Description

Blue Moon’s initial product was a kitchen spray cleanser in 1994, but today revenue is largely dependent on liquid detergents sold in China. Blue Moon sells a commodity product with weak competitive advantages— they have scale and good marketing, with domestic competitor Liby being a close second (only behind by 2-5% in market share).

Despite an industry with high gross margins, the laundry detergent industry lacks barriers to entry. Blue Moon relies only marketing, brand recognition, and IP— they have 647 registered trademarks, 126 patents and 155 copyrights in China. They also claim to have differentiated products such as a collar cleaner, but Blue Moon certainly is not a compounder with a fantastic moat to hold on to forever. 

Competition has intensified with new players such as Henkel, White Cat, and Kao stocked on store shelves. Blue Moon Chinese liquid detergent market share fell due to mistakes in firing a large sales force, fluctuating raw material (palm oil) costs, and poor negotiations with offline platforms like Walmart and RT-mart which led to the termination of their contract.

Competitors have caught up in market share— Liby (18-22%), Unilever (16-20%), Walch (9-13%), and Proctor and Gamble (11-18%) and new players such as Kao and White Cat. Blue Moon’s stock has tanked from hkd100B (USD13B) to a more reasonable valuation of hkd10B (USD1.28B), while earning around hkd800M-1.2B (USD80-120M), with minimal debt of around hkd200M (USD24-26M) and cash and short-term investments of hkd7.75B (1B), there’s minimal catastrophic risk, but will Blue Moon flourish?

Can management improve their product and operations, and capital allocation? Can Blue Moon diversify their product line to be more like competitors Unilever and P&G? Should they? Can Blue Moon regain market share and what does it mean for their bottom-line should utilization rates improve?

Total Addressable Market

The global Laundry Detergent market size is valued at USD 48 to 50B. The Home & Laundry Care market in China is approximately USD 13 to 15B in 2024 by revenue. It is expected to grow at an annual rate of 3-6% (CAGR 2024-2028).

As the largest segment of China's household care industry, the fabric care market logged retail sales of USD 9.38B (RMB 67.8 billion) in 2019, accounting for 61.2% of the household care market.

Ownership & History

Blue Moon was established by Luo Qiu Ping who has a master’s degree in organic chemistry. Currently, he is CEO, while his wife acts as chairman. Together, they both own 75% of the company.

Hillhouse capital’s Lei Zheng (who worked for Yale’s endowment under David Swensen and invested in Tencent early on) is a 9% owner and has changed Blue Moon’s trajectory by convincing management in 2007-2008 to sell higher end liquid detergent as he believed household income and purchasing power would rise in China.

Lei Zheng saw that there was an over-saturation of powdered detergent, with more than 10 competing brands. The retail sales of liquid laundry detergent surged to USD3.76B (RMB27.2B) at a CAGR of 13.1% in 2015-2019, while the powdered detergent suffered a decline in sales with a CAGR of -0.6% during the period. Blue Moon’s decision to change gave it temporary losses as a laundry detergent maker. But the strategic losses in 2008 eventually paid off as living standards continued to improve.

In addition, Hillhouse’s Lei Zheng also convinced management to increase their marketing by finding brand ambassadors such as Chinese diving gold-medalist Guo Jing Jing, to promote Blue Moon’s detergent heavily during the 2008 Beijing Olympics. This marketing expense was about RMB 200M (USD25M), which was half of Blue Moon’s annual sales at the time. Celebrity endorsements made Blue Moon standout by appealing to Chinese national pride.

Blue Moon hit 34% market share in 2009 and saw a 27.2% year on year growth in 2010 and achieved nearly 43-44% market share by gaining the dominant position with a first mover advantage. Proctor and Gamble had Tide and Ariel which entered the market in 2010, while Unilever introduced OMO (Persil & Skip in other countries) in 2009.

Blue Moon received an angel round investment of USD 45M from Hillhouse in 2010, and an additional USD 1M in the second year.

From 2015 to 2019, Blue Moon had 38-46% market share in China and has made more money from its flagship product than Unilever and P&G’s revenues combined (within the liquid detergent product category). As Blue Moon’s valuation soared after listing in 2020, Hillhouse made 20 times its original investment, but mistakes made along the way made Blue Moon’s market share shrink to 25%.

Mistakes made: Problems with Physical Stores Sales

Rising store listing fees, consignment fees, and in-store promoters led to shrinking gross profits. It is estimated that placing a bottle of detergent in tier 1 and tier 2 city supermarkets amounted to 30-35% of total cost.

Blue Moon wanted to negotiate a better purchasing contract with RT-mart and Walmart with their own standalone counter. CEO and founder Luo Qiu Ping was furious that the terms were so bad, and stores would not yield. Both parties were unable to come to a consensus, resulting in Blue Moon withdrawing their products from RT-Mart and Walmart in 2015.

Things got worse after losing product distribution from these two channels which caused heavy losses to resellers. Disgruntled distributors boycotted Blue Moon, which made them withdraw from major supermarkets such as Auchan and Carrefour in 2016.

With dominance fading, Blue Moon tried building their own self-operated “Moon House” store networks which were not well received by consumers. By 2017, the “Moon House” stores were shut down.

Blue Moon subsequently tried to rebuild the relationship it once had with the supermarket chains and was unable to regain its lead in offline channels. The 2-year hiatus allowed competitors to fill in the gaps making it difficult for the brand to carve out the same kind of shelf space it once occupied. Blue Moon's share of liquid laundry detergent market slumped from 39% to 25% in 2015-2019. Competitors like Liby, Nice, Tide was able to stock their products on supermarket shelves.

Blue Moon had more than 1,400 offline dealers in 2019, 70% of which are in tier 3 cities and below. They now have more than 2,100 dealers in China. 

Introduction into JD.com and Online Channels

Blue Moon was forced to expand online channels since they suffered a setback in offline hypermarkets in 2015, which helped them gain first-mover advantages in online channels.

Online sales in China are estimated to contribute 15% of the total revenue in the Laundry Care market. 32.3% of China’s liquid soap sales came from online channels. China’s online penetration rate for the household care sector is around 22 to 25%, so there is still a long runway.

Lei Zheng of Hillhouse Investment had close ties with the online sales channel JD.com since they were an early investor. Once BlueMoon was on both JD.com and Alibaba’s Tmall and Taobao, online sales became an important channel to acquire new customers. Online sales include high-profile sponsorships, large scale events and brand ambassador that caters to a younger Chinese audience.

By 2020, online sales reached hkd 3.7B in 2020, accounting for 53-58% of the total revenue contributing to robust growth in profit. Blue Moon from then on achieved a leading market share on all major e-commerce platforms.

Online sales channels contributed only 33% of sales in 2017, and is now close to 50%, while proprietary online channels make up 13-16% of sales. Proprietary online sales channels generate higher margins without having to pay additional fees to Alibaba (Tmall), JD, or PDD.

Adoption of high end Concentrated/Condensed Detergent & Inadequate control on pricing

Blue Moon entered the condensed/concentrated 3 in 1 fabric care products subsector slower than competitors. Ariel and Liby launched their laundry detergent packs in 2017, a year earlier than Blue Moon.

Blue Moon launched a product called Zhizun that was a concentrated Laundry Detergent with ingredients that removed bacteria and odor. While condensed laundry detergent is already quite popular in developed countries like the US and Japan, so this product is still not well accepted by Chinese consumers used to lower prices.

Zhizun is marketed as a high-end product at a retail price of RMB 130, but during promotional periods like Nov 11 (double 11, which is like China’s idea of a Black Friday discount sale), the price on JD sold for RMB 60, which hurts the product’s image as a high-end brand.

Mistakes made: Firing a significant amount of Sales Force

One mistake Blue Moon made was a drastic reduction in their sales force to lower expenses— a layoff of sales staff from 10,432 to 4,582 in 2017-2020, resulting in a steep drop in payrolls and a reduction in marketing which affected the brand’s image online. Reducing marketing and a huge sales force was not sustainable in the long term.

China’s penetration rate

China may have a larger population than the U.S (300M) with more than a billion people, but the U.S has a higher penetration rate. China's GDP per capita last year was USD12,720, according to the World Bank, six times smaller than the U.S. equivalent of almost USD76,000, but is rapidly growing. China’s liquid laundry detergent market has a large potential for future growth compared with developed economies.

The penetration rate of liquid laundry detergents was 44% in China as of 2019 (in 2024 the penetration rate for China is still around 55-59%), way lower than that of other major economies such as Japan (80%) and the U.S. (90%), indicating that a long runway for further substitution of powder laundry detergents by liquid laundry detergents. However, some bigger and more mature cities in China have 50-75% penetration rate. 

COGS— Fluctuating Raw Materials & Promotional Expenses

From the chart below, you can see that a large part of cost of goods sold is in the cost of raw materials. Palm oil-based materials to create the detergent, and Low-Density Polyethylene (LDPE) for the packaging. Crude oil is one of the main raw materials of LDPE. The price of LDPE is thus influenced by oil prices.

Despite having more than one raw material supplier, the fluctuation of palm oil prices which is not hedged is one of the reasons for fluctuating profit margins and inconsistent results. My interview with IR told me that the palm oil is usually held for 3 months before they are processed. Palm oil's prices slid with the increase in production capacity in Southeast Asia in recent years, but we can expect the price to increase in the future.

Blue Moon's revenues from 2017 to 2019 were HKD 5.63B, HKD 6.76B, and HKD 7.05B, respectively, with an approximately 12% year on year growth. However, revenue growth dropped from 20.2% in 2018 to 4.2% in 2019.  

If you look at the chart above, with little growth in Blue Moon's revenue, its profit margin growth between 2018 and 2019 was still as high as 94.9%, which means almost double Blue Moon’s gross profit from the previous year. In 2019, chemicals and packaging materials accounted for 41.4% and 35% of their total costs of sales, respectively.

Blue Moon's gross margin rose from 53.2% to 57.4% in 2017-2018 and further climbed to 64.5% in 2020. Blue Moon team management claims it is due to its products' cross-selling, which is a politically correct answer. However, the price of its essential raw materials, palm oil, has dropped to one of its lowest points in recent years, contributing to temporary and unsustainable high margin growth. Gross margin will be squeezed after raw materials rebound since commodities are inherently cyclical.

Covid should have been a time for Blue Moon to capitalize on a disaster and gain market share due to fear of germs. However, rising raw material prices minimized profits. I asked IR specifically how they would deal with this, but they won’t hedge or vertically integrate to control the varying raw material costs.

Revenue in 2023 was 7.3B of compared to 7.9B in 2022. Despite cost of sales decreasing by 17% due to a decrease in cost of raw materials for the year, net profits were still lower than 2022. Gross profit could have been higher in 2023, but management increased promotion expenses for brand awareness and sales by adding new sales channels and distributors. Promotion expenses went up from RMB  589M in 2022 to 1.29B in 2023.

Lack of Pricing Power and the importance of a high utilization rate

As of 2024, Blue Moon has 78 or more factories, with more than half (44) of them contributing to fabric care products or detergent. Roughly 36 or more of these factories contribute to only 15% of total revenue outside of detergents in personal hygiene products. As you can see below, the earliest production base for Blue Moon is in Guang Zhou.

The total revenue for 2023 for Blue Moon was hkd 7B (230-300k tons, author’s estimates), with an estimated total revenue capacity of hkd 21-25B (700k-1.2M tons, author’s estimates).  My estimate is that only 28-35% of total capacity was utilized at an average selling price of hkd12.7 per kilogram. 

Let’s reverse engineer this. In 2023, sales were hkd7.3B and in the previous year, 2022, sales were hkd 7.9B. Let’s assume 7.5B for ease of calculation.

If we divide this by hkd12.7/kg, we get 590M or about 600M kg in total. Which means that if our estimates of ASP are correct, 600M kg produced gives us a revenue of 7.5B, but the total capacity is 1.2B kg. Which means that utilization rate is only getting closer to 50% in 2024, when it should be at least 60%-80% in utilization to be effective.

Should Utilization rates go up beyond 50%, and if raw materials don’t rise to a point where Blue Moon can’t pass it on to consumers with increased pricing until demand drops, I’m assuming operating margins which were a horrid 1.8% in 2023 and 10% in 2022, will recover to near 20% (see above).

Capital Allocation

In December 2020, Blue Moon was successfully listed on Hong Kong Stock Exchange, debuting at 13.16 HKD per share. Of the hkd 11B raised from Blue Moon’s initial public offering, 3.9B was said to be for production capacity expansion, 5.7B was to be for marketing and brand awareness, 1.1B for working capital and 200M for R&D. As disclosed in the prospectus, over 50% of the IPO proceeds would be used to lift the brand awareness and product penetration, and to further strengthen the sales and distribution network.

So far, only 538M has been used for production expansion, and rightly so. Covid hit and as of today, utilization rates are only near 50%, which means that as China’s penetration rate for liquid detergents improve and as Blue Moon improves their sales channel, their under-utilized production can be realized.

For brand awareness, of the 5.7B raised for marketing, 4.1B was used. You could say that this 4.1B did not reach the top line nor the bottom line, since there was no growth from 2020 to 2023, and there’s no brand loyalty or stickiness to the product. While I can’t say people love Tide and Persil in the U.S, you know that you get a certain quality by buying a big-name brand.  

Dividends controversy

Right before the listing in mid-2020, Blue Moon rushed to distribute hkd 2.3B. By the end of the year, 2.7B in dividends were paid out. In 2017-2020, Blue Moon recorded a cumulative net profit of around hkd 2B, implying that all their earnings for the last three-and-a-half years were paid out. In my interview with IR they claimed that the retained earnings were not distributed to shareholders; once the company was public, they felt obliged to. That’s a politically correct answer, but I’ll take it for now. I’m happy that management has recently decreased dividends from 936M in 2022 to 334M in 2023.

Catalyst

The fabric care industry does not have a high barrier to entry and competition is intense as a result.

While the cash conversion cycle has not really changed, inventory outstanding has shown improvement.

It is relatively easy for incumbents/contenders to enter the industry and consumers are more price dependent when buying detergent.

There are 5 key factors that will contribute to Blue Moon’s failure or success—

1. Their success in selling and marketing high end condensed laundry detergent liquid.
2. Their ability to control costs of raw materials and keep profit margins sustainable. The ability to secure raw materials at a fixed rate and not allow it to affect gross profits every year is a key factor in making profits stable for Blue Moon.
3. Capital Expenditures are not that bad, FCF should be fine if there’s no major factory expansion —

             Op. CF            CapEx

2020       1.3B           (251.1M)               

2021       1.4B           (299.9M)

2022       560M         (285.1M)

2023         ?                (85.3M)

4. Their ability to increase production to ramp up annual revenue to hkd 14B (at least USD 1.8B) to get utilization rates higher than 60%.
5. Their ability to get their sales force back in line and to get key distributors and to mend relationships with physical stores such as Walmart and RT marts with a win-win contract. Online Sales make up 50-65% of total sales.