Chinese toothpaste maker Liuzhou LMZ announced it ran an 89.6 million yuan deficit during the first six months of 2015 on Aug. 18.
The company has been expanding its business into new areas in recent years. However, its main business – toothpaste – brought in 69.9 million yuan, which accounted for only 10.7 percent of its gross earnings.
Once a household name in China, Liuzhou LMZ appears to be collapsing and losing its presence in the Chinese toothpaste market.
Prosperity to Decline
Best known for its LMZ Herbal Toothpaste, Liuzhou LMZ was the third most popular toothpaste in the Chinese market during the last two decades. At its peak, the company sold more than 500 million tubes of toothpaste. In 2006, its toothpaste sales reached 312 million yuan.
But Liuzhou LMZ has entered a downward spiral. Its toothpaste is no longer in the Top 10. Few advertisements for its products appear on TV, and its classic slogans have been forgotten.
In supermarket and retail stores, Crest, Colgate, Darlie, Yunnan Baiyao and Zhonghua occupy about 75 percent of the market: LMZ Herbal Toothpaste accounts for less than 1 percent.
“When I came to a hotel and saw a tube of LMZ toothpaste among the disposable supplies, I was surprised to find the brand was still alive,?a netizen Da Lanyang (pseudonym) wrote on Jiemian.com.
Analysts have been quick to pin Liuzhou LMZ’s failure on a poor development strategy.
“An attempt to diversify its operations is what sent Liuzhou LMZ rolling downhill, Chang Yizhi, a researcher at CIConsulting Agency, told the Changjiang Times.
The company seized China by blending popular herbal medicine into its toothpaste formula. But the herbal gimmick has not withstood competition from domestic and foreign brands.
Liuzhou LMZ began looking into other fields rather than reinvent its core product.
From 2004 to 2006, Liuzhou began exploring the medical business. In 2007, it expanded into real estate and began synthesizing sucralose, a sugar-free sweetener.
The company further diversified when Ma Chaomei, chairman of the board, came to power in 2008. Ma led the company into the paper industry and imports and exports.
Three-year sales records suggest all these efforts were wasted.
In 2012, the company’s net profits decreased 80 million yuan. Its papermaking business lost 53 million yuan, and its real estate business only profited 2.82 million yuan.
Liuzhou LMZ’s deficit swelled to 109 million yuan in 2013. In 2014, its sucralose business lost 36.1 million yuan, and its papermaking business ran a 75.5 million yuan deficit.
The continuous deficits forced Liuzhou to sell all its interests in CITIC Securities.
The company has sold stock five times in the last five years, and on July 2 the shareholders passed yet another proposal to sell stock.
“Liuzhou LMZ is bringing more trouble for itself,” an insider who did not want to be named said. “It should not have chosen to diversify from the beginning.
During its previous boom, Liuzhou had a group of loyal consumers, rich experience in operating a toothpaste business and substantial market influence. Although its sales took a hit from other brands, it could have stressed its advantages to come out ahead.
Its toothpaste business experience did not transfer into its attempts at real estate, medicine and papermaking, where it had to build reputation and influence from nothing.
“Liuzhou LMZ put too much of its money and energy into unfamiliar fields and neglected the development of toothpaste business,” Chang said.
In fact, diversified business operations are a risk for any company.
If the company has too little capital and too little preparation, it can easily become trapped.
Wahaha and Li Ning are classic examples.
Wahaha had its start in the beverage business and rose to become China’s most famous beverage producer. It then expanded into other fields such as children’s clothes, foods and liquor. Its gross earnings never increased with that diversification: in 2014, Wahaha’s total sales fell 7 percent to 72.8 billion yuan.
Li Ning’s expansion into athletic wear, sneakers and sports accessories caused it to report losses three years in a row.
Liuzhou LMZ, Wahaha and Li Ning all suffer from the same problem: the lack of a clear business direction.
Yunnan Baiyao, which stuck to its core business and developed new toothpaste products for the market, has now become one of China’s top five toothpaste brands.
Liuzhou LMZ has realized the problems with its diversification and attempted to make a change in 2013. That was the year Zhong Chunbin took power from Ma Chaomei and began changing the company’s strategy.
Zhong reduced Liuzhou’s oral care products, cleaning products, travel supplies, paper products, medical products, chemical products, papermaking products and real estate business into five key sections. The consolidation narrowed the company’s scattered business operations and brought its capital and energy together.
In addition, he began to invest in entertainment circles to boost the company’s popularity. Liuzhou LMZ sponsored popular reality shows like Running Man and TV series such as Cruel Romance. It also hired actor Zhang Jiayi as a spokesperson to win over young consumers.
Although Liuzhou LMZ is confident the changes will be effective, insiders in the toothpaste industry say the battle is already lost.
“The domestic toothpaste market has reached a saturated stage. Price competition is fiercer than ever, and it’s hard to change consumers habits in the choice of toothpaste,” Chang said.