Taoli Bread Dividends : A Strategy Amid Stagnant Growth
Despite declining profits, Taoli Bread dividends. Investors are left wondering: what's the strategy?
- Financial Sixianghui
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In August 2024, Taoli Bread (603866.SH) released its semi-annual report, presenting data that disappointed its investors. For the first half of 2024, Taoli Bread’s revenue amounted to ¥3.02 billion, a 5.79% decrease year-on-year, while its net profit attributable to shareholders was ¥289.95 million, down by 0.6% from the same period last year.
Despite these lackluster results, Taoli surprised the market by implementing its first-ever mid-year dividend since going public. According to Taoli Bread’s 2024 interim profit distribution plan, the company plans to distribute ¥191.97 million (pre-tax) in cash dividends. This represents a dividend payout ratio of 66.21% of the company’s net profit. For context, Taoli’s cash dividend ratios from 2019 to 2023 were as follows: 96.24%, 77.40%, 74.85%, 83.31%, and 50.16%, respectively.
This move raises an important question: Why would Taoli Bread increase its dividends, especially when the company’s performance has been on the decline?
The Transition of Leadership
Taoli Bread was founded by Wu Zhigang, who started the company at the age of 60. In 2019, he passed the business to his sons, Wu Xueliang and Wu Xuequn. Unfortunately, the second generation has yet to replicate their father’s success.
Since the leadership transition, Taoli Bread’s market capitalization has experienced significant fluctuations. As of the report’s release, the company’s total market value was ¥8.319 billion, nearly the same as when it first entered the stock market.
Looking at Taoli Bread’s revenue growth over the past five years, the situation is concerning. From 2019 to 2023, its annual revenue growth rates were: 16.77%, 5.66%, 6.24%, 5.54%, and 1.08%, respectively. This indicates a steep decline in growth momentum, with net profit also shrinking year by year. Though dividends have remained generous, this mix of sluggish revenue and declining profits creates an uneasy outlook for investors.
So, how can Taoli Bread break through its current impasse and restore investor confidence?
Supply-Side Strategy
Taoli Bread became a household name over the past two decades due to its effective business model. The company benefited from the trend of short-shelf-life bread, which has a fresher taste compared to long-shelf-life competitors like Daliyuan. However, newer direct-to-consumer bakery brands such as Weidomei and Holiland have risen to challenge Taoli’s dominance in this niche.
According to the 2023 “China Bakery Market Outlook” report, the country’s bakery market is expected to surpass ¥400 billion by 2028. While the industry is growing, Taoli appears to have lost momentum.
Taoli has acknowledged its challenges in recent years. Their reports highlight efforts to improve both demand-side and supply-side factors.
Focusing on the supply side, short-shelf-life products require a rapid and efficient supply chain. These products must be produced, transported, and sold within 5 to 15 days. This places high demands on production and logistics. Taoli Bread, with 22 production bases, 35 subsidiaries, and more than 310,000 retail terminals, has the infrastructure in place.
Historically, Taoli’s “central factory + wholesale” model allowed it to expand nationwide with relatively low production and distribution costs. The strategy of building factories in key cities and expanding outward worked well in its heyday.
However, Taoli has faced challenges in southern China, where expansion has not gone as smoothly as anticipated. Data from 2022 and 2023 show declining profit margins in both the South and East China regions. In 2023 alone, Taoli lost 12 dealers in southern China, further hampering its expansion efforts.
For Taoli’s central factory model to succeed, it needs a strong market presence and stable sales. However, weak demand has made it difficult for the company to leverage its cost advantages.
Demand-Side Obstacles
For many consumers, Taoli Bread is considered a “safe choice,” offering good quality at an affordable price. Over the years, Taoli has maintained stable pricing by controlling raw material costs. It uses a centralized purchasing strategy for essential ingredients like flour and oils. Additionally, its contracts with suppliers allow for a degree of flexibility in adjusting prices to avoid sudden cost spikes.
Taoli’s strong partnerships with major retailers like Walmart and Yonghui have helped maintain consistent sales. By June 2024, the company had more than 310,000 retail terminals across China. However, shifts in the retail landscape, such as store closures and dealer changes, have affected Taoli’s sales in regions like southern and eastern China.
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Although Taoli’s products have a good reputation, newer brands and products are gaining traction. The company’s best-selling products—like its Mature Series and yeast bread—still dominate, but its newer offerings have struggled to achieve the same level of success. Taoli has tried to innovate with new products, such as cocoa croissants, red bean rice bread, and meat floss rolls, but none have had a breakthrough similar to Holiland’s half-baked cheese series.
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Recognizing the need for innovation, Taoli has been increasing its R&D investment since 2019. The proportion of R&D personnel has grown from 0.2% of total staff in 2019 to 1.06% in 2023. The company now releases new products each year, but the question remains whether these innovations will resonate with younger, trend-driven consumers.
