Dongpeng Special Drink, as the "first share of functional beverages", has a position but no market

In January 2021, the China Securities Regulatory Commission announced the meeting of Dongpeng Beverage Group, the parent company of Dongpeng Special Drinks.
This also means that this beverage factory that was on the verge of bankruptcy in 2003, after successfully transforming into a large beverage company with an annual sales of nearly 5 billion yuan today, will finally be listed in the A-shares as the "first share of functional beverages".
market.

According to the prospectus, Dongpeng Beverage is expected to raise at least 1.
49 billion yuan of funds.
After the IPO, the market value will reach about 14.
9 billion yuan, which is more than three times more than the 3.
5 billion yuan valuation when the investment institution Jiahua Capital was introduced in 2017.

If it is successfully listed, Lin Muqin, which took over Dongpeng Beverage Group's predecessor Dongpeng Industry in 2003, holds 56.

41%, and his net worth is expected to exceed 7.
6 billion yuan.

But the market is still curious about the energy drink market and the progress of Dongpeng Beverage to catch up with China's Red Bull.

Although Dongpeng Beverage had Dongpeng Special Energy Drink in 1997, it was the latecomer China Red Bull that really brought the concept of "energy drink" to the Chinese market.
Dongpeng Special Drink has won the status of "the second in the millennium" by selling low-priced versions of China Red Bull.

The inextricable nickname of "the second in the millennium" also indicates that Dongpeng Special Drink's prospectus not only shows that the beverage company is still on the way to catch up with Red Bull, but also demonstrates the difficulty of seizing the Chinese functional beverage market.

1.

"Follower Strategy"

1.
"Follower Strategy"

In a 2016 research report on the leading domestic food and beverage group Dali Foods, Deutsche Bank pointed out that the food and beverage company adopted a "follower strategy" in product categories and analyzed the advantages of this strategy.

Appropriate timing: The timing of the company's new product launch is appropriate, which coincides with the high-growth period of related food categories;

Competitive pricing: Except for plant beverages, the company's pricing in most areas is 10-38% lower than that of its leading competitors, positioning it in the low-end market;

Having a strong distribution network in traditional channels helps the company quickly expand its sales scale.

These three points are summarized from the product category strategies adopted by Dali Foods in potato chips, herbal tea, milk beverages, plant beverages and energy drinks.

At the same time, they can also be applied to summarize Dongpeng Beverage Group’s large single product Dongpeng Special Strategies adopted for drinking.

The success of Red Bull in China has spurred the interest of beverage companies in energy drinks.

This kind of market is small, but the segmented beverage market with high growth rate, high gross profit and low threshold has attracted companies including Dongpeng Beverage to enter this market in the past ten years.

According to Frost & Sullivan (Frost & Sullivan) data, the market size of functional beverages including energy drinks increased from 58 billion yuan to 112 billion yuan in 2014`2019, becoming second only to packaged drinking water and juice.

The third largest beverage market for beverages.

The gross profit margin of energy drinks is still at a relatively high level in the beverage industry.

The prospectus of Dongpeng Beverage shows that its energy drink business, namely Dongpeng Special Drink, has a gross profit margin of around 49%, which is also very close to Yangyuan Drinks (six walnuts) and Chengde Lulu, which have a gross profit margin of more than 50%.

Nongfu Spring’s functional beverage gross profit is also around 50%.

Dali Foods has not separately disclosed Lehu’s gross profit margin.
However, CICC pointed out in a 2017 report that the gross profit of Lehu’s product portfolio in Dali Foods The interest rate is the highest, above 60%-Lehu also helped Dali Foods' beverage segment to increase its gross profit margin to 46.
7%.

And China Red Bull, which only sells high-end canned products, may have a higher gross profit margin than Le Tiger.

Red Bull, which was introduced to China in 1995, successfully cultivated the awareness of energy drinks in the Chinese market.

Putting on the "blue hat" of health food, the founder of Reignwood Group, Yan Bin, invested heavily in marketing activities such as TV commercials and sports event sponsorship, bringing up a large single product worth more than 20 billion.
Adhering to the promotion strategy of "no blind spots in the market, every store must enter", Yan Bin once led a team to send Red Bull to taxi drivers along Chang'an Avenue in winter.

Dongpeng Special Drink can be regarded as a "low-priced version of China Red Bull" aimed at third- and fourth-tier markets.

In 2009, Dongpeng Special Drink launched PET bottles and plastic bottles.
The products fully imitated China Red Bull, including product formulas, packaging colors and slogans.
Even after China Red Bull abandoned the advertising slogan "Drink Red Bull when you are thirsty, drink Red Bull even more when you are sleepy and tired" in 2013, Dongpeng drinks were picked up and replaced with "Dongpeng Special Drink" in the copy.
"Red Bull" has become "You must wake up and fight when you are young! Drink Dongpeng special drink when you are tired and sleepy.
"

The biggest difference is the selling price.
Dongpeng Special Drink uses a PET bottle with a dust cap to replace the metal can of China Red Bull.
The price of 3.
5 yuan/bottle is slightly higher than the latter's 6 yuan/can.
China Red Bull has maintained the price of 6 yuan per can for more than 20 years.
It was a very expensive commodity in the early days of its introduction to the Chinese market.
144 yuan per box of China Red Bull needed to spend a week's wages of ordinary working-class people at that time, so China Red Bull focused on the first and second tier markets.
.

Before he took over Dongpeng Beverages in 2003, Lin Muqin was the director of Reignwood Red Bull's foundry.
He was familiar with all aspects of raw material procurement, technology development, product production, channel sales, etc.
The cost performance has become a difference from existing products in the market.
Lin Muqin, Chairman of Dongpeng Beverage, stated in an interview with Securities Times in April 2020:

"In 2009, when cutting into energy drinks, what we value is market demand and space, but the difficulties are also obvious: energy drinks have already emerged as market-leading brands.
How to break through fierce competition, fight differentiated competition, and strive for survival and growth? We have to face it.
"

The more cost-effective Dongpeng Special Drink has gained a price advantage.
The main cost-effective marketing activities such as buy one get one free have attracted more drivers, blue-collar workers, couriers, and medical workers who work longer hours.

Dongpeng Beverage, which started in Shenzhen, chose the neighboring city of Dongguan as its first vigorously promoted market, avoiding the competition from Pepsi, which entered Shenzhen at that time.
At the same time, Dongguan's population exploded after 2000, and the foreign population far exceeded the local population.
Dongpeng Special Drinks sold 20,000 boxes in the Dongguan market in one year.
In 2012, the sales volume in Dongguan exceeded 100 million yuan.
Dongguan has also become a model market for Dongpeng Special Drinks in third- and fourth-tier cities.

This follower strategy was also reused by Dali Foods in the energy drink Le Tiger launched in 2013.
Lehu takes into account the iconic product forms of Red Bull and Dongpeng Special Drink.
For example, the price of 250ml Lehu can is 1 yuan lower than that of China Red Bull, but its dealer network is much wider than Dongpeng Special Drink, covering the first line to Fourth-tier cities.
One year after listing, Lehu sold 394 million yuan, surpassing Qili in one fell swoop and occupying the third position in the energy drink market.

Even today, Dongpeng Beverage's layout in the national market is still weaker than Dali Food.
In contrast, Dongpeng Beverage had 1,236 distributors at the end of 2019, and nearly one-quarter of them were in the core Guangdong and Guangxi markets.

Dali Foods mentioned in its 2015 prospectus that as of the end of June 2015, Dali Foods had 3951 distributors and a sales network covering all provinces, cities and most county-level administrative regions in China.
In the same document, Dali Foods announced the layout of its production bases nationwide, building 16 strategic production bases, including 32 food and beverage-related factories.

Therefore, the "follower strategy" mentioned in the Deutsche Bank report actually sets an implicit premise: the beverage company has established a certain degree of market coverage foundation, which may be the basis of the follower strategy.

For the energy drink market segment, this may affect the catch-up speed of latecomers.
Dali Food's larger production base and dealer network have established the foundation for Lehu to quickly catch up with Dongpeng Special Drinks.
Although Dali Foods put Lehu, Heqizheng and other beverage brands into the ready-to-drink beverage business in 2019, and no longer announces Lehu’s performance separately, according to previously announced business data, Lehu’s revenue in 2017 was nearly 500 million.
The sales advantage of Yuan has surpassed Dongpeng Special Drink.

More production bases and a larger dealer network can help beverage companies quickly launch new products, while using multiple production bases to reduce logistics costs and increase gross profit margins.

If you carefully distinguish the threshold of energy drinks, there may be.
For example, energy drinks usually advertise "health benefits" such as refreshing and restoring energy.
Actually, they need to be reviewed by the national regulatory agency for health food.
This process usually takes 2 years.

However, the national standard "Classification of Soft Drinks" does not include the classification of energy drinks, nor the title of "functional beverages", only the term "special purpose beverages".
The standard defines "special-purpose beverages" as beverages that are adapted to the nutritional needs of certain special populations by adjusting the composition and content ratio of natural nutrients in the beverage, including sports drinks, nutrient beverages and other special-purpose beverages.
Functional drinks such as Red Bull and Lehu belong to the sub-category of "nutrient drinks".

However, in reality, the distinction between consumers and end retailers for energy drinks is often not obvious.

This also means that the lack of market coverage is still the biggest weakness of Dongpeng Special Drinks.

2.
Nationalization is still in progress

2.
Nationalization is still in progress

Reliance on Dongpeng Special Drinks and reliance on the Guangdong market are all questions that Dongpeng Beverages have been questioned after they announced their listing.
Today's Dongpeng Beverage Group cannot be said to be a multi-brand beverage group.
More than 90% of its revenue is contributed by Dongpeng Special Drinks, and more than 60% of its revenue is contributed by Dongpeng Beverage's headquarters in Guangdong.

Therefore, the market’s suspicion for Dongpeng Beverage lies in the following two issues:

Outside of Guangdong, can Dongpeng Beverage continue to expand the market?

In addition to the "Dongpeng Special Drink" energy drink, which has been selling for more than ten years (2009-present), is there sufficient growth potential for the new beverage category?

These two issues are ultimately tied to the nationalization issue at the core of Dongpeng Beverage.
Today's Dongpeng Beverage has not yet completed all the nationwide infrastructure.
In other words, the "nationalization" of Dongpeng Beverage started in 2013 is still in progress.

The landmark event of Dongpeng Beverage's "nationalization" was hiring Nicholas Tse as a spokesperson, placing CCTV advertisements, and starting to set up production bases across the country.
After China Red Bull encountered a trademark dispute in 2016, Dongpeng Beverage, which has always paid attention to outdoor advertising and TV advertising, also began to increase investment in sponsorship of sports events.

In 2018, Dongpeng Beverage reprimanded the replacement of Red Bull with more than 200 million yuan, and successively became the official sponsor of the Super League and the sponsor of the CCTV World Cup broadcast.
Lehu also sponsored the CFGP Formula Grand Prix, the Tencent TGA Grand Prix, the Stankovic Cup Intercontinental Basketball Tournament and the International Football Club Super Cup in the same year to strengthen its brand awareness in sports events.

However, in terms of market coverage, the production base of Dongpeng Beverages can only complete the preliminary national market coverage, resulting in greater logistics pressure outside Guangdong Province, and failure to launch influential products in the northern market.
This has led to Dongpeng Beverage who has invested a lot of money in marketing, but the channel coverage has not been completed, and the gross profit margin has also been affected.

Fund-raising on the IPO has become a solution to quickly gather funds in the short term.
More than 50% of the 1.
49 billion yuan raised from the listing will be invested in the construction of two production bases, Huapeng in South China and Yupeng in Chongqing.
The fund-raising plan for these two projects is 800 million yuan.
According to the plan, if the construction of Huapeng South China and Chongqing Yupeng is completed, Dongpeng Beverage will have 6 production bases.
Previous production bases such as Anhui and Guangxi production bases were put into operation in 2013 and 2017 respectively.

Limited by the production capacity of Dongpeng Beverages' production bases outside Guangdong Province, this company is still adjusting the corresponding product production and logistics transportation according to factors such as the construction capacity expansion of the production base and the production line capacity.
These adjustments are still in progress.
Logistics transportation also constitutes one of the main factors that directly affect the cost of Dongpeng beverages, second only to promotional expenses and employee salaries.
In the past three years, transportation costs accounted for an average of 2.
63% of Dongpeng's annual sales of beverages, and increased to 3.
26% in the first half of 2020.

In terms of transportation methods, Dongpeng Beverages needs to bear the transportation costs for distributors outside of Guangdong Province, and the distributors bear the corresponding transportation costs in Guangdong Province.

97% of the revenue contribution is dependent on Dongpeng Beverages sold in the distribution model.
The transportation costs outside Guangdong Province provide a perspective to observe its nationalization.

For example, in 2018, the average transportation cost of Dongpeng Beverage hit a new high, reaching 248.
76 yuan/ton.
Among them, in terms of land transportation, Huipeng, Guanpeng and Zengpeng ship goods for sales in Guangxi, Hunan, Guizhou, Sichuan, Yunnan and Chongqing.
The distance is relatively long and the unit freight is relatively high; Huipeng and Guipeng distribute to Hainan The volume of commercial shipments has increased, and the transportation distance has been longer, and the corresponding unit freight has increased.

In addition to the logistics supply chain, Dongpeng Special Drinks is also trying to adapt its products to more different regions, including the northern market with less coverage and the high-end market with higher impact on consumption.

In terms of increasing the northern market, the 500ml large bottle launched in 2018 helped the company improve this situation.

From 2017 to 2018, the production capacity of 500ml large bottles has doubled by 9 times, the product line with the fastest growth in production capacity.
The revenue share of energy drinks also increased from 27.
68 in 2017 to 54.
12% in 2018.
In order to increase the coverage of the northern market, Dongpeng Beverage also dug Jiaduobao and Xiangpiaopiao's executives to join: In 2018 and 2019, Dongpeng Beverage introduced the former Xiangpiaopiao marketing center general manager Lu Yifu and Jiaduobaoqian.
Promotion Director Wu Xinghai serves as the company's executives, both of whom are good at the northern market.

As a consultant for many food and beverage companies, Zhu Danpeng analyzed: "From the distribution of Dongpeng Special Drinks, the southern market has a larger proportion.
In addition, canned and bottled beverages are different in usage scenarios and channel layouts.
On these two points, JDB is a model in the beverage industry.
"

But the 500ml large bottle is a product that sacrifices gross profit margin in exchange for the market.
Dongpeng Beverage has expanded its 500ml large bottle distributors with lower gross profit margin in the north.
2018 was also the first time the company's gross profit margin was lower than 49%.
Dongpeng Beverage mentioned in the prospectus that the gross profit margin in 2018 was low and lower than the gross profit margin of the main business for the whole year, mainly due to the concentration of new distributors in East China, North China, Central China, and Southwest China.

But while expanding nationwide, Dongpeng Beverage has made quite limited progress in gross profit.
In terms of core energy drinks, the 500ml large bottle launched in 2018 was the only product that successfully raised prices during the reporting period.
The CIF price (ie the company's supply price/ex-factory price) in major regions rose slightly, from about 3.
2 yuan in 2017 /Bottle rose to about 3.
3 yuan/bottle.

The price of 250ml bottled and canned products has dropped.
The biggest change is the 250ml gold can, which dropped from about 3.
6 yuan/can in 2017 to about 2.
3 yuan/can.

The 250ml gold cans launched in 2017 were originally designed to take on the high-end products of Dongpeng Special Drinks, but the price cut basically declared the failure of Dongpeng Special Drinks' high-end attempts.
Dongpeng Beverage Company’s ex-factory price has changed slightly, but the terminal retail price has changed more obviously.
The original 6 yuan per can is directly cut in half, which has also greatly affected the distributors.

In 2018, the ratio of accounts receivable to advance receipts increased significantly.
For Dongpeng Beverages whose payment was delivered to delivery, this year was a year of losing part of their right to speak with distributors.

According to a report by Beijing Business Daily in August 2018, the relevant person in charge of Dongpeng Special Drink responded that the price of 250ml gold cans was reduced in response to brand competition, but in fact, the sales of this product's distributors in the northern market did not meet expectations.
A Dongpeng Special Drinks distributor said: "Many consumers know Dongpeng Special Drinks.
It is relatively easy for distributors to distribute the goods, but the terminal market just can't sell them.
The northern market does not recognize the brand.
"

3.
What should I do next?

3.
What should I do next?

In summary, now the impact of listing, it can be seen that Dongpeng Beverage wants to use the capital market to speed up financing as soon as possible, and complete the expansion of national bases and new product production capacity.

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