Special report on pet industry: discussion on breakthrough path of domestic pet food enterprises

Discussion on the breakthrough path of domestic pet food enterprises

With another round of pet enterprises coming into the market, the substantial expansion of production capacity of staple food and the slowdown of the growth rate of online channels relied on by emerging brands, China's pet food industry may be at the starting point of pattern improvement. The improvement of the pattern is not achieved overnight, but also needs to be led by competitive leading enterprises. We learned from the development laws of the pet industry in the United States and Japan, and summarized three elements of the rise of high-quality enterprises: 1. Have high-quality production capacity, so as to better control product quality and be able to carry out research and innovation of product concepts; 2. Pay attention to marketing and channel laying, especially offline channels; 3. Multi brand strategy.

The pattern of domestic pet food industry may be improved. How can the leading enterprises break through?

China's pet food industry may be at the starting point of pattern improvement, mainly due to the following reasons: 1. A new round of pet industry companies' listing tide begins, and China's top pet industry enterprises will impact the listing in the next few years. With the help of capital, the gap between the top enterprises and other domestic brands in terms of comprehensive strength may be further widened; 2. The head pet food enterprises will raise funds to expand production substantially after 2021, mainly focusing on the production capacity of high-quality staple food facing the domestic market. It is expected that the market for middle end staple grain products dominated by domestic brands will be more competitive, and small and medium-sized brands may be more difficult to survive; 3. The investment amount of the primary market in the pet industry has also declined, and the growth rate of the online market on which a large number of new brands rely in the early stage has also slowed down. The existing brands compete in the market, and the expansion of production intensifies competition. The industry may usher in a reshuffle period. The improvement of the pattern is not achieved overnight, but also needs to be led by competitive leading enterprises. We learned from the development laws of the pet industry in the United States and Japan, and summarized three elements of the rise of high-quality enterprises: 1. Have high-quality production capacity, so as to better control product quality and be able to carry out research and innovation of product concepts; 2. Pay attention to marketing and channel laying, especially offline channels; 3. Multi brand strategy.

Domestic substitution will reach the middle level, and the industry pattern may be improved

The 1990s was the enlightenment period for the development of China's pet food industry. With the increase of the per capita income of Chinese residents, pet groups began to emerge. In 1992, the China Small Animal Protection Association was established, marking the formation of the domestic pet industry. After 1993, foreign pet food companies such as Mars and Nestle began to enter China, and the first batch of offline pet stores in China began to appear in first tier cities. After 2000, the industry began to develop preliminarily. At present, most of the major pet food production enterprises in China were established at this stage: in 2002, Zhongchong and Petit were established successively, and in 2005, Fubei Pet was established; In 2006, Guaibao Pet was established. In addition, pet consumption began to spread to low-end cities, and professional pet hospitals began to develop.

Since 2011, China's population structure has also changed, and the increasing demand for companionship has promoted the rapid development of the pet industry as a whole. This period is also a golden period for the development of domestic brands. The rapid increase of e-commerce channel penetration has brought precious opportunities for domestic brands to overtake overseas brands. Compared with the limited shelves of offline channels, the flow of online channels is more dispersed, giving more opportunities for minority brands to display. Many domestic brands are based on the rise of cost-effective, occupying the middle price belt market. Foreign brands take the lead, domestic manufacturers compete homogeneously in the mid market, and the industry pattern is relatively decentralized.

At present, China's pet food industry may be on the starting point of pattern improvement:

1. A new round of pet industry companies will be listed. The top several pet industry enterprises in China will be listed in the next few years. With the help of capital, the gap between the top enterprises and other domestic brands in terms of comprehensive strength may be further widened. The last round of centralized listing of pet industry companies occurred in 2017, when Zhongchong Shares and Petit Shares were listed through IPO. Since 2021, another round of IPO and listing of companies in the pet industry has started. Yiyi Shares and Luc Shares will be listed in 2021 and 2022 respectively. Yuanfei Pets will also meet in May 2022, and Tianyuan Pets, Fubei Pets and Guaibao Pets are also in the process of listing;

2. The head pet food enterprises will raise funds to expand production substantially after 2021, mainly focusing on the production capacity of high-quality staple food facing the domestic market. It is expected that the market for middle end staple food products dominated by domestic brands will be more competitive, and small and medium-sized brands may be more difficult to survive. Guaibao Group and Fubei Pet will submit the prospectus (application draft) for listing in 2021, while Petit and Zhongchong will announce the plan for convertible bond issuance in May 2021 and March 2022, and their investment projects are mainly main grain and wet grain projects. Among them, the capacity of Zhongchong is expanding significantly, and its domestic product focus is shifting from wet grain to dry grain+wet grain. This financing will expand the production capacity of 60000 tons of dry grain, 40000 tons of wet grain and 2000 tons of freeze-dried grain; The investment fund raised by Petty's shares in this bond conversion will be invested in the expansion of 30,000 tons of high-quality wet grain project in New Zealand, and the expansion of dry grain production in Jiangsu Kangbei production base (50,000 tons of wind dried grain, frozen dried grain and mixed grain in total). The company's business focus will further shift to the domestic pet market; The fund raised by the IPO of Guaibao Pets will expand the production of 58500 tons of staple food, 3100 tons of snacks and 1200 tons of health products. Before the expansion, Guaibao has a production capacity of 124000 tons of staple food, and after the expansion, it will reach 180000 tons of annual production capacity; Forbes Pet IPO raised funds to expand the production of pet dry food totaling 33600 tons. According to our calculation, the total pet food production capacity of the four companies exceeds 700000 tons, while according to the Feed Industry Association, the pet feed production in China will be 1.13 million tons in 2021;

3. The investment amount of the primary equity market in the pet industry has also declined, and the growth rate of the online market on which a large number of new brands rely has slowed down in the early stage. Under the competition of existing brands, the industry may usher in a reshuffle period. The amount of financing in the domestic pet industry has increased rapidly since 2016, exceeding 6 billion yuan in 2020 and dropping to about 3 billion yuan in 2021. The enthusiasm for investment in the industry has declined, and the number of new brands may decrease in the future. In addition, the growth of online market on which a large number of new brands rely in the early stage has also slowed down. According to Euromonitor, the growth of e-commerce channel sales in the pet food industry has slowed from 35% in 2020 to 16% expected in 2022, The growth rate of offline channels will rise from 4% in 2020 to 7% in 2022.

The large-scale expansion of the production capacity share of the leading domestic manufacturers is not equal to the increase of their product sales market share. The improvement of the pattern requires the leadership of competitive leading enterprises. At present, the pattern of China's pet food industry can be summarized as follows: foreign capital takes the lead, and domestic capital competes homogeneously. We will answer three questions as follows: How is the current market pattern of China's pet food industry formed? What is the path of pattern improvement? What kind of high-quality domestic manufacturers can stand out from them?

What kind of domestic manufacturers can stand out from the industry competition?

Raw materials and formulas determine the product strength of pet food. Brand strength and product strength constitute an important basis for price band differentiation. With high-quality ingredients that are not inferior to overseas brands, Chinese brands have basically occupied the middle price band pet food market. The relative homogeneity of products also makes the competition pattern of mid end products more intense. High end price products with staple grains are dominated by overseas brands, and the market competition is relatively less fierce. The reasons for the formation of this market pattern are:

1. The overseas brands have led the domestic pet food product form and raw material formula, as well as the concept and cognition of pet food, thus occupying the high-end price belt. Domestic manufacturers compete in the middle price band of fresh meat ingredients and freeze-dried ingredients, and their products are relatively homogeneous. As an imported product, pet food's product form (including the shaping of consumer cognition) is mainly led by foreign capital. The continuous research and development of overseas pet food enterprises over the years has also constantly introduced new concepts into the pet food industry. From the early staple food, to the freeze-dried and air dried added food with higher meat content, to the natural food with fresh meat as the main raw material, and the prescription food for health problems, overseas brands led the iteration of the concept of pet food. The leading role of overseas famous brands in products is also evident in the raw materials of products. Pet food ingredients pursue high meat quantity, fresh quality and little addition. At present, in the middle end price belt staple grain products, most domestic grains are mainly added with fresh meat ingredients and freeze-drying. The relative homogeneity of products also makes the competition pattern of middle end products more intense. Overseas fresh meat grains represented by Longing and Aikena occupy the high-end price belt of staple grains. The raw materials of overseas high-end fresh meat grains come from overseas production areas such as New Zealand and Canada. Consumers generally believe that the quality of overseas fresh meat is higher than that of domestic meat.

2. The overseas market has laid out offline channels earlier and operated for many years. In recent years, the Royal Family has continued to divert staple food through controlling the prescription grain market in the pet hospital channel. Online channels give domestic brands the opportunity to overtake at corners, but the more decentralized traffic patterns also make online competition more intense. In the early stage of industry development, overseas brands entered and occupied offline channels. Compared with domestic brands that are good at cost performance in online channels, overseas brands have created a more stable brand image and price in offline channels. For staple food, a category with strong stickiness and high repurchasing, the explanation and recommendation of offline channel clerks will enhance offline consumers' trust in the brand and guide the subsequent multiple repurchases. In addition, functional grains are diverted to common staple grains. The Royal Family occupies most of the domestic prescription grain market. Prescription grain is usually recommended to consumers by pet doctors, which will establish a more healthy and positive brand image.

We further explain the pattern evolution of the domestic pet food industry, represented by four brands: Royal, Desire, Naughty and Crazy Dog. The key change point is from 2013 to 2014. At that time, the rapid increase in the proportion of domestic e-commerce channels gave domestic brands an opportunity to develop rapidly. The market share of traditional overseas brands represented by Royal declined from a high point of nearly 10%, while the market share of domestic brands represented by Naughty and Crazy Dog increased significantly after 2014. Among them, Naughty balanced the distribution of online and offline channels, while Crazy Dog mainly operated online channels. The online channel pattern was relatively decentralized. After the market competition intensified, Crazy Dog's market share reached a high point in 2019 and declined rapidly, while the market share of naughty brands steadily increased. At the same time, the Royal Family also stabilized its market share by more than 5% relying on offline advantages after being impacted by online channels. The online channel not only gives domestic brands the opportunity to overtake at corners, but also gives overseas high-end brands the opportunity to enter the domestic market. The online channel has attracted a large number of young consumers, more accepting the concept of healthy high-end pet food. The overseas high-end food brands represented by Desire and Aikena have entered the country through online and offline channels since 2015, and the market share has steadily increased.

Under the current market situation of leading foreign capital and homogeneous competition of domestic capital in China's pet food industry, which domestic brands can come from behind? In the American and Japanese markets, Lanjue and Unijia, two late emerging pet food brands, are at the core of product concept innovation and channel control.

In the US pet food market, Mars and Nestle accounted for nearly half of the market share. Lanjue brand was established in 2002. Through focusing on the differentiation route in the field of natural grain, it rose later and was acquired by General Mills in 2018. To sum up the reasons for the success of Lanjue brand, first of all, it created the product concept innovation of "natural grain", and focused on this subdivided category to continuously upgrade the product; The second is to attach great importance to marketing publicity. Before 2010, the company's profits had been negative. During this period, it spent a lot of money on brand building and marketing publicity. Its brand story is very consistent with the product positioning of advocating natural health. At the same time, a number of KOL groups have been organized offline to convey ideas; The third is to attach importance to offline channels. The company enters all stores of Petsmart for sales. After 2015, it will enter the prescription grain market and enter the offline pet medical channel sales.

The Japanese pet food market is similar to that in China. Around 2000, Mars, Nestle and other overseas leaders led the development of the Japanese pet food market. After 2000, Unijia and Inabao, two Japanese local enterprises, emerged. To sum up Unijia's successful experience, first of all, the company's product positioning was clarified after 2008. Following the trend of Japanese pet aging and sub-health at that time, the company focused on product development and promotion in the field of elderly and obese pets; Secondly, depending on the channel advantages of the Group, Unijia Group's main products are human care products, and has firmly controlled the channels of large supermarkets. Its pet products rely on the channel empowerment of the Group to successfully enter the channels of supermarkets in Japan.

Further explore the two elements of product concept innovation and channel control of pet food, both of which are sufficient conditions for the formation of brand power of latecomers. The biggest feature of pet food is the separation of consumers and users, that is, the product strength of pet food may be difficult to be clearly verified, but it can be falsified (which also puts forward high requirements for quality control). The successful innovation of product concept gives the brand a more professional brand image in a certain field, thus competing with the majority of products. On the other hand, channels and brands complement each other. On the one hand, offline channels such as pet stores/pet hospitals with service attributes are good sources of drainage. The product concentration of offline channels is higher than that of online channels, and sales personnel can guide consumers' brand awareness, which is conducive to the promotion of brand strength; On the other hand, for brands, channels attach great importance to the profit margin, price stability and product turnover speed they can provide. Products with strong brand power can have high premium, stable price and strong stickiness, and are more easily recognized by offline channels. Therefore, product concept innovation and channel control are ultimately the pursuit and upgrading of brand power.

As far as the domestic market is concerned, relying on its own high-quality production capacity and product research and development capabilities, the head domestic brands that can adapt to the market trend and control offline channels will be more likely to obtain higher market share in the future. As for staple food, except for fresh food, the product form of overseas pet food (i.e. puffed food, baked food, wind dried food and freeze-dried food) has been widely sold in the domestic market, and there is little room to occupy a higher market share through greater innovation in product form. In terms of the nature of pet food, greater form innovation may be unacceptable to consumers. Therefore, enterprises that can grasp the market trend through R&D and launch conceptual innovation or functional positioning products are more likely to stand out. This requires the enterprise to have high-quality self owned capacity and product research and development capabilities, and be able to track the domestic market pet food consumption trend. On the other hand, high-quality self owned capacity can ensure the stability of product quality control. From the experience of the Japanese market, the two major sub sectors of pet aging and sub-health may become the breaking entry of functional pet food in the future.

The online channel is facing the test of the trend of traffic fragmentation, while the offline channel of the pet industry has a service attribute, showing a relatively rigid channel feature. At the same time, the offline price is relatively stable, which can play a leading role, and the pet enterprises that can widely and deeply layout the offline channel will achieve more stable long-term growth in the future. Although the decentralized form of pet stores in China may be difficult to change, the supply chain system behind it or the integration trend behind it deserve attention. In addition, we should pay attention to the entry of pet food brands into pet hospital channels. Prescription food has a good diversion effect to daily staple food.

Since 2013-2014, the strong rise of e-commerce channels has significantly diverted offline channels. However, the current online shopping platforms are diversified. The rapid growth of Pinduoduo after 2018 has rapidly diverted the traffic to Alibaba and JD's two major integrated e-commerce platforms. The rise of live broadcast e-commerce after 2020 has further diverted the traffic from the integrated e-commerce platform. The operation of the online platform requires a large amount of marketing expenses, and under the current characteristics of online channel traffic, it is difficult for consumers to form stickiness to the product. As we discussed the development of Crazy Dog before, it may be difficult for the pure online brand to continue to grow steadily. In contrast, the flow of offline channels is relatively concentrated, which can play a better role in channeling. Pet consumption has a certain offline service attribute. The offline channels have shown a rigid feature. The decline in the proportion of professional retail store channels has slowed down in recent years, and the rigidity of pet hospital channels is strong, which has always been maintained at about 10%.

There are a large number of offline pet stores in China, and there are no national large-scale chain groups (such as PetSmart and Petco in the United States). The offline operation of brands has certain threshold. At present, Runhe Supply Chain under Xinruipeng Group is trying to integrate offline pet stores from the supply chain level. In November 2021, Runhe United Desire and Aikena launched the plan of "Golden Label Store". While the supply chain system enables stores, the supply chain brand can be promoted and sold offline. It may be difficult to improve the concentration of domestic pet offline stores, but the integration of the supply chain system may also improve the standardization and concentration of goods displayed in stores. Pet hospitals have strong channel rigidity. As far as pet food is concerned, pet doctors usually recommend prescription food as the staple food for sick pets. The voice of pet doctors can usually provide strong quality endorsement for prescription food brands. The Royal brand has deeply laid out China's pet prescription food market. On the one hand, the Royal brand has an extremely comprehensive prescription food matrix. On the other hand, the Royal brand has participated in the establishment of a training system for domestic pet doctors by sponsoring several pet doctor conferences, and promoted the Royal prescription food products to the domestic pet medical system.

In the previous discussion, we got a conclusion: the successful innovation of product concept can guide the brand to obtain differentiation advantages in a specific segment and thus develop and grow. This has led to a high degree of diversification of pet food. Each concept and category can meet a class of people. From the perspective of industry characteristics, the brand concentration may naturally be decentralized. From the perspective of the United States and Japan, where the development of the pet food industry has entered a mature stage, the leading enterprises mostly adopt a multi brand strategy, so the company concentration is far higher than the brand concentration. The multi brand strategy can make the group's R&D, production capacity and channels produce scale effects. In the future, China's head pet food enterprises may also develop into a multi brand matrix through acquisition.

In the U.S. pet food industry in 2021, corporate CR5 and CR10 will reach 73% and 78%, while brand CR5 and CR10 will only reach 26% and 42%. In the Japanese pet food industry, corporate CR5 and CR10 will reach 66% and 87%, while brand CR5 and CR10 will only reach 38% and 52%. Since it is difficult for a single brand to be recognized by all consumer groups, Mars and Nestle, the two global head pet food companies, adopt a multi brand strategy, and multiple brands can make the Group's R&D, production capacity and channels produce scale effects. From the perspective of the development history of Mars and Nestle, M&A is the main way to acquire brands. Building a brand from scratch requires a long time of operation and maintenance, trial and error, to acquire consumers' minds. In addition, the market share of companies ranked 6-10 in the Japanese market is 21%, which is far higher than 5% in the American market. The pet food industry in the United States is mainly controlled by five global enterprises, namely Nestle, Mars, Smecker, General Mills and Colgate Palmolive. Among the major enterprises in the Japanese pet food industry, there are not only Mars, Nestle and other global enterprises, but also Japanese local companies, such as Inabao and Unijia. This is also the blueprint of the future pet food industry in China or the formation of the market pattern.

Based on the above discussion, we have come to several basic elements that a domestic manufacturer should have to stand out from the domestic pet food industry: 1. It has high-quality production capacity and product R&D and innovation capabilities. First, to ensure the bottom line of quality control, the food safety issue almost vetoed the brand strength of pet food with one vote. Second, with its own production capacity and R&D, it is more likely to launch conceptual innovation categories and obtain differentiation positioning advantages; 2. Pay attention to marketing and channel laying, especially offline channels. On the one hand, it can enter more offline pet stores through the distribution system, and on the other hand, it can enter from the pet hospital; 3. Implement the multi brand strategy. The characteristics of pet food products determine the natural dispersion of their brands. The multi brand strategy can cover more consumers, and enable the Group's R&D, production capacity and channels to produce scale effects.

Comparison of domestic head pet food enterprises: Zhongzhong Pet Co., Ltd. and Guaibao Pet Duowei take the lead

With the submission of Prospectus 4 by Guaibao Pets and Fubei Pets in 2021, if they are finally listed successfully, the pet food sector of the main board and GEM will be expanded to four companies, namely Zhongchong Shares, Petty Shares, Guaibao Pets and Fubei Pets. Based on the above path of domestic manufacturers to break the situation, we will mainly compare the development and layout of the four companies' domestic markets.

Zhongchong, Guaibao and Petit were all established around 2005. Their early businesses were all overseas OEM. At present, the long-term development focus of the three companies has shifted to the domestic market private brand business. Fubei focuses on the main grain OEM business, which is currently the domestic main grain OEM business. Reviewing the development history of the four companies since their establishment, it is also a common growth path for the old domestic pet food enterprises. The establishment time was around 2005, and most of them started in overseas OEM business. Zhongchong and Guaibao are located in Shandong Province, the main white feather chicken producing area in China, while Petty and Faube are located in the Yangtze River Delta, where foreign trade is developed. Since 2010, the four companies have rapidly expanded their production and successively established their own brand businesses. With the rapid development of domestic brands after the rise of e-commerce channels in 2013-2014, Zhongchong, Guaibao and Petty have all turned their long-term development focus to domestic market businesses. Thanks to the OEM demand of a large number of emerging pet food brands, Faube's domestic staple food OEM business has also ushered in rapid development.

In recent years, the revenues of Zhongchong, Guaibao, Petit and Forbes have basically maintained a rapid growth. Affected by exchange rate fluctuations and raw materials, the profits have shown a fluctuating growth. Among them, the proportion of domestic sales of Guaibao exceeds that of overseas businesses. The income of Zhongchong and Petty is still mainly from overseas businesses. The income of Forbes Pets comes from domestic business OEM and independent brand sales.

In 2021, the revenues of Chong, Guaibao and Petit will be 2.88 billion yuan, 2.58 billion yuan and 1.27 billion yuan respectively, with a growth rate of 29%, 28% and - 5%. As the epidemic affects the production of Petit's Vietnam factory, the revenue and performance will decline in 2021. Forbes Pets has not disclosed its revenue and performance in 2021. The company's revenue in 2020 will reach 660 million yuan, with a growth rate of 64%. Due to the fierce competition in the domestic market, the private brand business in the domestic market has made little contribution to the performance of the four companies. The company's performance is affected by the price of raw materials and exchange rate, showing an overall growth in fluctuations. Under the influence of the appreciation of RMB in 2021, the performance of Zhongchong and Petit will be RMB 120 million and RMB 60 million respectively, down 14% and 48% year on year. In 2021, the parent net profit of Goubao Pets will be RMB 140 million, up 26% year on year. In 2020, the parent net profit of Forbes Pets will be RMB 160 million, up 96% year on year.

From the perspective of the proportion of domestic and foreign sales, Forbes has no export business, and its main business is domestic grain OEM. Among the other three companies, the proportion of domestic sales of Guaibao is the highest, reaching 52%. The proportion of domestic sales of Zhongchong Shares and Petit Shares is 25% and 17% respectively. The main income and profit sources of Zhongchong and Petit are still overseas businesses. According to the revenue of product splitting, the revenue of Zhongzhong Petty, Guaibao, Petty and Forbes from dry food+wet food is 780 million yuan, 910 million yuan, 150 million yuan and 430 million yuan respectively. Under this caliber, the wet food of Zhongzhong Petty includes some snacks, while Guaibao's pet's wet food excludes snacks, and Forbes' pet is mainly dry food; The income of Zhongchong, Guaibao and Petty's snacks was RMB 1.98 billion, 1.63 billion and 1.08 billion respectively. Among them, Zhongchong's snacks were mainly dried meat, while Petty's snacks were mainly chewed gum. The snacks defined by Guaibao's pets included freeze-dried, dried and air dried snacks, chewed gum, tooth cleaning bone and wet grain snacks.

In 2021, the domestic sales revenue of Guaibao Pets will reach 1.33 billion yuan, followed by Zhongchong, Fubei and Petit. Compared with the gross profit rate, the gross profit rate of Fubei, which has a higher proportion of staple food, will be higher, and the gross profit rate of domestic business of Zhongchong and Guaibao will be about 30%. As far as the domestic market business is concerned, the income scale of Guaibao Pets is relatively prominent. In 2021, the domestic market revenue of Guaibao will reach 1.33 billion yuan, and the domestic market revenue of Zhongbao and Petit will be 690 million yuan and 210 million yuan respectively. The three companies focusing on private brand business in the domestic market maintained a rapid growth in revenue before 2021. Affected by the overall consumption boom, the growth rate declined in 2021. In 2021, the growth rate of domestic market revenue of Zhongchong, Guaibao and Petit was 28%, 28% and 6% respectively, lower than 57%, 38% and 41% in 2020. Forbes Pet has not disclosed its domestic market revenue in 2021. In 2020, the company's domestic market revenue will reach 660 million yuan, with a revenue growth rate of 64%, of which the revenue from OEM business will be 380 million yuan, up 70% year on year, and the revenue from its own brand business will be 280 million yuan, up 58% year on year. Compared with the gross profit rate, Forbes' private brand is dominated by staple grain products, so the gross profit rate is high. The gross profit rate of Zhongchong and Guaibao's domestic business is about 30%, while that of Petit's domestic business is low, below 20%.

The expansion capacity of the leading enterprises is mainly invested in the main grain category, and the R&D of Guaibao dry grain products and processes is leading in the industry

In recent years, the production capacity of the leading enterprises has expanded significantly. The planned production capacity of Zhongchong, Guaibao, Petit and Forbes are mainly invested in high-quality staple food. After the planned production capacity is put into operation, Guaibao's dry food production capacity and Zhongchong's wet food production capacity or the leading industry. Zhongchong Shares and Petit Shares have raised funds for capacity expansion since their listing, and their early raised funds have been invested in snacks and chewing gum businesses related to the company's overseas business. With the expansion of business in the domestic market, after 2020, Zhongzhong Petty and Petty began to transform their strategic development focus in the field of pet food into staple food. Zhongchong put forward the development strategy of "focusing on the domestic market, focusing on its own brands, and focusing on staple food products"; Petit put forward the development strategy of "private brand operation, international production and manufacturing, supply of all kinds of products and high-end staple food products". In 2020, Zhongchong issued a fixed increase to invest in pet dry food and wet food projects. In March 2022, the company announced that it planned to raise funds to invest in pet dry food, wet food and freeze-drying projects in convertible bonds (plan); Petty shares issued fixed increase in 2020 and convertible bonds in 2021 to invest in pet dry food, wet food and freeze-drying projects. Guaibao Pet's domestic self owned brand Maifudi products mainly focus on staple food. Before applying for the IPO, it had a production capacity of 124000 tons of staple food. This IPO intends to raise funds to expand the production capacity of 58500 tons of staple food. Forbes Pet also focused on the production capacity of staple food before applying for IPO, which is about 42000 tons. This IPO is intended to raise funds to expand the production capacity of 33600 tons of staple food. If the current disclosure of the expansion plan is in place, it is expected that Zhongchong will have a production capacity of about 120000 tons of dry food and 110000 tons of wet food, Guaibao Pets will have a production capacity of about 180000 tons of staple food (mostly dry food, a small number of staple food type wet food), Petit will have a production capacity of about 90000 tons of dry food, 36000 tons of wet food, and Forbes Pets will have a production capacity of about 76000 tons of staple food. The dry grain production capacity of Guaibao Pets and the wet grain production capacity of Zhongchong Shares may lead the industry.

New and efficient production capacity needs to be released through high-quality products and converted into enterprise income. From the research projects disclosed by various companies, the research and development direction of Guaibao pet dry food is relatively rich and in-depth, and has been carried out in such subdivided fields as diet food and natural food that cater to the development direction of the domestic pet market. From the research and development projects disclosed in the 2021 annual report of Zhongchong, the company still focuses on the research and development of snacks and wet grains. It is expected that new types of pet tooth cleaning snacks and more mobile snacks will be introduced in the future; In the prospectus, Guaibao Pet has disclosed a relatively rich number of research projects. Its new product research and development includes adult cat health products, energy reducing pet food, clean label concept pet food (less added and less processed products), freeze-dried raw bone and meat dual grain, low-temperature baked food and other projects. The research and development direction has entered the field of natural and healthy concept pet food. In addition, Guaibao actively explores the raw materials and ingredients of the product, mainly focusing on the source of protein raw materials (including soybean protein and insect protein in R&D projects) and the impact of protein content on digestion. Patty's R&D direction covers wet grain, chewing gum and low temperature baked dry grain, and implements its full category development strategy. As a leading dry food manufacturer in China, Forbes mainly focuses on functional low-temperature baked grains, including hair beautification, defecation and odor removal, and tear stain removal.

The online and offline channels of Zhongchong Line are relatively balanced, and the marketing ability of Guaibao is relatively outstanding

Usually, the online channel of pet food can be divided into direct marketing, that is, the company directly opens brand flagship stores on online platforms such as Tmall and JD, and the distribution mode is divided into different cooperation modes based on online pet online stores, online platforms, and agent operators. Offline channels have been dominated by distribution mode, mainly connecting offline pet stores, pet hospitals and other entities.

Zhongchong focuses on the balanced development of online and offline sales channels. If the direct sales channels with a high proportion of online direct sales are classified into online channels, the proportion of the company's online and offline sales is basically balanced in 2016. After 2016, the company's annual report did not disclose channel splitting data. From the perspective of the company's domestic sales data since 2020 and the online channel sales growth rate disclosed by Pythagorean big data, except that the online growth rate in the second half of 2020 was significantly higher than the company's overall domestic sales growth rate, the company's domestic sales growth rate was not significantly different from the online growth rate, so the company's current online and offline channel sales share was relatively balanced. In addition, the company participated in Ruipeng Shares (the predecessor of Xinruipeng) in 2018, and reached deep strategic cooperation with it. It is expected to further expand the offline market in the future with the help of the pet hospital channels and supply chain system under Xinruipeng.

Mafudi, the self owned brand of Guaibao, is mainly sold through online channels, accounting for 84% in 2021. From the perspective of splitting its online channels: first, facing a more decentralized online traffic pattern, the company is also expanding a variety of sales models. At present, the company has formed an official flagship store based on Tmall, JD and Tiktok platforms, while expanding a variety of sales models such as online pet store distribution, JD self run, Tmall supermarket, and agency operated stores; The most common problem in online sales is that the price is relatively unstable. From the perspective of the proportion of the online sales model of the company's split of Guaobao, the company's official flagship store has always maintained a proportion of more than 40%. The official flagship store is directly operated by the company, and the price control is more direct and stable. The proportion with JD's proprietary, Tmall Supermarket and agency operating models has rapidly increased. Generally, these three models are also difficult to seriously undermine the price stability. The proportion of online pet store distribution mode that is difficult for the company to manage has decreased from 37% in 2019 to 21% in 2021.

Petit did not disclose the proportion of its online and offline sales channels in detail. The company's 40% direct sales model of domestic sales revenue, that is, opening online brand flagship stores or franchise stores on e-commerce platforms such as Tmall, JD, Pinduoduo, etc. Forbes' private brand Bile is mainly sold through offline distribution mode, with offline distribution mode of 2021H accounting for 68% and official flagship stores of online platforms accounting for 27%.

Guaibao and Zhongchong have invested a lot of marketing expenses in the domestic market. Guaibao has achieved good results by combining three marketing strategies: pan entertainment brand marketing, multiple online platform promotion and joint brand products. In terms of marketing expenses, Chong and Guaibao will spend 240 million yuan and 360 million yuan on sales in 2021, including 160 million yuan and 250 million yuan on promotion and sales services, which is far higher than the level of Petit and Forbes. At present, the main sales expenses of the four companies are mainly invested in the domestic market. From the two indicators of sales expenses/income from domestic independent brands and publicity and sales service expenses/income from domestic independent brands, Zhongchong is higher than Guaibao, and Guaibao's marketing expenses may be more efficient than Zhongchong. In terms of marketing strategy, Zhongchong set up a spokesperson system for its brands in 2021. The naughty brand signed with Lamu Yoko to become a "naughty little girl", Fu Seoul and Ran Gaomin to become "brand security officers", and Hou Minghao, its "ZEAL" brand, became a global spokesperson for wet grain; Guaibao combines three ways of pan entertainment brand marketing, multiple online platform promotion, and co branded product creation: 1. pan entertainment brand marketing includes brand spokesperson, variety show cooperation, film and television series cooperation, mobile game cooperation, and overseas reality show endorsement introduction; 2. The promotion of multiple online platforms refers to reaching potential users through various marketing methods such as recommendation area display, open screen advertising, information flow advertising, talent content promotion and so on on e-commerce platforms such as Tmall and JD, content platforms such as WeChat official account, Weibo, Xiaohongshu, Bilibili, Tiktok, Kwai, and mobile platforms such as VIVO and OPPO. In addition, the company cultivates brand KOL matrix through content cooperation with platforms such as Bilibili, Xiaohongshu, Tiktok, Kwai, and promotes products in the form of daily advertising and new grass planting; 3. The company cooperates with various entertainment IP programs such as Shangxin · Forbidden City, Listen to Friends, The Mission of a Dog, and Xiaomori Life mobile game to create co branded products.

Zhongchong and Guaibao have built the prototype of multi brand matrix

At present, Zhongchong Co., Ltd. and Guaibao Pet have built the prototype of a multi brand matrix, both of which are high-end brands and high-end brands.

The main brand of Zhongchong is Naughty. At present, the Naughty product line is relatively complete. With the introduction of high-quality dry food products such as fresh meat without grain, the Naughty brand has changed from the original wet food and snack products to the full range of dry food, wet food and snacks; As a high-end brand under Zhongchong, Zhongchong will put the wet grain production capacity of PNFZ, the peak OEM factory acquired, into ZEAL. In 2021, ZEAL will launch No. 0 main grain tank, and its product form will gradually develop from air dried snacks and pet milk to main grain. In the future, it may introduce dry grain products to further expand the product line. Product strength and brand strength comprehensively determine the price band of pet brands. The ZEAL brand with high-end pet food production capacity in New Zealand may become an important layout of Zhongchong in the high-end market in the future; In addition, the leading brands of the company mainly operate online channels, and the products were originally mainly staple food. After being incorporated into the listed companies, they have also expanded the wet food snack product lines such as cat strips.

The main brand of Guaibao Pet is Mafudi, and its product line is relatively complete. It is mainly made of staple food for cats and dogs, and also has snacks, wet food and other categories. At present, Guaibao is cultivating Fregat as a high terminal brand in the body, which is mainly positioned in high-end staple food for cats. Its ingredients are mainly fresh meat and freeze-dried. It was originally promoted as a sub brand of Mafudi, and now it has opened a flagship store of Fregat Tmall in Tmall, It may be promoted as an independent high terminal brand in the future; In addition, the company is the exclusive agent of K9 Natural&Feline Natural (hereinafter referred to as K9) in China. K9 bases itself on the high-end market with high-end freeze-dried grain and staple grain tanks. Guaibao and its joint shareholder, KKR, will achieve more long-term and in-depth cooperation in the future or in China. As the main brand covering the whole category, the product line of Hersheka under Petit has been expanded to staple grains, snacks and wet grains. The price band is positioned at the middle end. The brands of Jueyan and Teeneng under Petit still focus on dog chewing food. At present, the main business focus of Forbes is OEM in the domestic market. The private brand Bile is mainly positioned in the dry food business for cats and dogs. At present, there are a small number of snack products in the product line.