Baolingbao
Biology Co., Ltd. (Baolingbao), a leading manufacturer of functional sugar
in China that entered the domestic fructooligosaccharide
(FOS) market in 2011. The company implemented low-price strategy to
sell its FOS product, which can increase its product's competitiveness to
compete with the one of Quantum Hi-Tech (China) Biological Co., Ltd. (QHT), a major
FOS manufacturer in China, according to Sweetener China News issued by
CCM in September.
As
a new FOS manufacturer in China, Baolingbao tried its best to increase the
sales volume of its FOS in recent two years (Note: Baolingbao invested USD24.35
million to establish its FOS project with a capacity of 10,000 t/a in 2009, and
launched its FOS in Oct. 2010). Thanks to the low-price strategy, the sales
volume of FOS of Baolingbao witnessed a sharp increase in recent two years,
which brought more profit to the company. For example, the operating profit of
its FOS business was USD0.97 million in H1 2013, increasing by 1355% compared
with that in H1 2011.
Expressed
by QHT, due to several factors, including low-price strategy of Baolingbao, the
revenue of its FOS business showed a slight decline, from USD11.06 million in
H1 2012 to USD10.81 million in H1 2013. But the company also indicated that it
would rather keep the FOS price unchanged with high quality to attract new
customers and retain old customers than adopt the low-price strategy. Based on
this, the company tried its best to not decline the FOS price in H1 2013, which
retained the gross profit margin at a relatively high level. The company
believed that its idea was right. Under the impact of low-price strategy of
Baolingbao, most of its downstream customers still chose to continue the
cooperations with QHT. In addition, according to QHT, new customers such as
Dumex, an international infants' and children's nutrition company, investigated
QHT to show their willingness to cooperate.
Maybe
the low-price strategy is a good way for a company to enjoy good sales
performance in a short term, but it is not helpful to support the company's
long-term development. And it is the same with the industry. Take Baolingbao
for example. Despite the increase in their products' sales volume, the strategy
also eroded the gross profit margin of FOS of Baolingbao. Data from the 2013
semi-annual report of the company showed that its functional
oligosaccharide business which included FOS and isomalto-oligosaccharide
(IMO), was just 24.69% in H1 2013, which was much lower than the one
of QHT. The gross profit margin of FOS of QHT was as high as 46.29% in the same
period. For domestic FOS manufacturers, it is believed that the correct method
is to cultivate a larger downstream consumption market, to avoid reduction of
their profit when confronted with the low-price strategy implemented by rivals.
Actually, not only QHT but also Baolingbao showed their confidence in the good
prospect of the domestic FOS industry. Because of the low consumption volume in
domestic downstream industries and its health care effect, FOS will be added by
more and more downstream enterprises in China to their products.
In
H1 2013, the Chinese government has released a series of policies to strengthen
the management on the quality standards of home-made dairy products, especially
the home-made infant formula products, in order to strengthen the confidence of
the Chinese public in home-made infant formula, as well as strengthen the
competitiveness of home-made infant formula (for more information please refer
to Sweeteners China News Vol.3 July Issue, p15, Strong management on infant
formula may improve indirectly consumption of FOS in China). If the consumption
volume of home-made infant formula continues to increase, it can bring more
opportunities to domestic FOS producers.
It
is suggested that domestic FOS manufacturers should grasp the opportunities to
explore the domestic dairy industry, rather than snatch the existing market
share from other FOS manufacturers in China.
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Overall
condition of domestic sucrose industry not as good as it seems
Baolingbao
competes with QHT by implementing low-price strategy on FOS sales
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Sweeteners China News, issued
by CCM on 5th every month, offers timely update and close follow-up
of market and company dynamics based on China
CCM is dedicated to market research in China
Guangzhou
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