How instant noodles reflect where you’re from?

When I say “Instant Noodles”, what’s the first image that comes to your mind?

Do you think of the cake of instant noodles that you cook in boiling water and add the packet of MSG? Or do you think of something more along the lines of “Cup noodles?”

Your choice of instant noodle says a lot about you

Before we go into how the type of instant noodle reflect who you are, let’s start by firstly reviewing the instant noodle market in Hong Kong and China.

Instant Noodle Market Growth is Anaemic in both HK & China

According to an industry report from Frost & Sullivan, Hong Kong’s instant noodle market was worth around HK$1.8bn. Over the past four years, growth has been anaemic with sales value only rising 0.5% p.a. while sales volumes have actually contracted by 1.3% p.a.

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Although China’s instant noodle market is much bigger, it is also not growing much. The Rmb81bn of instant noodle sales in 2016 only represent a p.a. growth rate of 0.4% over the 2012-2016 period. Volume wise, the number of instant noodle serving has actually fallen by 3.9% p.a.

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Who eats more instant noodles?

In absolute terms, China’s 37.2bn serving of instant noodles is 90x larger than Hong Kong’s 415mn servings. However, if you consider that China’s 1.3bn population is actually 186x larger than Hong Kong’s 7 mn population, the data actually shows that Hong Kong people actually eat more instant noodle than their mainland cousins.

HK 59.2 servings Vs. China 28.6 servings

In 2016, Hong Kong people ate 59.2 servings of instant noodles, almost twice as much as the average 28.6 servings consumed by those in China.

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What do you eat? Cups, Bowls or Bags

When we examine the data further, we see another interesting distinction between Hong Kong and China’s instant noodle connoisseurs. In Hong Kong, bag-type instant noodles make up nearly two-thirds of the overall sales volume. In China, the mix is almost 50/50 with bags taking up 53% of sales.

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In this respect, if you associate instant noodle with those that come in a little plastic bag that you cook yourself, then you’re most likely from Hong Kong. Conversely, if you think about pouring water into a little cup/bowl then you’re most likely from China.

What brand do you prefer? 出前一丁 or 康師傅

If you go to a Cha Chan Teng in Hong Kong and order instant noodle for breakfast, you are usually given a choice of upgrading to 丁麵 (Demae Iccho) for a few extra bucks. But what you may not realise is that in Hong Kong, 出前一丁, 公仔麵, 福麵 and Cup Noodles are all carried by Nissin Foods.

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The multiple brand strategy has helped Nissin Group become a clear leader in the Hong Kong market with a market share of 65.3%. Nong Shim (maker of Shim Ramyun) and Sau Tao, are a very distant second and third and only have a 5.5% and 5.4% market share respectively.

In China, the names are very different. Taiwanese noodle makers like Tingyi (康師傅) and Uni-President dominate the instant noodle market and hold market shares of 46.5% and 17.8% respectively. Nissin Foods is much smaller and only holds a market share of 2.8%.

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So if you associate instant noodle with Cup Noodle and 出前一丁, you’re most likely from Hong Kong. On the other hand, if you think of 康師傅 or 來一客, then you are most likely from China.

These two distinction is even more stark when you consider the revenue breakdown of Nissin Foods in the two areas. In Hong Kong, the revenue split between Bag type instant noodles, cup/bowl type and frozen foods are almost even at 39/28/33. Whereas, in China, the revenue split for Nissin Foods is 85/13/2 .

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The Premium-isation of Instant Noodles

In a way, China’s instant noodle market is very unique. Unlike the other industries that we have looked at in our Mass Consumption series (travel, beer, coffee and fried chicken, online games), the instant noodle market is NOT growing. In fact, Frost and Sullivan forecast that the number of instant noodle servings will decline from 2016’s 37.2bn to 34.5bn in 2021E.

With volume in decline, the only way to make more money is to try to raise ASP through the premium-isation of instant noodles.

As the bowls get bigger…

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…and fancier…

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…so does the ASP. In China, over the past four years, the average selling price of instant noodles have risen by 4.4% p.a. since 2012 (faster than Hong Kong’s 1.75% ASP growth). chart (16)

However, with the “Big Cup” noodle now weighing in 80 grams, 450 calories and 1,600mg of sodium, I suspect this premium-isation trend could be hard to sustain. Furthermore, while the past few years’ increase in ASP appear to have helped with gross profit margins, the benefits do not appear to have flowed to the bottom line.

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I am Satay Flavour出前一丁

As for me, I’ve been told that I make the best instant noodles with the exact right balance of soup to noodle. If I had to choose one type of noodle to eat, it would be the satay flavour 出前一丁.

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Now what does that say about me?

 

P.S. In the first collage, there is one picture that does not belong, can you spot it.

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Mass Consumption Part 4 – Whassssup? Watching the game, having a beer

Whassup? During the summer, when it is scorching outside, there are few things better than an ice-cold beer. In Part 4 of our Mass Consumption series we review the state of the beer industry. But unlike the previous post, the Chinese beer industry outlook is not “whassup”. In fact, after peaking in 2013, Chinese beer consumption has fallen for three straight years and operating margins are less than half of global peers.

Whassssup?

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For those unfamiliar with the term, Whassup was an iconic beer commercial from the late 1990s. The commercial was so successful that for quite a while, everyone went around saying “Whassup?”. To truly appreciate the fad at the time, you have to go back and watch the commercial. (Youtube link here). It may appear silly now, but admit it, you said your fair share of “Whassup” back then.

As promised from my “Fried Chicken and Coffee” post, I was planning to do some work on the Beer industry but I did some initial reading, I I really did not feel a sense of urgency, hence the lateness of this post. To put it simply, the beer industry is not “Whassup?”

China beer production peaked in 2013

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According to data from the National Bureau of Statistics, in 2016, China’s beer production was 450.6mn hectolitres. Beer production had peaked in 2013 at 506.2mn hl and has now fallen for three straight years and are now down 11% from the peak. This is very different from the other mass consumption themes that we had been talking about (i.e. ageing population, travel and fast food).

Volumes down across most major breweries

Looking into the numbers, this is not just a China phenomenon. Across the major international breweries, Heineken was the only one to report a growth in beer sales in 2016 (up 6.3%). The largest brewery, AB InBev (owner of Budweiser, Stella Artois and Corona) saw sales volume drop by 0.4% in 2016. Carlsberg’s sales volume fell by 2.8% while Tsing Tao’s declined by 6.6%.

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Craft beers and premium-ization

With overall beer consumption flat, in order to grow revenues, breweries have turned to craft and premium beers to try to boost overall ASPs. Next time when you order a Leffe or Camden Town, you are in fact ordering a cousin of Budweiser (so to speak). Here’s a table of the family of beers.

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For instance, did you know that Budweiser, Corona, Hoegarden, Boddington’s and Pure Blond are from the same family. Similarly, the Carlsberg family of beers include Grimbergen and Brooklyn Lager. And in the Heineken family, this includes Moretti, Sol, Anchor and Tiger.

Alcohol-Free and Ciders

In addition to premium craft  beers, another focus area for the breweries is the “low and no-alcohol” beer segment. AB InBev has set a goal to have low-and-no alcohol beers represent 20% of its global beer volumes by 2025. For Carlsberg, although Craft and Non-alcoholic beer only represent 5% of its beer volume, they make up 10% of net revenues. As for Heineken, the low-and no-alcohol segment represented 12mn hectolitres in 2016.

Margins are all over the place

While the beer industry’s growth profile is very different from the other mass consumption industries that we have reviewed, there is one aspect that is similar: Low China margins.

At 29%, AB InBev has the highest EBIT margin among the breweries. Heineken and Carlsberg are at 17% and 13% respectively. By comparison, the two Chinese breweries’ operating profit margin of 6% is less than half of their international peers.

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Looking at the international breweries’ segmental results, China’s lower margin is not obvious. For AB InBev, although its Asia Pacific profit margin of 16% is well below those of Latin America, North America and EMEA, it is still more than double that of Tsingtao and CR Beer.

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Interestingly, for Heineken and Carlsberg, their Asian operating margins are actually higher than those of Europe and the America. Of the three, Heineken’s 32% operating margin in Asia is the highest among our comparison group.

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Need to diet before I have a pint

Although overall volume growth has been anaemic, the sector has not done too poorly over the past 12 months. On a blended basis, the five beer stocks above are up 27% against their 52 weeks lows. But with current price only 8% below their 52 week highs, I feel that similar to my own situation, the stocks may need to go on a diet before they become attractive again.

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Mass Consumption Part 3 – Coffee and Fried Chicken

I love coffee and I love fried chicken. Normally, I wouldn’t mix these two together but in Part 3 of our mass consumption series, we look at the economics of feeding China’s 1.3bn mouths.

I know, I know, coffee and fried chicken don’t go well together. I wish the title could have been Beer and Fried Chicken but I have yet to do work on the beer industry so for this week, we will have to focus on the two strange bed fellows of Coffee and Fried Chicken.

I love coffee and I love fried chicken. Every morning, regardless of whether it is a weekday, weekend, rain or shine, I always start my day with a Grande Black Coffee. If one were to talk about an industry with a defensive moat where consumer stickiness is very high, coffee is it for me. If my local Starbucks were to raise prices, I’m stuck.

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On the other hand, although I love fried chicken, I eat it sparingly. When I was a teenager, I could devour a whole bucket of KFC by myself but nowadays, I try to limit myself to splurging once every 6-12 months. It taste good but I feel very guilty afterwards and the indulgence shows up immediately on the scales.

What do they have in common? Making money in China

But what do Coffee and Fried Chicken have in common? They are two of the food companies that have been able to make money in China. Yes, I’m talking about Starbucks and KFC.

In part 3 of our Mass Consumption series, we turn to the largest consumption category. At Rmb1,535, food and tobacco make up 32% of the average spending of the Chinese consumer. Although its growth rate of 4.6% is the second slowest among the various categories, it is still growing nonetheless.

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A Starbucks around every corner?

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Although it may seem like there is a Starbucks around every corner, the actual penetration is still limited, especially in overseas market. At the end of September 2016, including both company operated and licensed stores, there were 15,607 in the Americas. China and Asia Pacific is one of the fastest growing regions but the 6,443 stores is still only 41% that of the Americas. In percentage terms, the America’s have 62% of total stores, China/Asia Pacific 26% and EMEA 11%.

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(Source: Company data for all charts)

In terms of revenue, the skew is even higher. The Americas contributed US$14.8bn or 69% of total revenues. China and Asia Pacific grossed US$2.9bn of revenue or 13% of the total while EMEA made US$1.1bn revenue or 5.3%. Although it may not seem obvious from the below chart, China and Asia Pacific had the fastest revenue growth in FY2016 at 22%, nearly double the 11% growth rate experienced in the Americas.

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By product, beverages make up 58.1% of total revenues. Food make up 16.4% and packaged and single-serve coffees and teas made up 13.4%. From a growth rate perspective, in FY2016, food sales grew 13% y/y, slightly faster than the 11% beverage sales growth.

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The trick is in growing profitably

As we have written previously (see here and here), China’s allure has always been its massive 1.3bn population. But the big pitfall for many companies is how to grow in a profitable manner especially when it is faced with hyper competition.

Starbucks profitability in Americas and China / AsiaPac

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In this regards, Starbucks appears to be successfully juggling between growth and profitability. In absolute terms, Starbucks made US$632mn from the China and Asia Pacific region. This represented a margin of 21.5%, roughly 4pp below the 25.3% operating margin that it makes in the Americas. Even if one were to exclude the 5.1pp by way of income from equity investees, the operating margin of 16.4% is still pretty respectable.

Looking at the cost breakdown, the obvious areas of variance between the Americas and China/Asia Pacific would be in the (i) cost of sales including occupancy costs and (ii) store operating expenses. While the store operating expenses in China / Asia Pacific is much lower than the Americas (26.5% Vs. 33.2%), this is more than offset by the higher occupancy costs (35.6% Vs. 44.1%).

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Last but not least, while China and Asia Pacific’s 22% revenue growth is obviously important, don’t count out the Americas. If we were to consider same-store-sales growth, The Americas are actually doing better at +6% versus China / Asia Pacific at +3%. Notably, the key distinction is in the change in ticket size. In FY2016, the average ticket in the Americas increased by 5% while the average ticket in China / Asia Pacific only rose by 2%. In both cases, the number of transactions within the stores only rose by 1% but that is understandable as more stores are being added around every corner.

Finger licking good

If we are talking about tapping into China’s mass consumption wave, Starbucks was actually pretty late. It opened its first store in 1999 at the China World Trade Building in Beijing. McDonald’s opened its first store in Shenzhen in 1990. The first global brand to go into China was in fact Kentucky Fried Chicken. Yes, Colonel Sanders was the first one to “make a run for the border”  when he opened the first KFC in Beijing back in 1987 (Note: two points if you can tell me where the quoted slogan is from).

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Including sister restaurants like Pizza Hut, Taco Bell and Little Sheep, Yum China now operates 7,562 restaurants in China. This is 14% more than Starbuck’s 6,443 stores in the China / Asia Pacific region.

Over the past five years, the number of KFC and Pizza Huts have increased by 32%. Company operated restaurants make up nearly 80% of restaurants with franchisees and unconsolidated affiliates making up the other 20%.

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Between fried chicken and pizza, KFC is more popular. At the end of 2016, there were 5,224 KFCs, nearly 3x the number of Pizza Huts. Incidentally, both KFC and Pizza Hut have added about 400 stores over the past two years.

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While the number of KFCs outnumber Pizza Hut 3:1, at the top line revenue level, KFC’s US$4,696mn revenue is only 2.6x that of Pizza Hut’s US$1,774mn. Perhaps due to some food scare issue, KFC’s revenues have actually fallen slightly from US$ 4,893mn to US$4,696mn while Pizza Hut’s revenues have increased by 4.5% from US$1,696mn to US$1,774mn.

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What KFC appears to have done much better over the past two years is in boosting its profitability. According to the segmental data, restaurant margins at KFC has increased from 11.4% in 2014 to 15.9% in 2016. By comparison, Pizza Hut’s margins have oscillated from 14.3% in 2014 to 12.3% in 2015 before rebounding to 14.0% in 2016.

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Similar to Starbucks, occupancy costs and other operating expenses are the biggest cost items, eating up around 33.5% of revenues. Interestingly, “Food and paper” is the second largest cost item, accounting for around 28.4% of revenues. I suppose fried chicken is quite greasy and you do need lots of napkins to clean your hands afterwards.

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So what will it be? Chicken or Coffee?

Hmm, that’s a hard one. In nominal terms, although Yum China’s revenue is more than double that of Starbuck’s China / Asia Pacific revenues (US$6,752mn Vs. US$2,939mn), as Starbuck’s China / Asia Pac 21.5% operating margin is double that of Yum China’s 9.5%, their nominal operating profits are actually very comparable. For the fiscal year 2016, Yum China had operating profit of US$640mn while Starbuck’s China / Asia Pac segment earned US$632mn.

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While Starbuck’s US$87bn market cap is much higher than Yum China’s US$15bn, from a valuation perspective, the two are in fact quite similar. Starbuck is currently trading at 30x trailing twelve months PE. Yum China is at 28x. Although both company’s PE may appear high, one must decide if China’s 1.3 billions mouths to feed are worth it.

Decisions, decisions….