Three Squirrels, a snack maker that made it in e-commerce, has expanded offline through franchising and now grapples with shrinking profits and disappointed franchisees.
By ZHAO Xiaojuan
ZHANG Ying runs a Three Squirrels franchise in a small town in Hebei and the nerdy, grinning squirrels are not doing much to lift the heavy atmosphere in the nut store. Foot traffic has dwindled due to recent small coronavirus outbreaks in Hebei, and Zhang is having a hard time disposing of the inventories she was told to stock up with for Chinese New Year. Franchise owners in nearby Shijiazhuang are even worse off with the city back in lockdown.
This is not what they signed up for. As a seller of nuts, dried fruit, and other stacks, Zhang has found Three Squirrels’ brand recognition weak to nonexistent, and though her initial investment was low compared to other franchises, profit has turned out to be a much harder nut to crack than anyone expected.
Three Squirrels made its name on Alibaba’s Tmall. Founded in 2012, on the eve of China’s e-commerce take-off, the company boldly forwent brick-and-mortar, committing fully to online retail instead. With savvy marketing, smart logistics and products that capitalized on the rise of “gourmet” snacks in China, the business was an instant success. One in every three bags of nuts sold on Tmall comes from Three Squirrels and in 2019 the company made its debut on the Shenzhen Stock Exchange.
As competition in the e-commerce space nibbled away at Three Squirrels’ profits, the online-only brand decided to seek opportunities offline, opening nearly a thousand franchises in two years. But profits have suffered. So have franchisee relationships. The company has tried slimming down and specializing, but the effectiveness of the new measures remains to be seen.
The decision to go brick-and-mortar wasn’t made on a whim. Competition has slowly nibbled at Three Squirrel’s high-profit margins as others expand their own online presence. Chasing the money through the franchise model was expected to capture the relatively untapped market in lower-tier cities. Two years on and Three Squirrels has 1,000 franchises nationwide, with plans to double the number this year. But sales are not as expected and store owners, discouraged and disappointed, are looking for someone to blame.
The most common complaint is the price. Stores prices are higher, even in the sales season, and the company spends big on campaigns online. Customers check out products in stores and place orders on Tmall. In fact, online prices are sometimes so low that franchisees buy their stock on Tmall posing as a regular consumer, rather than buying from the company directly.
Profits have taken a hit since franchising began. Sales grew fast every year since 2014, but profit growth tapered off in 2018. In 2019, as the company went all-out on a “thousand store” campaign and profits were fell back 20 percent to the 2016 level. This is alarming given that sales were 2.3 times those of 2016. The slack continued into 2020. The first half-year saw profit margin in all its product categories decline by as much as 6 percent.
Many of Three Squirrels’ competitors already have a well-established presence with online channels synergized with offline. Three Squirrels may not be able to turn the tide simply by expansion, whether online or offline.
ZHANG Liaoyuan, founder and CEO, said in September that Three Squirrels needs to “slim down and specialize.” Since then, it has discontinued 297 of 760 products but has launched over 100 products exclusive to brick-and-mortar stores in an attempt to compensate for price disadvantages. Over the past year, Three Squirrels has set up four new subsidiaries specializing in ready-to-go meals, infant food, pet food and gift boxes. The infant food brand, “Little Blue Deer,” has already reached 100 million yuan in sales, top of the Tmall infant food category.
According to Zhang, specialization means “targeted marketing.” It’s hard to distinguish buyers of nuts and dried fruits because almost everyone likes them, but more specialized products designed for particular customers would perhaps extract better value from TMall’s algorithms
The company has committed to spending 200 million yuan (US$30 million) on consolidating raw material supply, manufacturing, and distribution, onboarding twenty regular suppliers. Nevertheless, little of that money has actually been spent.
Analysts are concerned that heavy spending on the supply chain will strain Three Squirrel’s resources, already stretched after the franchise expansion. And there is no guarantee that new brands will replicate Three Squirrels’ previous success.
With declining margins and intensifying competition both online and offline, Three Squirrels, once “light and nimble,” now seems to be willing to try anything, even big-box retailers.
“Three Squirrels is well aware of its weakness,” ZHU Danpeng, a food industry analyst, told Jiemian News. “But to really strengthen its offline channels and bring them up to par with other brick-and-mortar brands, it will take a lot of trial and error, and time as well.”
As Chinese New Year approaches, the nerdy, grinning squirrels have been spotted in Walmart. As the retail scene reshuffles, no brand feels safe anymore.
