December 10, 2017 2:00 pm JST

Sweets market turns sour for Want Want China

Rice cracker maker faces competition from imports and home delivery

YUSHO CHO, Nikkei staff writer

Want Want China is facing more competitions for shelf space at a Shanghai supermarket. © Reuters

SHANGHAI -- Want Want China Holdings, a maker of rice crackers and soft drinks, faces an unprecedented challenge as it struggles to grow in the face of increasingly popular Western-style sweets and the proliferation of home-delivered food.

Shanghai-based Want Want China's difficulties stem from changing consumer tastes and an improving distribution system in China, which gives new entrants the opportunity to reach more customers. The company is the mainland unit of Taiwanese conglomerate Want Want Holdings. 

At a Carrefour supermarket in a busy shopping district near Shanghai's Zhongshan Park, Want Want China appears to be losing shelf space to rivals, including pricey imported sweets and chocolates.

The Hong Kong-listed company's annual sales totaled 19.7 billion yuan ($2.98 billion) in the financial year ended December 2016, down nearly 20% from their peak three years earlier. Backed by a high gross profit margin of more than 40%, Want Want China has continued to eke out a net profit despite slumping sales, though results have been up and down. The latest earnings report for the first nine months through September indicated a similar trend, where sales declined another 1% from the same period last year, while net profit attributable to shareholders dropped 14% to 2.02 billion yuan.

But that happened during a period of double-digit growth in Chinese consumer spending. Now, with the environment tougher, Want Want China faces an uphill battle.

Its stock price appears to reflect this challenge. Want Want China's shares closed at 6.09 Hong Kong dollars on Friday, 22.5% higher year-to-date, but dwarfed by the benchmark Hang Seng index, which is up 30.2% over the same period. Stretching back further, the snack maker's stock has lost more than half of its market value since April 2014, when it hit an all-time high of HK$13.10.

Sweet spot

Want Want China has two main strengths: One is competitive products launched based on improved sanitary management and development expertise learned from Japan's Iwatsuka Confectionery, with which it has a partnership.

The other is its nationwide reach. It has a network of factories and sales channels across China, from the western Xinjiang Uighur Autonomous Region to the northeastern province of Heilongjiang.

But consumers are developing a taste for new treats as they grow richer, and an improved distribution system gives them access to new products. Streets in big cities are lined with cake and cream puff shops offering freshly made items. Haagen-Dazs ice cream, owned by Swiss food giant Nestle, is also popular in big cities, although at 30 yuan a serving it is more expensive than in Japan.

At shops in rural areas and at highway rest stops, Want Want China's sweets still have prime shelf space. But in richer parts of the country the brand lacks cachet. 

The proliferation of home-delivery services is another headache. Customers with a smartphone can have almost any type of meal or dessert brought to their doors.

Up to now, Want Want China's wide sales network has been a strength, but it will become a costly burden if the sales slump continues. The company is looking to develop higher-priced products, but many other Chinese food and drink makers are plagued by similar problems and have yet to hit on a formula for success. It is unclear whether the company can rediscover the sweet spot. 

It is not all bleak for Want Want China. Anson Chan, an analyst at Daiwa Capital Markets in Hong Kong, maintains a "buy" rating after the company's latest conference call in November. Chan foresees sales growth recovering next year "on new product contributions and further penetration in e-commerce, lower-tier cities, and modern channels." However, he highlighted a "further gross margin erosion on raw material cost surges" to be the key risk.

Nikkei Asian Review Business and Market News Editor Kenji Kawase in Tokyo contributed to this report.

Asia300

Want Want China Holdings Ltd.

China

Market(Ticker): HKG(151)
Sector:
Industry:
Consumer Non-Durables
Food: Major Diversified
Market cap(USD): 10,642.00M
Shares: 12,465.63M

Iwatsuka Confectionery Co., Ltd.

Japan

Market(Ticker): JAS(2221)
Sector:
Industry:
Consumer Non-Durables
Food: Specialty/Candy
Market cap(USD): 298.90M
Shares: 5.99M

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