Natural Food – Initial Thoughts

Natural Food (1837.HK)

[August 30, 2019]

Interim Results Announcement @ Conrad

Background

I was simply attracted by the brand name and guided by my preliminary China theme – consumption upgrade. Before attending the meeting, I thought Natural Food was doing something like what General Mill does…

Initial Thoughts

I didn’t find anything that got me excited about the company during the meeting. While the strategic investment from Pepsi is interesting but it still takes time for both parties to generate synergy, if any. Apparently, the company is navigating through the O2O space and experimenting with omni-channel.

  • Online Channel

Natural Food cited some promising numbers in their online channels and boasted it is one of key reasons in addition to natural food concept why Pepsi was interested in investing them. However, without further disclosing on customer behavior or unit economics in online channels, it’s difficult to evaluate the performance.

  • Revenue Contribution & Growth

The growth of revenue contribution from online channel looks okay. It has around 20% of total revenue coming from online channels and growing at 24% year over year (primarily from e-commerce platforms).

  • Profitability across Channels

The company said the gross margin of offline channel and online channel were in mid seventies and in mid sixties, respectively. Without offline overheads, online channel has higher contribution margin (not sure what kind of margin it is). With online channel growing at a faster rate, the trend of blended gross margin is downward while the operating margin should go up in the long term, a rosy assumption. What I expect to see is rising customer acquisition cost if the company could not figure out this D2C (direct-to-customer) business. Online presence / traffic can be easily competed away. If the company does not manage online customer base well,  that asset will turn sour quickly and it will see “similar” “differentiated products in differentiate packaging” spring up like mushroom.

  • Side note

Will the subscription model work on certain type of products?

The primary risk to the thesis that Natural Food captures the opportunity of O2O, consumption upgrade, and health awareness, is execution. The company still has time but I don’t think the window is wide. I’m not sure whether founders/management team are aware of this.