Instant Noodle King Builds a Beverage Empire
Last year, Master Kong, the biggest instant noodle brand in China, for the first time generated more revenues from beverages than noodles. Now it hopes to claim top spot in the Chinese soft drink market.
Instant Noodle King Builds a Beverage EmpireBy Ming-Ling Hsieh
From CommonWealth Magazine (vol. 447 )
Ting Hsing is hardly a household name. Having started out as a family business in rural Taiwan and relocated to China some two decades ago, eventually achieving success with its Master Kong brand of instant noodles,
Ting Hsing has always been low-key, and somewhat secretive. But for the past year the company has not been able to stay out of the limelight, as its stellar business performance drew the attention of investors in Taiwan.
First, Tingyi (Cayman Island) Holding Corporation – the subsidiary of Ting Hsin International Group that owns the Master Kong brand – triggered a buying frenzy in Taiwan last December, selling up to 380 million Taiwan depositary receipts (TDR) at the local bourse at a price of NT$45 per piece. In March, when the company's financial report for 2009 came out, it shone with double-digit EBITDA (earnings before interest, taxes, depreciation and amortization) growth and around 40 percent after-tax net profit growth year-on-year.
Despite a steady stream of new competitors entering the Chinese market and volatile prices for raw materials in China, the noodle and beverage giant has seen unfettered growth.
In the beginning the company was successful because it was one of the early entrants into the Chinese food market and because Taiwan was ahead of China in terms of market experience. Today, Tingyi's success is owed to economies of scale, rising efficiency and continuous transformation. "In the short term you win on efficiency, but in the long run, you win on scale," Tingyi chairman Wei Ing-chou once said.
Efficient Economies of Scale
From the very beginning of its China venture, Tingyi had a grand deployment strategy in mind.
Great China Prospects Development president Randy Hsiao worked at the Tingyi headquarters in Tianjin from 1995 to 1998. As manager at the business planning department and assistant manager at the business center, Hsiao participated in mapping out the company's first strategic plan.
"Back then the Japanese said that China had a market potential of only 3 billion packs, but we estimated that it was worth 14 billion!" Hsiao recalls. Consequently, Tingyi established regional production centers and sales bases in seven major regions across the country, centering on large cities such as Guangzhou, Hangzhou, Wuhan, Chongqing, Xian and Shenyang.
"Competitors that arrived later didn't have room for cracking the market. When others saw the big pie, we had already eaten two thirds of it," says Hsiao in emphasizing Tingyi's advantage as a market pioneer.
In 1998 Tingyi launched a "Better Access, Broader Reach" distribution strategy, which aimed to develop scale, by establishing a dense distribution network.
Tingyi officials note that the Fast Moving Consumer Goods industry usually depends on the end vendor for marketing and stocking goods. But Tingyi dispatches its own sales people to shops to market its products and ensure proper store presentation and display. The company has ten times more sales staff than other companies, which helps boost market penetration. Therefore, Tingyi products are found even in the remotest places.
"Tingyi's growth is the result of laborious distribution work," Time magazine concluded in a special feature on companies that have successfully tapped China's domestic consumption, published in March.
Yet more importantly Tingyi has its eye not just on quantity, but on "efficient quantity." The company uses strict management to keep the widening scope of sales under control.
Taking cash flow as an example, Tingyi has adopted a "cash before delivery" principle in dealing with most of its points of sale. In 2009 Tingyi's accounts receivable cycle time stood at just 8.82 days, 1.6 days less than a year earlier.
Effective economies of scale have resulted in cost efficiency for the company. When it comes to raw materials, for instance, Tingyi is a major buyer of Chinese agricultural products. Every year, the company buys up 3.2 percent of the country's entire production of white sugar and 1.39 percent of its wheat production. As a major buyer, Tingyi not only gets good prices, but also avoids the risk of China's notorious price fluctuations by negotiating the buying prices for raw materials in advance.
From a different perspective, it was achieving a certain scale that caused the company to deliberately emphasize efficiency, launching vertical integration and demanding continued cost reduction within the company.
For example, Tingyi holds a large stake in a raw materials company under its mother company Ting Hsing International Group, which provides the bowls, lids, wrapping and other packaging materials for its instant noodles. And inside Tingyi's beverage factories, production lines are set up for the manufacturing of PET bottles from scratch out of tiny PET granules.
Gunning for the Huge Rural Market
Efficient scale drives stable growth, and in return growth generates scale. Once the company had launched a positive cycle, Tingyi's pace and ambitions for tapping China's domestic consumption only got faster and bigger.
"China has such a huge territory, but the structures are different. It will still take a very long time before its 300 or so spotty economic pockets grow together to form an economic area," Hsiao predicted in an exclusive interview with CommonWealth Magazine.
Strong purchasing power in urbanizing rural villages will provide the next wave of growth momentum for Tingyi. In-house scenarios expect second- to fourth-tier cities to become the focus of business development in the coming years. "The rural villages have already become the most contested market among industry rivals," Wei reveals.
With 56 production bases and 414 production lines across the country, Tingyi is China's "instant noodle king." But Wei is not stopping there. Last year, Tingyi started production at a brand new instant noodle factory in Tianjin using state-of-the art machinery from Germany and Japan.
When running at full capacity, the new Tianjin plant can churn out 4.8 billion packs of instant noodles per year, equal to Taiwan's entire instant noodle consumption over six years. Such fast and automated production enables Tingyi to accommodate expanding domestic demand.
Tingyi already is the market leader in the high-end instant packet noodle and bowl noodle segments. It is also currently working to gain a leading position in low-end instant noodles, which typically cost less than one yuan per pack, by launching its "Fumanduo" and "Yi Wan Xiang" brands in second- and third-tier cities.
And for its beverage b"siness, which last year for the first time generated more revenue than instant noodles, Tingyi now follows the principle of "market share comes first." Products include tea beverages, bottled water and fruit juice.
"Drinks are impulse purchases. That's why retail outlet penetration is very important," Wei said late last year when he returned to Taiwan in connection with the TDR issue. In a presentation to institutional investors, Wei said that Tingyi is planning to oust Coca Cola from its top position in the Chinese beverage market within five years. He said Tingyi has a competitive edge over Coca Cola when it comes to market penetration, but that the company will need to set up a low-cost production system for its beverages to be able to compete with Coca Cola's bottling capacity. Wei said he is prepared to fight a ten-year battle to see who emerges as the winner.
Translated from the Chinese by Susanne Ganz