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'Digital first' pays off in China's food and beverage sector

Upstart local companies use interactive online brands to beat multinationals

| China

China's food and beverage market has undergone an unprecedented transformation over the past few years, enabling the emergence of new players and threatening incumbents -- both foreign multinational corporations and local companies.

With consumer food and beverage spending expected to reach approximately $10 trillion by the end of 2016, China is one of the largest such markets in the world, if not the biggest. But the market is also defined by its mercurial and fast changing nature.

Competition in the country's deregulated sectors is often the most intense in the world, with innovation and disruption happening all the time. The food and beverage sector is a prime example of this, in part because of the increasingly sophisticated demands of a growing middle class with rising income levels.

Other factors driving competition include a changing media landscape, which is encouraging new interactive formats that are altering the way consumers interact with content and brands. Advances in technology are also playing a part, including the internet, drones, artificial intelligence and virtual reality.

Seamless communications via smartphones and the app economy are important, as is the emergence of a new amalgamation of virtual and physical retail and delivery. Globalized resources are allowing food and beverage players with international aspirations to source products from around the world.

A new generation of local food and beverage players has emerged from this transformation. These companies have embraced the digital nature of Chinese consumers while also tapping into their aspirations. While there are many other companies that fit this description, we have found three notable examples.

Three Squirrels, a premium snack seller known for its popular cartoon mascots, has become a digital champion of China's food and beverage industry. As a "digital first" player, Three Squirrels' main sales channels are its store on Tmall, one of Alibaba's online shopping sites, and its own website.

Calling itself "the best internet customer experience brand," Three Squirrels emphasizes service innovation to build a loyal customer base. This digital first strategy allows Three Squirrels to leverage its customer data to build personalized shopping experiences and other service innovations. The company also places a strong emphasis on consumer feedback, adjusting its product offerings, flavors and packaging in response.

Three Squirrels' strategy has paid off handsomely, with its 2015 revenue reaching 3 billion yuan ($433.2 million), a 200% year-on-year increase. The company plans to go public in the near future.

Jovo, a brand of baijiu (Chinese white spirit) launched in 2012, was aimed at China's younger generation -- a consumer segment that is known for its lack of appreciation for the drink. In order to convert young Chinese consumers to baijiu, Jovo tailored its distribution channels, product packaging and product identity around the behavior and interests of its target segment.

It focused on digital channels for distribution, after observing the shopping behavior of its target customers, and relied on customer feedback in the development of the brand. Jovo was able to develop a lifestyle community around its product that spoke to the desires of the younger Chinese generation.

This allowed Jovo to transform itself from a product to a reflection of the image its customers wanted to present to the world. With 2015 revenue reaching 200 million yuan, a 100% year-on-year increase, Jovo is steadily making an impact and building a loyal customer base.

Brand ownership

LePur Yogurt, a premium Greek-style yogurt startup founded in 2014, has built a fervent fan base around its product as a result of the strong sense of brand ownership it instils in its consumers. LePur has won over savvy, health-conscious Chinese consumers with its emphasis on zero artificial additives and premium imported ingredients.

Another new arrival that has embraced a digital strategy, the core of LePur's system is its account on WeChat, a multi-functional Chinese messaging app. Users can purchase LePur products, check on the status of their orders, read related content and, more importantly, interact directly with LePur staff. Through this contact, LePur gives its consumers a sense of participation in the company's operations.

New flavors, branding and packaging, and even dairy sources come from the recommendations of its loyal fan base. While the startup does not publish financial results, LePur claims to have more than 300,000 active customers using its WeChat account to purchase its products.

For a long time in China, global multinational corporations maintained a solid hold over the market in the fast-moving consumer goods industry, and in food and beverage specifically. Multinationals such as Unilever and Nestle (and Procter & Gamble in the broader industry) brought their products, brands and know-how to China. Local companies that were just beginning to learn the trade initially viewed these companies as role models, but times have changed.

Local competitors have learned the lessons and found their own ways to compete, often very effectively, against the multinationals. With an accelerating manifestation of the major drivers of change, many large multinationals are finding it increasingly hard to adapt to the local environment and consumer demands.

Local brands such as LePur and Three Squirrels are good at identifying new and niche consumer demands and offering products and services in a manner that their target consumers prefer. Big multinational brands that continue to rely on traditional ways of identifying and communicating with their consumers, and of going to the market, are very likely missing out.

The food and beverage industry in China has reached a new stage. The question now is whether big multinationals will adapt and regain their positions or continue to decline. The new local players are dynamic, and they utilize the technologies that their consumers have embraced to build brand awareness and sell their products. While each has a unique formula for growth, they share the same characteristic: They have a good understanding of what their target consumer wants and have figured out the best way to sell it.

Some will surely dwindle along the way. But as long as the fundamental drivers of disruption and innovation continue to be present and to evolve, newer and more disruptive players will continue to emerge.

In China's ever-changing market, it will be interesting to see which of the players in this pioneer class will able to maintain their positions, which will fall to the wayside, and whether new players with fresh ideas and strategies appear along the way.

Edward Tse is founder and CEO of Gao Feng Advisory Co., a global strategy and management consulting company, and the author of "China's Disruptors." Ian Meller is a consultant at the company.

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