Dismantle a company that subverts 90% of people's perception
Dismantle a company that subverts 90% of people's perception
Article | Market Value List, Author | Jia Lele, Editor | Zhao Yuan
On August 9, 1995, a Silicon Valley company named Netscape went public. The company, which had been established for only 16 months and had never made a profit, was wildly pursued by investors, and its share price tripled that day.
On that day, people were surprised not by the soaring stock prices, but by the fact that they could be listed without a mature profit model. It broke the inertia thinking, marking the acceptance of a new business model by the market:
As long as money burning can generate large-scale user growth, you can continue to get money in the primary market and enter the secondary market for cash even if you don't make money for the time being.
The seeds planted on the other side of the ocean are also popular in China more than a decade later.
From Fanke and Qianxun in e-commerce in the 2010s to Baituan battle, to taxi taking and take away, to bike sharing and AI enterprises in recent years, they can hardly escape this path.
In the era of loose financing environment, this model can certainly rapidly expand a company. Once the financing environment and outlets change, they will face an unprecedented challenge.
How does a company without capital operate? When studying related topics, we found an Australian company, EZZ Life Science Holdings Limited (hereinafter referred to as EZZ), on the track of life science. It went in the opposite direction, started in a very light mode, grew rapidly, and had a strong ability of self hemopoiesis. It saved money for the next step of development, and gradually approached the ultimate goal of integration of production and research.
In just two and a half years, EZZ has completed the growth from 0 to 1. From an entrepreneurial company to a public company listed on the Australian Main Board (ASX), its share price rose 150% on the day of listing, which has attracted wide attention.
This paper will take EZZ company as a sample to explore another path for the growth of a start-up company.
01. Start: light asset model
EZZ is a company established in July 2018. At the beginning of its establishment, EZZ was a wholesale distributor of skin care products of EAORON brand (hereinafter referred to as "Aorong"), and engaged in distribution business in Australia and New Zealand.
Why did EZZ Life Science (hereinafter referred to as "EZZ") start in Australia? Why intervene in the form of distribution?
From the perspective of industry, the skin care market in Australia and New Zealand grew at a compound annual growth rate of 7.2% from 2015 to 2019, reaching AUD3.1 billion in 2019, which is still an incremental market.
Dismantle a company that subverts 90% of people's perception
From the brand point of view, Aorong brand products are developed and produced by Australia United Pharmaceutical Co., Ltd., and are well known in the local market. It has a network of red products, such as smearing water light needle, water light needle mask, bee venom mask, etc. Some single products have been on the sales list of Chemist Warehouse, the first brand of Australian pharmacy, for three consecutive years.
Aorong enjoys high popularity among overseas Chinese by sponsoring Chinese stars to perform in Australia.
The concept of EZZ is consumer and market demand oriented. The signal of the popular Aorong brand was quickly captured by EZZ, and the cooperation was born from it.
From the perspective of the three forces model of consumer goods, Aorong has its own product power and brand power. The joint point of cooperation between EZZ and Aorong can only be in the channel, and channel development is a long-term task, especially in the market where the sales channel pattern of skin care products is relatively stable.
In Australia, the largest retailer of skin care products is pharmacy. In 2019, the proportion of skin care products sold through pharmacies reached 31.7%, followed by non franchised store retailers (23.2%), and department stores (19.8%). The number of franchised stores and e-commerce channels was 8.6% and 8.9% respectively. In New Zealand, non franchised retailers, pharmacies, department stores, franchised stores and e-commerce are ranked.
EZZ cooperates directly with the largest chain drugstore retailers in Australia and New Zealand, such as Chemist warehouse and Priceline, and sells through their relationships.
The retail network of Aorong skincare brand products is spread over more than 500 Chemist Warehouse, more than 400 Priceline stores and more than 400 pharmacies, supermarkets, other grocery retailers and specialty stores in Australia and New Zealand.
The EAORON facial mask products sold by EZZ accounted for 17% - 25.3% of the sales of the retail market in Australia and New Zealand in 2019 (different measurement standards).
Due to the smooth sales, EZZ has gradually become the largest distributor of Aorong skincare products. In July 2020, EZZ won the exclusive distribution right of the main offline channels with the promised sales volume as the chip.
In the whole process, EZZ orders directly from suppliers, does not produce products or generate inventory, and its operation mode is very light. More than 90% of assets are cash, cash equivalents and debt receivables.
Dismantle a company that subverts 90% of people's perception
The risk of earning the first bucket of gold in this way is small, but in the long run, the disadvantages of the distribution model lie in the uncontrollable upstream production costs, the strong bargaining power of downstream pharmacies, and the vulnerability to "splintering". For example, in fiscal year 20 (July 1, 2019 June 30, 2020), the gross profit rate of the Aorong brand fell from 39.5% to 22.0%.
EZZ Company has clearly realized the instability. EZZ, which has opened channels and accumulated funds, launched its own brand EZZ of the same name in December 2019, focusing on the big health and personalized health market, and completed the evolution from the first stage to the second stage.
02. Transition: from distribution to brand self support
From distributors to distribution and self support, EZZ's important opportunity is the devastating epidemic.
With the arrival of the epidemic, consumers in Australia and New Zealand began to panic to buy and stock up related drugs and health products to enhance immunity and dietary supplements in March 2020.
EZZ brand gene health products, which have only been operating for three months, also generated early income at this time, and by the end of June 2020, they had achieved an income of $800000.
On the other hand, the demand for skin care products in Aorong has been greatly reduced due to its inability to socialize, but it has also been impacted by the epidemic.
On the one hand, the immigration segregation in Australia and New Zealand has reduced the enthusiasm of foreign customers and purchasers. On the other hand, Australia has begun to implement the policy of closing stores for non essential goods. The situation in New Zealand is similar. Many retail channels for purchasing agents have been suspended. By March 25, a large number of enterprises had implemented home quarantine orders, Unnecessary retailers were closed.
The epidemic has brought about two changes, consumer demand and market, which is particularly hard for EZZ, which focuses on customers and markets.
When enterprises face the sudden black swan, it is a test whether they can adapt and adjust their strategies in time.
First, adjust the product mix in response to changes in consumer demand.
EZZ shifted the focus of its product strategy to the EZZ brand and expanded the range of its products. The number of categories increased from 3 in mid-2020 to 14, forming two business lines: high-end and personalized health.
EZZ is stronger than the channel power in terms of the brand power and product power that have been formed in Aorong, and new brands need to build product power and brand power, which determines that the operation of EZZ brand cannot completely follow the "light" of Aorong, and EZZ chooses non core links to rely on external completion.
Market research and R&D are important links.
EZZ's products are market-oriented. Hiring a third-party market research company to conduct market research and demand assessment is the beginning of the birth of a product.
In product research and development, EZZ cooperates with scholars from New Zealand Gene Research Center and Auckland University of Technology Gene Center, covering four research directions: gene anti-aging, HPV immunity, Helicobacter pylori and weight management.
Other links, such as production, packaging design, storage and logistics, are entrusted to a third party. EZZ appoints quality management personnel to strictly control the whole manufacturing process.
Second, the changes faced by the sales link are manifested in two aspects: market and channel.
As the local market shrinks, we are looking for incremental markets by "going to sea". The market of EZZ brand is located in the Asia Pacific region, including Singapore, Malaysia, Thailand, China and other places.
The offline channel is limited, and the e-commerce card is played. EZZ opened stores in Lazada, an e-commerce platform in Southeast Asia. In March 2020, EZZ settled in JD, and in July, it opened a flagship store in Tmall Global.
This strategy has achieved remarkable results, especially in China, where epidemic prevention has achieved better results. In the 21st fiscal year, EZZ's revenue in mainland China increased by 325% year on year, accounting for 45.5% of the total revenue, forming a strong growth momentum.
Dismantle a company that subverts 90% of people's perception
To promote a new brand to a new market through new channels, how to do marketing and promotion to reach consumers and occupy consumers' minds is a particularly critical step.
Reviewing the past ways in which traditional health care products have become popular brands, they have the following characteristics:
1. Precise market positioning, such as calcium supplement products that are easy to be osteoporotic when they are older;
2. High media exposure, such as advertisements 10 seconds before news broadcast;
3. Advertising words brainwash or implant curative effects, such as "no gifts for holidays this year", "the waist is not sore and the legs are not painful";
EZZ's marketing has also grasped these elements, for example, weight management products choose young people gathering places like Xiaohongshu and Diaoyin as the publicity platform. Compared with the previous mode of people looking for goods where products are distributed to terminal retail stores through established channels, the mode of people looking for goods where the platform gathers traffic to promote products can reach users more accurately. Some bloggers who are small red books and twitter are KOL themselves, and their publicity of product effects has a higher conversion rate.
EZZ completed the transition from the first stage to the second stage, which is the result of adapting to environmental changes and adjusting strategies in a timely manner, and also benefited from the original asset light mode of operation, the so-called "food in hand, calm in mind".
Its strategy for the next stage includes controlling the whole production process through the acquisition or construction of GMP certified manufacturing plants. In this process, it is inevitable that assets will become heavier and capital expenditure will inevitably increase. So what are the achievements of EZZ's transformation and how much ammunition will be saved for the next stage?
03. How is the financial performance after the transformation?
First, let's conclude:
1. Marketing has driven revenue growth, but also consumed net profits. Overall, profitability has improved, and the original model has been verified.
2. The quality of earnings is high. The cash flow generated by the company's operation is sufficient to meet the current operating and investment expenses, but for the acquisition and construction of its own production line, external financial support is still needed.
In terms of profitability, EZZ has significantly increased its gross profit rate through the adjustment of product structure, and expanded the incremental market, resulting in a significant increase in revenue.
As a distributor, EZZ Company earns product price difference and profits in one link of the industrial chain. The gross profit margin in FY21 is 29%; Among self operated brands, EZZ Company directly faces customers and earns most of the profits in the industrial chain. In FY21, the gross profit margin was 82%.
In the 21st fiscal year, the revenue of EAORON brand products decreased from 16.554 million Australian dollars to 10.918 million Australian dollars, down 34%, while the revenue of EZZ brand increased from 800000 Australian dollars to 11.4 million Australian dollars, up 13 times, accounting for 51% of the revenue.
Between rising and falling, the gross profit margin increased from 23% to 56%, and the overall revenue increased from $17.315 million to $22.287 million, a year-on-year increase of 29%.
It is undeniable that EZZ has paid a high price in order to open the market and increase income. The most typical is that the expenditure on marketing and other aspects has increased significantly from 1.554 million Australian dollars to 7.843 million Australian dollars, which is the most important expenditure besides the cost, accounting for 35.2% of the revenue in FY21.
At what level is 35.2%? In horizontal comparison, the sales expense rate of mature brands in the skin care industry, such as Shanghai Jiahua and Peraya, is 35% - 45%, and the sales expense rate of some emerging brands, such as Yixian E-commerce (Perfect Diary), is more than 60%.
Dismantle a company that subverts 90% of people's perception
By contrast, the 35.2% sales expense rate is not high, which means EZZ is relatively restrained in marketing and pays attention to efficiency.
In terms of net profit, EZZ Company increased by 28% from AUD1586000 to AUD2031000 in FY21, with the net interest rate basically unchanged at 9.11%.
Net profit is wealth on paper, while expenditure requires real gold and silver, and the quality of profit is crucial.
In FY20 and FY21, EZZ received operating cash inflows related to sales of AUD 19.586 million and AUD 23.846 million respectively. Considering relevant taxes, it is basically that the bank and goods have been paid off, and there is no case of customers defaulting on payment for goods.
Another performance of high profit quality is that accounts receivable did not increase with the growth of income, which were AUD2.339 million and AUD2.047 million respectively.
As of June 30, 2021, the cash and cash equivalents of EZZ will be $8.854 million, a net increase of $5.68 million over the same period of the previous year, of which the actual funds raised by issuing shares will be $5.55 million, less than $5.68 million.
In other words, the cash flow generated by EZZ's operation has a balance in addition to meeting the daily operation (payment to suppliers, employee compensation, etc.) and investment activities such as purchasing equipment. Of course, the premise is that in the current mode, there is no acceleration expansion.
According to EZZ's goal of transforming itself into a life science company centered on causes, only the accumulation of its own cash flow may miss the opportunity, and relying on external financing has become a necessary means.
The model has been verified. At this time, seeking financing in the capital market is less risky for social shareholders.
If all goes well, EZZ will integrate research, production and marketing in the next stage, and respond to market trends more flexibly and timely. The transformation of internal processes in the production process will further reduce costs, improve gross profit margin and profitability, and thus the moat will be widened step by step.
04. Conclusion
Reviewing the two transformations of EZZ, we believe that new brands and new enterprises should get two inspirations:
The first enlightenment is whether to research and develop or to implement.
A typical example is AI enterprises, which look for scenarios with technology. In the process of technology accumulation, enterprises cannot make ends meet, and they rely on the financing attracted by the concept to maintain their operations. Because the scenarios of AI application are often non-standard, commercialization has become a major obstacle, and profitability and scale cannot be achieved at the same time. Once the financing environment is cold, it may be over before we can find the scene.
The other logic is EZZ, which is market-oriented and looks for products that consumers need. After a certain amount of funds and resources are accumulated, we can master R&D and production. The process has also changed from "finding" products needed by consumers to "doing" products needed by consumers, forcing research and development.
Neither of the two models is right or wrong, but common sense such as reducing losses and seeking profits becomes valuable when the market is precooling or in a crisis.
The second enlightenment lies in the utilization of industrial chain.
Enterprises often believe that only in a strong position on the industrial chain can they have the ability to integrate the industrial chain. Of course, Apple's strong industrial chain integration ability lies in its absolute brand power, so as long as we master the "design" brain, we can get most of the profits on the industrial chain.
When there is no absolute voice power, it can also maximize the use of its own resources by giving full play to its own advantages and outsourcing non core links in the form of close cooperation.
It has also been fully verified in the development of EZZ that only by making good use of the value of the industrial chain can we leverage the big with the small.
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