Consumption is inexplicably intertwined with our daily lives and is a powerful engine that stimulates economic growth.
In 2020, new F&B startups have overturned industry convention by reaching consumers directly, without distributors in between. These companies are formulating new approaches to marketing, sales, and manufacturing, according to Alex Wang, managing partner of Meridian Capital China.
In the meantime, online shopping channels played a dominant role in consumption around the globe, leading to business opportunities in new markets. However, the reality is that retail shops, restaurants, and beverage caterers suffered great losses as the COVID-19 pandemic closed brick-and-mortar venues for months.
COVID-19 led to hastened polarization within the industry, and that is set to continue. “Those who took advantage of the opportunities in 2020, you’ll see them doing better next year,” said Wang.
Lessons from lockdowns
The pandemic introduced huge uncertainty to China’s F&B sector. “Our total revenue from February to March has dropped a lot. Many restaurants couldn’t be reopened, such as in Beijing, because our staff couldn’t travel back after the Chinese New Year,” said Michaelia Zhu, co-founder of chain restaurant brand Soup Master. The company operates more than 100 stores across 35 cities in China.
Zhu said the business model of running small locations equipped with their digital management tools, while splitting the business between in-person catering and online delivery, helped minimize the risk for their business.
“You can’t rely solely on takeaway, because the commission fee charged by the delivery platforms is getting higher and higher, and they control your traffic. You also can’t operate a purely offline model either, because revenue will fluctuate too much.”
It’s not necessarily a negative thing that many stores shuttered during the pandemic, said Wang from Meridian Capital China, as high-value locations in malls have been freed up and represent new opportunities for businesses that are ready to occupy those spaces.
Furthermore, the pandemic resulted in Chinese consumer brands increasingly doing business with overseas markets. “E-commerce is global,” said Wang. “On Amazon, the proportion of Chinese merchants is very high, and the revenue of merchants doing business abroad this year is around two to three times higher than last year.”
New F&B founders have diverse backgrounds
Founded in June 2016, Akoko is a bakery startup based in Hangzhou that has obtained a combined USD 15.3 million in financing over two fundraising rounds, the most recent of which closed in January 2018.
“To build a good consumer brand, the team needs to do three things well—product, distribution, and marketing,” said Akoko’s founder and CEO Ke Ke.
Unlike many of the F&B veterans, Ke Ke and Soup Master’s Zhu didn’t start out as industry practitioners.
“We may not be as professional as those who have been in the industry for many years, but when we think about methods of iteration on the original workflow, new marketing channels, and new initiatives, we may be bolder, adopt changes faster, and have a better understand of the internet,” said Ke Ke.
“Gleaning consumer insights is often done most effectively by people outside the industry,” said Wang. The founder of a noodle brand that received an investment from Meridian Capital, for example, used to sell mobile phones.
While the barrier to entry in the F&B industry is lower than in more tech-focused fields, industry experience is essential. “We pay attention to the cooperation of the whole team. For example, if I’m in the food business, there must be someone who can take care of the supply chain and product development. It doesn’t really matter whether the founder himself started out in the industry or not,” said Wang.
Building consumer trust
Initially, Soup Master had limited resources. As an industry outsider, the first group of consumers was key to the chain’s long-term success.
“We thought we should reach a core group of customers who can endorse our brand for future customers,” Zhu said. “We approached pregnant women at prenatal care centers. Pregnant women drink soup every day. If they are willing to drink our soup, it means that the soup is healthy and safe.”
Zhu said their initial customer acquisition was based on various consumption scenarios, like office workers and corporate catering. First waves of customers stabilize the business when they translate into repeat orders.
While online retail has become a big trend this year, Wang still emphasized the importance of offline channels for new consumer brands: “Some offline sales methods, whether it’s a flash sale or pop-up stores, are very effective,” said Wang.
“As the pandemic passes, restaurants’ income and cash flow will be restored. At the same time, they can try to optimize their future layout,” said Wang. “We have seen many offline brands actively expanding this year, rather than shrinking. Especially in the second half of the year, the expansion has been quite strong.”