Nearly 40% of new consumer brands in China that were recently the darlings of venture capital investors are experiencing a steep decline in sales. In particular, brands that sell instant foods and packaged nut snacks saw their year-on-year sales drop by 30–40% in the second quarter.
This is a reversal of developments from the past two years, during which consumer brands mushroomed quickly. The fundamental driver in this once-booming sector was visitor traffic brought on by aggressive online presence, particularly on social media.
Platforms such as Douyin, Xiaohongshu, and Bilibili give brands a way to attract a large number of new customers in a very short time span. For instance, oatmeal brand Wangbaobao’s monthly sales skyrocketed from RMB 1.2 million to 40 million, or from USD 186,600 to USD 6.2 million, in just nine months thanks to its ad blitz on Douyin. Ubras, which sells lingerie and other intimates, logged a staggering 800% year-over-year growth rate in 2020 for the same reason.
Tong Jie, the founding partner of Shang Cheng Investment, told 36Kr that numbers like these are “addictive.”
Staggering growth in sales numbers across the sector was used as justification for sky-high valuations. In return, investors demanded even faster climbs in sales volume. One entrepreneur told 36Kr that many investors pressed their portfolio companies to build out their presence on social media platforms to whip up transactions.
But the effectiveness of this move has been diminishing since the beginning of 2021. When performing due diligence to vet a well-known food brand this spring, Zhang Chao, vice president of a China-based fund, was surprised to find that it was performing poorly. For every RMB 10,000 spent on advertisements, the company only generated RMB 8,000 in sales. Plus, the retention rate was dismal—in 2020, less than 10% of its customers made a second purchase.
In a crowded sector, it is becoming more difficult for consumer brands to reach new customers, and there’s little reason for existing clients to remain loyal to a brand if similar products offered elsewhere carry discounts. That means losses are widening across the space.
However, broader investment sentiment in the sector remains robust. In the first half of 2021, there were 280 investments in new consumer brands totaling RMB 39 billion (USD 6 billion), making 2020’s some 200 deals pale in comparison.
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36Kr Connection features translated and adapted content published by 36Kr. This article was originally written by Wu Ruirui for 36Kr. It was translated and adapted by Jiaxing Li.