On March 14th, Besunyen Holdings Co., Ltd. (hereinafter referred to as "Besunyen") released its 2017 performance report. According to the report, Besunyen realized revenue of 543 million yuan in 2017, a year-on-year increase of 5.5%. And profit attributable to holders of the company was 4.086 million yuan, compared with a loss of 68.714 million yuan in the same period of 2016.

It is worth noting that there are other health product companies whose performance in 2017 were booming. Up to now, almost all of the companies in this field who have released 2017 performance reports, preliminary earnings estimates or forecasts have seen growth.

Looking back at the health product market in 2017, what is the competition structure and what are the new opportunities in the next few years?

▍Companies that turn a profit

According to industry analysts, Besunyen’s performance has been growing well, but in 2016 it experienced a sharp decline with a net loss of 68.714 million yuan. Today’s performance recovery is due to certain adjustments of the company.  

The financial report shows that in 2017, Besunyen insisted on the expansion of new products, new crowds and new areas, and continued to develop the OTC chain and terminals in depth. While maintaining the stable development of the two tea products, it has also launched new products such as Orlistat Capsules and its Mei Yangyang enema product.

Meanwhile, By-Health also enjoys a performance recovery. According to By-Health's 2017 financial report, the company achieved annual revenue of 3.11 billion yuan, a year-on-year increase of 34.72%; and a net profit of 766 million yuan, a year-on-year increase of 43.17%. In 2016, By-Health achieved a net profit of 535 million yuan, which means a year-on-year decline of 15.78%.

Insiders believe that By-Health has been a leader in the health products industry, and 2016 was the first time that its net profit declined. The rebound in 2017 was due to its achievements in creating "big medicine system," "big single product strategy," "branding of e-commerce," developing the business of Jianzhibao, the joint venture company, and laying out the sports nutrition market.

By-Health and Besunyen accurately met the current consumer demand for health products and made their own strategic adjustments. For example, in the past, Besunyen’s development mainly relied on overwhelming advertising, but today it begins with consumer education and guidance to increase consumer stickiness.

▍Significant market progress

It is worth noting that almost all health-products companies that have released their 2017 performance reports, preliminary earnings estimates or forecasts have all achieved a lot of performance.

Specifically, besides Besunyen and By-Health, the performance forecast of Xiwang Food shows that it is expected to achieve a profit of 280 to 300 million yuan in 2017, a year-on-year increase of 107.69% to 122.53%; the preliminary earnings estimate of Xiamen Kingdomway Group in 2017 shows that its 2017 revenue was 2.085 billion yuan, with a year-on-year increase of 25.37%, and its net profit was 476 million yuan with a year-on-year increase of 58.76%. Only Sinolife United estimate a profit decline by 80% in 2017.

In this regard, Zhu Danpeng believes that the health products industry has fully enjoyed the benefits of consumption upgrades in the past few years. In 2016 many companies were still in the layout stage. In 2017, a large number of enterprises have obtained the dividends of scale and profits brought about by layout and investment, and the overall performance is good.

From the perspective of the market as a whole, after several years of rapid development, the size of the entire health product market has continued to increase. According to statistics, the five-year CAGR (compound annual growth rate) of the output value of China's health products industry from 2012 to 2016 was 22.6%, and the output value of 2016 reached 262.11 billion yuan, about six times that of 2009, and growth was very rapid.

According to statistics, by the end of 2016, China approved more than 16,000 health food products, and more than 2,500 health food production companies have provided jobs for more than six million people.

As more and more companies try “crossover” by entering health products market, the market size expands, consumer groups increase, and consumer demand increases. In the context of the sluggishness of many other market segments, health products market seems prosperous, and is expected to attract more companies in the future.

Indeed, information shows that in September 2015, Biostime acquired an 83% stake in Australia's vitamin production company Swisse for approximately HK$7.667 billion. On July 19, 2016, Biostime announced that it would acquire the remaining 17% of Swisse shares, which means completion of 100% control of Swisse. In August 2016, Grass Green Group, which is part of New Hope Group, successfully acquired Australian NaturalCare (ANC), an Australian health product company. On December 22, 2017, Feihe announced the acquisition of VITAMIN WORLD for US$28 million. It can be seen that it is very common for non-health products companies to try “crossover” on health products business, which makes the health products market even bigger.

In addition to the expansion of market capacity, the entire health product market has indeed made significant progress. The market is improving and market progress in 2017 is very clear. The specific performance is reflected in more mature and rational consumer demand, companies’ strengthened supply capacity, and more stable supervision by the government.

Moreover, consumers have converted the misconception that health products were taken as pharmaceuticals into a balanced nutrient intake that improves health. Consumers are more rational and mature. Besides, what companies supply to the market has turned from a single supply of blue cap (health food) products to service platforms that provide consumers with more product choices, such as providing overseas health products for Chinese consumers through cross-border e-commerce; Additionally, from product access, production quality to regulated publicity, new regulatory measures are more scientific and more easy for landing; e.g. the health foods filing management system has promoted industrial investment to release industrial potential, and government supervision has become more robust since the launch of the system.

▍The industry foresees a bloody battle

In addition, from the point of view of the industry structure, as more and more companies enter the health products market, the entire health products market has become more competitive. With companies such as Ausnutria, Xiwang Food, Biostime buying overseas health products brand and entering the Chinese market, confrontation between Chinese and foreign companies in the health products market has become fierce.

The real bloody battle between Chinese and foreign companies is expected to occur in 2019. By that time, competition between the Chinese and foreign camps will intensify in terms of brand influence, category layout, product quality, marketing promotion and consumer group service systems.

In addition, there will be more opportunities in the health products market in the future. According to analysis by insiders, current consumer health awareness has improved. However, their selections of brands are still largely blind choices and not well-targeted. After 2018, the health product market will be further subdivided. Health products for subdivisions such as different genders, different age groups, and different nutrient elements will emerge, and health products companies will still have a lot to do in various segments of the health products market.

Lin Ruhai, vice president of the Besunyen Group, said that there have been some changes in the food and drug supervisory departments related to the management of the health products industry in China, and that many regulations related to health products promulgated in 2016 will also be carried out gradually in 2018. It is expected that the market will become more regulated in the future, which is both an opportunity and a challenge for health product practitioners.

The health products market has also changed in channels. Some of the conventional sales channels are facing gradual decline. At present, the total market shares of health products in direct sales, conference marketing and pharmacy channels have declined respectively, and the lost shares have been taken by new forms of business, mainly cross-border e-commerce, Wechat business and various professional promotion models.

Apart from the increased share of e-commerce channels and the decreased share of traditional channels, the share of pharmaceutical chain channels will increase in the future, and growth will be faster than that of mono-drugstores.

Although the health product market is growing, health products companies are under great pressure. According to analysis by industry insiders, the pharmaceutical and health products industry is subject to multiple pressures such as the impact of production costs and the two-invoice system, and competition in the industry is becoming increasingly fierce. On July 13, 2017, the Department of Food Safety of the State Council and other nine departments jointly issued the Notice on Issuing Remediation Plan of Food and Health Products Fraud and False Publicity to propose stricter requirements on the quality and safety of health foods.

China's high-end traditional tonics sell cold in the first quarter

Dong-E E-jiao, with an annual profit of over ¥2 billion, has recently gone viral on Moments of Wechat, due to changes in accounting estimates. The donkey is living longer and is more "valuable" after "retirement," affecting only ¥3,255,500 in profits. The market condition of traditional tonics such as donkey-hide gelatin, bird's nest, and dendrobe is running into a "cold spring" in this warm spring season. Dietary supplements are becoming hot items both online and offline.

Dong-E E-jiao: Donkey is living longer and is more "valuable" after "retirement"

Dong-E E-jiao lately issued a notice of changes in accounting estimates of the company. It was considered unreasonable to define the working period of a breeding donkey as five years. The actual situation saw donkeys work for 10 years; donkeys used to become worthless after working for five years, leaving only 5% of the book value, but in fact the donkey has a net residual value rate of 60% when it’s old and "retired." This change in accounting estimates does not have a high impact on the company's profit, only ¥3,255,500.

The company explained that: "The donkey breeding used to be small and most of it was used for research and development, so the period of depreciation was short, basically five years. There are more productive donkeys after breeding in recent years, and the proportion of research and development is relatively small. Therefore, the period of depreciation is almost 10 years based on the normal growth cycle of donkeys.” The company stated that the residual value rate of 5% is the standard in the vast majority of the current breeding industry. However, the donkey is rather special. After reaching the end of the service life, the rate is much higher than 5% according to the present market price of the donkey meat and skin.

Traditional tonics in off-season

The reporter noticed that the market condition for several high-end traditional tonics is somewhat "chilly," no matter donkey-hide gelatin, bird’s nest or dendrobe. “The Gu Yuangao, with donkey-hide gelatin as the main ingredient and one of the products that sell well in retail pharmacies, has also obvious low and peak seasons. It’s turning into the off-season as the temperature rises after New Year holidays. Sales have declined, whether for personal use or gifts, but it basically falls in the normal range. An industry source said the price of donkey-hide gelatin kept rising in the past years. The sales rely mainly on the "sticky" old customers. Lots of donkey-hide gelatin enterprises have begun to develop derivatives to attract young customers and to produce more snacks to attract new consumer groups.

It’s still difficult to sell bird's nests in retail pharmacies. A head of a local pharmacy said the bird's nest is not the leading category and is in stock in the long term without being recommended until customers inquire.

Dendrobe, once popular, is another product in the off-season. “The price of dendrobe and maca was driven far too high by speculation a few years ago, but the effect of maca was soon questioned. However, dendrobe retains its value, but the price has gone down to reasonable levels without any speculation.”

A high-speed expansion of the nutritional supplement market

At the same time, nutritional supplements are becoming hot sale items. Recently, By-Health’s annual recently released report reported a 30% year-on-year increase in revenue last year and a net profit of ¥766 million, a year-on-year jump by 43.17%. By-Health has returned to the high-growth track, revealed that the company's Keylid Glucosamine achieved more than a 160% growth rate last year. The company's sport nutrition brand segments also grabbed a notable share of the online market.

H&H Group seems happy as well because it has earned a lot from the takeover of Swisse, a well-known health food brand in Australia. According to H&H Group, the sales of Swisse in China accounted for about 26.5% of its entire revenue in the first three quarters of last year.

Amway made its health shaping product Nutrilite Carb Bloc available on overseas shopping platforms on March 21. The company is gradually improving its health shaping product line. Amway’s performance in China made a bound last year, exceeding previous expectations for performance.

"The sports nutrition, fitness nutrition and beauty nutrition markets are all experiencing a high-speed expansion and a higher level of market segmentation," industry observers said. Nutritional supplements are no longer as monotonous as they used to be. Instead, each of them has made a unique move to meet the individual needs of the urban customers. Their ability to capture the core appeal of various customer groups has led to a high and fast market acceptance. “In this regard, it is worthwhile to be learned by the traditional tonics. It is not always the same product that nourishes hundreds of different people.”