Ebrun conversation with JD Capital: How to look at restaurant and food supply chain investments in 2023?

2023-04-12

Summary: After three years of the pandemic, in 2023, in the context of gradual recovery of overall consumption, where will the catering and food-related supply chain industry go? How will JD Capital find investment opportunities among them? Recently, Ebrun and JD Capital had a detailed discussion.

Source: Ebrun

Journalist: Yang Li

 The following is the full text: 

Whether it is food and beverage or milk tea and coffee, all industries involved in eating and drinking are showing signs of recovery from the beginning of 2023. However, it is still relatively rational compared to 2020, 2021, and 2019.

Consumption is determined by per capita disposable income, the expectation for economic development, and consumption habits. National Bureau of Statistics data show that the national disposable income of 36883 yuan in 2022, net of price factors, an increase of 2.9% year-on-year. Regarding per capita consumption, food, accommodation and transportation ranked the top three with 30.5%, 24% and 13%, respectively. In terms of consumption, from January to February 2023, the market sales growth rate turned from negative to positive, including total retail sales of consumer goods of 7706.7 billion yuan, up 3.5% year-on-year.

According to IT Orange data, consumer goods investment and financing began to fall sharply in 2022, with 334 investment events, down 45% compared with the previous year. Total financing amounted to only 31.3 billion yuan, down 73% year-on-year and below the level before 2019.

At the beginning of 2023, uncertainty is still spawning major new changes. After the big ups and downs, what new opportunities for entrepreneurship and investment are still available in the consumer industry, especially in the restaurant and food industry? Why are supply chain companies getting more and more attention?

With these questions, Ebrun recently interviewed Chen Wang, Managing Director of the Consumer Investment Department of JD Capital.

1.People’s pursuit of a better life will not change

The direction of category upgrade is still certain

Ebrun: As you can see, what is the pace of recovery in the consumer sector this year?

Chen Wang： Since the beginning of the year, financing has occurred in segments such as coffee, restaurants, prepared dished, snack chains, and dermatological-grade skin care products, but overall consumer industry investment is still on the rational side compared to 2020, 2021, and even 2019. Specifically:

First，over the past three years, consumer investors have experienced a change in mentality from frenzy to calmness and even respect for the consumer track, reshaping their understanding of this track and further seeing the industry’s laws.

For example, the new channel such as Tik Tok and RED have brought certain traffic dividends, giving rise to some new brands that rely on financing and investment flow to become large-scale quickly, but their product power is insufficient, and they do not capture a share of the market and occupy the minds of consumers with reasonable gross margins, which is reflected in poor repurchase, the need for continuous marketing to pull new, their blood-making capacity is weak, and cash flow from operating activities is not enough to cover expenses.

This year，investors are treating such projects more rationally, carefully screening whether their growth is marketing-driven or whether the product itself is superior.

Second，people are paying more attention to the consumer upstream supply chain than ever.

The reason is that, firstly, downstream brands, especially new consumer new brands, are chasing some new demographics and new categories whose market penetration is not yet high and whose certainty has not yet been fully validated.

Secondly, a track in which no matter brand runs out downstream, it will grow with more certainty for the upstream head supply chain companies, as long as the market grows.

Once again, the trend of standardization and mechanization of a downstream Chinese restaurant and bakery brands, and the problems they face, such as rising labor and rental costs, are forcing the upstream supply chain to develop rapidly.

Third，transaction valuations are also gradually returning to rationality.

The market generally recognizes that the growth and development of consumer companies have their laws, product polishing, channel construction, supply chain improvement, and even the establishment and consolidation of brand intelligence, all need long-term cultivation and iteration. Moreover, even the first category of enterprises, can not do “winner takes all.”

Therefore，the capital rush easily gives large dozens or even hundreds of times the PE of the partial Internet play in the consumer field does not apply.

Ebrun: What segments and characteristics of projects will JD Capital pay more attention to in the F&B competition?

Chen Wang：At the downstream end, we still focus on large categories with higher certainty and will look more at spicy hotpots, fried skewers, coffee, etc., which have a higher degree of standardization and broad spectrum. As well as regional categories that continue to increase penetration and expand rapidly nationwide, such as pre-packaged snail noodles. And continue to focus on some new categories that meet future upgrading trends, such as new hot brine, coconut-based plant protein drinks, etc.

At the upstream end, we will continue conducting in-depth research and focus on segments such as prepared dishes, compound condiments, and frozen bakery.

For example, the downstream pattern of the baking industry is relatively fragmented, and in the past, many stores would have a ready-to-bake area with more staffing investment and low efficiency. We found through our research that the survival of most chain stores is not ideal. Of the more than 500000 bakery stores in China, less than 40% have survived for more than four years.

The upstream companies that provide frozen baked semi-finished products bring new imagination to the downstream stores: they no longer need a strong R&D capability or much staffing for on-site production, and at the same time, they can eliminate the need for store ready-to-bake area, which in turn greatly improves the single-store model.

In particular, for small and medium-sized chains and single bakery stores, the ability and economy of their central factory are not enough. The scale, research, and development advantages of frozen bakery suppliers to provide semi-finished products is the best solution, both to reduce storage costs and broaden the sales category.

Large bakery chains, whose non-core products are also motivated to be supplied by frozen bakery suppliers.

In addition, the increase in baking consumption in scenarios such as supermarkets, coffee and beverage stores, and the maturity of frozen baking companies have provided better solutions for these non-professional baking locations.

Currently, the secondary market is valuing the head companies in the upstream supply chain of the frozen bakery at a relatively high level. We will be more optimistic about frozen bakery projects that can continuously develop and build explosive products, scale, and cost advantages and achieve a nationalized factory layout.

Ebrun: In the restaurant industry, JD Capital invested in the star company “Juewei Food.” What is the logic behind your thinking from cold brine to hot brine?

Chen Wang：Category upgrading and differentiation are major themes in consumer investment. Our focus will also change with the dynamics of the original category development.

The new hot brine is a new category upgraded from the cold brine represented by Juewei, which is an extension of the table brine products, mainly in the way of fresh brine/semi-fresh brine in stores, with better taste and more freshly baked, steaming hot feeling to consumers, creating a better product experience.

Hot brine has formal and casual attributes, from the consumption scene and time to traditional cold brine breakthroughs. Hot brine stores are currently mainly in the commercial district stores, store area than the traditional cold brine stall-type larger, generally with dine-in location, per capita consumption and single store efficiency are higher than the traditional cold brine brands.

From the head brand, the hot brine single-store investment is higher, but the payback period is shorter. At present, the hot brine industry is still in the early stage of development. Most of the brands were established after 2016, there has yet to be a national brand of a thousand stores level, and the industry has a lot of room for growth.

2.Who can help standardize and chain restaurants

Who is more valuable in the future

Ebrun: A few years ago, “chain” was the keyword in the restaurant industry. Nowadays, does this word still apply?

Chen Wang：I believe the “chain” still applies and needs long-term development. Currently, there are several reasons for the low chain rate of Chinese restaurants:

First, Chinese restaurants are characterized by many flavours and an overabundance of product SKUs that are difficult to mass produce, making mechanization more difficult.

Second, the supply chain of China’s restaurant industry is still in its infancy due to infrastructure, development history and other factors, which is not enough to incubate a strong supply chain company like Sysco, and it isn’t easy to support many restaurant companies to do large-scale mechanization. It isn’t easy to support many restaurant companies to do large-scale chains. It is extremely challenging for downstream brands to keep their products, operations and management actions undeformed during off-site expansion.

The development of an industry is the simultaneous development of each chain vertically. If one link does not keep up, the whole industry will also lag.

Now, brands downstream of F&B are eager to expand their scale through mechanization and standardization, which will also force the supply chain that pulls each other to keep pace to provide better services, such as improving fulfillment, logistics and distribution and product quality and even technology.

For example, standard products for hot pots, including fish balls and beef balls, are relatively easy to standardize and have emerged as great supply chain listed companies, such as Anjing Food.

However, in technology, Chinese cuisine’s semi-finished products, have not been a great breakthrough. Frozen products restore the taste but still can not reach the level of ready-made.

Currently, the restaurant industry is in the stage of trying to evolve and break the game in all chains, and unlike making chips, cooking does not have to involve very difficult technology. After the further development of breakthroughs in food and beverage supply chain companies in categories such as prepared dishes and compound seasonings, the upstream and downstream linkages will take the chain rate of the food and beverage industry to another level.

Ebrun: Restaurant “chain” trend, what will stir industry?

Chen Wang：Behind “mechanization” is standardization. Whoever can help the downstream to achieve standardization and mechanization around food and beverage characteristics will be more valuable in the future.

Prepared dishes, for example, contain two elements: ingredients and compound seasoning. Compound seasoning, means eliminating complex cooking steps and fire mastery making dishes and achieving efficiency and standardization in the production of dishes. Currently, compound seasoning is one of the growing segments in seasoning.

The further chain development of ready-made tea drinks also requires the improvement of integrated equipment such as upstream tea-making machines, reducing stores’ reliance on many employees ready-made to ease labour cost anxiety.

Ebrun: What are the characteristics of compound seasoning projects that JD Capital is more interested in?

Chen Wang：Because the market penetration rate is not yet high, the current completely To C compound seasoning brands, whether in terms of volume or profitability, are still in the primary stage.

We are more concerned about compound seasoning companies with the To B focus. These companies provide raw materials to downstream restaurants or food processors, have larger volumes and are more mature, with certainty for future development.

To B compound seasoning companies can be divided into two categories:

One category focusing on customization is to provide downstream restaurant customers with a customized one-dish flavor profile. The advantage of this type of company is that it has strong flavor development capabilities and can customize for most companies. The disadvantage is that each flavor or product can only be sold to one customer, the process and equipment are difficult to reuse, and the investment in R&D and staffing costs are high, making it difficult to achieve economies of scale.

In contrast, we are more concerned about another category of companies: those with some customization capability and a high percentage of standardized products. This type of standardized product is not only sold to most restaurant customers but also serves the C-suite. After the company makes a product and gets validated, it can continue to go to B and C to sell and form a strong scale effect. As the volume grows, its production, operation and other aspects of fixed costs will continue to be optimized.

Ebrun: Supply chain companies are more hidden because they are not C-side-oriented, so how do you dig and judge?

Chen Wang：We will start from the downstream brand companies we have invested in and are familiar with, sort out their quality suppliers in detail, and combine recommendations from resources within the industry to explore relatively hidden supply chain projects.

In terms of project judgments, we then base them on several dimensions:

First, it is important to distinguish between large-scale distribution-oriented companies that mainly provide substitute picking services and production-oriented companies with deep processing capabilities. The former is difficult to form deep barriers and has a low gross margin. We will give priority to the latter. It is in a relatively advantageous position in the industry chain of its raw material cost advantage, customization capability, R&D and production process iteration to provide differentiated products that create higher value and higher gross margins.

Then, look at the comprehensive customer feedback, whether doing brand or supply chain business. The most basic is product power. The product being recognized by customers is the foundation of its existence. We then make judgments based on comprehensive factors such as customer repurchase, order addition, evaluation, etc.

Finally, compare the hardware level of such companies horizontally, including factory size, process flow, technology introduction and equipment advancement, and even R&D personnel background and R&D capability. From here, go one step forward and make a judgment from the source.

For example, in a compound condiment project compared with the listed company Tianwei Food, if the gap is the ability to develop explosive products, it isn’t easy to catch up in the short term. If the gap is old equipment, and there is no core obstacle to the availability of new equipment, it can be solved by financing the equipment replacement.

We believe that the company’s ability to develop and build explosive products, scale advantage, production cost, and the helmsman’s understanding of downstream customers and the sales team’s ability to expand customers are the core.

Ebrun: If the business is already very mature, what are the reasons for equity financing?

Chen Wang：This question can be broken down to look at the:

First, some companies are growing, but their profits are growing slowly, and they need to build new factories to scale up their production capacity, which is one of the main uses of financing money for many supply chain companies.

Second, the company's factory has been built, and the production capacity appears to be phased overflow. Research and development funds are also enough, but such companies are in the industry segment, and the future market size and the competitive landscape will change greatly. For example, in frozen bakery, the first few years of development are very slow but gradually accelerated to the critical growth point in the past few years. And pre-prepared dishes, currently relatively slow development, once the key point breakthrough, will also develop very quickly.

If the company does not lay out in advance, once the wind comes, and then builds a factory for one or two years at the earliest, can not keep up with the pace, it will take a lot of effort to gain market share. In this case, although the company is currently not short of money to keep up with the pace of industry development in the future to grab territory with competitors, but also needs to finance money.

In addition, some mature companies are facing growth bottlenecks in their main business and need equity financing to expand expanding their second growth curve actively.

3.Supply Chain vs. Brand Investment

What are the differences?

Ebrun: What are the differences in investment between the upstream supply chain and the downstream brand side?

Chen Wang：They are two business models. The upstream supply chain is more of a To B business, and the downstream restaurant chain is more of a To C or brand business.

The customers of the To B business are not consumers but B-side restaurant chains or food processing companies. This requires the former to provide products with some added value compared to the latter’s past products.

Compound seasoning companies, for example, provide customers with the added value of making each dish without adding different seasonings to the process, thus reducing the impact of the chef’s skill or mood on the texture of the dish and also reducing the size of the back kitchen, while still achieving a uniform taste. This solves the problem of difficult consistency in the taste of dishes encountered by many chain stores in the expansion process.

For To B supply chain enterprises, whether the scale and cost have advantages, the existing customer acquisition ability, the actual customer retention rate, renewal rate, and whether there is room for future optimization are important indicators for us to make judgments.

Taking Anjing Food as an example, its scale of frozen rice, noodles, and meat products has now achieved industry leadership and brought the highest production efficiency. Because it provides relatively standard products, it forms a positive flywheel effect: the larger the scale, the lower the production cost. Therefore, it can still achieve better quality at a better deal or the same price. In this case, customers are certainly willing to work with it.

For To C caterers, we will focus on these dimensions:

First, whether the category has a broad spectrum, strong social, and high standardization qualities.

Second, whether the company’s strategy and development direction align with the industry’s future long-term development trend. On this basis, we then judge based on factors such as product power, consumer recognition, and service environment.

Again, from the point of view of cost control and store management, can the same products achieve higher profits per piece at a lower cost? If the single-store model has been polished and mature, does it have the ability to expand multiple stores across regions and the ability to manage them? If only individual stores do good business, their replication ability is not up to standard.

There are also similarities in judging To B and To C companies.

The various details of the business are similar to various indicators, such as a person’s height and weight. After investors look at it, they must also look beyond the corporate team’s knowledge and understanding of the industry. For example, whether they can grasp the key points of the industry, category survival, and what will happen in the future.

In addition, both need to understand and capture the rhythm of the capital markets. Both primary and secondary markets have become increasingly volatile and violent over the past few years. It is crucial that those at the helm of a company can accurately understand the industry trends when to take a little more financing and when to be more rational.

Ebrun: Who is the higher price for the two types of companies mentioned above?

Chen Wang：It is impossible to say which price is higher. Whether in the primary or secondary market, the valuation is given to a combination of the market space in its industry, future development trends, growth rates, the competitive landscape and the company’s position holds in the industry.

Moving forward, whether the company’s development is in line with the changes in the industry and whether it can maintain its current advantages or even expand them in the future, thus grabbing a larger market share. If a company, which happens to be in a fast-growing industry with a lot of space in the future, and at the same time has relatively obvious advantages and a high moat, can foresee that it can fully enjoy the rapid growth brought by the dual role of industry growth and the accumulation of its competitive advantages in the future, it will win a higher valuation.