Three major drivers will shape consumption in China over the next decade:
1. Economic growth: China’s economy will continue to migrate from an investment-driven model to a consumption- and services-driven model;
2. Demographic shifts: China will move from a relatively younger to a relatively older and aging population;
3. Technology and innovation: China will advance from being a major manufacturing power to an active leader in digital innovation -- a path it has already begun.
At the 19th National Congress of the Communist Party of China (CPC) which closed on 24 October 2017, China’s leadership announced that the country has entered a new era of development. China’s transformation to a society that fosters innovation while improving people’s well-being is one of the priority issues in the government report. Moreover, consumption upgrade is frequently discussed as we have witnessed the new normal transition of China’s economy and strongly believe in rise of domestic brands.
Based on this view, EqualOcean has been focusing on the new consumption trend in China in recent years and will release a TOP 100 China new consumer brands list based on our analysis.
The TOP 100 new consumer brands list are selected on three basic criteria:
1. Recently founded: we first need to separate new consumption from traditional consumer brands in terms of operation time. China's new consumer brands are generally established after 2013, therefore the list will select companies founded after 2013 as the standard of "new". The list also covers a number of brands that have been established early than 2013 for that they have completed capitalization in recent years.
2. Capital recognition: since obtaining capital favor is an important step for a company to scale up and a criterion to determine the capital capabilities of these new consumer entrepreneurs, we need investors' recognition as an endorsement for their potential. Most of the brands in this list have received financing from Angel round to Series C. Those who with no capital support either refuse to accept investment due to their outstanding operation performances, or are still at an early stage.
3. Direct-to-consumer brands: the list focuses on high-value consumer brands that may emerge in China's major segments of consumer goods in the next few years. The list excluded platform brands functioning as online retail distributing channels such as Taobao (a Chinese version Amazon), JD.com or NetEase Yeation.
We will first release 20 promising consumer brands as a spoiler and illustrate some of the representative brands.
Food & Beverage
Food & beverage sector accounts for more than 70% in terms of consumer brand deal numbers. The beverage (wine excluded), which has seven brands chosen in the list, can be further categorized by bottled and fresh-made drink, or by tea, coffee and milk drink.
Bottled tea drink, one of the focuses in the beverage market, has been showing great potential in recent years and caught the eye of venture capital.
Since 2015, several industry giants of bottled beverage such as Uni-president (统一), Master Kong (康师傅), Nongfu Spring (农夫山泉) and Wahaha (娃哈哈) had unveiled their new tea brands respectively, marked the beginning of brand upgrading and shuffling of bottled tea drinks, and raised the price range from CNY 3-5 to CNY 6-8.
In the meantime, Chinese consumers are shifting from low-quality drinkable tea to new style tea drink with better ingredients and design. However, compared with sugary tea drink’s upgrading, the sugar-free tea drink had remained a much lower market scale for years due to a small group of sugar-free tea consumers. Until recent two years, the post 90’s and 95’s have grown and turned to a more healthy way of consumption, plus they have already formed the habit to pay for bottled drinks, leading to an opportunity for sugar-free drink market.
In the interweaving development of the consumption trends, Yuanqisenlin (元气森林), an Internet innovative beverage company emerged just in time. The company who focuses on healthy and good-tasting beverages for the younger generation, launched Rancha (燃茶), the most attractive low-sugar and low-calories products in recent two years. After Rancha, the company consecutively introduced eight beverage products, covering tea drinks and sparkling water.
The product positioning of Rancha based on the concept of healthy drink has led to the success of its brand. In the RED (小红书) app, the note number (an indicator of the popularity of certain brand) of Rancha had substantially surpassed other tea drinks and low-sugar tea drinks.
Moreover, it received both popularity and capital support.
As for the fresh-made tea drink, the bubble tea or new style tea drink is another market that has fostered several new brands.
The new style tea drink mainly refers to the beverage that chooses top-quality tea leaves or a concentrated liquid that extracted by various methods as the raw materials, mixing with fresh milk, imported butter, natural animal butter, and seasonal fruits and so on. At present, cheese-toped bubble tea and fresh milk tea are the representatives on the market.
Based on the characteristics of good quality, exquisite packaging, and upgraded consumption scenarios, the new style tea market boomed with brands like HeyTea (喜茶), LELECHA (乐乐茶), Nayuki (奈雪的茶) and GAGA (GAGA鲜语) in 2018. According to China Merchant Securities, in the third quarter of 2018, the number of new style tea stores in China reached 410,000, with an annual increase of 74%.
Another brand benefited from the healthy and low-sugar trend is Lepure (乐纯), a high-end yogurt brand. Lepure yogurt has no fragrance, no sweetener, no pigment or emulsifier and can only be refrigerated and kept fresh for up to 21 days. Though the price (CNY 16 each) is two to three times higher than common yogurt, it not only owns 1.2 million fans online, but also successfully breaks through high-end hotels and appeared on-shelves of convenient stores like 7Elven, Lawson, FamilyMart, FreshHema, blt and BHG. Gaining popularity from the Internet, the company has operated without the traffic-attracting logic in a lot of Internet related businesses. Moreover, Lepure values greatly on the returning consumers and keeps launching new product on a monthly basis. It’s latest round of financing was led by Coca-cola, followed by IDG Capital and Zhen Fund with more than CNY 1 billion raised.
As to “food” in this sector, China's catering business has reached CNY 4 trillion in market scale in 2018. Two brands - Hefu-Noodle (和府捞面) and Zihaiguo (自嗨锅) - are selected to have a further look.
Hefu-Noodle is a Chinese noodle chain restaurant. Due to the difficulty in standardization and complex operation management, many venture capitalists have balked at investing in Chinese catering companies. Plus Noodle in China dated back 2,500 years and have long been associated with a plebian culinary tradition.
Hefu-Noodle, however, deviated from this norm by positioning itself as a high-end restaurant. It immerses diners in a bookstore-like setting, leveraging its unique operating model to create a slow and refined dining experience.
The noodle brand continued to appeal to investors for three reasons: first and foremost, product. The company abandoned cheap raw materials and coarse cooking procedures, spending several years on trying to make the best noodle and soup. Service is another strength of Hefu-Noodle and it is centered around the principle of “zero disturbance." Thirdly, the delicate control of delicate food. The company has spent CNY 10 million on building its central kitchen. Centralized production saves the firm a great amount of money in labor costs as well as ensures better control of consistency in taste and quality.
Compared with Hefu-Noodle, Zihaiguo excels in the trend of DIY dining with convenience and speed.
Zihaiguo is a self-boiled DIY hot pot brand, an upgrade version of instant noodle. Cai Hongliang (蔡红亮), founder of the company, is a veteran in the Internet business battlefield and had founded the snack brand BEE&CHERRY (百草味). In 618 shopping festival, the DIY hot pot ranked first in the sales of Tmall instant food category, took the lead in the "brand hot search list" an sold more than CNY 20 million till it is out of stock.
Behind its hot-selling record are a group of “lazy young people" who are exploding in consumption potential. CBNData showed that the number of mobile app users under 24 years old increased by more than 10 million year-on-year, contributing 44% of the total online users’ increase. In addition, young staying in people has become the largest online instant hot pot buyers.
Cai is not satisfied with an evolved edition of instant noodle, he wants something bigger: to become the pioneer in China's standardization catering and to introduce the "Chinese cuisine" to the world.
Part II will continue discussing new consumer brands on the list.