Summary of Key Points
For the fiscal year 2025 (April 2024 to March 2025), Wangwang's revenue increased slightly by 3.8% to 24.4 billion yuan, but its net profit plummeted by 11.5% to 3.837 billion yuan, resulting in a situation where it is selling more products yet earning less profit. The reasons behind this are as follows: Traditional sales channels have been declining for two consecutive years, while new channels (such as snack vending and e-commerce) have seen growth but require sacrificing margins to boost sales volume. Additionally, rising raw material costs and soaring sales/administrative expenses have further squeezed profits. The company is in a period of painful channel transformation and will need to rely on new channels to quickly make up for the losses in the future.
Detailed Analysis
1. Slight Revenue Increase: “Trading Price for Volume” Boosts Sales but Kills Profits
Although Wangwang's sales volume increased by a high single-digit percentage in fiscal year 2025, revenue only rose by 3.8%, indicating that the average transaction value per customer decreased. In other words, the company had to lower prices or offer cheaper products to sell more goods. For example, new products like AD calcium milk and fruit juices saw sales increase by over 80%, but revenue only increased by 40%, clearly due to their lower prices. Similar strategies were used in the snack vending channel with larger-sized ice creams and Xianbei snacks, which also relied on price discounts to drive sales. While this approach maintained overall revenue, it significantly reduced the company's gross margin, setting the stage for declining profits.
2. Uneven Performance Among Three Business Segments
Wangwang’s business is divided into three segments with varying performance:
- Dairy and Beverages (51% of revenue): This core segment has struggled with weak growth. The revenue from its flagship product, Wangzai milk, even decreased by 0.3%, with the company relying on new products like AD calcium milk and fruit juices for growth (which saw a 40% increase in revenue), resulting in only a 1.9% overall growth.
- Rice and Snacks (24% of revenue): Revenue remained virtually unchanged (a 0.5% increase), but there was double-digit growth in the snack vending channel, particularly for larger-sized ice creams and Xianbei snacks.
- Snacks (24% of revenue): This segment performed the best, with revenue increasing by 10.4%. Candy sales reached a record high, driven by e-commerce and the snack vending channel; frozen products also saw strong growth due to hot weather and rapid expansion in this channel, as did puffed snacks.
The stagnation of traditional product segments and the reliance on new snacks and products indicate that Wangwang’s foundation is becoming weaker.
2. Two Major Drivers of Profit Decline: Rising Raw Material Costs and Excessive Expenses
The significant drop in net profit (11.5%) can be attributed to two main factors:
- Rising raw material costs: The prices of imported whole milk powder and palm oil, among other bulk materials, increased by double digits. Coupled with the high volume of lower-priced products sold, the company’s gross margin dropped from 47.6% last year to 46.3%, meaning it earned 1.3 yuan less per 100 yuan in sales.
- Soaring expenses: Sales expenses (distribution costs) increased by 16.9% (an additional 500 million yuan spent), mainly due to the need for advertising, promotions, and price discounts in new channels. Administrative expenses also rose by 11.4%, stemming from the establishment of new product divisions and higher salaries. These expense increases outpaced revenue growth, eroding profits significantly.
3. The Painful Process of Channel Transformation
Wangwang is undergoing a channel transformation:
- New Channels (snack vending, e-commerce): These channels now account for 15% of revenue and are growing rapidly, becoming key drivers of growth.
- Traditional Channels (70% of revenue): They have been declining for two consecutive years, with estimated losses of 1.2 to 1.5 billion yuan. The new channel growth is not enough to make up for the losses from traditional channels, and these new channels even require additional investment (such as price discounts) to compete effectively, further squeezing profits.
In short, traditional channels are losing customers, while new channels need to spend more to attract them. The costs of this transformation are clearly reflected in the company’s declining profits.
4. Future Directions
To overcome these challenges, Wangwang needs to rely on new channels to quickly make up for the losses:
- CEO Cai Yanming emphasizes that maintaining the status quo would mean falling behind. However, the transformation is not an immediate process:
- Traditional channels, which account for 70% of revenue, are still declining and will be difficult to turn around in the short term.
- New channels (snack vending, e-commerce) require continuous investment and rapid expansion to offset the losses from traditional channels.
- The company also needs to control costs, such as finding cheaper raw materials or optimizing expense structures.
If new channels cannot grow fast enough to compensate for the decline in traditional channels, Wangwang will continue to face pressure on its profits.
In One Sentence
Wangwang is transitioning from a traditional snack giant to a player focused on new sales channels. While sales volume is increasing, the costs of transformation (price discounts and increased expenses) and the loss of traditional customers are resulting in lower profits. The company’s future success depends on whether it can quickly develop its new channels enough to overcome these challenges.