The latest research report on China's frozen food industry has been released

This is an in-depth report on the development of the frozen food industry in 2019. It mainly discusses three aspects: the general situation of the frozen food industry, frozen food category analysis, and prospects for frozen food enterprises, providing an in-depth interpretation of industry development.

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|Overview of the Frozen Food Industry|

China's consumption is still low, and there is still great room for growth

Changes are taking place on both the supply and demand sides

I. Development History: The Frozen Food Industry Has Entered the "Mobile Internet Era"

China's frozen food industry emerged in the 1980s and 1990s, and with the progress of the times and the improvement of living standards, it has achieved rapid development. Looking back at the development history of China's frozen food industry, it can be roughly divided into four stages: 1) Industrial Era; 2) Commercial Era; 3) Internet Era; 4) Mobile Internet Era.

Since 2015, the frozen food industry has officially entered the "mobile Internet era." In this era of "traffic is king," it requires solving personalized needs while providing high-standardized ingredients, not only breaking through its own demand bottlenecks but also meeting the needs of the catering industry's scale, process, and standardized material procurement. Catering standardized supply Brands are developing rapidly.

II. Current Situation: Compared with developed countries, China's per capita consumption of frozen food is still at a relatively low level.

With its convenience and industrial characteristics, frozen food has become an important part of the food industry in developed countries. With the acceleration of the pace of life and the finer division of social labor, the demand for frozen food is also more vigorous:

In terms of per capita consumption, the per capita consumption of frozen food in the United States reaches 60kg/year, 35kg/year in Europe, and 20kg/year in Japan. In contrast, China's per capita consumption is only 9kg/year, which is significantly lower than that of developed countries;

In terms of the variety (category) of frozen food, the United States, Europe, and Japan maintain more than 2500 varieties, while China only has 600 varieties, which is also a gap compared to developed countries.
 

III. Development Space: Changes are taking place on both the supply and demand sides, and there is considerable room for development in China's frozen food industry

Long-term trend: Under the socialization of housework, the increase in frozen food usage is a long-term trend.

With the acceleration of the pace of life, the trend of socialization of housework is becoming more and more obvious. Comparing Japan, we can find that in the process of socialization of housework, the consumption of takeout food and frozen food is also increasing year by year. Therefore, it can be seen that the process of socialization of housework is the main driving force for the development of convenient catering forms such as takeout food and frozen food.

1. Demand side: Steady release of household demand, obvious mismatch and rapid expansion of catering demand.

Household demand: The decline in young people's cooking skills is a major factor driving the development of convenient foods such as frozen food.

Catering demand: Compared with the household channel, the catering channel is an important channel for frozen food. In fact, from the experience of Japan, where the industry is relatively developed, the catering channel is the main force in consuming frozen food production capacity.

In terms of quantity, of the 1.6 million tons of sales in Japan's frozen food industry in 2017, 41% was for household use (household demand), and 59% was for business use (catering, etc., demand);

In terms of amount, of the 718 billion yen sales amount, 42% was for household use, and 58% was for business use.

If Japan is used as a reference system, then the proportion of the frozen food industry in household and catering channels should be 2:3, and food service channels such as catering are the main sales channels for frozen food.

So what is the approximate channel structure of China's frozen food? According to our analysis and calculation of different categories, it is estimated that the structure of catering: household is about 3:7.

According to IBIS data, in China's frozen rice and noodle food, supermarkets account for 61%, small retail terminals account for 23%, and other channels only account for 16%. Considering the market size of frozen rice and noodles of 64.7 billion yuan, it is estimated that 84% of frozen rice and noodles are supermarket channels (i.e., household channels, corresponding to a market size of 54.3 billion yuan), and 16% are catering channels (assuming that other channels are all catering, corresponding to a market size of 10.4 billion yuan);

According to the channel data of a leading hot pot ingredient company (general food manufacturing companies mainly use distributors to access downstream channels, here it is assumed that the proportion of distributors' investment in catering is 70%), we roughly calculated that the proportion of catering: household is 62%/38% (the leading data is more representative). Considering the market size of frozen hot pot ingredients of 41.1 billion yuan, it is estimated that 24.7 billion yuan of frozen hot pot ingredients are sold through catering channels, and 16.4 billion yuan are sold through household channels;

Other categories assume that catering and household each account for 50%. Based on comprehensive calculations, we can roughly estimate that the current ratio of catering channels to household channels in China's frozen food is 36%:64%. From this result, there is still considerable room for adjustment in China's frozen food in catering channels.

2. Supply side: Cold chain progress + product innovation, industry changes are taking place.

The rapid development of cold chain transportation has increased the radiation radius of the frozen food industry. Nowadays, fresh food e-commerce and fruit and vegetable home delivery have become popular choices in the current consumer market, and have also driven the rapid development of the domestic cold chain logistics market.

According to statistics, in 2018, the scale of China's cold chain logistics market has reached 303.5 billion yuan/+19%, and it is expected that the scale of cold chain logistics will still maintain a growth rate of around 20%;

Since the cold chain logistics industry in China still has great development space, many giant companies have begun to deploy cold chain logistics, especially e-commerce and express delivery companies that respond quickly to the logistics market, such as SF Express and JD.com.

With the rapid development of cold chain transportation, the sales radius of frozen food can be expanded, and the coverage area can be further improved.

Improved innovation capabilities drive category explosion and quality upgrades. After the "fight" of homogenization competition in the early stage and the continuous improvement of frozen food technology, frozen food enterprises have begun to continuously improve their product innovation capabilities and embark on a differentiated path;

On the one hand, there is an explosion of new categories. For daily consumer goods such as frozen food, product innovation is an important means of generating new demand. From the annual selection of hot pot ingredient bestsellers in 2019, it can be seen that there are more than 20 award-winning categories, and more and more Brands are beginning to rely on characteristic new products and bestsellers to gain market share;

On the other hand, there is an upgrade in quality. The quality upgrade of frozen products is more in line with the current trend of consumption upgrades. Taking frozen hot pot ingredients as an example, in recent years, high-end fish paste products have begun to show advantages, such as Haixin's "Fish Extreme Brand", which is a representative of high-end products on the market. In 2017, the revenue of Fish Extreme products reached 120 million yuan, with a compound annual growth rate of 33.5%, and a gross profit margin as high as 50.6%. There is also a huge space for high-end products.

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|Frozen Food Category Analysis|

Large scale of noodles and rice, hot pot ingredients are in the limelight, and pre-made dishes have high potential

Currently, the two major categories with larger market share are frozen noodles and rice and frozen hot pot ingredients. In addition, major leading companies have begun to target the catering channels and launched frozen dishes, which can divide China's frozen food into three major categories: frozen noodles and rice, frozen hot pot ingredients, and frozen dishes.

According to the industry life cycle (combined industry growth rate and market concentration), we believe that these three categories are at different stages of the industry life cycle:

Frozen noodles and rice are in a relatively mature stage, with a large industry scale, obvious advantages of leading Brands, and high market concentration;

Frozen hot pot ingredients are in the growth stage, with faster industry growth than noodles and rice, and leading Brands are steadily increasing their market share;

Frozen dishes, as a newly emerging category, are in the market development stage and have high potential.

I. Frozen Noodles and Rice: The Largest Scale, Prominent Leaders

Market Scale: In 2017, the market scale of frozen noodles and rice reached 64.7 billion yuan.

Due to data availability, we use output value here to measure the market size. According to data from the National Bureau of Statistics and Zhongshang Industry Network, in 2017, the market size of frozen noodles and rice in China was approximately 64.7 billion yuan/+7.1%, and the 5-year CAGR was 2.5%, showing the characteristics of the mature stage in the industry life cycle.

Although the growth rate of the frozen noodles and rice industry has slowed down, in recent years, there have been many new categories that have become big single products, such as hand-held pancakes, fried dough sticks, and Cantonese dim sum. The industry is gradually showing obvious category differentiation, and new categories are beginning to drive the industry trend to rise.

Application Scenarios: Traditional staple food substitutes.

Broadly speaking, staple foods refer to foods that are consumed frequently in people's daily three meals, providing people with their main energy and nutritional sources. Traditional staple foods in China include rice, porridge, steamed buns, noodles, and rice noodles. With the acceleration of the pace of life, more and more people are beginning to choose frozen noodles and rice as substitutes for traditional staple foods.

Taking Henan Province, where frozen noodles and rice enterprises are concentrated, as an example, 25% of residents buy industrialized staple food products from supermarkets, 31% buy staple food products from workshops in the market, and 44% make staple foods at home, proving that only a quarter of residents buy frozen staple foods from supermarkets, and there is still room for improvement.

Main Categories: The main frozen noodles and rice products circulating in the market include frozen glutinous rice balls and dumplings, among which glutinous rice balls and dumplings are the two main categories, accounting for 31.6% and 30.8% of frozen noodles and rice products, respectively.

With the increase in innovation and the upgrading of consumer demand, the categories of frozen noodles and rice are also showing a trend of blooming flowers, and new sub-sectors are constantly emerging big single products, such as hand-held pancakes, custard buns, and brown sugar steamed buns. We believe that traditional frozen noodles and rice have almost reached saturation, and the subsequent growth of the industry will be driven by the continuous introduction of new big single products in sub-sectors, and the differentiation will become more obvious.

The market structure of frozen noodles and rice is basically stable, with a CR3 market share of nearly 64%, and a high market concentration. Because frozen noodles and rice are currently mainly positioned as staple food substitutes, they are more suitable for stocking in supermarket channels. Large Brands such as Sanquan and Siansi, through years of cultivation, relying on Brand recognition and channel advantages, have gradually built certain barriers, and the overall market structure of frozen noodles and rice is basically stable. The market shares of the top three, Sanquan, Siansi, and Wanchai Ferry, are 28%/19%/17%, respectively, and the three leading companies have already accounted for 64% of the market share.

II. Frozen Hot Pot Ingredients: The Hottest Track in the Frozen Food Industry

Market Scale: In 2017, the market scale of frozen hot pot ingredients was approximately 41.1 billion yuan.

According to data from the National Bureau of Statistics and Zhongshang Industry Network, in 2017, the market scale of frozen hot pot ingredients (including frozen fish paste and frozen meat products) in China was approximately 41.1 billion yuan/+11.4%, and the 5-year CAGR was 12.6%.

Application Scenarios: Catering + Convenience Stores + Family, richer application scenarios than frozen noodles and rice.

Frozen hot pot ingredients are one of the few categories in frozen food that have the attributes of leisure food. In addition to being widely used in the hot pot industry, they can also be used in mala tang, oden, barbecue, and other catering forms, with very rich application scenarios. The development of these application scenarios has driven the demand growth of frozen hot pot ingredients, making it possible for the penetration rate of frozen hot pot ingredients to further increase.

Main Categories: The frozen hot pot ingredients circulating in the market mainly include two categories: frozen fish paste products and frozen meat products, of which frozen fish paste products account for about 55%, and frozen meat products account for about 45%.

The market structure of frozen hot pot ingredients is still in the integration stage, the market structure is relatively dispersed, the concentration is low, and the rise of Brands is expected to become the theme of the next stage. Compared with frozen noodles and rice, the market structure of frozen hot pot ingredients is relatively dispersed. Among them, Anjing, as the absolute leader of frozen hot pot ingredients, has a market share of about 9%, Haixin and Huifa have market shares of 3% and 1.5%, respectively, ranking 2nd and 3rd, and the CR3 market share is only 13%.

We believe that frozen hot pot ingredients are currently the hottest track in frozen food, mainly due to the following points:

☉ Frozen hot pot ingredients have a fresh and salty taste, which can be well applied to spicy catering scenarios, meet the taste habits of most people, and have a large potential consumer population;

☉ Taking the hot pot industry as a good track to enjoy the vast space of the hot pot market;

☉ The rapid development of convenience stores brings new incremental demand for frozen hot pot ingredients.

III. Frozen Pre-made Dishes: The Next Blue Ocean of Frozen Food

Let's take Qianwei Central Kitchen, an early entrant, as an example. In 2008, Nian Suan Food's fried breadsticks began cooperating with KFC, ushering in the era of explosive popularity for restaurant-style fried breadsticks. In 2012, Nian Suan Group established an independent company, Qianwei Central Kitchen, to begin developing the cold food and restaurant distribution market, achieving sales exceeding 100 million yuan in its first year. Currently, Qianwei Central Kitchen's restaurant clients include KFC, Pizza Hut, McDonald's, Zhen Kung Fu, Dicos, and Yonghe Soy Milk, among others.

The success of Qianwei Central Kitchen demonstrates the enormous market for frozen pre-prepared dishes exclusively supplied to the restaurant industry, attracting the attention of investors.

As a pioneer in China's frozen food industry, Qianwei Central Kitchen has maintained a 20%-30% annual growth in transaction volume and total profit since its establishment. In 2017, its sales reached 610 million yuan, with a net profit of nearly 47 million yuan. The success of Qianwei Central Kitchen signifies the vast market potential of frozen pre-prepared dishes.

In December 2018, JD.com and Juewei Foods jointly invested 100 million yuan in Qianwei Central Kitchen, with a total valuation of 1 billion yuan, reflecting the capital market's attention to frozen pre-prepared dishes.

Other leading domestic frozen food companies are also developing the frozen food market.

In 2016, Sanquan Foods established its subsidiary, Zhengzhou Quick Kitchen, to develop the domestic restaurant market for frozen dishes. In 2018, the company's restaurant channel revenue reached 560 million yuan (+45.9%), accounting for 10.1% of total revenue and becoming a significant revenue contributor.

At the end of 2018, Anjing Foods adjusted its business strategy, proposing a "three-pronged approach, focusing on the restaurant industry," and launched a sub-brand, "Frozen Food Gentleman," specifically targeting restaurant ingredients, thus entering the restaurant channel. Current main products include tempura fish, tempura shrimp, and dried bean curd sheets.

Frozen pre-prepared dishes are currently in their early stages of development, with a relatively small market size. However, relying on the vast restaurant market, frozen pre-prepared dishes enjoy enormous development potential and have become a track that leading frozen food companies are competing to enter, representing the next blue ocean market for frozen foods.

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|Frozen Food Company Outlook|

Looking ahead, what kind of companies will stand out?

We have already learned about the development prospects and driving factors of frozen foods and major frozen food categories. Next, let's discuss which companies are expected to stand out in the wave of industry development.

A. Short-term: Layout of the blue ocean of restaurant channels

With the increasing demand for semi-finished food ingredients from the restaurant industry, restaurant channels will become a new blue ocean for frozen foods, providing new development opportunities for the frozen food industry. In our view, the current layout of frozen food companies in restaurant channels is timely.

1. The restaurant industry market is vast, and the food supply chain enjoys a trillion-yuan market space.

1) People's rigid demand for food has created a vast market space for the restaurant industry, maintaining a stable growth rate. In 2018, China's restaurant industry revenue reached 4.2715 trillion yuan (+9.0%), maintaining a growth rate higher than social retail sales since 2015.

2) The vast market of the restaurant industry has driven the development of the food supply market. According to statistics from iiMedia Research, the food supply chain is expected to enjoy a trillion-yuan market space.

2. The explosion of food delivery has led to a continuous increase in the demand for rapid response food supplies.

Data shows that in Q4 2018, the overall transaction volume of China's food delivery industry reached 140.6 billion yuan (+107.7%), maintaining a growth rate exceeding 100% since 2016. The explosive growth of food delivery has introduced more and more customer traffic and orders to the restaurant industry.

In addition, the rapid growth of food delivery orders and the demand for shorter delivery times mean that food delivery restaurants urgently need food supplies that can respond quickly, which also provides development opportunities for frozen foods.

3. Cost pressures require frozen semi-finished products to save costs.

The prices of labor, rent, and raw materials in the restaurant industry are constantly rising, and cost pressures are squeezing the profit margins of restaurant businesses. Therefore, more and more restaurant businesses are starting to try using frozen pre-prepared semi-finished products to replace some labor/rent, in order to control costs.

B. Long-term: Adapt to changing habits and grasp demand-side trends

Today, under the general trend of consumption upgrades, traditional frozen products can no longer meet the ever-changing consumption needs of consumers. This means that to achieve per capita consumption growth in the future, it is necessary to rely on constantly updated new product categories. Therefore, in order to grasp this consumption trend, excellent frozen food companies should possess two major capabilities: strong new product development capabilities and a rich product portfolio and brand advantages.

1. Strong new product development capabilities

Under the trend of consumption upgrades, consumers' demand for differentiated products is increasing. Therefore, whether for frozen noodles and rice with a relatively concentrated market share, or for frozen hot pot ingredients whose market share is still in the integration stage, new product development capabilities are the core competitiveness to meet current consumption trends.

Anjing's example shows that new products contribute significantly to overall revenue growth. In 2015, the company's new frozen hot pot ingredients contributed 48.1% to revenue growth, and frozen noodles and rice even reached 71.2%. Therefore, whether in stock reshuffling or incremental expansion, companies with strong new product development capabilities will be able to maintain strong competitiveness.

2. Rich product portfolio and brand advantages

Consumers' consumption habits and tastes change rapidly, which also brings great uncertainty to the life cycle of frozen products, and the market will move towards a more segmented and differentiated pattern. In order to maintain stable and sustainable long-term competitiveness, frozen food companies need to have a rich product portfolio and product matrix:

In categories that have already formed a certain market scale (such as frozen noodles and rice), they must have brand advantages to ensure the stability of market position and profitability (laying the foundation);

In areas where a stable market has not yet been formed (such as frozen dishes), continuously launch new product categories to meet the needs of new markets and satisfy consumers' changing consumption habits (achieving growth). In a constantly changing market environment, only by having a rich product portfolio and brand advantages can companies maintain stable and long-term competitiveness through product category rotation, avoiding being a "flash in the pan".

Source: Orient Securities