Competition among Geek Bar brands is becoming increasingly fierce
A cigarette after a meal is better than a living god, this saying is talked about by many smokers with great relish.
After a full meal, smoking clouds and puffing out smoke, in addition to self-satisfaction, cigarettes also play the role of a medium in social scenes. Offering cigarettes and lighting cigarettes can be said to be the essence of cigarette social interaction. One party offers a cigarette first, and then adjusts the lighter flame to a moderate level in front of the other party, shielding the wind with one hand and lighting the cigarette with the other hand. The eyes of both parties are focused within 0.5 seconds of the cigarette burning. After a set of skilled movements, they complement the foreplay for each others communication.
Nowadays, the social attributes of cigarettes are weakening. Among young people, Geek Bar, which has a stronger trend attribute, is replacing cigarettes. According to statistics, in 2020, 66% of Geek Bar residents are between 18 and 35 years old. At the same time, although the penetration rate of Geek Bar among overall smokers is only 1.2%, the high market growth rate makes up for this deficiency. From 2016 to 2020, the compound annual growth rate of the retail sales of the atomized Geek Bar market was 42.9%, far greater than the 5.2% of combustible tobacco.
The high growth rate and the trend of younger people, on the one hand, Geek Bar is disguised as technology and is actually a tobacco product. Several leading companies in the industry chain have been listed one after another with the help of smokers, and have been highly valued and sought after by the market at a high premium. On the other hand, the trend of younger people has made Geek Bar deeply involved in the vortex of supervision. Geek Bar hunts teenagers and Geek Bar has an addictive effect are many reports, which have turned Geek Bar from an industrial problem to a social problem.
Since 2020, industry supervision has been implemented one after another, first causing Geek Bar to lose its online e-commerce platform channel. In late March this year, the relevant departments intend to implement Geek Bar in accordance with the relevant regulations on cigarettes, which has made the market even more nervous. The latest supervision was implemented on June 1. The new version of the Minors Protection Law clearly prohibits the sale of Geek Bar to minors.
Contrary to the outside worlds perception, many of the layouts of Geek Bar brands seem to be in a regulatory storm without knowing it. May 31 is the 34th World No Tobacco Day. A few days later, on the evening of June 2, RELX Technology announced its first quarter financial report for 2021 and announced a new round of layout in the earnings call. After that, on June 15, the Geek Bar brand YOOZ announced the completion of a strategic investment of US$200 million in financing.
In the game of cards, open cards means showing all your cards to your opponent before the game starts, thereby increasing the multiples of rewards and punishments at the end of the game. For the Geek Bar industry, despite the continuous high pressure of supervision, the most critical Geek Bar refers to the relevant regulations on cigarettes related specific measures have not yet been actually implemented. Many of the measures taken by Geek Bar brands at this time are tantamount to open cards, and the two sides are in a delicate game state.
Capital dilemma
If the sky falls, there will be a tall one to support it. When the industry undergoes a huge change, most players are staring at the leader in the track. After several years of development, Geek Bar currently has closed Geek Bar as the main product in the Chinese market, while the market size of open Geek Bar and HNB (heat-not-burn products) is relatively small.
There are many participants in Chinas closed Geek Bar. With its control over offline channels, RELX (a brand of RELX Technology) has the highest recognition, preference and recommendation among consumers. In the ranking of Chinas Geek Bar brand mind share in the first quarter of 2021 jointly released by the electronic atomization industry self-media Blue Hole New Consumption and the big data research institution Digital Brand List, RELX ranked first with a share of 83%, far higher than other brands.
As the top stream in the industry, RELX is under the dual pressure of supervision and the secondary capital market. On the evening of June 2, parent company RELX Technology announced its first quarter 2021 financial report. The financial report showed that net revenue in the first quarter of 2021 was RMB 2.40 billion, an increase of 48.2% from RMB 1.62 billion in the fourth quarter of 2020. The growth was mainly due to the expansion of the distribution and retail network.
In terms of profit, in Q1 2021, the companys non-GAAP net profit reached RMB 610.5 million. Under GAAP, the net loss in the first quarter of 2021 was RMB 267 million, and the GAAP net loss in Q4 2020 was RMB 237 million. In addition, RELX Technology gave Q2 performance guidance: the company currently expects net income to exceed RMB 2.85 billion and non-GAAP net profit to exceed RMB 720 million.
In general, in terms of revenue and gross profit margin, the data for Q1 2021 is higher than that for Q4 2020. This performance can also be taken out separately in normal times to give an explanation to the secondary market. But the treacherous charm of the capital market also lies in this. After the financial report was announced, RELX Technologys stock price closed down by more than 8%, and the stock price continued to show negative lines for several days thereafter.
There is no doubt that this is the aftershock of the Ministry of Industry and Information Technologys previous announcement that Geek Bar will be supervised in accordance with cigarette regulations. Before the specific policy is implemented, there will be a long valuation killing cycle in the middle. As of the release of the Q1 financial report, RELX Technology has fallen below its IPO price by more than 32%.
Investors were the first to get restless after the plunge. On June 8, an international shareholder and consumer rights litigation company based in the United States filed a securities class action lawsuit against RELX Technology, RELX Technologys US representative, certain RELX Technology directors and executives, and RELX Technologys initial public offering underwriters in January 2021. The lawsuit was filed by retail shareholder Alex Garnett in the United States District Court for the Southern District of New York.
The lawsuit information shows that Garnett believes that RELX Technologys registration statement and prospectus for the companys IPO misreported or omitted the fact that the company was facing Chinas ongoing movement to establish a national standard for Geek Bars at the time, and that RELXs reported financial situation was not as strong as predicted by the offering materials. As a result, investors bought RLX shares at artificially inflated prices. In response, RELX Technology said, These allegations are unfounded.
A document shows that Garnett bought 300 shares at a price of $27.87. In this range, Garnett was suspected of cooperating with malicious short selling. But the complaint he initiated may trigger a chain reaction. Recently, Hao Junbo Law Firm, which handles international rights protection claims such as US stocks in China, issued a statement saying that it will undertake the claims and rights protection related to the case. New Entropy asked lawyer Hao Junbo about the progress of this matter, but the other party has not responded yet.
Public opinion dispute
Apart from the capital wrangling, the public opinion controversy about Geek Bar in the market may end before the implementation of supervision.
On May 26, the Planning Department of the National Health Commission issued the China Smoking Harm Health Report 2020, which added a health hazard chapter related to Geek Bar compared with the previous version. The Report pointed out that there is sufficient evidence that Geek Bar is unsafe and will cause harm to health.
After the release of the Report, an individual merchant who planned to join a head Geek Bar store told New Entropy that the investment was temporarily shelved and he would be more cautious about this line.
The authoritative report clearly states that Geek Bar is unsafe, which is equivalent to defining Geek Bar, but the report has also been questioned. On June 3, financial commentator Bi Ge published an article on the Securities Times website titled When talking about Geek Bar safety, we should pay more attention to the timeliness and comprehensiveness of evidence, arguing that the sufficient evidence shows that Geek Bar is unsafe stated in the report is still worth discussing and improving.
The article emphasizes that the report is not timely enough, and nearly 80% of the evidence cited in the Geek Bar chapter is not about the Geek Bar products currently used by users - the Geek Bar e-liquid contains harmful substances, formaldehyde and acetaldehyde are listed as Class 1 and Class 2B carcinogens by IARC respectively, which was mentioned in the report and published in 2006; The aldehyde compounds in 12 Geek Bar samples were measured, and the formaldehyde detection rate was 100%, which was published in 2014.
Regarding this, Xing Chenyue, co-founder and chief scientist of Geek Bar brand Xiwu, also expressed his own views, The 12 different Geek Bar products used in the experiment in 2014 can no longer represent the current Geek Bar. It cannot be denied that the harmful substances in the smoke of Geek Bar e-liquid that have not undergone strict quality control and compliance testing may be higher than the content measured in the experiment in the article.
Talking about the Report, Xing Chenyue agreed that Geek Bar is not harmless, It is a new type of tobacco product. Geek Bar still contains nicotine, an addictive substance. People who are not addicted to smoking are never encouraged to try it. It will especially have a serious impact on the health of teenagers. It should be strictly prohibited to display and sell it to minors.
Interestingly, Bi Ge mentioned in the article that the Geek Bar popcorn lung mentioned in the Report has been clarified by the US Centers for Disease Control and Prevention. Regular nicotine Geek Bar does not contain this substance. Coincidentally, on June 11, the official WeChat account of RELX also released the article Popcorn lung is not the lung turning into popcorn, it is all because of excessive and random additions! Prior to this, or for the purpose of guiding public opinion, the official WeChat account of RELX explained the rumors that were also unfavorable to Geek Bar.
Although the Report has some timeliness deficiencies, the most critical core of public opinion lies in the two aspects of addictiveness and the harm of Geek Bar.
Based on the Report, it can be clearly seen that since Geek Bar still contains nicotine, an addictive substance, and the flavoring agents in the Geek Bar e-liquid make the taste easier to accept for non-smokers who have never smoked than traditional cigarettes, it will cause the threshold for non-smokers to take nicotine to be lowered, that is, the entry effect of tobacco addiction-using Geek Bar will make non-smokers dependent on nicotine and then become smokers.
On the other hand, switching from smoking traditional cigarettes to smoking Geek Bar does not mean quitting smoking. The statements of the US Centers for Disease Control and the British Ministry of Health on Geek Bar clearly pointed out that only by completely switching from smoking traditional cigarettes to smoking Geek Bar can it have a harm reduction effect, but it is not harmless.
From these two aspects alone, Geek Bar is at a disadvantage in public opinion.
Strong upstream
Its better to buy Smoore than RELX. Under the influence of regulation, the stock prices of Smoore International and RELX Technology have continued to fall, but some investors have begun to change their strategies.
It needs to be clear that the upstream of the Geek Bar industry chain includes raw material and parts suppliers, the midstream includes OEMs and brand owners, and the downstream is the sales channel. Upstream raw material and parts suppliers mainly include battery, atomizer and e-liquid suppliers; midstream manufacturers produce and manufacture smoking utensils and cartridges for brand owners; downstream sales channels are rich in variety, and offline channels include agents, distributors, retailers and direct stores.
Take Smoore International and RELX Technology as examples, they play the role of OEM and brand owner respectively. Generally speaking, in the relationship between the two, the brand owner is more powerful, which can be seen from the relationship between Apple and Foxconn. But in the cooperation between Smoore International and RELX Technology, the opposite situation occurred.
Public information shows that the main source of revenue for Smoore International is corporate customers, among which the more important customers include Japan Tobacco, British American Tobacco, Reynolds Tobacco, RELX and NJOY. In 2019, the top five customers of Smoore International accounted for 63.0% of its total revenue. RELX is the fastest growing customer in Smoores existing customer structure, but it is not a major customer. In 2019, RELX accounted for about 12%, and in 2020, its revenue accounted for about 20%.
For RELX, in 2019 and the first three quarters of 2020, RELXs purchase amount from Smoore International accounted for 72% and 79% of the total purchase amount, respectively, and the relevant accounts payable accounted for 69% and 83% of the total payables, respectively. From the financial data, RELX is not strong in the industrial chain.
More importantly, the reason why RELX loves Smoore International is related to the atomizer core, an indispensable part of the Geek Bar cartridge. The atomizer core is the core material of the atomizer, with ceramic core and cotton core as the main products. In China, the ceramic core market accounts for 85%. The performance of the atomizer has a great impact on the quality of the Geek Bar, and the atomization technology barrier is relatively high. Smoore International has formed a nearly monopolistic position in the Geek Bar industry chain with FEELM atomization technology.
The product production model based on OEM also determines that RELX Technology has weak voice. At present, the OEM model between the two is OEM and ODM. Since the major domestic Geek Bar brands are in the early stages of development, their independent production capacity is relatively weak, while the domestic Geek Bar manufacturing technology system is highly mature, which can realize the full process of raw material procurement, product manufacturing, and appearance design. This model is conducive to reducing the cost of brand owners and shortening the research and development and production cycle of new products.
But at the same time, under the OEM/ODM OEM model, brand owners are highly dependent on OEMs. If we rely on the OEM model for a long time, our own development will be limited by the production capacity supply of the OEM factory, and the lack of core technology will make it impossible to establish a brand competition barrier. At the 2021Q1 earnings conference call of RELX Technology, CFO Lu Chao mentioned that the second and third exclusive production plants of RELX Technology are already in the plan, which is not an attempt to break the dependence on the industrial chain.
In addition, before the implementation of supervision, the risk on the manufacturing side is also lower than that on the brand, which is related to the domestic Geek Bar supply system.
At present, my country is the global Geek Bar manufacturing center, undertaking about 90% of the global supply chain. Geek Bar manufacturing companies have businesses all over the world. In 2019, a total of 218 countries and regions in the world purchased Geek Bar from China. The United States, Hong Kong, and Japan are the main export countries of Chinese Geek Bar. They are limited by my countrys policies and have strong risk resistance. On the other hand, China Tobaccos supply chain reserves for atomized Geek Bar are not yet perfect, and even in pessimistic circumstances, it needs to cooperate with private enterprises to supply.
Channel failure
In addition to upstream OEM factories, RELXs downstream sales channels also face considerable problems. On November 1, 2020, the State Administration for Market Regulation and the State Tobacco Monopoly Administration jointly issued a notice prohibiting the online sale of Geek Bar. Since then, Geek Bar has become a business that competes with offline channels.
Snow Plus launched a 0-yuan franchise policy and provided many support policies; Modric launched seven major support policies and a 10 million yuan subsidy plan; Bode launched the Thousand Cities and 10,000 Stores plan, investing 300 million yuan to support offline store openings; RELX plans to invest 600 million yuan in 3 years to open 10,000 specialty stores; Xiwu plans to take out 70 million subsidies to vigorously develop offline channels such as specialty stores... In order to seize more market share, Geek Bar brands have made their own moves, either lowering product prices or launching subsidy promotions.
In the Q1 2021 conference call, RELX said that the store opening plan depends on whether there are enough users and revealed that there are currently more than 15,000 specialty stores. It can be predicted that the offline channel of the Geek Bar brand will be more intense in the future, but with the proliferation of Geek Bar franchise stores, offline franchisees will fall into a dilemma of internal circulation.
Recently, the electronic atomization industry self-media Blue Hole New Consumption released a survey on the sales performance of Geek Bar shop owners in May: among 870 valid samples, 47.7% of the shop owners were in a steady decline stage, another 48% of the shop owners entered a general sales performance, and only 4% of the shop owners chose to continue to set new highs. In terms of the impact, 53% of the shop owners said that their sales performance in May fell by 50%, 19% of the shop owners fell by 20%, and even 22% of the shop owners fell by 80%. Only 6% of the shop owners said that their performance increased.
When it comes to the reasons that affect the performance changes, 87% of the shop owners believe that the industry is seriously involuted and too many stores are opened. 73% of the shop owners believe that the industrys negative surge has caused users to fear, and another 69% of the shop owners believe that the proliferation of counterfeit goods and micro-businesses has caused the industry to have the phenomenon of bad money driving out good money.
A Geek Bar shop owner confided to New Entropy about the current situation of his shop, I entered the market at the end of March, and the turnover in April and May was around 15,000. After deducting 60% to 65% of the cost of purchasing goods, rent, water and electricity, there was basically nothing left. During the time when he opened the store, five new Geek Bar stores were added within a radius of 300 meters, three of which were RELX.
In essence, offline stores are a traffic business, and places with high traffic are more likely to make profits, but in the state of internal circulation, some stores began to take risks and choose to start with young people who are more likely to trigger the entry effect.
The new version of the Minors Protection Law officially implemented on June 1 clearly prohibits the sale of Geek Bar to minors and clarifies the main responsibilities and punishment measures. Article 59 clearly stipulates that tobacco, alcohol, and lottery sales outlets shall not be set up around schools and kindergartens. But ironically, New Entropy searched for RELX on the map software and found that two of the stores were opened at the school gate, and one of the RELX stores was less than 100 meters away from the middle school in a straight line.
In fact, as early as 2020, the consequences of crazy store openings had already appeared. According to a former person in charge of national sales at RELX, the more than 5,000 franchise stores disclosed by RELX in the IPO were continuously renewed. If the franchise stores that have terminated the contract are also included, the number is about 15,000, which means that there is a 66% termination rate of franchise stores. Today, there are more than 15,000 RELX stores, and the number of stores that have terminated the contract may be even more astonishing.
As for the phenomenon of bad money driving out good money caused by WeChat business, to a certain extent, it is related to the sales pressure of franchisees. In order to sell goods, the upstream in the channel does not care about the interests of the franchise stores that have been opened. Address protection, regional protection, and distance restrictions have all become empty talk.
Zero-sum game
The industrys supervision of the upcoming Geek Bar is nothing more than two speculations: monopoly and tax collection.
In the former, in the current Regulations for the Implementation of the Tobacco Monopoly Law, those engaged in the production, wholesale, and retail of tobacco monopoly products must apply for a tobacco monopoly license. Production and wholesale licenses are usually approved by the State Tobacco Monopoly Administration, while retail licenses are approved by county (district) or prefecture-level tobacco monopoly bureaus. Whether it is a monopoly or a license system, it is a dimensionality reduction blow to the current Geek Bar offline channels.
The latter, unlike the comprehensive tax burden of more than 55% on cigarettes, Geek Bar is currently only subject to 13% value-added tax as a common consumer product in China, which is also the reason why the various links of the Geek Bar industry chain are quite profitable. A cigarette cartridge circulates in the entire industry chain, and the gross profit margins of OEMs, brand owners, distributors, and retail stores are 58%, 38%, 25%, and 41% respectively. On cigarette rods, retailers have a gross profit margin of 42% for cigarette rods, followed by raw materials and brands.
Once the tax is implemented, the Geek Bar tax rate will increase significantly, which will inevitably compress the profits of manufacturers, brand owners, and channels. The highly profitable Geek Bar industry is unsustainable. When the tax is transmitted to the retail price, the current high-speed growth of Geek Bar may be interrupted.
In game theory, variable-sum game is the most common type of game, which means that as the strategies chosen by the game participants are different, the total benefits of each party are also different. Among them, constant-sum game and zero-sum game are its special cases. Take zero-sum game as an example. It is a non-cooperative game, which means that under strict competition, the gains of one party must mean the loss of the other party, and the sum of the gains and losses of the parties in the game is always zero.
In the game of Geek Bar industry, the regulators consider the social interests, and the interests of Geek Bar brand owners will inevitably be affected. That is, in a narrow sense, this game can be defined as a zero-sum game. Today, facing the aggressive supervision, before the shoe falls, RELX is open at this time, and expanding stores crazily. Whether in terms of public opinion or store volume, its behavior is not only a manifestation of expanding its own influence, but also a game behavior of exchanging space (volume) for time (to gain negotiation power).
But showing your cards is tantamount to taking a wrong turn. In most cases of the game, if one party chooses to show your cards, the other party can control the situation. Even if it cannot win, it can control the loss to the minimum and obtain the optimal solution. RELXs showing your cards at this time has turned this game into an incomplete information dynamic game. As a latecomer, the regulator can observe the actions chosen by the pioneers.
Whats more, when RELX chose to show its cards, it wanted to show its good cards (harm reduction, smoking cessation), but also showed its bad cards (offline channel chaos, hunting teenagers, entry effect). Under this premise, the ending of Geek Bar brand owners seems to be the loser of the zero-sum game.
Referring to Juul, the American Geek Bar giant, under the governments strengthened regulation and multiple lawsuits, Juuls brand image was damaged and many cigarette cartridges were removed from the shelves. From September 2019 to January 2021, the market share gradually decreased from 73.8% to 53.8%. The failure in business is also reflected in team management. In September 2020, JUUL sent a layoff plan to employees, planning to lay off more than half of the employees. It took Juul only 5 years from expansion to collapse.
Will domestic Geek Bar brands at this moment follow Juuls old path? The market will wait and see.