China’s e-commerce and the industrial ecosystem is as different from the western world as its culture. The country took decades to earn its reputation as the world’s factory, but now it has a supply chain and manufacturing capacity that few countries can match.
The creative use of the nation’s networked manufacturing and logistics centers makes mass production both cheap and easy. Clothing, electronics, toys, automobiles, musical instruments, furniture – name it and you’ll find a manufacturer in China who can turn your intangible concept into mass-manufacturable reality in just days. And they will do it for less than anywhere else in the world.
It was only a matter of time until an intrepid Chinese entrepreneur with a background in technology decided to take on Coca-Cola and PepsiCo.
China is also home to one of the world’s largest e-commerce and technology ecosystems. Hundreds of startups dot the landscape, and the amount of money collected and spent to innovate in the country’s industrial weight is mind-boggling.
So it was only a matter of time until an intrepid Chinese entrepreneur with a background in technology decided to take on Coca-Cola and PepsiCo. The technological revolution has not yet affected the bottled beverage industry as much as others. The incumbent giants could therefore lose a considerable market share if a company simply managed to combine the skills and manufacturing agility of China with the philosophy of modern tech startups of ‘go fast and break things’.
One such candidate is Genki Forest, a Chinese direct-to-consumer (D2C) bottled beverage start-up. A data-informed iteration-centric philosophy, fast turnaround times, and a laser focus on leveraging China’s huge e-commerce ecosystem has helped this company’s revenue grow rapidly since its inception. creation five years ago. Its sodas, milk teas and sugar-free energy drinks are sold in 40 countries and generated approximately $ 450 million in sales in 2020. The company aims to reach $ 1.2 billion this year.
On the contrary, the valuation of Genki Forest has climbed even faster. It recently completed its fourth round of venture capital which values it at $ 6 billion, triple the price it reached a year earlier, and it has so far raised at least half a billion dollars. .
It is striking how much Genki Forest’s operations resemble those of a tech startup. So we thought we should take a closer look and see what this company’s chart can tell us about the new wave of Chinese entrepreneurship D2C looking to take over the world.
Find a bigger wave to ride
The bottled beverage industry was not what Genki Forest founder Binsen Tang originally planned to tackle. Its first startup was a casual, predominantly mobile gaming company known as ELEX Technology. It was far from breaking records, however – some 50 million users have logged into a few popular games in over 40 countries around the world, including one of the early releases of Happy Farm, a predecessor of Zynga’s. Farmville. But Tang was not satisfied and eventually sold ELEX Technology to a publicly traded company for around $ 400 million in 2014.
Tang would walk away with some important lessons. He had now learned that Chinese products were already competitive on a global scale, whether people realized it or not, and that geographic arbitrage was real, with Happy Farm being the perfect example. Finally, he now knew that it was much more important to choose the right “racetrack” (as Chinese investors and entrepreneurs like to say) than to have a good product.
Choosing the right race to win was perhaps the most important thing to remember. It’s also an idea that sets Chinese entrepreneurs apart from their Western counterparts – the most useful efforts are in identifying the most important and rewarding market, regardless of previous expertise. This is what led Zhang Yiming to create ByteDance and Lei Jun to found Xiaomi.
This very philosophy led Tang to build the Genki Forest. After selling ELEX Technology, Tang did not return to the company that won him his first pot of gold. As much as he had benefited from the rise of the mobile internet, he also believed there was a much greater opportunity to build a consumer brand and apply the lessons he learned from programming to manufacturing. tangible products.
He quickly established his own investment fund, Challenjers Capital, convinced that the next big tech opportunity in China was the application of technology to everyday consumer products. He quickly started investing in everything from ramen and hotpots to bottled drinks.
China’s rapidly expanding e-commerce ecosystem and the plethora of thriving D2C companies on Alibaba and JD.com would also influence its decision to sell directly to its target audience rather than going the traditional route. But to truly understand its motives, we need to take a look at the extremely unique D2C environment in China and how it has evolved over the years.
How is Chinese D2C different?
“China doesn’t need good platforms anymore,” Tang told his team in an internal email in 2015, “but it needs good products”. Tang explained that the era of building e-commerce infrastructure in China was largely over; Now was the time to create brands that could take advantage of the advanced distribution network that had been built.
Other investors have also noticed. Albus Yu, director of China Growth Capital, told me that his fund had stopped investing in independent consumer platforms or markets for some time. “2014 may have been the last year it was economically possible to start such a business due to the increasing cost of acquiring customers and the strength of the incumbents,” he said.
Indeed, 2015 was the year CACs started to overtake or at least compete with the ARPUs of Alibaba and JD.com.
In China, this distribution network was present in the digital and physical worlds. Online, there was immense market power concentrated in the hands of just two players: Alibaba and JD.com, which held, and still retain, 80% or more market share.
In fact, Alibaba’s dominance, in particular, was so overwhelming that for years, VCs invested not in D2C, but in “Taobao brands”, as it was the only channel that had to be conquered. to achieve this.
So customer acquisition was straightforward: advertising it all on Alibaba’s Tmall platform, especially during its annual flagship shopping festival, Singles Day. Even today, securing a top spot in one of the category rankings remains a surefire way to boost brand awareness, investor interest, and sales records.
Physically, the Chinese market also differs greatly from most developed Western countries. Years of heavy investment in logistics by the private sector, accelerated by government support and infrastructure construction, means delivery costs have dropped dramatically over the years, even falling below $ 0.40. by wholesale parcel from this year. Innovations such as return insurance have also accelerated customer adoption.
In 2016, China shipped 30 billion packages per year, already accounting for 44% of global shipments. This number doubles every three years and is expected to exceed 100 billion this year. And the low cost of delivery is one of the main reasons for China’s oversized e-commerce market – the largest in the world and estimated at $ 2.8 trillion in 2021, more than triple that of No.2, the States. -United.
Another advantage of today’s China is the proximity to an advanced and flexible manufacturing network and supply chain for the vast majority of consumer products, and the ability to almost outsource them. all.
Original equipment manufacturers of years past have long evolved into original design manufacturers. One expected consequence of being “the factory of the world” for so many years, making products for some of the best brands in the world, is that some of the knowledge was inevitably transferred.
It can be difficult for foreigners to understand how strong China’s networked manufacturing centers are these days. What used to take weeks now only takes a few days, with turnaround times significantly shortened by software, bots, and other advancements. For example, Chinese cross-border super-fast fashion company Shein cut design time to shipment to just seven days.
And it’s definitely not just for cropped tops. The turnaround can be surprisingly quick even when manufacturing completely unfamiliar products, such as when electric vehicle maker BYD turned its factory into the world’s largest face mask factory in just two weeks when the COVID-19 pandemic hit. hit last year.
Businesses are leveraging this manufacturing flexibility and agility for more than just speed. Chinese cosmetics newcomer Perfect Diary uses it to launch twice as many SKUs as its overseas competitors. In addition, the speed of execution allows agile brands to take advantage of the most ephemeral intellectual property, memes.
This is not to say that the Chinese supply chain is inaccessible to foreign entrepreneurs. The successful mattress maker Zinus, for example, is founded by a South Korean, but its products are made in China and mostly sold on Amazon to US customers.
It’s just that very few non-Chinese companies have figured out how to tap so deep into the supply chain as this new generation of Chinese D2C brands, which can take years of work not only on the side but physically on the inside. factories, by building trust and know-how. How? ‘Or’ What. Shein, for example, carefully monitors what other brands are making by staying close to factories.
The Chinese Opportunity
Before global sensations such as TikTok weakened the mantra, “copying in China” was a dominant characterization of Chinese startups. In December 2015, when Tang registered the Genki Forest brand, it was still a very relevant strategy.