Startups Capitalize on China’s ‘Consumption Upgrade’

In China, a milk tea startup could turn itself into a multi-million dollar business, such as HeyTea.

The aspirant startup, hoping to be China version of “Victoria’s Secret”, recently raked in USD 21 million in series C funding from leading VC such as QiMing Ventures.

The rapid rise of a humble startup specializing in the claw machine, emoji design and stuffed animals that sound so lame in contrast with artificial intelligence put its founders on the list of Forbes under 30 this year.

The country is blowing the tailwind of so-called “consumption upgrade”, regardless of the slowing down of the economy. From tier 1 to lower-tier cities, certain data source suggests the annual personal expenditure on average is still growing at the rate of over 5%.

Today any startup which is able to satisfy any whimsical needs of consumption in China, with premium quality and the right pricing strategy, might strike gold immediately. No longer cheapness is the main impetus to drive consumer purchases. A six-month-old high-end ice cream brand sold out 400,000 expensive popsicles within 40 minutes during its e-commerce launch.

The Chinese millennials are looking for 4 key factors to satisfy the consumption desire.

It is said consumption is the new social assets for the much younger generation to define who they are, how they communicate and whom they want to be with. The sneaker you wear, the bag you carry, the restaurant you go, or the gym you visit, would speak loud about your identity and become the social currency to start the conversation with peers and find the right friends.

If creating a new brand has been a rather traditional startup concept, its quick success now can be catalyzed by the new technology to release explosive money potentials. On top of that, B2C branding is no longer about blindly burning money to draw traffics and attention like a few years ago. Even Adidas has to admit they are over-investing in digital advertising (see Link).

Consumption is the new darling for investment. Some investors are now seriously looking into the area of “new consumption”, hoping to find startup brands empowered by digital mindset at an early stage. It is said the return and exit might come much higher and faster, compared with those let’s say boring SaaS enterprise solutions (many simply cannot make big bucks in China BTW). One VC revealed that he is setting up a fund solely dedicated to “consumption centric startups” and asking some famous brands to chip in just for a minority stake. The mechanism behind this is he will nurture the baby brands in the beginning. If the baby is able to grow up and gain popularity, perhaps time for the big brands to offer large sum of money on the table and take the baby under their wing; in that way, the VC can have a quick win while the big brands can instantly harvest new and verified product idea, eliminate competition, look sharp in PR press release or eventually boost company’s bottom line, etc.

It is no big secret giant brands are keen to scout emerging brands for acquisition. For example, in the beauty sector, it is well known that L’Oreal or Shiseido has a growing appetite to snap up fledgling beauty brands. 

Because the life span of any new product is getting shorter, while the speed of the established brands’ internal R&D might fail to catch up with the fickle needs of the consumers. For instance, it is said culinary innovation for Pizza Hut has been stagnant. In 2017, Pizza Hut’s parent company, Yum Brands, just spent USD22 million in product research and development. On the other hand, in the same year, Yum invested USD 130 million for pizza delivery technology and related marketing. It basically stopped innovating its pizza product itself. Nevertheless, product innovation should undergird the whole operation for any B2C business in order to maintain a steady stream of revenues. 

By: Cecilia Wu