Just as the Chinese high-end hand-crafted beverage brand Nayuki catches HK$45 billion (about $5.8 billion) in market cap via its recent Hong Kong IPO, HeyTea, one of its main rivals, is reportedly getting a new round of financing that might push its valuation towards 60 billion yuan (about $9.27 billion).
HeyTea's latest round is reportedly highly competitive and funded solely by existing investors such as IDG Capital, Sequoia China, Tencent, Hillhouse Capital, Coatue. The lineup represents the all-star level in the Chinese and China-related global investment scene.
Milk tea and beverages chains, such as Nayuki, HeyTea, and many others, had long been an integral part of China's urban population. Originated in Taiwan in the form of "boba milk tea" (with toppings such as tapioca balls), hand-crafted tea shops in mainland China have diversified their offerings and are now ubiquitous from modern metropolises to tier-3 cities. These brands have seen a sudden surge in the number of shops, customer base, and even broader business landscapes. For some enterprising brands, there's a significantly increase in venture capital investors who chase their tails, because the brands now means the potential valuation of seven or eight digits.
Moreover, premium beverages are only one of the many industries in China that have seen a wave of explosive growth in recent years. The "new consumer brands", from e-cigarettes to dietary supplement gummies to social fashion retail and cosmetics, sprung up nowadays, raising tens, and even hundreds of millions per round, with some even able to go public in just three years of founding.
As consumers are increasingly fed up with uninteresting offerings of traditional domestic brands and looking for a cheaper alternative to the foreign products, these new, or established but previously lesser-known brands caught their attention with innovative products, decent quality, as well as an affinity in modern design catered to Gen-Z buyers.
A different market landscape
Founded in January 2018, Relx is currently the top e-cigarette brand in China. The brand grew fast and achieved 100 million yuan ($15.4 million) in sales in the first year after selling 5.9 million nicotine-salt pod packs and half a million atomizers. The 3-year-old Relx had already made 2.2 billion yuan ($340 million) in sales and close to 400 million yuan ($62 milllion) in adjusted net profit in 2020, showing incredible growth and profitability when it went public in the US earlier this year.
Back in China, the market for e-cigarette products in the form factor of pod devices is far from saturation. Jumping on the bandwagon of an e-cigarette craze around the same time Relx debuted, a number of competing brands were established. Many waned, and the surviving few were left with a blue sea market to take. These brands operate directly or through franchise tens of thousands of storefronts and branded pop-up stores across higher tier cities in China, hoping to grasp more of the opportunity presented by a change in consumption habits driven by younger consumers.
As to why top e-cigarette brands like SnowPlus are breaking out so fast and growing relatively healthy, Ray Xiao, a co-founder at SnowPlus, said it boils down to 2 major cost-related advantages:
“First off, our growth curve is very much decided by how many stores we can open. While others might think expansions are costly, e-cigarette is already a high-margin product category, we don’t really need to burn cash on purpose like the rideshare industry to achieve our goals, so the growth can be more healthy.”
Compared with today's rideshare giants like Didi (formerly competitors Didi and Kuaidi), or bike-share companies, it is a clear-cut. To sign up more users to secure a steep growth curve at the beginning, companies in the sharing economy and food delivery, as two prime examples, had to initiate subsidy wars on each other, resulting in a highly volatile competition landscape that nearly depleted China's venture capital stockpile a few years ago. This is not the case for SnowPlus and its competitors, who are spared from exhausting price wars.
The other advantage is some blessing in the disguise of a curse: China forbids online sales and nearly all kinds of mass-facing advertisements of consumer nicotine products, including regular cigarettes and e-cigarettes. The tough ban in turn saves these e-cigarette brands a big chunk of budget in marketing.
“We literally aren’t allowed to spend that much money on marketing, so we pour more on product research and development, safety, and obviously opening more stores,” said Xiao, “let’s say we open 20,000 more stores, solely operated by ourselves. That’s going to cost us what, 2 billion yuan annually? That’s basically how much an internet giant can burn through in 2 days for a subsidy campaign!” Xiao also added that it’s likely no one else in his industry is interested in subsidizing products to gain more market share.
Those facts give venture capital investors more comfort, as many of them at the top of the league were previously accustomed to investing more to allow for subsidy wars in order for their portfolio to secure a seat at the high table eventually. SnowPlus is funded by top investors such as Sequoia China, Matrix Partners, and ZhenFund, who stuck with it through its earlier pivots and are now generally happy with how it had turned out as one of the players shaping the e-cigarette landscape in China, despite the regulatory uncertainties that may come with a currently unregulated industry.
How VCs see the new consumer brands uprising
Popmart, a Chinese toy shop specializing in "blind box" toys, was valued at around 10 billion RMB back in 2019 when raising the likely last private round before going public in Hong Kong. The high valuation caused many potential investors to fret over return on investment. They were stunned as the blind box toys category leader was valued at more than HK$100 billion ($12.8 billion) on its IPO debut. Popmart's market cap sits at around HK$107.7 billion ($13.9 billion) today.
The case of Popmart now remains a reminder to venture capitalists that if you see a good company, do whatever it takes to get in since it might as well be a once-in-a-lifetime opportunity.
As mentioned earlier, the fast-paced and relatively healthy growth for many of these new consumer brands out of China boosted institutional investors' confidence to place their bets in this domain. A previous notion in venture capital that platform companies can scale faster while (conventional) consumer products have a more linear growth curve is being challenged by the explosion of a number of top brands.
"Frankly speaking, it was unimaginable several years ago that a single brand could make a company with more than ten billion dollars," said Li Haojun, a partner at GGV Capital.
Li said that the current situation where new consumer brands are being chased by venture capital largely due to the fact that investors are trying to get into the next leading companies in high-volume categories, such as Genki Forest in bottled drink, or Perfect Diary in cosmetics. Additionally, the build-up of mobile internet infrastructure allowed for newer brands to break out faster than before. Specifically, the popularization of e-commerce platforms, as well as mobile social networks like Xiaohongshu and Douyin fusing developing their own e-commerce channels, allowed for new brands to reach customers accurately and efficiently, both online (in terms of brand/product display) and offline (physical delivery of products, for instance).
It is nearly impossible for new platform companies, like e-commerce and mobile social networks, to break out these days, as internet traffic, the main market-making factor for these categories, is controlled heavily by a few incumbents. That's why leading venture capital companies are increasing their bets on the new consumer brands, hoping to help the select few disrupt their consumer categories.
GGV, an early investor of Alibaba, Airbnb, ByteDance, Didi, and 281 portfolio companies, lists the new consumer brand as one of the most-watched areas on its website. Notable "Direct to Consumer" (DTC) companies GGV had invested in include CHALI and Buff X.
The venture fund announced that it had led the C round investment of several hundreds of millions of RMB for CHALI, a high-end teabag brand. The brand is supplying more than 7,000 high-end hotels operated by groups like IHG and JW Marriott and boasts popular sales channels including FreshHema (owned by Alibaba), Miniso, etc. Its product lineup ranges from popular young drinker-oriented fruit-flavored and herbal tea bags to all kinds of instant tea and milk tea products.
Sold in boxes, CHALI's triangular cone-shaped tea bags containing whole leaves average 4-7 yuan ($0.6-1) per bag, a significant increase from Lipton's offering (less than 1 yuan per bag). Founded seven years ago, Chali is the manifestation of young Chinese entrepreneur Tan Qiong's attempt to reinvigorate the highly fragmented, non-standardized tea drink market of China where no local brands can stand out to compete with global brands like Lipton and even Starbucks' Teavana.
The brand saw that as more new forms of online and offline sales channels emerged in the past decade, the "power of consumption" is liberated. The new trend caused the once old-fashioned tea consumption to be accepted by a new generation of consumers - but only if the product quality and brand image match their lifestyle preferences. GenZ customers are more open to tea products. And machine shredded Lipton bags are no longer their option. Stocked with high-quality products directly sourced from tea farms that collaborated with the brand for tea research, CHALI has sold more than 600 million tea bags and topped the chart in the herbal tea category during Tmall's Double 11 shopping festival last year.
Buff X is making nutrition and energy gummies in China. The "buff" in its name is a commonly used term in popular games that refers to beneficial status effects applied to player characters, hence demonstrating the brand's affinity to young consumers. Buff X sources from leading food ingredient suppliers, including Yong An (for taurine), Beneo (functional fibers), Novasol (curcumin), Bloomage Biotech (Gamma-AminoButyric Acid), and makes gummies that can be used as alternatives to energy drinks, carb blockers, vitamin supplements, and anti-hangover pills.
Last year, Buff X made over 1 million yuan ($154,000) in their fortnight online launch sales. GGV led its Pre-A financing round 4 months after the brand's angel investment of tens of million yuan. Its products are considered a prime example of a lifestyle favored by Gen-Z working people, jokingly dubbed "punk fit" (keeping good health in a punk's way), or striking a balance between "work hard, play hard" and taking care of oneself. The idea is a signal of a more significant trend in the Chinese consumer market that new challengers disrupting the stagnant market norms are being accepted by consumers. These brands represent the young generation of consumers and the future.
In general, domestic consumer brands are increasingly becoming venture capital's new poster children, as a recent report by Deloitte suggested that companies in the consumer sector counted for nearly half of the IPO funds raised among all of the 33 Chinese companies that went public in the US in the first half of 2021. For the subsequent batches of new consumer brands from China, fast growth and highly sought-after IPOs await.
Design matters
Typically, the founder, the product, and the money matter most in the startup economy. Whereas in China's new consumer brands movement, it is interesting that design, including visual identity, packaging, merch, etc., has contributed more than people would imagine to the fast growth and acceptance of the brands. Bold fonts, vibrant and modern color palettes, creative use of other visual elements led many consumers to fall for those brands, with some proudly posting on social media that they went for the product but kept their packaging as collections.
A Black Cover Design, styled as ABCD, is an international branding and design agency based in Beijing and San Francisco specializing in collaboration with brands in the "new retail" landscape. Under the torrent of China's new consumer brands movement, ABCD is a crucial contributor in its design's vibrancy and diversity, an award-winning and market-tested branding enabler behind various companies that will soon be taking over China tomorrow. Since its establishment in 2015, the studio has collaborated with more than 20 new brands considered top 3 in their respective categories today. It is sometimes compared to Red Antler, a New York-based agency known for its branding work for many top US consumer startups.
Nod Young, one of the co-founders and an Art Director at ABCD, told PingWest in a call that he and his partner Guang Yu had been in the design industry for more than 20 years but had previously never imagined that they would be later known as the design masterminds behind this new wave of Chinese consumer brands.
ABCD's co-founders were thrilled to find that some of their clients from early on, like Naive Blue 天真蓝, a photo studio specializing in ID photos, in 2015, and pidan, a brand of pet products, around 2018, quickly evolved to lead their categories. Then more DTC brands came to their door, granting them a vital revelation that it would be a pleasant and profitable thing for them to devote their expertise to the cause of reinvigorating Chinese consumer brands.
Nod said that although the designer's occupation often carries a niche-seeking stereotype, he is more of a fan and design researcher of mass consumer brands like Ikea, McDonald's, and Nike. After several successful collaborations with clients, ABCD saw an opportunity to incubate more of such brands out of China and went all in. Today, the design studio is still relatively unknown to China's general public compared to major powerhouses in the branding scene, like Ogilvy or Dentsu. Still, it is already a celebrity among the founders of the new Chinese consumer brands.
A dissection of the success of today's new Chinese brands from the design angle found that although their teams are filled with seasoned retail veterans from world-class brands, the founders and decision-makers are often younger than their traditional counterparts. The change caused them to be more willing to push for bold, Gen-Z-oriented styles, even when designing for China's general consumers, which are both young and aging at the same time. It turned out that Gen-Z consumers love these designs, also the older population finds them refreshing and a representation of the future.
Nod suggested that the prosperity of these new brands is also attributable to consumers' changing views on new and traditional brands. As the entirety of China's economy was reshaped by mobile internet in the last decade, new sales channels like e-commerce and social networking apps became popular, transforming the way people shop. This resulted in what he calls liberation of "power of consumption," demonstrated by new sales channels, lowered entry barriers for new brands to emerge, etc. Nod said that as the consumers are more empowered to buy different stuff from more channels, "they will be more inclined than ever to choose these fresher products that never existed before, from these relatively new brands that are thriving at the top end of their categories."
Commenting on ABCD being called the "harvester of top brands in China" by media outlets, Nod humbly told PingWest that the studio isn't a fan of that title because its real intent is rather noble: to unite a family of new consumer companies, to build a commune of brands aligned not solely by business interests, but more importantly the shared affinity for good design, and the goal of providing better Chinese products and services to Chinese people. This commune can serve as a progenitor of a new world, the consumer goods aspect championed by such beloved Chinese brands, alongside the likes of Ikea, Uniqlo, and Nike.
Tread carefully
Another shift in a market trend that allowed for new brands' prosperity is the fragmentation of categories. For example, in the past, a leading brand for toothpaste would often also be a leader in the general oral care category. Still, these days a particular brand can sell the most popular mouthwash product while other brands dominate toothbrushes, toothpaste, etc. Or, in the instance of bottled drink, all kinds of beverages from Coca-Cola, PepsiCo, Nongfu Spring, and a few others take over the shelves, but in the last two years alone, Genki Forest dominated the sugar-free, flavored sparkling water category.
The significant increase in the number of brands in all categories and the capital power chasing them is inherently a reactionary result of the first wave of frontrunners realizing their success. Many interviewees agree that success won't be guaranteed just like any other venture capital-fueled high-growth industry in the past.
Some figures in the scene even warn of a bubble in the making. Li Chengdong, an angel investor, said that the new consumer brand investment is obviously overhyped, "the trend is there, but the pricing is too high." Dong Zhanbin, the founding partner at Qingsong Fund, commented that significantly more people, from complete rookies to large companies, to marketing and advertising agencies, are all entering this game, causing some key metrics, such as customer acquisition cost, to inflate heavily.
Meanwhile, Sun Xiaomeng, a vice president at YF Financial, thinks that the current hype represents investors' belief in the trend and the present "systematic opportunity."
After many collaborations, Nod warns of the survivorship bias when people observe the market, meaning that the fate of the brands we see alive and kicking today doesn't necessarily apply to all brands. "Conventional brands still possess immense market power," he said, adding that his studio also partners with much larger brands like Li Ning and Nike in their rebranding and new product line endeavors. As much as he would like to see a commune of new consumer companies reinvigorating the image of Chinese brands, working with established global brands remains one of his childhood dreams.
"I completely disagree that right now is a good moment for us to immortalize the great development of new brands and new retail in China. 2019, the first year of this movement, is barely two years behind us. 2020 was also a very special year with the pandemic, during which a lot of novel factors might have been in effect," said Nod.
Nonetheless, what's happening in the new consumer brands movement out of China is very unusual and promising at the same time, challenging the consumer landscape in China formerly heavily influenced by foreign brands and reshaping people's purchasing habits and lifestyle choices. These new brands form a market is driven by young founders building the next global retail giants of China, funded by venture capitalists trying to pitch in on the next Alibaba and Tencent, visualized by design masterminds with a world-class record and down-to-earth attitudes.
And, if there is one thing that is certain about China's massive market, it's that when these forces combine, the incoming change is unstoppable and irreversible.
Feature image creadit: CGTN