yihai Kerry Group, said publicly that Yihai Kerry's development transformation in China is about diversification, seeking domestic capital status and changing its development model.
From an industry perspective, Yihai Kerry's diversification is in fact about finding a second profit support point, especially when its grain and oil segment encounters a bottleneck in scaled development, making the exploration of new businesses particularly urgent. According to Nielsen statistics, the competitive landscape of China's small-packaged oil market has stabilized, with the top five brands' market share approaching 80%. Among them, Yihai Kerry's edible oil exceeded 1.5 billion bottles, and its edible oil series products hold a market share of as high as 40%. The Arawana brand alone holds a market share of as high as 30%, higher than the share of the company ranked second in market share.
Although it firmly sits on the throne of market leader, in China's edible oil market, where scale has not grown for many years, Yihai Kerry's edible oil development has also encountered a bottleneck. Take last year as an example: Arawana cut prices twice, with reductions exceeding 23%, bringing prices to their lowest point since 2006. Boosted by price-cut sales, Arawana maintained an 11.6% increase in sales volume last year, but due to the large price cuts, its overall revenue of USD 3.5 billion was merely flat compared with 2013.
A grain and oil industry analyst told a Beijing Business Today reporter that stagnant market scale and fierce competition are a true portrayal of the domestic edible oil market, especially in some regional markets where Yihai Kerry's market share has been squeezed by local brands to varying degrees.
Besides full competition, thin profits are also a consensus in the edible oil industry. "Take Fortenoo, Arawana's biggest competitor, as an example. The gross profit margin of the brand's agricultural product-related businesses, including edible oil, was 6.96%, 6.59% and 3.89% over the past three years respectively, and fell to 3.11% in the first quarter of this year. In the past few years, Arawana's profit margin was about 6% at its highest and only 1.3% at its lowest, making its profits even thinner than Fortenoo's." said the above-mentioned grain and oil industry analyst.
Previously, a relevant person from Yihai Kerry also said publicly: "In super-large cities and municipalities directly under the central government, competition in the edible oil industry has become white-hot, and profitability is very difficult."
Early stage yields no results yet
Compared with the edible oil industry, the domestic condiment industry has shown strong growth advantages. It is reported that the condiment industry's scale grows at an average annual rate of as high as 15%, and the market concentration of the top 5 in the industry is less than 10%. This has also become one of the reasons Yihai Kerry entered condiment production of soy sauce. "From edible oil to the rice and flour industries, Yihai Kerry achieved horizontal expansion within a few years. Now it wants to expand vertically, taking its diversification a step further." pointed out analyst Chen Lina.
However, Yihai Kerry's diversification is still in its early stages, with projects either under construction or just put into production and distribution, so how the market will respond is still unknown. Nevertheless, the above-mentioned person close to Yihai Kerry told a Beijing Business Today reporter that the sales revenue of Yihai Kerry's earlier flour and rice businesses achieved year-on-year growth of more than 30% in 2013, far exceeding the growth rate of the edible oil segment. "It is worth noting that this segment started from a low base, so its growth rate is naturally faster than edible oil's, but it is understood that this segment has not yet achieved profitability."
In addition, in the view of some other industry insiders, Yihai Kerry's diversification has uniquely favorable advantages. First, the support strength of its controlling company Wilmar International should not be underestimated. Wilmar International is the world's largest supplier and trader of grains, edible oils and agricultural products, and can provide Yihai Kerry with relatively abundant financial support. In addition, the sales network Yihai Kerry has laid out across the national market can also bring smooth channels for its later products. According to Yihai Kerry's official website, Yihai Kerry's production, sales and logistics network covers 2839 counties and cities nationwide, nearly 350 sales offices, 1585 distributors and more than 5000 sub-distributors.
"The next step is to see how Yihai Kerry's non-grain-and-oil segments can use these networks and resources for nationwide distribution. In addition, it is worth noting that although the industries Yihai Kerry has entered have low concentration, they are not lacking in predecessors, and how to win customers from those predecessors is also something Yihai Kerry needs to study carefully."
The above-mentioned grain and oil industry analyst further said that from Yihai Kerry's diversification map, it can be seen that its products rely increasingly on retail terminals, so brand promotion and marketing strategies also determine the success or failure of the products. "In addition, if the crossover is relatively large, product awareness will be limited by Yihai Kerry's fixed image as a grain and oil producer, and at this time the role of brand promotion will become more prominent."