2024-07-28
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Text | Understand Finance, Author | Yang Yang, Editor | Xia Yijun
In the three years since the core asset bubble burst, the leading consumer stocks have been plunging all the way down. Even Moutai itself has fallen by 30%, and other consumer stocks have fallen by 70%.
butNongfu SpringIt is an exception. Before May this year, it had only fallen 25% from its previous market value peak, making it more resistant to declines than Moutai and the most resilient consumer stock.
But after May, the situation is completely different. In the past three months, the market value of Nongfu Spring has dropped by one-third. What happened? Is Nongfu Spring the next consumer brand to fall?
This article holds the following views:
1. The business of selling water has changed. Pricing power and strong operations have enabled Nongfu Spring to achieve a gross profit margin of 59.5%. However, the green bottled water launched in May launched a price war, which reduced its profits. A research report predicts that Nongfu Spring's net profit will fall by 4.6% in the first half of the year.
2. There is a hidden worry of lowering brand premium. The ranking of consumer product investment concepts is that product power is not as good as channel power, and channel power is not as good as brand power. The most direct manifestation of brand power is a strong price. The decline of many brands often starts with price imbalance.
3. It will not become another consumer giant that falls. At the beginning of the consumption downturn, many consumer giants copied the answers of Japanese companies and raised prices to maintain performance. But they failed to maintain their performance, which deepened the decline in stock prices. However, Nongfu Spring found an incremental market for sugar-free tea and still maintained its growth potential.
Hong Kong stocks + consumption, when these two labels are concentrated on one company, the valuation of this company is likely to not look good.
Nongfu Spring is an accident. Against the backdrop of a sharp drop in Hong Kong stocks and a "fall in both volume and price" in the consumer market, Nongfu Spring's valuation has been given at more than 50 times in the long term (from September 2020 to 2023).
One of the core reasons for the high valuation is the pricing power + strong operation, which brings it super profitability. In 2023, Nongfu Spring's net profit increased by 42.19% year-on-year, and its gross profit margin was as high as 59.5%.
The pricing power comes from the "natural water" positioning. Most bottled water on the market is purified water. Purified water comes from tap water, and natural water comes from nature, so the pricing power is naturally confident.
Strong operations allow farmers to make a lot of money even if their products are only slightly more expensive than purified water.
Natural water is sold at a low price, but the transportation cost is high. There is a theory called "500-kilometer transportation radius", which means that if the water is sold at a price of 2 yuan and the place of production is more than 500 kilometers away, the company can only work for highway toll stations and gas stations. Therefore, Kunlun Mountain focuses on selling water at more than 5 yuan, and does not cheat the poor at all.
Nongfu Spring's 12 water sources are evenly distributed across the country's major consumer markets, perfectly matching the "500-kilometer transportation radius". Even if it is sold at two yuan, the profit will not be eaten up by transportation costs. Now that the exploitation of water sources is restricted, it is impossible for competitors to buy out the effect of Nongfu Spring.
With pricing power and strong operations, Nongfu Spring has been making huge profits without doing anything. No one can threaten its profits except itself.
Public opinion has affected the sales of Nongfu Spring. Data from Jiuqian’s central platform shows that Nongfu Spring’s sales in the first half of the year fell short of its sales target due to the public opinion incident caused by the death of the founder of Wahaha.
However, the impact of the baby time was mainly in March and April. In May, Nongfu Spring's stock price hit a three-year high. After May, Nongfu Spring's stock price fell rapidly by 1/3.
This shows that it was the company itself that pulled down the stock price in order to stimulate sales. Nongfu Spring launched green bottled water in May and soon set off a price war. On June 18, the price of a 12-pack of green bottled pure water in Nongfu Spring's official flagship store was 0.82 yuan per bottle on average, much lower than Wahaha and Yilibao.
It is hard to say whether the price war can grab market share, but its own profits will probably fall first. Macquarie's research report released in July predicted that Nongfu Spring's net profit in the first half of the year may fall by 4.6% due to promotions and subsidies for sales channels.
The market fell first. In addition to the worry that the price war would reduce profits, there was also the worry that the brand premium of the red bottle water would be eliminated.
The ranking of consumer product investment concepts is that product power is not as good as channel power, and channel power is not as good as brand power.
The most direct manifestation of brand power is strong prices. The decline of many brands often starts with price imbalance.Estee Lauder。
Of the two leading cosmetics companies, L'Oreal's revenue is still hitting new highs, but Estee Lauder's revenue has been declining for seven consecutive quarters. The reason is that Estee Lauder often offers discounts. When consumers are accustomed to the 300 yuan little brown bottle, who will pay for the full-priced products in shopping mall counters and flagship stores?
Nongfu Spring is aware of the importance of brand, so it launched a new green bottle of water to engage in a price war.
In the eyes of some people, Nongfu Spring's fierce price war with a newly launched product with zero sales volume is a perfect implementation of Tian Ji's horse racing strategy. The green-bottled water has grabbed market share without damaging the brand of the red-bottled water.
This statement is a possibility. If things go well, Nongfu Spring may rely on its cost advantage to crush others and continue to increase its market share. But there are also risks. It may divert the sales of Nongfu Spring red bottle water and reduce its brand premium.
Similar things are also very common. After Ideal L6 was launched, the first thing it attacked was not other products, but the sales of its own L7.
Although L6 is smaller in size than L7 and has some reduced configurations, after the release of L6, with a price 70,000 yuan cheaper than L7, Ideal L6 first reduced the weekly sales of L7 from 3,000 to around 2,000.
Back to Nongfu Spring, although the green bottled water is purified water, which is equivalent to reducing the natural water content of the red bottled water, the price of 80 cents a bottle is still much cheaper than 2 yuan a bottle, and the price is attractive enough.
Especially when consumers buy water, many people rely on the convenience of "grabbing it at hand". When new products and old products are crowded in the same channel and in the hands of the same distributor, competing for the same group of consumers, it is questionable whether green bottled water can divert the sales of red bottled water.
History is a mirror that can correct one's behavior. Compared with the various beverages that have disappeared in the long river of history, the beverage product with the longest life cycleCoca ColaIn the hundred years since its birth, it has been a global bestseller with almost no major product iterations.
One of the rare surprises was when, in 1985, Coca-Cola, facing the relentless pressure from Pepsi, announced that it would no longer produce the old cola, but would adopt a new formula and a new name. After suffering a sales Waterloo, Coca-Cola began to put things right after returning to its classic products.
From this perspective, for consumer products, product innovation should focus more on new products. When it comes to core and long-established fundamental products, it is better to make fewer changes. After all, brand loyalty and user stickiness are the biggest moats of consumer products, and making too many changes sometimes weakens people's minds.
Will Nongfu Spring, which is now in crisis, be the next consumer giant to fall?
Over the past three years, consumer leaders have been plummeting, with many consumer stocks experiencing a 70% drop.
But Nongfu Spring is an exception. If we don’t count its rapid decline after May this year, it has only fallen 25% from its previous market value peak, making it the most resilient consumer stock.
Right now, although Nongfu Spring is caught in a price war and its stock price has retreated rapidly, in the long run, it is unlikely that Nongfu Spring will fall by 70% to 80% like other consumer stocks.
The biggest difference from other consumer shorts is that Nongfu Spring still has strong growth potential.
After the consumption cooled, many consumer leaders were under pressure to grow.Golden ArowanaRevenues decreased by 4.1% and 2.3% year-on-year, but Nongfu Spring's revenue increased by 28.36% year-on-year.
The core of Nongfu Spring's counter-trend growth is to take advantage of the reuse of consumer product channels and scenarios, that is, to sell more and more new categories by leveraging the channels that have been developed.
Relying on the channels established by bottled water, Nongfu Spring's tea beverages have become the engine driving the company's growth. The proportion of tea beverage revenue has increased from 13.5% in 2020 to 29.7% in 2023.
In fact, channel scenario reuse is something that every consumer leader can do. For example, Haitian leveraged the channels established by soy sauce to successively develop oyster sauce and sauces.
But the difference is that most of the products extended by consumer leaders are still stock products in the old battlefield, while Nongfu Spring is betting on products with incremental potential.
As early as 2021, Nongfu Spring launched Oriental Leaves, which once became the most unpalatable beverage among consumers. Its early sales also flopped, but it still insisted on cultivating the brand.
Until the concept of health emerged, sugar-free tea emerged as a new force, with a compound growth rate of more than 20% in the past five years. Nongfu Spring also took advantage of this to achieve high growth.
Nongfu Spring also provides a reference for domestic consumer leaders to survive the economic cycle.
In the early stage of economic adjustment, the path taken by domestic consumer product leaders was somewhat similar to Japan's high-end upgrade. For example, Japan's "Hai Tian" and Guijia Wang maintained a revenue growth rate of 3%-8% by raising prices through high-end products (the price of its products is 30% higher than similar products) after facing the economic downturn.
Domestic consumer leaders Haitian and Jinlongyu have also raised their prices in the past two years, but the effect is not obvious, and the company's revenue has still experienced negative growth. In essence, although they have also encountered an economic cycle, the per capita income level is different, and it is difficult for domestic consumer leaders to copy the answer immediately.
For the current consumer brands, the best way to break the impasse is to find their own Oriental Leaves as soon as possible.
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