Industry dilemma under the wave of pet economy

Amid the positive rhetoric about the prosperity of the pet economy, it is difficult to conceal the plight of listed companies in the pet industry.

Recently, Boqi Pet, "China's No. 1 pet e-commerce company", released its performance report for the first half of fiscal year 2023 as of September 30, 2022. The financial report showed that revenue dropped to 589.6 million yuan, compared with 6.04 in the same period last year. 100 million yuan decreased by 2.38% year-on-year; the loss continued, at 29.5 million yuan, a 64.0% decrease from the net loss of 81.9 million yuan in the same period of fiscal year 2022. After the financial report was released, Boqi Pet’s share price fell 10% on the New York Stock Exchange.

Since its establishment in 2008, Boqi has been trying to tell the story of "community + e-commerce + service". However, today, more than 90% of Boqi's revenue still comes from e-commerce. Its own brands, pet ecology, and third-party The contribution of services and other services to overall revenue is still very limited.

Without a run-through business model, Boqi’s development cannot be considered healthy in China’s limited pet market. Since this year, Boqi Pet’s cumulative decline has reached 75%.

And the dilemma is not limited to pet e-commerce. From the perspective of market segmentation, the development of pet food, pet medical and other industries is also unsatisfactory. The high-end market is scarce, the low-end market is involution, and homogeneity is extremely high. The market is still dominated by European and American brands. For listed companies in the pet industry, the problems of "large size and low gross profit" still hinder their further development.

Data from the "China Pet Industry White Paper" show that China's pet (dog and cat) market size will reach 249 billion yuan in 2021, a year-on-year increase of 20.58%, and the compound annual growth rate CAGR in ten years is as high as 27.4%. However, far from mature markets in developed countries such as Europe and the United States, the Chinese market has obviously not found the best way out on how to run the pet economy well.

Revenue declines and losses continue

Pochipet’s financial reports haven’t been very good recently.

As of September 30, 2022, Boqi Pets achieved revenue of 589.6 million yuan in the first half of the fiscal year, a year-on-year decrease of 2.38% from 604 million yuan in the same period last year. Among them, Boqi Pets’ main business, product sales, was 5.687 billion, a decrease of 1.5% from 577.6 million yuan in the same period last year; online marketing and information services and other income were 20.9 million yuan, a decrease of 20.5% from 26.4 million yuan in the same period last year.

Following its first revenue decline in the previous quarter, Bochi Pets remained unchanged in the second quarter. With revenue hampered, we had to work hard to reduce costs to save ourselves.

Financial report data shows that sales and marketing expenses were 63.5 million yuan, a decrease of 29.0% from 89.5 million yuan in the same period of fiscal year 2022, accounting for 10.8% of total revenue, which was lower than 14.8% in the same period of fiscal year 2022. The decrease was primarily due to lower advertising expenses to $26.1 million due to lower expenses and an increased proportion of revenue from more cost-effective channels.

In addition, general and administrative expenses were 22.1 million yuan, a decrease of 48.4% from 42.8 million yuan in the same period of fiscal year 2022. The main reason for the decrease was the cancellation of options corresponding to employee resignations, a decrease in share-based compensation expenses of 13.5 million yuan; the optimization of the organizational structure, a decrease in employee costs by 3.7 million yuan; and a decrease in professional fees compared with the same period in fiscal year 2022 2.5 million yuan. Overall, the percentage of this part of total revenue was 3.7%, down from 7.1% in the same period in fiscal 2022.

Tang Yingzhi, co-founder, co-CEO and chief financial officer of Boqi, commented: "We see the growing value of caution amid market uncertainty. In the first half of fiscal 2023, we made great progress in cost control. Progress has been made, and the proportion of operating expenses to total revenue has dropped from 32.2% last year to 26.1% this year, which paves the way for the company to significantly reduce its net loss."

The financial report shows that Boqi Pets’ net loss in the first half of the fiscal year was 29.5 million yuan, a 64.0% decrease from the net loss of 81.9 million yuan in the same period of fiscal year 2022.

However, it is worth noting that judging from the financial report data released by Boqi Pets, as of now, Boqi Pets has not yet achieved profitability. The annual net losses in the past three years were 133 million yuan, 193 million yuan, and 176 million yuan respectively. Although the quarterly losses show a gradually decreasing trend, reducing losses is also full of challenges for Boqi Pets in the context of difficult revenue.

environmental restrictions

Difficulty making profits is a dilemma for all vertical e-commerce companies, and the pet track that focuses on the rising trend is no exception. Even Chewy, the American pet e-commerce giant, has barely achieved a single quarter of profit in the past two years.

Chewy is a pet e-commerce company founded in 2011. At that time, the offline pet service industry in the United States was relatively mature. With the rise of e-commerce, the U.S. pet industry is accelerating online. At the same time, the trend of pet consumption upgrading is becoming more and more intense. It is obvious that the personalized consumption experience that focuses on service is difficult for Amazon, a comprehensive e-commerce company, to satisfy. With good fortune, it also gave Chewy the opportunity to become a giant online professional pet retailer.

Among them, the continuous repurchase brought by the subscription model has become an important development engine for Chewy. The subscription model means that after a user places a single order, the merchant automatically repeats the order at regular intervals, which caters to the characteristics of regular purchases of pet food. It is reported that the revenue from this model accounts for nearly 70% of Chewy's revenue. The continuous repurchase brought about by the increase in the number of consumers has boosted the rapid growth of Chewy's revenue and helped the company form user stickiness and a stable customer base. In order to achieve diversified revenue, Boqi has also imitated Chewy's business model, but with little success. Relevant data shows that as of the first half of 2020, Boqi has only 23,000 members, with an average pre-deposit amount of 3,154 yuan per person. .

This is not unrelated to the size difference between the two markets. Data shows that there are 91.47 million pet households in my country's cities and towns in 2021. According to the National Bureau of Statistics, there are 494 million households in China in 2020. The penetration rate of pet ownership in China is less than 20%, while the penetration rate in the United States, Japan, and Europe has reached 70%, 57%, 49%.

Zhuang Shuai, an expert in the retail e-commerce industry and founder of Bailian Consulting, said in an interview with a reporter from the 21st Century Business Herald that the penetration rate of pet ownership in China is far lower than that of developed countries in Europe and the United States, and China’s consumption level for pet feeding, medical care, and entertainment is still low. In very early stages.

The limited market does not leave room for a "Chinese version of Chewy", and the lack of business models is the most significant problem of domestic pet e-commerce. In the context that several major domestic comprehensive e-commerce companies have completely divided the market, then More deadly.

In China, the development of vertical e-commerce is more like surviving in cracks. Miya founder Liu Nan once concluded: “When comprehensive e-commerce has algorithm capabilities, vertical people can see vertical content on comprehensive e-commerce.”

Public data shows that in 2021, Taobao’s market share is 52%, JD’s market share is 20%, and Pinduoduo’s market share is 15%. Coupled with the entry of content e-commerce companies such as Douyin and Kuaishou, the domestic e-commerce ecosystem The pattern is set. Data shows that among e-commerce platforms with pet businesses, Taobao occupies 60% of the market share, JD.com ranks second with 3.7%, and the most vertical Boqi Pet market share is only 1.9%. In comparison, Chewy’s market share in pet e-commerce in the United States exceeds 50%.

Zhuang Shuai said that vertical e-commerce itself has problems such as high customer acquisition costs, difficulty in meeting the diverse needs of users, and limited service provision, which are all major obstacles for pet e-commerce.

iiMedia Consulting CEO Zhang Yi also told the 21st Century Business Herald reporter that the pet e-commerce platform needs to find some breakthrough strategies. “Perhaps we can consider ways to combine online and offline, such as offline stores, community services, etc. .”

The "China Pet E-commerce Industry Insights (2022)" research report released by the Zhejiang Provincial E-Commerce Promotion Association pointed out that the investment and financing situation of pet retail e-commerce is not outstanding in the entire pet industry, with only 6 sales in 2019 and 2020. A total of 7 investment and financing incidents have basically disappeared in the past two years.

The industry structure is fragmented and OEMs are common

In addition to pet e-commerce, other segments such as pet food and supplies are often small in size and have low net profit margins. The performance and stock price performance of listed companies are also relatively mediocre.

"At present, the penetration rate of pet-raising households in my country is lower than that in Europe and the United States. Although the number of users has increased, the extent is limited." Mo Daiqing, senior analyst at the e-commerce research center of NetEase, was interviewed by a reporter from the 21st Century Business Herald Shi said, “At present, foreign brands are still relatively well-known in the pet e-commerce industry, and domestic pet brands are still in the low-end market.”

The "China Pet E-commerce Industry Insights (2022)" research report shows that from the overall situation of pet sellers, only 5.1% of pet stores will have sales of more than 100 million yuan in the first half of 2022. The current competitive landscape of pet sellers is relatively fragmented and the market is concentrated. Degree is low.

From the perspective of market share, foreign brands still occupy a large market share in the domestic pet market by virtue of their first-mover advantages. The "China Pet Industry White Paper" shows that in categories such as cat staple food, pet vaccines, dog anthelmintic drugs, and cat anthelmintic drugs, the top ten are mostly foreign brands, and the top positions are basically monopolized by foreign brands.

"Chinese companies are still in the early stages of improving their own brand products and commodity power. They mainly rely on extensive management models and have not worked hard on commodity power." Zhuang Shuai said.

Pet food, as the bulk of the pet economy, still has more than 50% imported brands. Fundamentally, the leading pet companies in China have not completely gotten rid of the fate of OEM for foreign brands.

Reliance on OEM competition and low gross profit margins drive companies to move downstream. In the early days, most domestic pet companies relied on their advantages in labor costs and raw material costs to carry out OEM production and OEM exports for overseas brands. However, OEM is not a long-term solution for enterprises. It is not only difficult to form competition barriers themselves, but also lacks endogenous growth momentum. , and also limits the scale of the entire industry from further development.

Taking China Pet Holdings as an example, in the first half of 2022, domestic revenue was 383 million yuan, accounting for only 24.12%, and overseas revenue was 1.206 billion yuan, accounting for 75.88%. However, the gross profit margin of the OEM business is only about 20%, which is only half of the gross profit margin of its own brand; the gross profit margin of Guabao Pets, which has relatively mature self-owned brand development, has continued to increase, from 36.14% in 2019 to 2022. 41.24% in the first half of the year.

In recent years, the development of private brands has become an industry consensus. Zhongchong has launched "Naughty" and "Zhenzhi", Petty has launched "Haoshijia" and "Tooth Neng", and the aforementioned Boqi has also launched its own brands. "Yiqin" and "Moka" are not as well-recognized as international brands in China.

"The relatively high-end brands in the domestic market are basically dominated by overseas brands. Although Chinese brands are not weak in manufacturing capabilities, service capabilities and marketing capabilities, they still lag behind foreign countries in brand building." Zhang Yi He told a reporter from the 21st Century Business Herald, "Chinese companies still have a long way to go in terms of branding, which is also an important way to increase profits."