Part 1 covers China’s two social media giants expanded into the country’s F&B industry through a flurry of investments in recent years.
Two different approaches
ByteDance and Tencent each have their own reasons to dip their toes into the coffee game.
Tencent’s strengths lie in its social network and gaming markets. Although Internet penetration in China has peaked, staying creative in developing new games will sustain Tencent’s growth for a while. The F&B investments seem more like a litmus test for Tencent’s social commerce prowess. With China’s largest social media and messaging app, WeChat, Tencent will be able to channel customer traffic to its investees—similar to how it propelled the rise of Pinduoduo.
ByteDance’s investments, on the other hand, are a reflection of the company’s aspirations in building up a “local lifestyle” business that is largely inspired by Douyin. The term “local lifestyle” was coined in China and roughly refers to the ability to be in tune with one’s immediate offline surroundings, culture, and shops.
According to a report by Chinese media outlet the LatePost, ByteDance established a department dedicated to this in December 2020. The team comprises nearly 10,000 people and focuses on finding partners from sectors like catering, cultural tourism, and lifestyle services.
ByteDance has set an internal KPI for GMV (Gross Merchandise Value) for this business, aiming to hit RMB 20 billion (USD 3.07 billion) annually. As of March 2021, however, it has only achieved a GMV of around RMB 40 million (USD 6 million)—falling far short of this target.
The company’s shortcomings are not due to a lack of traffic—Douyin and Toutiao boast no shortage of either content or users for this. Instead, the seemingly fundamental reason why ByteDance met its Waterloo in its offline expansion is that as an internet company, it lacks first-hand experience in operating offline businesses.
The investments in Manner and other F&B companies are supposed to help it gain a closer look at how offline businesses work and seek out opportunities accordingly. On the one hand, it can look closely at the nitty-gritty of offline operations—from running stores and systems to attracting customers to data management. But, on the other hand, it can potentially experiment and test out multiple hypotheses across its bevy of portfolio companies on how to best convert its online traffic into real offline consumption.
This also means that ByteDance is unlikely to be a passive investor in Manner coffee. Unlike Tencent, which mainly supports Tim Hortons in providing traffic and support for online services, ByteDance will probably involve itself more heavily in daily operations and management.
ByteDance was once reported to have said that Manner was just another financial investment for it. But considering Bytedance’s financial heft—its return on investment in Manner is likely to be relatively insignificant. For ByteDance, greater value is gained from the ability to figure out a roadmap for offline operations.
Strengthening e-commerce aspirations
Aside from its local lifestyle business, ByteDance is also hoping to grow its e-commerce operations too. Supporting internet food brands such as Lazy Bear Hotpot and Shark Fett, as well as F&B influencers like Li Ziqi, can help them create their own private label brands for Douyin’s e-commerce arm.
In June 2020, ByteDance officially established its e-commerce business department, which oversees the coordination of its e-commerce business operations across its multiple platforms such as Douyin, Toutiao, and Xigua Video.
Its main competitor in the short-video space, Kuaishou, is also eyeing the e-commerce market. But it is clearly not ByteDance’s only nor main competitor in this space. Instead, China’s e-commerce behemoths Alibaba, JD.com, and Pinduoduo pose more real threats. Compared to the trio, ByteDance has no shortage of users, online traffic, or funds. What it has, however, is a clear lack of seller supply.
Each of the three e-commerce platforms has a distinct advantage: Alibaba’s Taobao’s in the fashion and clothing market, JD.com in the consumer electronics (3C) market, and Pinduoduo in agricultural produce. These advantages are engraved deeply into each company’s branding, user perception, and income statement.
In contrast, ByteDance has not yet developed a distinct trump card. F&B products might look to be a good choice. As a trillion-dollar market, the F&B industry can provide ample space for creative e-commerce supply. Li Ziqi’s well-known vermicelli brand has also proven that influencers can launch F&B products to great success.
Backpedaling to old gameplay
Prior to its entry into the F&B market, ByteDance’s investment targets have always been more obviously related to its core businesses. This reflects its pattern of making up for business shortcomings by absorbing external teams and resources. For instance, in its early stages, ByteDance invested in a series of media organizations and communities. It has also invested in leading visual image content companies such as Tuchong and Dongfang IC. Such investments not only enriched ByteDance’s supply of content on news aggregator platform Toutiao but also reduced the risk of copyright infringements against the platform.
After Douyin took off, ByteDance invested in a series of multi-channel networks (MCN) such as Fengmaniu Media and Taiyang Chuanhe. This helped Douyin lock in a large number of celebrities and key opinion leaders on its platform.
As ByteDance looks to expand its business lines towards workplace collaboration services, education, and gaming, the focus of its investments has shifted accordingly. In line with its old game plan, it has acquired Shimo (a collaboration suite akin to Google Suite) and Zhaoxi (a mobile scheduling app) and paid a hefty USD 4 billion to acquire game developer Mutong Technology.
ByteDance’s non-stop acquisitions have historically helped it build a bridge into unfamiliar markets and gained it a seat at the table.
However, other problems have stilted its plans. For instance, ByteDance originally held high hopes for the online education market, seeing it as the second growth curve for the company. Since 2021, however, the Chinese online education industry has entered into a cold winter due to regulatory pressures. ByteDance is no exception to this winter and has had to dial down its plans here.
And while regulatory pressures on the gaming industry are small in contrast, ByteDance’s difficulties in this area are no small matter. Moving into the industry is akin to a direct challenge to Tencent, whose home turf lies in the very field itself.
Over the past two years, the two companies have come head-to-head in investing in the gaming industry, which has not only raised the cost of talent in the field but also caused acquisition premiums to rise. This is giving rise to a capital bubble in the gaming market.
Furthermore, ByteDance has no native advantages in the gaming industry compared to Tencent—such as in-game development, distribution, and branding channels. Even if it does offer a higher acquisition premium to game makers, it is less proven in the market and may be less attractive to them.
But F&B is a different story. Tencent has no obvious advantages here and seems to be moving rather slowly in contrast. In addition, the F&B business may be relatively simple compared to the online education and gaming industry due to the shorter supply chain both upstream and downstream.
Once the unit economics of its brands’ offline stores are proven through trial and error, its other F&B brands can replicate the same model to expand across the country. Hopefully, ByteDance’s capital and traffic can accelerate this. Further expansion can also give rise to economies of scale and accelerate the growth of the business.
However, investing in F&B is not easy, and it is challenging to guess which brands and projects will emerge as winners. This is a big problem for ByteDance, which has never ventured into the industry before.
For instance, market favorites such as Xiaoheng Dumplings, Huangtaiji, and Diao ye Beef Brisket were heavy favorites in China’s initial wave of new-age consumer F&B brands. These brands seem to have it all, with media attention, investment capital, and promising operational data. However, as their offline presence increased, these brands’ ability to maintain quality standards, cost controls, and management oversight faltered. Xiaoheng Dumplings’ last round of financing was in 2016, while Huang Taiji and Diaoye Beef Brisket have long since disappeared.
In contrast, more media-shy brands such as ice cream and bubble tea brand Mixue Bingcheng might have become unexpected winners. Although it was first founded in 1997, it was not until early 2021 that Mixue Bingcheng received RMB 2 billion (USD 307 million) from Hillhouse Capital and Meituan’s Dragon Ball Capital, marking its debut on the internet brand stage.
The F&B industry has long lain outside of ByteDance’s most obvious range of investments, and the company has clear shortcomings in data and experience on this front. Even if Tencent may be a sleepy competitor, the question of whether ByteDance can decisively win in this competitive sector still remains.
This piece originally appeared in Zimubang, and was written by Yanfei.