1. Overview of the Compound Seasoning Industry
1.1 Definition of Compound Seasoning and Industry Segmentation
Compound seasoning, as opposed to single seasoning (basic seasonings such as soy sauce, vinegar, and salt), refers to seasoning made from two or more condiments through special processing. With economic development, improved living standards, and advances in R&D, compound seasoning has gradually become a very important component of condiments. According to the classification of compound seasoning in the "Classification of Condiments (GB/T20903-2007)," compound seasoning can generally be divided by form into three types: liquid compound seasoning, solid compound seasoning, and compound seasoning sauce. By category, compound seasoning can generally be divided into chicken essence, hot pot seasoning, Chinese-style compound seasoning, Western-style compound seasoning, and others. By product characteristics, compound seasoning can further be divided into customized compound seasoning and standardized compound seasoning.
1.2 Compound Seasoning Has Diverse Application Scenarios, with Hot Pot Seasoning Accounting for Approximately 20%
From the overall structure of compound seasoning, chicken essence remains the largest component of China's compound seasoning, followed by hot pot seasoning. Compared with Japan's condiment consumption structure, China's compound seasoning categories still have considerable room for expansion. From the perspective of application scenarios, the use scenarios of compound seasoning are relatively diverse. According to our grassroots research, a compound seasoning company in the Sichuan-Chongqing region has more than 20 product series, including not only hot pot base products but also boiled series, barbecue series, skewer series, braised seasoning series, and others.
2. Comprehensive Benchmarking of Compound Seasoning and Basic Seasoning
Compared with the relatively mature basic condiments, the compound seasoning industry is still in its early stage of development. We attempt to compare compound seasoning with basic seasoning across multiple dimensions, including industry development status, competitive landscape, and industry chain, so as to provide a comprehensive perspective on the compound seasoning industry. In summary: 1) Industry development status: We believe compound seasoning is currently still in a stage of accelerated expansion and penetration, while industry profitability has not yet entered a steady upward channel and remains a volume-growth market; 2) Industry competitive landscape: The compound seasoning industry is highly fragmented with numerous participants, and no leader has yet emerged; 3) Industry chain: On upstream raw material procurement, compound seasoning involves a wide variety of raw materials, and packaging material costs account for a relatively low proportion; production barriers are relatively low, with greater emphasis on raw materials and formulas; on downstream channels, the compound seasoning industry is more dependent on household channels.
2.1 Development Status: The Compound Seasoning Industry Is Growing Rapidly, with Penetration Still at a Low Level
From the perspective of industry development status, we believe China's compound seasoning is still in the early introduction stage, mainly based on the following aspects: 1) China's compound seasoning industry is the only sub-sector in the condiment segment that maintains double-digit high growth; 2) China's compound seasoning penetration remains low compared with basic condiments and still lags significantly behind developed countries; 3) Industry profitability is relatively stable and has not shown a steady upward trend, with the industry still driven mainly by volume growth.
On the one hand, unlike industries such as soy sauce and yeast that grow in the single digits, the compound seasoning industry maintains double-digit high growth. We compared the growth rates of various sub-sectors in the condiment industry and found that as the industry continues to mature, growth rates in industries such as soy sauce and yeast have fallen from double digits to single digits. In contrast, compound seasoning has become the only sub-segment in the condiment segment with double-digit high growth.
The compound seasoning industry maintains double-digit high growth. According to Frost & Sullivan, the market size of China's compound seasoning in 2018 was RMB 109.1 billion, with a compound growth rate of approximately 14.39% from 2013 to 2018. By sub-category, Chinese-style compound seasoning maintained rapid growth, with a compound growth rate of approximately 15.38% from 2013 to 2018. Meanwhile, the market size of hot pot base compound grew at a compound rate of approximately 15.36% from 2013 to 2018, and Sichuan cuisine seasoning, due to its broad category expansion boundaries, achieved a market size compound growth rate of nearly 20% from 2011 to 2018. According to Frost & Sullivan's forecasts, the compound growth rates for Chinese-style compound seasoning, hot pot seasoning, Western-style compound seasoning, chicken essence, and other categories from 2016 to 2021 are 16.5%, 13.8%, 14.0%, 14.1%, and 12.5%, respectively.
On the other hand, compound seasoning penetration remains low. According to Frost & Sullivan, in recent years China's compound seasoning penetration has been rising rapidly (from 18.20% in 2015 to 25.97% in 2018), but there is still a significant gap compared with levels exceeding 50% in Japan, South Korea, and the United States. In 2018, the compound seasoning penetration rate in the United States reached as high as 73%. From the perspective of per capita expenditure on compound seasoning, China's per capita expenditure on compound seasoning in 2016 was approximately USD 9, leaving considerable room for improvement compared with the United States (USD 85.5) and Japan (USD 88.7). Meanwhile, according to data from the Qianzhan Industry Research Institute, China's soy sauce penetration rate is as high as 99%.
At the same time, from the perspective of profitability, the profitability of the compound seasoning industry has not yet shown a stable upward trend. In the basic seasoning industry, the gross margins of leaders Haitian and Hengshun are approximately 45%, while Fuling Zhacai, a table condiment company, has an even higher gross margin of nearly 60%. As the competitive landscape stabilizes, the industry shows a phenomenon in which leaders raise prices and other companies follow, and the profit margin levels of industry leaders show a trend of steady slight increase. In contrast, in the compound seasoning industry, C-end representatives Yihai and Tianwei have gross margins of 37%-38%, while B-end representative Richen Shares has a relatively high gross margin of around 50%. Unlike the sauce and vinegar industry, which has a relatively stable competitive landscape, the compound seasoning industry has not yet shown a steady upward trend, reflecting to some extent that the industry has not yet entered the reshuffling and consolidation stage and that participants are in a growth stage of staking out territory.
We broke down the product gross margins of various compound seasoning companies to eliminate the distortion of overall gross margin fluctuations caused by changes in product mix. It can be found that the gross margins of various categories at Tianwei Food, Yihai International, and Richen Shares are all within relatively stable ranges. Meanwhile, according to feedback from grassroots research, in the C-end supermarket market in Chongqing, competition among brands is intense, and price competition and terminal promotions are common, further confirming that the industry is in a development stage of staking out territory.
2.2 Competitive Landscape: The Competitive Landscape of the Compound Seasoning Industry Is Extremely Fragmented, with No Leader Yet Emerging
The competitive landscape of the compound seasoning industry is extremely fragmented, with no leader yet emerging. There are numerous sub-sectors in compound seasoning, among which the hot pot base industry is the most mature and has relatively high concentration, but compared with other sub-sectors in the food and beverage industry, its competitive landscape is still relatively fragmented. This is mainly reflected in two aspects: On the one hand, the CR3 of the compound seasoning industry is relatively low. The CR3 of the yeast industry is approximately 80%, with leader Angel Yeast holding a market share of as high as 55%, while the CR3 of the pickled mustard tuber industry is approximately 53%, with leader Fuling Zhacai holding a market share of approximately 30%. According to 2015 data, the CR3 of China's hot pot base and hot pot seasoning were 24% and 21%, respectively. On the other hand, the market share gap among the top three in the compound seasoning industry is small, and the competitive landscape is subject to significant change. In 2015, the market shares of the top three in the hot pot base industry were 9%, 8%, and 7%, respectively, and those in the hot pot seasoning industry were 8%, 7%, and 6%, respectively.
Given that the 2015 data are relatively old and that there are too many sub-sectors in the industry with slight differences in channel layout among companies, we take Tianwei Food and Yihai International as examples and attempt to break down from the perspectives of channels and categories to estimate their market shares in different channels and categories. Based on our estimates, we estimate that in 2019 Tianwei Food's market share in hot pot seasoning and Chinese-style compound seasoning in the B-end market was less than 1%, while in the C-end market, Tianwei Food's market shares in hot pot seasoning and Chinese-style compound seasoning were approximately 5.9% and 6.5%, respectively. Yihai International, relying on Haidilao, has a relatively obvious advantage in the B-end hot pot seasoning market, with a market share of approximately 13.0%, and a market share of approximately 0.5% in Chinese-style compound seasoning; from the C-end perspective, leveraging Haidilao's brand advantage, Yihai International's C-end market share in hot pot seasoning is approximately 10%, but its market share in the Chinese-style compound seasoning segment is only approximately 3.3%.
At the same time, non-listed hot pot base manufacturers in the Sichuan-Chongqing region are all in good condition, and each non-listed hot pot base manufacturer maintains relatively rapid growth. Among some compound seasoning companies we visited, many are actively expanding production capacity. The industry has not yet entered the consolidation stage, and the industry ceiling remains far away.
2.3 Industry Chain: Barriers to Entry for Compound Seasoning Are Relatively Low, with Relatively High Dependence on C-End Channels
From the perspective of the entire industry chain, we compare compound seasoning and basic seasoning in multiple aspects, including raw material procurement, production barriers, and downstream supply. On the raw material side, compound seasoning involves a relatively wide variety of raw materials, but large-scale procurement still has certain scale advantages over small factories, and the proportion of packaging materials is relatively small; from the perspective of production barriers, the production barriers for compound seasoning are slightly lower than those for basic seasoning, with greater emphasis on product R&D and formulas; from the perspective of downstream demand, compound seasoning helps solve the pain point of mismatch between young people's cooking needs and cooking skills, and therefore has greater dependence on C-end channels than basic seasoning.
1. Comparison of Raw Material Procurement
Compound seasoning involves a wide variety of raw materials, large-scale procurement has certain scale advantages, and the proportion of packaging materials is relatively low. We compared the number of raw material categories required by major condiment companies and found that Tianwei Food and Richen Shares require nearly 20 types of raw materials (without considering grade subdivisions within categories), significantly higher than basic condiments such as soy sauce and vinegar. Therefore, to a certain extent, this helps smooth the impact of single raw material cost fluctuations on the cost side, and large-scale procurement by compound seasoning manufacturers also has scale advantages.
In addition, we compared the cost structures of basic seasoning and compound seasoning and found that basic condiments are mainly packaged in glass bottles, while compound seasoning is mostly packaged in plastic, so the proportion of packaging materials and other costs in the raw material costs of compound seasoning is relatively low, and fluctuations in packaging material prices have a relatively small impact on the costs of compound seasoning. Overall, cost-side fluctuations in compound seasoning are relatively controllable.
2. Comparison of Industry Barriers
From the perspective of barriers to entry, basic seasoning emphasizes production processes and place of origin, while compound seasoning emphasizes formulas and raw materials. According to the professional classification method, the production methods of compound seasoning mainly include fermentation extraction, decomposition reaction, and raw material blending. Among them, raw material blending compound seasoning is relatively common and is mainly used in terminal (C-end and food service) channels. We reviewed the production processes of the main products of Tianwei Food and Richen Shares and found that both adopt raw material blending production methods. Raw material proportioning, mixing, and stir-frying are relatively key production steps. In comparison with basic seasoning, taking soy sauce as an example, production processes mainly include the Japanese style (represented by Kikkoman and Qianhe, high-salt dilute controlled-temperature fermentation) and the Cantonese style (represented by Haitian and Chubang, natural fermentation under sunlight by day and dew by night), with strain production, koji making, and sun-drying as key steps, which are relatively difficult to replicate.
From the perspective of taste stickiness, consumers have higher taste stickiness toward compound seasoning. Consumers have a certain degree of taste stickiness toward condiments, and the higher the degree of compounding of condiments, the more distinct and prominent the taste characteristics, and consumers' taste stickiness toward that category will correspondingly strengthen. For example, flavors such as spicy and numbing, savory and salty, and light and sweet all have loyal fans. However, while taste stickiness strengthens, the audience for a single compound seasoning product is also gradually narrowing compared with basic seasoning. We believe that category diversification is an important way to expand the consumer audience.
3. Comparison of Channel Composition
According to the prospectus of Yihai International, in 2015 the retail channel and food service channel of the hot pot base industry developed in parallel, and the compound seasoning industry's dependence on household channels is significantly higher than that of traditional condiments. We believe the main reason is that compound seasoning can effectively lower the usage threshold for C-end consumers and, amid a faster pace of life and the diseconomies of scale of cooking, help reduce the time required for cooking and improve cooking efficiency.
There are also certain differences in the consumer profiles of compound seasoning and basic seasoning. On the C-end, basic condiments mainly target traditional consumers, mostly housewives, while compound seasoning mainly targets young people with a fast pace of life and limited cooking skills, especially single young people who cook infrequently. To capture this consumption characteristic, in July 2020, Tianwei Food placed advertisements on the dating show "If You Are the One" to enhance brand power and accelerate penetration in the C-end market.
3. A Multi-Dimensional Perspective on the Future
3.1 The Compound Seasoning Market Space Is Estimated at Nearly RMB 500 Billion
According to Frost & Sullivan, the market size of China's compound seasoning industry in 2018 was approximately RMB 109.1 billion. Referring to the channel distribution of the hot pot base industry, we assume that C-end household consumption accounts for approximately 50% of the overall compound seasoning industry and B-end food service consumption accounts for approximately 50% (since industrial channels are intermediate links, they are temporarily excluded from the analysis scope here), implying that the B-end and C-end compound seasoning markets each amount to RMB 54.6 billion. We attempt to examine the industry's growth space from both the B-end and C-end: B-end: We believe that the increase in the food service chain rate will drive demand for compound seasoning, and the penetration of compound seasoning in non-chain food service is expected to rise. In 2018, China's food service chain rate was approximately 8%, leaving considerable room for improvement compared with Japan (51%) and the United States (57%). According to data from the China Industry Information Network, in 2018 the penetration rate of compound seasoning in condiments in China was approximately 26%, far below the 60-70% level in Japan and the United States. If we assume that the food service chain rate reaches 50% and that compound seasoning accounts for 8% of the cost of dishes in chain food service, then chain food service would require approximately RMB 170.9 billion of compound seasoning; at the same time, with the penetration of compound seasoning, non-chain small B-end food service channels will also use relatively standardized compound seasoning. Assuming a compound seasoning penetration rate of 60%, non-chain food service would require approximately RMB 64.1 billion of compound seasoning. Therefore, in total, the B-end compound seasoning market space is approximately RMB 235 billion.
C-end: According to Frost & Sullivan, benchmarking against the per capita compound seasoning expenditure levels of Japan and the United States, China's per capita annual compound seasoning expenditure in 2018 was approximately USD 9.3, while Japan and the United States had per capita annual compound seasoning expenditures of approximately USD 87.7 and USD 85.5, respectively. Taking into comprehensive consideration the dietary habit differences between China and Japan and the United States, we assume in a neutral scenario that China's per capita annual compound seasoning expenditure reaches approximately half of Japan's per capita expenditure (assuming USD 40/person/year), implying more than a threefold increase from the current per capita expenditure, and we estimate the C-end compound seasoning market space at approximately RMB 234.6 billion.
Overall, we neutrally estimate that China's compound seasoning market space is approximately RMB 469.6 billion, leaving considerable room for development. To meet consumers' increasingly diverse taste needs, compound seasoning categories continue to diversify, and the boundaries of category expansion are far broader than those of basic seasoning. Industry innovation supports the rapid expansion of the industry.
Where does the core growth driver come from?
We believe volume growth is the main driving factor. According to Frost & Sullivan, the market size of China's compound seasoning in 2018 was RMB 109.1 billion, and the industry size has maintained double-digit high growth in recent years, with a compound growth rate of approximately 14.4% from 2013 to 2018. Meanwhile, according to statistics from the Xinsijie Research Center, China's compound seasoning output in 2018 was 559,000 tons (+12.9%). Assuming a production-to-sales ratio of 100%, the change in ton price was approximately -0.4%. Volume growth is thus the core factor supporting the rapid development of the industry.
At the same time, we broke down the industry space by volume and price and can see that the volume growth foundation on the B-end comes from two aspects: the food service chain rate and the increase in compound seasoning penetration, while the expansion of consumer coverage has become the main driver of C-end growth.
Is the industry currently accelerating at the margin or slowing at the margin?
We believe the industry is showing an accelerating growth trend, mainly for the following reasons:
1) Existing participants are significantly expanding production capacity. While listed companies Tianwei Food and Yihai International are significantly expanding production capacity, during our industry chain research in the Sichuan-Chongqing region, we found that many unlisted hot pot base manufacturers are also actively expanding production capacity.
2) Primary market attention to the compound seasoning industry has increased significantly.
3) Other condiment companies have successively begun to lay out compound seasoning businesses. After Haitian Soybean Paste, Haitian Flavouring has continued to increase its investment in the compound seasoning segment and recently launched four new products: Korean spicy beef, Xinjiang tomato, Yunnan sour soup, and Korean army stew. At the same time, Fuling Zhacai is also preparing to enter the compound seasoning industry.
3.2 B-End and C-End Dual Drivers Propel the Development of the Compound Seasoning Industry
We have previously discussed the composition and importance of compound seasoning in B-end and C-end channels.
From the food service side: There is considerable room for improvement in the food service chain rate, and the application of compound seasoning helps reduce restaurant kitchen area and labor costs. According to data from the Qianzhan Industry Research Institute, the brand chain rate in China's hot pot industry is relatively low, with hot pot food service brands having more than 100 chain stores accounting for only about 0.32%, while food service brands with 2-5 chain stores account for as much as 84.5%. We believe there is still considerable room for improvement in the chain rate.
According to data from the China Hotel Association, we broke down various costs of different types of food service. Excluding raw material procurement, rent and property costs and labor costs are both important components of food service costs. The application of compound seasoning will help reduce kitchen area and lower labor costs, while also unifying taste and improving operational efficiency. Although the impact of the pandemic on food service channels has hindered the growth of B-end compound seasoning companies, in the long run compound seasoning can effectively replace manual labor, so the pandemic has to some extent accelerated the penetration of compound seasoning in B-end channels.
From the household side: As housing sizes shrink, compound seasoning effectively alleviates the diseconomies of scale of household cooking. Benchmarking against Japan's household condiment consumption, we can see that consumption of compound seasonings such as instant dry soups and seasoning sauces has been rising, while consumption of basic condiments such as soy sauce and vinegar has shown a gradual decline. According to statistics from the Ministry of Public Security, China's average household size has continued to decline. As of 2018, China's average household size was 3.08 people, with the urban average even smaller (2.98 people), a significant reduction compared with the average family size of more than 5 people in 1960. Against this background, the accelerated pace of life has further reduced cooking frequency. Cooking with multiple condiments such as oil, salt, soy sauce, and vinegar is difficult and subject to diseconomies of scale, and compound seasoning will effectively solve this pain point, thereby accelerating its entry into C-end channels.
Given the different characteristics of B-end and C-end channels, how should compound seasoning companies break through?
Due to the special attributes of compound seasoning and the differences in demand between the B-end and C-end, we believe that the breakthrough paths for compound seasoning companies on the B-end and C-end are not entirely the same. We selected the financial indicators of major listed companies for comparison to discuss and verify this issue. Overall, we believe the B-end depends on products + services, while the C-end depends on marketing + channels.
From the perspective of selling expense investment, we selected representative companies with B-end and C-end channel layouts for analysis and found that the selling expense ratios of C-end leaders such as Qianhe Condiment, Tianwei Food, Jonjee Hi-Tech, and Hengshun Vinegar have shown a steady upward trend, while the selling expense ratios of Yihai International, Richen Shares, and Anjoy Foods have continued to decline in recent years. In addition, we selected the proportion of advertising and promotion expenses in selling expenses as one of the measurement criteria, and it can be seen that Tianwei Food has the highest proportion of advertising and promotion expenses in selling expenses, accelerating its "staking out territory" in the C-end market during the industry expansion period. At the same time, Richen Shares, also a representative compound seasoning company, mainly focuses on B-end layout, so its advertising and promotion expenses as a proportion of selling expenses are far below the peer level.
From the perspective of R&D investment, Richen Shares, as a representative enterprise of customized food service seasoning, has both its R&D personnel proportion and R&D expense ratio at high levels among peers. Through continuous new product R&D, Richen Shares develops new flavors for food service customers, thereby creating possibilities for customer development in food service channels. (Note: In Richen Shares' customized food service seasoning operating model, some members of the R&D team act as sales personnel, interfacing with food service enterprises and providing services.)
From the channel perspective, companies with more C-end layout will place greater emphasis on building channel networks to enhance consumer reach. At the same time, companies mainly focused on B-end layout usually experience a rapid increase in the number of distributors during their transition to the C-end.
In summary, we believe that for compound seasoning companies, diversified product development based on R&D is the foundation, providing new flavor development services for food service is an important means of entering the B-end, and brand marketing and channel building are the core paths to expanding C-end market share.
3.3 A Perspective on the Future Competitive Landscape
Ajinomoto of Japan occupies half of the C-end compound seasoning market. According to information from Ajinomoto's official website, Ajinomoto has an extremely high market share in the C-end market. In fiscal 2018, its umami seasoning market share reached as high as 90%, and its market shares in Japanese-style compound seasoning and menu-customized compound seasoning were 57% and 31