This is an English adaptation of a FoodBud historical article originally published on October 2, 2021.
On September 30, 2021, Chinese snack retailers Liangpin Puzi and Three Squirrels both faced large planned shareholder reductions. For chain operators, the Liangpin Puzi case is useful less as a market-timing story than as a look at how investors were reassessing internet-era retail brands, channel structure, and operating scalability.
Liangpin Puzi announced on the evening of September 30 that three concert parties, Zhuhai Hillhouse Tianda Equity Investment Management Center (Limited Partnership), HH LPPZ (HK) Holdings Limited, and Ningbo Hillhouse Zhiyuan Investment Partnership (Limited Partnership), planned to reduce their combined holding by no more than 24.06 million shares, or no more than 6% of total share capital.
The reduction was to be carried out through centralized bidding, block trades, or negotiated transfer between October 29, 2021 and April 7, 2022.
These shareholders had invested before Liangpin Puzi’s listing and, at the time of the announcement, together held 36.0238 million shares, equal to 8.98% of total share capital. Based on the latest closing price of RMB 38.61 per share, the combined holding was worth nearly RMB 1.4 billion.
This was not the first reduction. From March to August 2021, the same shareholders had already reduced Liangpin Puzi holdings by 10.7765 million shares at prices between RMB 33.07 and RMB 53.19 per share. During that reduction period, Liangpin Puzi’s share price fell more than 30%.
On February 27, 2021, Liangpin Puzi had disclosed Hillhouse’s earlier reduction plan: no more than 24.06 million shares, or 6% of total share capital, citing its own funding needs. Before that plan was implemented, Zhuhai Hillhouse, Hong Kong Hillhouse, and Ningbo Hillhouse together held 46.8003 million shares, or 11.67% of total share capital.
A June 8 announcement showed that from April 28 to May 28, the three entities reduced holdings by 2.0163 million shares through centralized bidding, equal to 0.50% of total share capital. From May 6 to June 7, they reduced a further 3.345 million shares through block trades, equal to 0.83% of total share capital. By June 7, their combined reduction had reached 5.3613 million shares, bringing their stake down from 11.67% to 10.33%, a reduction exceeding 1% of total share capital.
Hillhouse Capital had invested more than RMB 800 million in Liangpin Puzi in September 2017, becoming a strategic investor and supporting the company’s move toward the premium snack market. Liangpin Puzi listed on China’s A-share market on February 24, 2020. After listing, it recorded 15 consecutive limit-up sessions, and its market value once exceeded RMB 30 billion.
Liangpin Puzi’s stock had been in a prolonged decline since the second half of 2020. From July 1, 2020 to September 30, 2021, the cumulative decline reached 47%.
Operating results moved in the opposite direction. Since 2018, Liangpin Puzi had delivered three consecutive years of revenue and net-profit growth. In the first half of 2021, revenue reached RMB 4.421 billion, up 22.45% year on year. Net profit attributable to shareholders was RMB 192 million, up 19.29%. Gross margin from the core business rose 1.56 percentage points year on year to 32.46%.
Core business revenue was RMB 4.309 billion, up 21.36%. Online channels contributed 51.58% of revenue and offline channels 48.42%. Online revenue grew 19.34% year on year, while offline revenue grew 23.58%. Gross margins improved across channels: online channel gross margin rose 1.64 percentage points, and offline channel gross margin rose 1.45 percentage points.
As traffic became more decentralized, Liangpin Puzi continued to defend traditional e-commerce while expanding into social commerce and community commerce. In the first half of 2021, non-platform e-commerce, including social and community channels, generated RMB 399 million in revenue.
Offline expansion also continued. By the end of June 2021, Liangpin Puzi had 2,726 offline stores across 22 provinces, autonomous regions, and municipalities. In June, it entered Qinghai for the first time and accelerated expansion in southwest and northwest China, while further developing Shandong, Hebei, Shanxi, Yunnan, Guizhou, and Hainan.
Regionally, central and eastern China delivered clear growth. Hubei revenue rose 20.05% year on year. Eastern, southwestern, and southern China grew 31.72%, 28.23%, and 30.98%, respectively.
To broaden offline distribution, Liangpin Puzi established a distribution-channel business unit in the first half of 2021, working with large key-account retailers, convenience stores, community supermarkets, and new-retail platforms. It had entered Retail Link and Jingxitong and reached strategic cooperation with Walmart, Hema Fresh, and Yonghui Superstores, providing customized products for these channels.
Li Yue, head of consumer-sector research at Hillhouse Capital, had recently summarized Hillhouse’s investment methodology around four dimensions.
First is information collection. Investors may collect 100 data points related to a company and its industry. This is not sufficient to make a good investment, but it is a necessary foundation.
Second is change, or identifying the main contradiction. Of 100 factors affecting a company, only one or two may determine its direction. There is no perfect answer, only the best answer under a given time and context.
Third is the market. Hillhouse does not emphasize this layer as heavily, but it sees valuation as art and fundamentals as science. Market conditions determine the entry point.
Fourth is time and capital allocation: spending both on genuinely good businesses and genuine structural change. Hillhouse sees this as central to long-term differentiation.
Li used “superstring theory” as a metaphor: the world is high-dimensional, complex, diverse, nonlinear, and unknowable. Low-dimensional, simple, single-factor, linear, or “perfect” thinking is dangerous. At the same time, the main contradiction driving development is often simple and singular, so investors need both quantification and strong qualitative judgment.
Hillhouse describes a classic framework: business, environment, people, and organization.
Business has a kind of destiny. Some categories have naturally better economics than others, regardless of effort.
Environment affects how a universal need is expressed. People in the United States and China both need to eat and drink, and people did so 100 years ago as well. But different times and places create different business forms. Many industries and companies earn money from their environment rather than from the intrinsic quality of the business or from organizational capability. That can still be investable, but if the environment changes, the view must change as well.
People and organization matter differently across situations. Historically, Hillhouse believed business attributes outweighed people and organization. But as competition improved across industries, the chance of finding a great business, strong environment, and exceptional organization all at once became much lower. Hillhouse therefore began investing in some businesses that did not look structurally attractive, where it believed exceptional people and organizations could change the nature of the business.
Hillhouse looks for entrepreneurs with insight and long-term vision, but Li highlighted two operating challenges.
The first is breaking through category bottlenecks. He used Haidilao as an example: restaurant operations are not naturally easy, but if a company breaks through the management bottleneck, it can create a very large premium. At the time discussed, Haidilao’s market value was about RMB 200 billion, while the second-largest restaurant company was below RMB 10 billion.
The second is moving from a single-product company to a platform company. This requires turning individual capability into organizational capability, and turning business-unit capability into group-level capability.
Li described two organizational types. A control organization is top-down and closely linked to the founder’s personality. It can mobilize substantial resources when entering new areas, but may lack bottom-up innovation and can hit leadership-capacity limits if it does not build middle-office and back-office capabilities.
A context organization grows bottom-up and may use internal competition mechanisms. It can produce broad innovation across multiple areas, but has its own coordination challenges. Different product lines and different time-space contexts require different organizational focus.
Hillhouse’s first question is whether time is a friend. Businesses that must rush to list by a certain date do not meet the standard, including in primary-market investing.
The second question is whether the company becomes stronger in a worse environment. Hillhouse argues that only supply-side strength, core capability, or industry barriers can carry a business through cycles. The strongest companies often gain share and profit when the industry worsens, then recover fastest when the next upturn arrives.
The third question is whether scale is a friend. Many businesses only become bigger with scale, not stronger. Restaurants and education services, viewed in one dimension, were cited as examples of businesses with difficult scaling characteristics: as store counts rise, people-management complexity and variance rise too. A 1,000-store restaurant chain still bears a high proportion of single-store costs, including rent and labor, and may not enjoy meaningful procurement advantage in China’s complex food and meat supply chain.
Yet this is also why bottleneck-breaking operators can become exceptional. Haidilao was cited again: if most operators can only manage a few stores, but one company breaks that ceiling, it can stand apart. In education, New Oriental and TAL were cited as major Hillhouse holdings. The pandemic and the shift online favored leading and oligopolistic players, while many smaller institutions failed.
The fourth question is whether technological progress helps or hurts. In traditional consumer goods, channel control could allow a brand to control hundreds or thousands of stores. With Tmall and Taobao, consumers became more self-directed. Hillhouse observed that only four or five industries became more concentrated; most reverted to their natural structure.
Belle was used as an example. Hillhouse first went long, then began shorting the company from 2012, and later privatized it at the bottom. In footwear and apparel, the move from offline to online revealed a naturally fragmented structure because consumers are style-driven, brand loyalty is weak, and products are mutually substitutive: people often do not want to wear the same thing as yesterday or the same thing as colleagues. Department stores had previously created channel-based concentration, but online self-directed decision-making changed the main contradiction.
By contrast, liquor, sportswear, and ultra-premium cosmetics became more concentrated, while lower-end cosmetics became more fragmented.
Hillhouse frames expenses as the cost of acquiring users. Gross margin, in this framework, reflects the cost to the consumer of leaving the brand.
If Company A sells a product costing RMB 50 for RMB 100 and earns RMB 20 in net profit, Company B can enter with a similar RMB 50 product priced at RMB 98. If consumers face no cost in leaving A, they move to B. A then cuts price or increases spending to win them back, and average returns eventually fall to 4%-5%, below what the business originally appeared to offer.
Moutai’s premium reflects the consumer’s high cost of switching away from the brand.
Hillhouse breaks brand attributes into five broad categories: emotional, safety, differentiation, convenience, and addiction. Emotional attributes include self-expression, association with joy or sadness, and social settings. Beer was cited as a strong category because it resembles beverages but also carries alcohol attributes. AB InBev, despite selling beer at around RMB 10 or just over USD 1 per bottle in many markets, can earn net margins above 40% in some places, comparable to Moutai and Wuliangye.
Safety attributes do not necessarily mean a product makes the user safe; rather, not using it may feel unsafe.
Li argued that China differs from mature Western markets in two fundamental ways.
First, China’s social cycles are shorter. Japan has a symbolic imperial continuity of about 1,400 years, and Japan and India both have true century-old brands. China, in this view, does not have the same continuity, so brand cycles are shorter.
Second, China’s business models emerged at the same time. In the United States, retail evolved from grocery stores to department stores to supermarkets, then into the Walmart model, Costco model, discount stores, convenience stores, and other forms. In China, many models appeared simultaneously. E-commerce represented a leap from early stages directly to a data-rich retail form, unlike any previous retail format.
Coca-Cola is a major Buffett holding and a good business in the United States, but Hillhouse said it would not spend much time on that kind of business in China unless the people and organization were exceptional.
Li cited two differences. First, U.S. food and beverage variety is far narrower than China’s. In the United States, nonalcoholic beverage choices are relatively simple: hot beverages are mostly coffee and tea; cold choices include water, carbonated water, juice, and energy drinks. China and Japan have far more SKUs, which is good for consumers but difficult for companies.
Second, Coca-Cola’s U.S. system developed through bottlers with local distribution territories. Glass bottles mattered because they were heavy, had short transport radii, and required two-way logistics: cola went out and bottles came back. Scale improved capacity utilization, and the U.S. three-tier distribution system protected the structure by preventing brand owners from directly controlling distributors or stores.
China differs. Asian tastes are more varied; disposable PET packaging changed the economics; and China does not have the same three-tier distribution law. As a result, companies such as Tingyi, Uni-President, and Nongfu Spring built very large sales teams, and competition became intense across nearly every link in the chain.
Beer can be an excellent business, with ultimate profit margins of around 40 percentage points in many markets. In China, however, beer earned only two or three points of profit margin for a long time. Hillhouse had watched the industry for 10 years. Entering in 2006 would have produced roughly a threefold gain over 10 years; entering in 2016 would have produced roughly a threefold gain over three years.
Li divided China’s beer market into four stages.
Stage one, from 1990 to 2010, saw rapid growth in per-capita consumption and rapid capacity expansion.
Stage two, from 2010 to 2015, saw per-capita consumption flatten or slightly decline while capacity continued to rise. Around 2013-2014, even the two best companies, AB InBev and Snow Beer, were earning only two or three points of profit margin, compared with 15%-20% previously.
Stage three is continued demand slowdown while capacity expansion stops, because leaders are earning very low margins and smaller players are losing money.
Stage four begins when new demand drivers emerge and supply has already narrowed. Hillhouse focuses mainly on this fourth stage, although it may also invest in stage one, which is often more suitable for VC and PE investors.
In stage four, demand recovery may be slower than in stage one, but supply is constrained, the winners are clearer, and the risk of being wrong is much lower. For beer, Hillhouse saw 2015 as a clear dividing line because China’s per-capita beer consumption had stopped rising. Li invoked Peter Lynch’s point that growth is not always a friend, and added the reverse: lack of growth is not always an enemy.
The fourth stage can offer large return potential despite modest growth. In China beer, Hillhouse saw room because beer prices were much lower than overseas prices, with potential room of three to four times. New post-1990s consumers were also entering the market in their mid-20s. After years of brutal competition and capacity clearing, leaders had concentrated share, smaller companies had exited, and major companies could begin to form a new equilibrium. With investor expectations already destroyed, Hillhouse described the setup as a moment when “all the stars” were aligned.
Note: share-reduction, market-value, IPO/listing, and forward-period figures are historical as of the original 2021 article.