Why Tingyi could face more pain in China's instant noodle market

May 30, 2016 16:26
China’s leading instant noodle maker has warned of extreme challenges in the marketplace. Photo: Reuters

Tingyi (Cayman Islands) Holding Corp. (00322.HK), China's leading instant noodle producer, saw its shares plunge 10.2 percent last Friday following news of a slide in revenue and profit in the first quarter.

It's commonly believed that firms involved in low-end food, like instant noodles and fast food, would benefit from a weak economic environment as people reduce their spending during difficult times. 

But that has not been the case with Tingyi this year. That is because the company adopted a wrong strategy of pushing up its product prices.

As of the first quarter of 2016, Tingyi had a market share of 52.4 percent in China’s instant noodle market, down 2 percentage points from the previous three months.

Despite a reduced market share, the company remains the dominant player in its segment, staying ahead of rivals such as Uni-President China Holdings (00220.HK) and Want Want China Holdings (00151.HK).

The leading market position, however, could not prevent Tingyi from posting a 9.5 percent drop in sales revenue and 45.8 percent slide in profit in the first quarter compared to the same period in 2015.

The result was far below market expectations, given that mass-market food like instant noodles is usually more resilient to economic cycles.

Instant noodles were seen as one of most affordable food items for the working class in China. For example, migrant workers would buy dozens of bags of instant noodles when they need to spend several days on trains while traveling home during the Spring Festival Holiday.

However, there are far more choices of fast-food nowadays, such as microwave food in convenience stores, street-side food stalls, or lunch boxes offered on trains. This has posed a serious challenge for China's instant noodle makers.

Tingyi and its competitors all suffered substantial slide in their operating performance since last year. Being the leader in the segment, Tingyi appears to have taken a particularly big hit.

China's instant noodles sales per year stands at 44 billion bags, representing half of the world’s total and making the nation the world’s largest market for that food item. However, per capita annual consumption in the country is only 34 bags, far below South Korea's 74 bags and Japan's 44 bags.

Why are instant noodles so popular in developed economies like Japan and South Korea?

That fact is that instant noodles are no longer associated with cheap food, given the changes in terms of quality, diversity and prices.

Japan's Kindai University, for example, has developed a tuna instant noodle that is sold at far higher prices than the usual offerings. Despite the high price, the new product is sold out quickly every time.

Given this situation, there are both challenges and opportunities in China's instant noodle market. Tingyi decided to take the initiative to upgrade its product line and launch more high-end products.

But the strategy has apparently failed as Chinese customers don't seem to be ready for the noodles upgrade.

Tingyi’s instant cup noodle and high-end noodle sales dived 16 percent and 37 percent respectively in the first quarter compared to a year earlier. By contrast, the company's mid-range products saw their sales surge 62 percent in the same period.

This has prompted Tingyi to make some price revision for the second quarter and warn of "extreme challenges" in the market.

As it may take several years before China's instant noodles market rises to a new level, we shouldn't be surprised if Tingyi faces more pain going forward. 

This article appeared in the Hong Kong Economic Journal on May 30.

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist