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China's Gen Z inspires beverage makers to take on Coca-Cola

Patriotism and slick marketing fuel sky-high valuations for new companies

A courier picks up an order from Chinese bubble tea chain Nayuki in Beijing on June 24.    © Reuters

A shift in interest among young Chinese toward homegrown products, and a desire to lead healthier lifestyles, has opened the door for more local brands to challenge big international names such as Coca-Cola and Starbucks, fueling investor interest in startups and inflating valuations.

The change is being driven by Generation Z -- those born in the late 1990s -- who grew up during a period of unprecedented domestic economic growth and China's rise to global prominence. This has instilled in them confidence, national pride and a sense of nostalgia for all things Chinese.

They are also digital natives and, since they account for roughly 15% of the population, they represent the engine of growth for domestic consumer spending, according to U.S. consultancy McKinsey & Co.

"Most of the new consumption trends have been guided by domestic culture, rather than by foreign input," said He Peibin, an analyst at Ping An Securities, in a report last month.

The support for domestic companies among the younger generation illustrates a phenomenon dubbed guochao, or "China chic," in which consumers switch back to local brands previously viewed as inferior and lacking in style.

This group of buyers is more favorably disposed toward domestically made products than previous generations, and their spending power is expected to rise fourfold to 16 trillion yuan ($2.5 trillion) by 2035, according to the latest report by financial advisory China Renaissance.

This has been a boon to consumer startups, which have also benefited from more mature domestic supply chains, sophisticated manufacturing and, perhaps most importantly, slick, targeted marketing.

Three companies that have seen their valuations soar on expectations underpinned by this shift in tastes are sugar-free soda and packaged tea-maker Yuan Qi Sen Lin (Beijing) Food Technology Group, and milk tea chains Shenzhen Meixixi Catering Management and the recently listed Nayuki Holdings.

Yuan Qi, which was founded in 2016 and whose products trade under the name Genki Forest, announced in April that it had completed a new round of financing valuing the company at around 40 billion yuan, which, according to some reports, is a tripling of its valuation from last year. Its perceived growth potential has attracted high-profile investors, who reportedly include IDG Capital, Sequoia China, and tech giant Tencent Holding.

Its flagship product, a peach-flavored soda that claims to have "zero sugar, zero fat, zero calories," along with tea varieties, is now sold across China and overseas, with sales of nearly 3 billion yuan last year.

High valuations

In terms of the price-to-sales ratio, which gives an indication of how much investors are willing to pay per dollar of sales, that valuation would give the company a sales multiple of 13, compared with just over 6.7 for Coca-Cola, the world's largest soft drink maker.

At the end last year, founder Tang Binsen forecast at a dealers meeting that his company's sales would jump 150% this year to 7.5 billion yuan.

Impressive growth forecasts aside, Yuan Qi has some way to go before it can challenge industry leader Coca-Cola. The U.S. giant accounts for 42% of China's soft drink market, including carbonated beverages, fruit drinks and bottled water, followed by perennial rival PepsiCo with about 32%, according to data from Daxue Consulting.

High price-to-sales ratios aren't uncommon in China's red-hot beverage market, with domestic behemoth Nongfu Spring reaching a P/S ratio of 19.76 after a blockbuster listing last September raised around $1.1 billion. The company now trades at a market value of about $470 billion Hong Kong dollars ($60.5 billion).

Meixixi, which trades under the name HeyTea, has also seen its valuation more than triple to over 50 billion yuan at the beginning 2021 from about 16 billion yuan at its last funding round in March last year.

"There is no doubt that valuations in the consumer product industry are at a record high," an executive at Verlinvest S.A., an investment holding company, told Caixin. This has been driven partly by financial relief measures and fiscal stimulus launched in multiple countries in response to the COVID-19 pandemic.

Influx of cash

These direct fiscal measures have ranged from 5% to 24% of 2019 gross domestic product in advanced economies, which for many has contributed to the largest single-year increase in the government debt-to-GDP ratio during peacetime, according to the Reserve Bank of Australia. This in turn has led to huge amounts of money flowing into capital markets.

In the first half of the year, the aggregate value of venture capital deals in China's consumer discretionary sector reached $11.9 billion, well on track to top the figures in 2020 and 2019, according to a report earlier this month in Vogue Business, citing data and insights platform Preqin.

"Investors are energized by Chinese consumers' resilience during the COVID-19 pandemic, together with a wave of innovative new ideas and the growing buying power of younger generations," it said.

While some analysts told Caixin that the valuations were too high, given the propensity of consumer startups in China to burn through cash quickly on marketing before generating significant profits, others point to their potential as warranting such investor confidence.

"The high valuations for star consumer brands are reasonable, partly because they are in fast-growing niche markets," Gao Huan, a senior director specializing in the consumer sector at consultancy Alvarez and Marsal Holdings, told Caixin. "You can't judge a brand's valuation simply based on its own competitiveness, [you] should consider how far the market can go."

"Winner take all"

China's soft drink market is expected to rise by a compound annual growth rate of 9.6% to 1.9 trillion yuan by 2025, from 1.2 trillion yuan last year, with fresh and packaged tea drinks only trailing coffee in terms of growth, at 14.6%, according to Nayuki's prospectus, which cited consultancy CIC.

Investors give high valuations to leading startups because they bet on them to come out on top in a "winner take all" market, and to be early to file an IPO, said Gao.

But that isn't always how it turns out. Despite initial investor enthusiasm for teahouse chain Nayuki, which raised $656 million in its Hong Kong debut last month, it has since seen its market cap dwindle to $2.5 billion from an initial $4.4 billion.

A surge in revenue to 2.87 billion yuan in 2020 from 909.5 million yuan in 2018 and expansion from 44 teahouses in 2017 to 562, may have attracted investors. However, plans to open an additional 1,000 shops through 2023, despite the company not recording any profit, may have cooled interest.

The rise of local beverage brands has also been facilitated by slick online marketing campaigns that emphasize their hip product design, Chinese heritage and health benefits -- as well as the ubiquity of online shopping, especially among the younger generation.

Generation Z is viewed as the first generation of truly digital natives, a cohort of more than 320 million people as of November 2020 and making up 28.1% of all mobile internet users, according to digital marketing company Croud.

Among this group, 82.3% shop online, according to a survey by QuestMobile and cited by Croud, showing how China's Generation Z is more reliant on online shopping channels than in other countries.

Slick marketing

For Genki Forest, that means taking their sales pitch online to push the "zero calorie" benefits of its flavored soda water range, which comes in Japanese-style bottles popular among young consumers, and packaged teas marketed as "a modern tea experience inspired by an ancient tea legacy."

This message is bolstered by collaborating with top "key opinion leaders," such as Li Jiaqi and Weiya, who have featured Genki Forest products in livestream events. This is aimed at Generation-Z consumers, who get much of their product information from social media platforms like Weibo, Douyin, the Chinese version of TikTok, and Bilibili.

HeyTea, which was launched in 2012, has also pushed the health angle, uses natural ingredients and sweeteners, milk and fruits to create a robust product portfolio, including its flagship cheese tea range at its estimated 800 directly operated stores across China.

Despite the strong growth, it still trails Starbucks, which was China's largest operator in the specialist coffee and tea shop market with 36.4% in 2020, according to Euromonitor, a market research provider. The Seattle-based coffee chain operates 5,000 stores in 200 cities on Chinese mainland.


Read also the original story. is the English-language online news portal of Chinese financial and business news media group Caixin. Nikkei recently agreed with the company to exchange articles in English.

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