The gap in bakery consumption between China and other Asian regions is expected to narrow due to higher penetration of the Western diet and increasing occasions for baked goods consumption.
As early as 1980, Western bakery goods, including bread, cakes, pies, and other pastries, have expanded into China. However, decades later, consumption of such products has yet to rise to a level comparable to other Asian geographic regions. According to Euromonitor, by 2017, China’s per capita annual consumption of bakery products was 7.2kg, less than a third of Japan and less than half Hong Kong.
Chinese appetites for bakery products are growing
Nevertheless, the gap in bakery consumption between China and other regions is expected to narrow for several reasons. We expect that young people from middle to high-income urban families, especially in southern China, will soon drive higher sales in bakery products. While traditional Chinese baked goods such as mooncakes, Lao Po Bing (A pastry with fillings such as red bean paste, commonly consumed in Hong Kong), egg tarts and pineapple cakes are commonly consumed by older generations, young people are more open to a Western diet. Cheesecakes and croissants, for example, have become increasingly popular in high-end bakeries and shops, especially when flavors are adjusted to better satisfy the Asian palates. Further, occasions for consuming baked goods have expanded to include birthdays, business conferences, parties, weddings and other ceremonies. According to Euromonitor, the bakery industry in China grew to RMB 194 billion (USD 29 billion) at a CAGR of 13% from 2013 to 2017, outpacing the global growth of 3.5% during the same period.
In the meantime, the bakery market in China remains highly fragmented. Most of the almost 600,000 bakeries in China are local businesses, few of which are nationally known. Euromonitor showed that in 2015, CR5 of the bakery industry was only 10.4% in China but as high as 88% in Japan. We believe that more and more mom-and-pop stores without standardized manufacturing processes will exit the market due to higher opex and tougher food safety regulations.
Bakery moves to E-commerce
Barriers to enter the bakery industry are low, but for offline bakery stores in China, rising rent and labor costs have led to higher operating costs and shrinking margins. Since 2014, over 10 nationally-known brands including Uncle Testu 切丝叔叔), Christine (克里斯汀), and Aoqi Cookie (奥奇饼干), have closed almost all of their physical shops. Meanwhile, Bliss Cake (幸福西饼), 21Cake, and LeCake (诺信蛋糕) have chosen an exclusive E-commerce model, cutting costs and offering competitive prices for consumers. To consumers, viewing cake images online or in person is likely to lead similar purchasing decisions, but online ordering grants the convenience of shopping from home and do not need to wait in lines or make two trips - first choosing a cake and then picking it up after it is made.
According to an AskCI Consulting survey, 26% of people have bought cakes online while the remaining 74% have not done so, due to a lack of delivery services, lack of understanding, or other barriers. We believe that the percentage of people ordering desserts online, especially birthday cakes, will increase due to the higher value proposition.
How does Bliss Cake achieve its goal of rapid expansion
Bliss Cake is an online cake brand specializing in cheesecakes, birthday cakes, Mille Crepes and other pastries. Bliss Cake products are sold on its website in addition to major E-commerce platforms in China. In 2008, the company was initially established as an offline bakery chain, but by 2014 all physical stores had closed and Bliss Cake completely transformed into an O2O business. In two years, it raised over CNY 800 million (USD 118 million) from Meituan, Huaxing Capital and other investors. The company now operates in nearly 150 cities in China including Shenzhen, Guangzhou, Beijing and Shanghai. Each day, they receive approximately 40,000 orders and have currently realized around CNY 6.8 million (USD 1 million) sales.
Bliss Cake has scaled impressively over the past 5 years, supported by its estimated sales of CNY 2 billion this year, a revenue figure comparable to that of Holiland, one of the best-known offline bakery chains in China with 27 years of operating history. Bliss Cake’s quick growth can be attributed to franchising their satellite factories. Key ingredients including cheese, milk and cream are purchased in bulk and stored in central factories. After forecasting the next day’s customer demands based on sales data, central factories deliver ingredients and half-finished goods to smaller satellite factories located near residential and commercial areas. After a customer places an order, the nearest satellite factory will initiate the baking process and deliver the freshly-made cakes door-to-door within 2 hours in major cities and 3-5 hours in all other cities. The company owns 32 satellite factories in Shenzhen, each of which make about 200 to 300 cakes per day, serving customers within 3 kilometers. The business model both reduces rental costs and guarantees fast delivery.
Bliss Cake also takes advantage of diversified sales channels. Around 60% of the orders come from Wechat’s mini-program and 30% of the orders come from online delivery platforms like Ele.me. The remaining 10% come from JD.com, Taobao and other E-commerce sites.
Visually appealing products combined with relentless marketing capture core customer groups
Product design has been vital to winning over consumers, particularly women and children. Rather than offering a single frosting flavor, like traditional birthday cakes, Bliss Cake offers different flavors in a single cake. For example, their signature cake is evenly sliced into 2, 4 or 8 pieces; each piece has a different flavor, including chocolate mousse, fresh fruit, cheesecake, coconut, and so on. Images/posters of creatively designed cakes in bustling commercial districts make the brand easily remembered and recognizable to a large number of potential consumers. The brand also tried to win children’s hearts by securing the IP rights to Peppa Pig, Boonie Bears and SpongeBob SquarePants and then designing cakes featuring those animation characters.
Since late 2017, the company has been heavily using celebrity and KOL endorsements; ads can be seen in subways, train stations and residential/commercial buildings in cities. During the same period, daily searches for Bliss Cake on Baidu skyrocketed to 3,000 to 5,000. Since then, the number of daily searches for Bliss Cake usually exceeds searches for competitors including Ganso (元祖蛋糕) and Wedome. Furthermore, the company leveraged resources from its investor, Meituan, a lifestyle app with about 300 million MAU. Meituan’s users will see Bliss Cake featured when they are in the neighborhood of Bliss Cake’s factories. In our perspective, thanks to aggressive marketing strategies, Bliss Cake is well-positioned to serve its core customer groups in the middle to high-income families.
Opportunities with desserts markets
Even though birthday cakes bring around 15%-20% higher margins than other baked goods, fewer repeat orders make it difficult to cultivate customer loyalty. Bliss Cake has the highest demands among all bakery operators for cold chain logistics, which enable it to add more delicate offerings like muffins, cupcakes, napoleon cakes and British High Tea. The company is also considering selling seasonal flowers and chocolates in its offline stores in the future. We believe diversified SKU encourages more purchases from young females.
Industry and business risks are hard to ignore
We believe that Bliss Cake could encounter multiple challenges in order to maintain or take up more market shares in this fragmented bakery market in China.
1) So far, growth has mostly been driven by ads and discounts, raising concerns for the brand’s competency and customer loyalty. According to management, their gross margin in birthday cakes was only around 30% in 2018, lower than the industry average of 50% to 70%. This was likely the result of frequent sales promotions coupled with low unit economics. On the other hand, other birthday cake manufacturers have quickly reacted to competition by offering Barbie doll cakes as well as cakes featuring the rabbit and bear characters from Line Friends, making the company’s “Peppa Pig” and “Bonnie Bears” cakes less visually unique. Additionally, popular bubble tea chains including HeyTea (喜茶) and Nayuki (奈雪) started to offer baked goods, in turn becoming additional competitors to Bliss Cake. Different from online bakery vendors, these bubble tea stores aim to provide a seamless in-store experience for millennials to eat, drink, chat and take photos, creating high traffic and strong brand awareness. This is likely the reason why Bliss Cake announced that they plan to rebuild their offline presence and to play a more visible role in stores in 2019.
2) Rapid expansion through franchising has created issues with food safety, management, and customer service. In 2018, a franchise factory claimed that Bliss Cake was using expired ingredients. Though the company immediately explained that the label date was an error, fast expansion through franchise factories in the food industry is still risky. If the company fails to investigate similar issues or to maintain food quality during manufacturing, storage, and transportation, the brand may follow the path of BreadTalk (面包新语), a bakery chain which ultimately closed hundreds of stores due to multiple food safety scandals. We also note that franchise factories generally pay less attention to the brand awareness or customer service but focus exclusively on profitability, leading to the conflicts of interest between the business and factories. For example, customer service at Bliss Cake seems to be inadequate, as there are lots of posts on Baidu complaining about late delivery, failure to deliver, and a long refund process. It seems that late delivery happens frequently due to heavy traffic in the top-tiered cities, but customers often do not receive reimbursements (as how the brand claims in the ads), leading to a relatively low customer satisfaction rate.
Transforming to New Retail
With rising customer acquisition costs and slowdown in growth, an increasing number of E-commerce players have turned to New Retail. Bliss Cake, likewise, implemented similar strategies: It has been on the lookout for possible venues and has recently opened two stores in Shenzhen and is now looking to open over 1,000 physical stores in the next five years. The existing brick-and-mortar stores are similar to Holiland’s stores, mainly offering bread and beverages and expanding through direct chain rather than the franchise model. With ~40% sales currently coming from top-tiered cities in China, the brand is still less-known in the third- and fourth- tier cities with lower Internet penetrations. Therefore, the vision is to raise brand awareness in such locations. This year will be the first step toward realizing the company’s vision of achieving information symmetry so that its mobile app users can check on their phones to see what products are in the process of being baked. This is a way to update them on the status of inventory, facilitate placement of orders and also deliver the most freshly-made food to consumers.