With tech, gaming and education companies out of favour with investors, consumer brands like Perfect Diary and HeyTea are capturing the hearts of venture capitalists and private equity firms, writes Mark Tanner from The China Skinny
A scan down the US rich list reveals a gaggle of technocrats from Seattle and Silicon Valley. Warren Buffet, at number four, is the only name in the top nine who doesn’t fit that description (although seventh-placed Elon Musk left Silicon Valley late last year).
The richest in China, whilst still tech-heavy, are a little more diverse. Just five of the top 10 are technocrats and more than half have built their businesses outside of the tier-one cities. The richest man, Zhong Shanshan, made his billions selling Nongfu Spring bottled water, and number eight, Qin Yinglin, breeds pigs for a living.
If becoming super-rich is your goal – which it is for many Chinese – the likelihood of making your fortune through a tech company is more remote than it was before. Many of the young and ambitious are now aspiring to be the next Zhong Shanshan, rather than the next Jack Ma – making their fortune from consumer goods.
Beijing once placed tech firms on a pedestal – they could do no wrong. Gregarious ex-teacher Jack Ma was the poster child for what hard work and a little savvy could do for you in the new China. Leadership in the tech space would enable China to become a high-income economy.
The new China has moved on and is now more multi-dimensional. Beijing is more confident than ever, not feeling like it needs to prove itself to the world by showcasing successful entrepreneurs as it once did. In fact, there is barely a tech firm that hasn’t been impacted by government crackdowns in the way Alibaba and its Ant Financial has been since last November. The most recent was Didi, China’s Uber, which was blasted by Beijing just after its IPO in the US, wiping $2 trillion off the value of Chinese stocks in the US. China’s tech entrepreneurs, once talismans, are now acting sheepishly. Investors are spooked, and with less money available, the allure to join the tech brigade is fading for many of China’s best and brightest.
However, investors are still as enthused as ever about investing in China. The market has again shown its resilience, this time in the face of the global pandemic. But with tech, gaming and education companies now out of favour with investors, there is a new show in town supported by Beijing that is capturing the hearts of venture capitalists and private equity firms: consumer brands. These brands cover everything from beauty to fashion to leisure, but the grocery/food & beverage category is particularly hot right now.
During this year’s 618 e-commerce festival, 459 brands that were the top-sellers in their sub-categories were less than three years old. They include Make Essence, the best selling men’s hairstyle brand; Rocking Zoo, the top body scrub and Colorkey, the best selling lipstick. Top-selling soda wine, TenFifteen, only launched this year.
The success of emerging brands in the consumer category has been followed by investors. The tea category is just one example, with tea drink makers receiving RMB 5.3 billion (£590 million) investment in the first six months of this year alone, all hoping to be the next Heytea, the teahouse chain now worth almost £7.2 billion.
With more and more brands cashed-up in each category, brands are investing greater sums in marketing to stand out. In fact, many of these businesses are operating like start-ups from Silicon Valley, more focused on growing revenue and customer acquisition than profit. Whereas most foreign brands in China spend between 15-25% of their revenue on marketing, many of these cash-rich emerging brands are spending north of 65% of revenue on marketing.
Five-year-old healthy beverage maker Genki Forest, which aims to be the next Coca Cola, hammers China’s social media platforms with one third more posts than Coca Cola each month and a whole lot of influencer and live streaming campaigns. Its latest fundraising round earlier this year valued it at £4.3 billion, providing plenty more cash for building its brand. Similarly, makeup brand Perfect Diary has become a darling of the beauty industry, spending large amounts of money on key opinion leader and key opinion creator (an influencer with a smaller amount of followers) campaigns, supported by clever strategies to convert customers into loyal followers online.
These well-funded marketing initiatives have helped shape consumer expectations. British brands would be wise to take note and target their positioning, marketing and products towards specific consumer groups and tribes
In addition to upping their marketing budgets, the rush of cash is being invested in new product development. This isn’t for new, highly technical products that take years to develop, rather a plethora of easily-launched products that target specific demographics, geographies, tribes and occasions with tweaks in ingredients, packaging, formats and positioning.
Whilst these brands are constantly analysing big data to develop their new products, the approach could be described as ‘scattergun.’ Many Chinese companies don’t have the same brand heritage to protect as long-established British brands do, and have an influx of investor cash, meaning that they are unafraid to launch some failed efforts. The strategy has worked well for numerous brands as consumers feel like they getting products specific to their unique needs rather than a generic good that isn’t.
These well-funded marketing initiatives have helped shape consumer expectations. British brands would be wise to take note and target their positioning, marketing and products towards specific consumer groups and tribes – which can still be sizeable based on the sheer scale of China’s market. This focus ensures that messaging and products are genuinely resonant with specific consumer groups rather than not meaning anything to anyone.
The digitally-entrenched lifestyles of Chinese consumers allow for a lot of data to be gleaned. This can be used thoughtfully to provide insights to direct this segmentation and subsequent marketing strategies. These insights can also define groups for deeper consumer research which can be used to understand the buttons to be pushed to connect with Chinese consumers at an emotional level.
British brands still have many qualities and an air of prestige that is often hard for local brands to match. That, coupled with a smart, targeted strategy can carve out a sizeable segment of the lucrative market and provide lessons and stepping stones to grow further.