Baolingbao competes with qht by implementing low price strategy on fos sales (20130906)

Baolingbao competes with QHT by implementing low-price strategy on FOS sales Summary: Baolingbao adopted the low-price strategy on its FOS product sales in the last two years, in order to heighten its competitiveness over QHT. Tags: Baolingbao, functional sugar, fructooligosaccharide, FOS, oligosaccharide, isomaltooligosaccharide, IMO, low-price strategy 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 homemade 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.

Table of Contents of Sweeteners China News 1309: HFCS and corn starch expected to get listed as futures in China Operating rate of China's starch sugar industry is at low level in July -Aug. 2013 Profitability of China's acesulfame-K producers is at low level Zhaoqing Coruscate cooperates with SCUT on research on starch sugar Luzhou Bio-chem suffers net loss in H1 2013 China Starch: proportion of starch sugar in total revenue continues to increase in H1 2013 GLG: revenue of stevia sweetener business witnesses dramatic decrease in Q2 2013 Net profit of JK Sucralose sees sharp increase in H1 2013 Export overview of some sweeteners and raw materials in China, July 2013 Shanxi exports more cyclamate though national export volume decreases in Jan. -July 2013 Export volume of China's saccharin increases by 3.33% YoY in Jan. -July 2013 Overall condition of domestic sucrose industry not as good as it seems Baolingbao competes with QHT by implementing low-price strategy on FOS sales Ex-factory prices of sweeteners in China in August 2013 Changzhou Guanghui plans to balance production and sales of aspartame in next five years Chenguang Biotech: stevia sweetener project expected to come into use in H2 2013 CSA announces plan to prevent unreasonable expansion of raw sugar processing capacity Shandong Futaste obtains certificate on low-carbon xylitol Sucrose revenue of COFCO Tunhe accounts for large proportion while contributes little 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’s sweeteners industry. It also releases the latest information on raw material supply, price update, import & export analysis as well as consumption trend & competitiveness.

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