This is an English adaptation of a FoodBud historical article originally published on November 14, 2021.
For chain operators watching packaged bakery, Taoli Bread offers a useful case study: a short-shelf-life bakery leader with deep factory and route-to-market capabilities, but also rising cost pressure, uneven national expansion, and questions over founder-family commitment after repeated share sell-downs.
On November 11, 2021, Taoli Bread announced that Sheng Yali, one of the company’s actual controllers, had reduced her holdings by about 10.4913 million shares between August 19 and November 11, 2021. The reduction represented 1.1% of total shares, and more than half of the planned sell-down had been completed.
Taoli Bread, known as the first A-share listed bread company, is a classic family-controlled business. Its 2021 third-quarter report showed that founder Wu Zhigang’s family collectively held more than 65% of the company and occupied seven of the top eight shareholder positions.
After the lock-up period expired, the Wu family began a series of share reductions:
In less than three years after the restricted shares were released, the Wu family had completed seven rounds of reductions and was conducting an eighth, cashing out about RMB 3.931 billion through the secondary market.
Meanwhile, from 2015 to 2020, Taoli Bread distributed dividends of RMB 248 million, RMB 135 million, RMB 377 million, RMB 471 million, RMB 658 million and RMB 680 million, totaling RMB 2.569 billion. Roughly RMB 2 billion of that flowed to the Wu family.
On the 2020 Forbes China Rich List, the Wu family’s wealth reached RMB 30.09 billion, making the family Shenyang’s richest.
Taoli Bread’s response to criticism was that the company encouraged older family shareholders to exit, which it said would help the core team manage the company more centrally. It also argued that selling when the share price was low created an opportunity for investors, otherwise strategic investors would not be able to obtain shares.
Wu Zhigang built Taoli Bread from a bakery workshop in Dandong into a national bread company over more than 20 years, and the company listed on the A-share market in 2015.
In 2019, Taoli Bread held more than 40% share in China’s short-shelf-life bread market and led the category by a wide margin.
But internally, the business still had structural constraints: a concentrated product mix and heavy dependence on northern China. In 2020, revenue was around RMB 6 billion and annual bread output exceeded 350,000 tons. Bread and pastry products contributed about 97% of revenue, while mooncakes, zongzi and other products were negligible.
By region, the northeast, Taoli’s home market, contributed about 50% of revenue. North China and East China each contributed about 20%. The company had built five production bases in Wuhan, Shenyang, Shandong, Jiangsu and Zhejiang to expand southward, but operating performance was not optimistic.
On October 18, 2021, Taoli Bread reported third-quarter results. Third-quarter revenue was RMB 1.724 billion, up 5.57% year on year, while net profit attributable to shareholders was RMB 200 million, down 25.37%.
For the first three quarters of 2021, revenue reached RMB 4.663 billion, up 6.67%. Operating profit was RMB 720 million, down 17.35%; total profit was RMB 730 million, down 17.21%; and net profit attributable to shareholders was RMB 569 million, down 17.1%. In short, revenue grew but profit declined.
Quarterly gross margins in the first three quarters were 26.56%, 26.56% and 25.68%. Excluding the effect of 2020 and restoring comparability, the company’s historical average gross margin was above 27%. Rising prices for flour, sugar, gasoline and other commodities challenged cost control. At the same time, capacity ramp-up and market expansion pushed up unit manufacturing costs and return rates.
Sales-expense control did not offset the gross-margin decline. Sales expense ratios in the first three quarters were 9.22%, 8.84% and 8.43%, while net margins attributable to shareholders were 12.27%, 12.83% and 11.54%. The third-quarter decline came during peak season, though the margin remained close to the 2017-2019 average of 11.65%.
Taoli Bread’s gross margin had long been criticized as low for the bakery sector. In the first half of 2021, Ganso’s gross margin was 64.21%, Christine’s was 44.48%, and Taoli Bread’s was only 26.56%, well below peers and still declining.
Bakery products can be divided by product type into bread, pastry, cake and other desserts. By shelf life, they can be divided into short shelf life products of 1-15 days, medium shelf life products of 1-3 months, and long shelf life products of more than six months.
Across the bakery value chain, upstream yeast has the highest concentration, followed by midstream short-shelf-life bakery manufacturing such as packaged products sold in convenience stores and supermarkets. Taoli Bread, Garden and Mankattan are leading players in this segment. Upstream fats and flour are also relatively concentrated, with CR3 around 30%. Bakery storefronts are the least concentrated part of the chain.
As a rough comparison, Angel Yeast reported revenue of RMB 5.234 billion and net profit of RMB 828 million in the first half of 2021. Ganso, a downstream store operator, reported revenue of RMB 1 billion and net profit of nearly RMB 61.78 million over the same period. The economics of upstream ingredients were stronger.
Yeast accounts for only 0.8%-1.5% of bread fermentation, but it is critical to product quality. The yeast industry is capital- and technology-intensive, with each capacity expansion requiring substantial investment and a 2-3 year construction cycle. Angel Yeast alone held roughly half of China’s domestic yeast market.
Taoli Bread’s model is a domestic “central factory + wholesale” bakery model focused on bread and pastry production and sales. Its main product is Taoli-branded bread. It also produces mooncakes and zongzi for traditional holidays. In 2020, bread products contributed more than 97% of revenue.
Taoli Bread’s terminal network covered more than 300,000 outlets. As of June 30, 2021, it had established production bases in 20 regions nationwide. It mainly used a make-to-order production model, flexibly planning output according to market demand, with centralized factory production.
For seasonal products, production was concentrated. Mooncake production lasted about 45-60 days each year, mainly one to two months before Mid-Autumn Festival. Zongzi production lasted about 35-45 days, mainly from 45 days to one month before Dragon Boat Festival.
Sales were mainly through direct sales and distributors. For large chain supermarkets, KA customers, and small and medium supermarkets and convenience stores in central cities, the company signed agreements directly. For out-of-town convenience stores, county and township shops, and small stores, it used distributors.
On the cost side, Taoli Bread’s expense ratio had risen to 23%, with product logistics and delivery accounting for as much as 60%. The main drivers were regional market development and a higher daily-delivery ratio. In 2020, because of new revenue-recognition standards, product delivery service costs were moved into operating costs. In 2019, product delivery expenses were RMB 700 million, compared with RMB 580 million in 2018. In accounts payable, delivery expenses rose from RMB 44.14 million in 2019 to RMB 64.11 million in 2020.
Taoli Bread was still in an expansion phase. As factories increased and market density deepened, freight costs were unlikely to decline in the short term and could even rise.
For short- and medium-shelf-life products, production costs do not differ much from long-shelf-life products. The main differences are fast-turn logistics costs and product loss costs. Under the central factory plus wholesale model, short-shelf-life bakery products place very high demands on the supply chain. Taoli’s agile production system and improving supply chain were core competitive barriers.
As industries mature, value chains often compress from many steps between raw materials and end consumers into fewer steps. When front-end traffic is strong enough, operators often take stronger control of core supply-chain links.
Krispy Kreme was cited as a relevant comparison. It previously focused mainly on wholesale, but after being acquired by JAB, it strengthened the store side and pursued fresh daily delivery. Of its more than 9,000 global outlets, over 7,500 were Delivered Fresh Daily points of sale, somewhat similar to convenience-store shelf coverage in China.
The model of factories, large stores, small stores and convenience-store points of sale helped Krispy Kreme densify coverage and shift from wholesale toward fresh daily distribution.
After listing, the Wu family team repeatedly cashed out large sums, totaling RMB 4.4 billion when share reductions and related cash-outs are considered in the article’s framing. Another explanation given was that many family members were already older and needed liquidity. Selling after listing is normal, but continued sell-downs and family exits raise questions about team energy and commitment.
At the same time, China’s bakery market was changing quickly, creating opportunities for new brands.
Taoli Bread said it had more than 300,000 distribution points and internally expected that number could reach 1 million to 1.5 million, compared with Yili’s 3 million.
The first issue was capacity. Because commodity and labor costs had risen in recent years, Taoli planned to continue factory construction until around 2024-2025, eventually reaching more than 30 factories. Each factory would cover more than 500 kilometers, similar to Juewei’s central kitchens covering 300-500 kilometers. More than 30 factories were expected to support RMB 10 billion to RMB 20 billion in revenue.
Taoli had previously set a target of reaching RMB 10 billion scale by 2023. Based on post-pandemic feedback, it adjusted that internal target and planned to complete it in 2024. At the time, Taoli Bread’s valuation was still RMB 27.47 billion.
According to Taoli Bread’s 2020 annual report, sales were mainly direct and distributor-based, with direct sales accounting for 61.7%.
Regionally, the company remained strongest in Northeast and North China, while other regions were still underdeveloped.
Based on Taoli Bread’s external communications, East China was profitable overall, but the Yangtze River Delta dragged on results, with Jiangsu, Anhui, Shanghai and Zhejiang loss-making.
The company expected capacity to be released in these regions, so it adopted a relatively aggressive approach to gain share. South China had also been aggressive, but capacity issues forced a regional adjustment and some strategic retrenchment, with the goal of improving sales first and converting gradually to profitability.
South China was loss-making but moving closer to breakeven. In 2021, it faced challenges including Guangdong’s power restrictions, which hit capacity hard. South China was also far from other production bases, making interregional transfers inconvenient.
Central China was more stable and was expected not to lose money that year. South China’s first-half growth was solid and near breakeven. East China’s Yangtze River Delta losses were larger; labor and other costs were high, and new factories in Jiangsu and Zhejiang faced capacity ramp-up, depreciation and amortization pressure.
Power restrictions added further pressure. In Taoli’s Northeast home market, operations were more protected than in Jiangsu and Guangdong. Before power restrictions, the Jiangsu factory’s utilization rate was 40%; under restrictions, it was equivalent to only about 20% utilization.
Northwest and Southwest China were affected by the pandemic. Because the 2020 base was high, tourism weakness in July and August 2021 hurt sales. Revenue in these two regions was volatile and unstable.
In its fourth-quarter 2021 outlook, Taoli Bread expected revenue to be difficult because of capacity constraints, so it focused on improving profit. Measures included reducing discounts and promotions, and gradually adjusting prices in Northeast and North China. Labor and raw-material costs were rising, and capacity constraints reduced scale benefits. The company expected the fourth quarter to be better than the third, but strategy still needed adjustment.
Taoli Bread faced rising raw-material costs, potential price increases, competition from short-shelf-life, medium-shelf-life and frozen bakery players, and the need to capture new consumer demand quickly.
Internally, Taoli saw two core advantages: stable products with strong value for money, and a broad logistics, factory and terminal network.
Competition in short-shelf-life products was intensifying. Taoli believed competition within the same category was less intense than in 2019, when a new entrant had just arrived. In 2020, the pandemic reduced competition, and in 2021 competition recovered somewhat. Community group buying, raw-material increases and capital entering small bakeries all intensified competition to a degree, though Taoli considered the overall level moderate.
Over the previous 10 years, short-shelf-life bread products had grown by more than 10% annually on average. In mature Taoli markets, annual bread consumption in Shenyang was about RMB 35 per person, or about five to six pieces of bread and five bread occasions per person per year.
For long-term growth, the market still needed to build consumer habits and provide higher-value products, more convenient channels and better shopping experiences.
Raw-material inflation was a near-term issue. In the first half of 2021, Taoli Bread’s gross margin fell 2.8 percentage points. Social-security factors had the largest impact, followed by returns and raw-material price increases. The company was working to control return rates and adjust product structure. If input prices continued to rise, broad price increases could not be ruled out.
Taoli was using price adjustments and fewer promotions to respond to raw-material inflation. The price adjustment was around 3%-5%, implemented gradually rather than through a nationwide one-off increase. It started in October 2021, though the effect on October itself was limited. Taoli expected fourth-quarter gross margin to improve through product mix and pricing adjustments.
Demand varied by region. In northern China, bread buyers were mainly family consumers who cared more about freshness. In southern China, buyers were mainly younger consumers and were less sensitive to short versus medium shelf life. Medium-shelf-life products were more acceptable there.
Taoli Bread was upgrading its product mix from staple-style products toward bakery-style products with 72-hour or 2-3-day shelf lives and medium-shelf-life products. Medium-shelf-life products had lower prices and lower return rates, while bakery-style and medium-shelf-life products had higher gross margins.
The overall SKU count was 50-60, with local regional averages of 30-40. About 15% of products were eliminated each year, with new products added accordingly. Sliced bread accounted for up to about 10%, the second-largest product about 9%, the third about 8%, and even the smallest around 1%. Taoli’s rock-baked cake was the fastest-growing product, already contributing 1%-2%.
In frozen bakery, Ligao’s layout created short-term overlap. Taoli’s response was to copy Ligao’s products and consider an OEM model.
Because of power restrictions, Meibeichen was using medium-shelf-life products to attack aggressively. Short-shelf-life players were more affected by power restrictions. Taoli viewed short-shelf-life companies as still relatively large, while it saw itself as weaker and a chaser in medium-shelf-life products.
Taoli was also watching whether consumer demand for medium-shelf-life bread was a short-term change or a long-term shift. Medium-shelf-life bread lasts one month longer than short-shelf-life bread and is easier to distribute, while the taste gap is not very large. Internally, Taoli hoped medium-shelf-life products could eventually reach 20% of the mix.
Taoli Bread had begun experimenting with community group buying.
KA-channel traffic was declining, while community stores offered coverage closer to consumers. Short-shelf-life bread was less affected by community group buying; medium-shelf-life bread was more affected. The company needed to track changes in consumer preferences and shopping formats.
The third quarter of 2021 was described as Taoli Bread’s hardest in recent years. Many factors were outside its control, including the sudden August pandemic impact and reduced tourism in July and August. Northwest and Southwest China performed poorly.
Community group buying had a smaller impact on short-shelf-life products and a larger impact on medium- and long-shelf-life products. The impact was greater along the Yangtze River and in South China, and smaller in North and Southwest China. Taoli’s community group-buying business grew quickly from a low base, reaching RMB 5 million to RMB 6 million per month. The article argued that short-shelf-life routes were already closer and faster than the last-mile channels community group buying competed for.
E-commerce accounted for 2% of the business. In 2020, this business grew 80%-90%; in the first half of 2021, it grew 50%. Online profitability was low because bread is bulky and delivery costs are high.
Daily delivery accounted for more than 60% of Taoli’s business, reaching 80% in Northeast China, and the ratio was still rising. This increased costs, but also improved customer stickiness and could basically cover the cost increase.
Taoli Bread’s key target was to reach RMB 10 billion scale by 2024. Its central factory plus wholesale model could defend across short-shelf-life, medium-shelf-life and frozen bakery, but the main battlefield remained short-shelf-life products.
On the terminal side, KA channels were declining. To increase outlet coverage from 300,000 to 1 million, future growth would need to come from community stores, community group buying and other nearby channels.
National expansion remained difficult. Moving from the Northeast and North China home base into East and South China involved long distances, different food habits between north and south, and more resistance in market development.
The larger question was organizational: after listing, repeated large cash-outs gave the founding family financial freedom. Whether the aging team still had the ambition to take the company to the next level was uncertain. Consumer demand was changing rapidly, and once emerging brands build store-side networks, they may counterattack the same channels, creating openings in areas where older packaged-bakery leaders had been strong.
Note: IPO, valuation, cash-out, dividend and forward target figures are historical and reflect information available in the original November 14, 2021 article.