Liziyuan is not 'sweet'

Zebra Consumer Chen Xiaojing

It may have been unexpected for Li Guoping, the founder of Li Zi Yuan, that the company's performance has stagnated since its IPO three years ago.

In its early years, the company rose to prominence with its sweet milk products. Now, this "sweet tooth" has become an addiction that Li Zi Yuan can't quit, making it difficult to find new growth drivers.

With 30 years of experience in the food and beverage industry, Li Guoping has repeatedly attempted breakthroughs. He has led the company in launching numerous new products, such as fruit and vegetable yogurt, coconut milk, zero-fat products, and more—all trendy and youthful.

Yet, no miracle has occurred.

Addicted to Sweetness

A few days ago, Fang Jianhua, a vice president of Li Zi Yuan (605337.SH), accidentally bought 2,900 shares during a centralized bidding reduction, resulting in a short-term trade. The company had to issue a clarification announcement on the evening of May 14, gradually putting an end to this absurd episode.

This incident also drew public attention to this food and beverage company. Li Zi Yuan has long relied on dairy beverage products, a strategy that has persisted for nearly 30 years. In 2023, the company's dairy beverage business generated revenue of 1.381 billion yuan, accounting for 98.31% of total income.

The company's dairy beverage revenue primarily comes from sweet milk products, which has raised concerns about market risks. In last year's annual report, the company acknowledged that over-reliance on this product could significantly impact performance.

Today, the dairy beverage market is crowded with major players like Yili, Mengniu, Bright Dairy, and China Want Want, as well as newcomers like Yangyuan Beverage, Chengde Lulu, and Junyao Health, all vying for a share.

Amid this intense competition, Li Zi Yuan faces unprecedented challenges in a market it cannot afford to lose.

From 2021 to 2023, the company's dairy beverage sales were 277,300 tons, 254,900 tons, and 250,700 tons, with year-on-year growth rates of 34.49%, -8.06%, and -1.67%, respectively. Revenue growth rates were 36.64%, -4.82%, and 1.62%.

Notably, last year, the company's dairy beverage inventory surged by 43.13% to 9,583.68 tons, the highest in three years.

Struggling to Find Growth

Li Zi Yuan is not unwilling to change its "sweet tooth" predicament. In recent years, while maintaining its classic sweet milk flavor, the company has introduced products like Li Zi Yuan coffee milk, coconut milk, fruit and vegetable yogurt, lactose-free oat milk, and zero-fat lactic acid drinks. However, none have made a significant market impact.

As a result, the company's non-dairy beverage business has struggled with revenue and profitability. In 2023, flavored milk drinks, composite protein beverages, and other products generated revenues of 8.4919 million yuan, 5.4049 million yuan, and 9.8637 million yuan, respectively, totaling just 1.69% of total revenue. Their gross margins were 7.44%, -2.55%, and 14.81%.

In last year's annual report, the company stated that it would launch aseptic cup-packed juice drinks, sparkling milk-flavored beverages, and fruit juice drinks with pulp in 2024.

To support new product development, R&D expenses increased from 14.154 million yuan in 2021 to 19.3367 million yuan in 2023, with the expense ratio rising from 0.96% to 1.37%.

Over-reliance on a single product has also hindered the company's market expansion.

The company's revenue is heavily concentrated in East China, contributing 782 million yuan, 729 million yuan, and 702 million yuan from 2021 to 2023, accounting for 53.38%, 52.15%, and 50.02% of total revenue, respectively.

Even before its IPO, the company had planned to expand nationally while maintaining its stronghold in East China. Last year, however, its core East China market weakened, while Central and Southwest China saw only single-digit growth. The Northeast and Northwest markets declined sharply. Although emerging markets in South and North China grew faster, their combined share was less than 8%.

Last year, distributor channel revenue reached 1.374 billion yuan, up just 0.59% year-on-year. Meanwhile, the number of distributors dropped by 589 to 2,585.

Like many food and beverage companies, Li Zi Yuan has ventured online, but e-commerce sales growth remains sluggish. Online sales fell 1.38% year-on-year to 40.1638 million yuan.

Stubborn Persistence

Li Zi Yuan went public in 2021, only to fall into the curse of "peaking at IPO."

From 2021 to 2023, the company's revenue was 1.47 billion yuan, 1.404 billion yuan, and 1.412 billion yuan, while net profits attributable to shareholders were 263 million yuan, 221 million yuan, and 237 million yuan—all stagnant or declining.

Li Guoping, a native of Jinhua, Zhejiang, founded Li Zi Yuan in 1994. Over 30 years, the company gained fame with its sweet milk product, but he has failed to replicate that success.

Sweet milk products first emerged in the 1980s and 1990s when fresh milk was scarce due to limited production, processing, and logistics. Dairy beverages became substitutes.

In 2005, Wahaha launched Nutri-Express, which surpassed 20 billion yuan in sales by 2013, becoming a blockbuster product. Other giants like China Want Want, Yili, and Mengniu also launched dairy beverages, some of which became billion-yuan hits.

During the golden age of dairy beverages, these companies capitalized on the "milk + drink" trend, winning consumers with nutrition, taste, and flavor. But as shelf-stable milk spread nationwide, health-conscious consumers found better alternatives.

Li Zi Yuan has chosen to persist, investing in production capacity and 布局 focused on dairy beverages, seemingly convinced the market still has room to grow.

In marketing, Li Zi Yuan lacks standout strategies. Unlike Junyao Health's Weidongli, which emphasizes gut health, or Yakult, which highlights probiotic benefits, Li Zi Yuan relies on nostalgia and the slogan "Fresh and New Li Zi Yuan."

It remains to be seen whether the new endorser, Cheng Yi, can bring any change to Li Zi Yuan.