In an Age When Nobody Writes With a Pen, How Does Old-Line Stationery Maker M&G Find a Future?

Going through the motions in a fog clearly leads nowhere better. But once you start upgrading, you are building something completely different.

The moment each student finishes secondary school may mean, for M&G, the loss of one loyal customer.

Riding on China's enormous population of student consumers, this old-line stationery company has, over the past two-plus decades, hung its red-and-black M&G sign above more than 75,000 stores. In some regions, the number and density of its outlets exceed even those of China Unicom and China Mobile.

Keeping the office workers who have left campus for the workplace from abandoning it has become M&G Stationery's biggest challenge. Put another way: in an age when nobody uses pens, how should a company that built itself on pens, and made them its core strength, find a future?

The question presses on M&G now because of two irreversible trends.

The first is that M&G's most important group of customers, students, is shrinking. Their demand used to be a steady, unbroken stream, but a falling population shrinks the market on its own. The latest figures show that the boost from the two-child policy lasted only a year: in 2017, births in China fell by 630,000 from the year before.

The second trend is "paperlessness." The term used to belong mainly to the office market, but its ties to education keep growing stronger — doing homework on an iPad is no longer novel, and that will further cut students' need for paper and pens.

"The biggest difference between us now and before is that we develop products around consumption upgrading and new consumption scenarios," Chen Huxiong, president of M&G Stationery, told QDaily. "In the past we focused mainly on mass, essential-need products; now we're extending into lifestyle scenarios."

Among the 10 major categories and 54 subcategories M&G Stationery now sells, writing instruments still account for half — a share that used to be higher and has since fallen to around 50%.

Worldwide, the stationery business has little good news to offer, in the office segment or the retail one. The only bright spot is probably designer stationery and independent shops that win on looks, and none of them operate at scale. By sheer size, very few players in the Chinese market can really be called M&G's competitors.

Two others are publicly listed: Comix Group and Guangbo. But Comix deals mainly in office equipment rather than office supplies, while Guangbo's revenue and net profit growth have both slowed sharply — in the first half of 2016, its stationery revenue was 390 million yuan, down 7% year-on-year.

Among unlisted companies, the closest match is TrueColor, which is also well known among students and whose product mix most resembles M&G's. It first filed for an IPO in May 2014, then withdrew the application two years later. M&G, which filed at roughly the same time, listed successfully on the A-share market in 2015. TrueColor, already the smaller company, has seen its results decline for several years running, and the gap keeps widening.

Look purely at the numbers and M&G is nowhere near the kind of trouble that calls for a rescue. It is still growing well.

In the first three quarters of 2017, M&G Stationery posted revenue of 4.493 billion yuan, up 30% year-on-year, and net profit up 24.14%. Several brokerages are bullish on the company, and Guotai Junan Securities raised its target price for the stock.

The new businesses — M&G Kelipu, M&G Life House and M&G Technology — stood out in the earnings report, with operating revenue up 116% from a year earlier. The latter two come closer to what Chen Huxiong calls "making products around consumption upgrading and new consumption scenarios": M&G Life House has started selling household goods, while M&G Technology works mainly in information technology and digital products.

But most of the growth came from expansion in office supplies. Using the international client channels of Office Depot China, acquired last August, M&G lifted its market share and brand recognition in direct office sales. According to figures the company provided, office supplies account for roughly 15% of total turnover.

That may be why M&G isn't especially anxious right now. Asked about "paperlessness" and the shrinking student population, Chen Huxiong stayed fairly optimistic: he expects M&G to keep growing at some rate over the next three to five years. The domestic stationery industry is fragmented, and he thinks it will consolidate "from one or two thousand companies now down to a few hundred."

But like every long-established market leader, M&G — founded in 1997 — has in recent years said "upgrade" more often than any other word. Facing an uncertain market, its worry about the long run is real.

In its early days, one big reason M&G lodged itself in the national memory was that it offered to replace the signboards of small shops near schools free of charge, which got its products into ordinary stationery stores and spread the M&G brand fast among primary and secondary school students across the country.

That is why the stationery shops near schools had signs that were half M&G logo and half the shop's own name, something like "Xiaocao Stationery." Ordinary stores absorbed into M&G's expansion this way were called "model stores," and they laid the groundwork for the franchise chain that followed.

In 2008, M&G filed with the Ministry of Commerce and formally launched its franchise program, picking the best outlets among the 40,000 to 50,000 nationwide that sold M&G products and upgrading and rebranding them — completing the triple jump from ordinary stationery store to model store to franchise store. In a Zhihu thread titled "Why has M&G Stationery been so successful in China?", nearly every answer points to its channel advantages and product coverage.

But none of that experience applies to M&G now.

Widening the customer base is the usual way to find a new market, and M&G is no exception. "We've raised our target consumer group to white-collar workers — young people working in offices," Chen Huxiong said.

In other words, moving into the mid-to-high-end market. M&G's "upgrade" turns on two things: the channels that made its name, and the products themselves.

The new channels M&G wants are far from campus shops and street-corner stores. It now wants its products on the counters of upscale department stores, and in the kind of boutique bookshops that also sell coffee and lifestyle goods.

So it simply opened two store formats of its own: M&G Life House and Jiumu General Store. The first can be read as a fourth-generation prototype of the M&G stationery shop, more a store upgrade meant to show franchisees what to copy, though what it sells already includes household goods like towels and aroma diffusers. The second is an entirely new brand that moves into shopping malls, a wholesale upgrade of M&G's channels.

M&G now runs more than 100 M&G Life House stores and 25 Jiumu General Stores nationwide. Both count as strategic new businesses, but the company expects more from Jiumu. By Chen Huxiong's account in the interview, China has around 5,000 shopping malls today, a number likely to reach about 7,500 by 2021 — and more than 2,000 malls nationwide would suit a Jiumu General Store.

From 25 to 2,000: you can probably feel the ambition of this old-line stationery company. According to figures M&G provided, a single Jiumu General Store currently takes about 13 to 16 months to pay back its cost.

That is far harder than swapping a signboard or moving into a street-corner shop. Rents are expensive, for one thing, and the department store business itself is struggling — a problem across retail right now.

"I think that worry is fair, but there's no need to overdo it," Chen Huxiong said. He believes offline demand will always exist. "It's like how you still need to go out to eat. When you're out eating and there happens to be a Jiumu General Store nearby, you don't necessarily have to go back online to buy. Improving how well you run the store is what really matters."

Chen Huxiong thinks "touch" counts for a lot in selling stationery: picking up a pen, writing with it, feeling it, is an important part of the purchase. When he talks about what customers want, he still thinks like a very traditional maker of pens and paper.

The hardest part of what he calls running the business well is making goods good enough to sell in a department store — items with more design, more invention, and a higher price. Whether M&G can win new users and open new channels always comes back to the product.

At M&G Stationery's "Our Future: 2017 Premium Creative Stationery New Retail Summit" last November, the company staged a concentrated show of goods developed with IPs such as the illustrator Anthony and Lonely Planet. Collectible, scenario-driven items — 500-color pencil sets, travel notebooks — were the other stars.

Before that, M&G had worked with Han Han's "ONE" studio on a 299-yuan stationery gift box, and released a Gift Box "Double-Sided 27" set for Lu Han's birthday season — marketing of a kind it had not done before.

These products exist to meet new occasions for buying. "Take a 500-color pencil set or a 24-color gel pen set — you might never actually use them, but for a customer who can afford them, it can be a matter of interest, of collecting," Chen Huxiong said, pointing to stationery enthusiasts who keep hundreds of pens and notebooks at home, mostly as a collection or a hobby, and sometimes give them as gifts.

Open M&G's flagship Taobao store and the thinking does show up in the categories: fairly high-end gift sets, and personalized products made in crossover collaborations with big museums and internet celebrities. Sort by sales volume, though, and the five best-sellers are still mass-market goods: 9.9-yuan gel pen refills, exam pens, 50-pen gel pen sets.

As the customer base stretches from students to better-paid white-collar workers, M&G's competitors change too. In this market Muji and Moleskine clearly hold the advantage. But these long-established stationery brands, known for design, quality and their so-called fan culture, are not doing all that well either.

In fiscal 2016, Muji's parent company turned in its weakest revenue and profit growth in three years. To stir up sluggish overseas markets, Muji announced early this month that it would cut prices in China for the eighth time, with stationery taking the brunt.

As for Moleskine, its 2013 listing drew wide press coverage, but after three disappointing years on the stock market its major shareholder sold out, and in 2016 a Belgian car distributor took it over through a mandatory buyout. Moleskine recently opened a café in Beijing's Sanlitun to push its gift business.

So there is not much ready-made success for M&G to learn from. At this stage of its transformation, its approach may still be to spend effort on design and looks, and make expensive stationery that looks just as good.

According to Sun Lu, the M&G Stationery vice president in charge of product development, the company now has an in-house design team of more than a hundred people. Beyond that it raises design quality mainly by working with well-known industrial design studios, artists and popular IPs. "Our Youpin premium line, for example, was developed with a BMW design studio."

Judging by the market response so far, M&G's method is to borrow design talent from outside while supplying a steady supply chain and manufacturing skill at the back end — the part it is surest of. On R&D, Sun Lu said these design-led products get more than twice the usual spending, mainly to lift the brand's register.

But everything about Jiumu General Store — the way the space is divided, the style of the goods, the display — feels like something you have seen before. That is exactly what customers question and criticize.

Open the reviews of Jiumu General Store on Dianping and the words that come up most are "Japanese-style," "artsy," "wide selection" and "good for photos." Some reviewers find the prices high; others compare the shop to Muji and call it reasonable; still others say it resembles Miniso — which tells you how far apart shoppers' sense of its prices can be.

M&G's own press releases put Jiumu General Store's target customer at "women aged 15 to 35," a very wide span. So far the group it mainly draws still skews young.

In the interview, Chen Huxiong said M&G's plan is eventually to raise creative products to 20%, even 30%, of the whole business. But on this forward-looking decision his wording turned notably careful.

"Our future growth will come mainly from mid-to-high-end products, which might leave the impression that M&G no longer wants to make mass-market products. Please don't misunderstand — we are absolutely not giving them up. There must be no such misunderstanding," Chen Huxiong said.

For now, mass-market products remain M&G's main source of revenue. Every year it is still laying down the most basic franchise stores; in Chen Huxiong's plan, outlets are still too thin on the ground in remote provinces such as Yunnan, Guizhou and Sichuan, and M&G needs to add more than 3,000 stores a year. The mid-to-high-end line — the premium creative goods it puts on display — sits mostly in first-tier cities and provincial capitals.

M&G's decision-makers are of course happy to talk to the press and to investors about new products, new channels and a better-off user base. For a company this size, it built its own internal communications team only recently, led by someone who used to work at a major international consumer goods group.

M&G says annual R&D spending on mass-market products runs to about 4% of revenue, and about 10% for premium creative goods. "Because the base for premium creative is small, the percentage is large. With a small base, the absolute amount is still small," Chen Huxiong added.

He knows the company has to change, yet what he came back to repeatedly in the interview was the core technology and supply chain behind making pen refills — still this traditional stationery giant's main strength. M&G remains, at heart, a company that makes pens, and its turn toward a lifestyle brand does not yet look certain.

When M&G Stationery started out, it went by "China-Korea M&G," hoping to catch students' eyes on the Korean pop wave then sweeping the country. In the 1990s, Korean light-industrial design led the stationery trade, and the studios Chinese student-stationery makers paid dearly to hire or partner with all came from South Korea. Now Chen Huxiong talks more about Japanese and German craftsmanship.

Compared with where China's stationery industry stands, the more mature Japanese market grows at about 1% a year — slow, but still growth. According to a report Ping An Securities published last April, China's stationery market is worth roughly 150 billion yuan, with per capita spending of 105 yuan a year against a global average of 204 yuan, which is taken to mean the industry still has room to grow. But "paperlessness," and the slow progress of new sales channels such as e-commerce, are both counted as risks ahead.

M&G can probably coast a few more years on what it has built. But going through the motions in a fog clearly leads nowhere better. And once you start upgrading, you are building something completely different.

Its upstream suppliers, its partners at the point of sale, even its competitors are all very different from before.

In this new trade it is after, there is no one successful to copy. M&G, and everyone else in this market, faces one large uncertainty.

Cover image source: Sohu