Feature 6. Food & Beverage

The recovery pace of the food and beverage sector may stabilize, with the extent of recovery contingent on the marginal improvement in consumer spending power. There is a prospect of a gradual shift in consumer spending focus from price reductions towards quality enhancement. In terms of competitive dynamics, the trend of differentiation is likely to persist, with centralization remaining the prevailing theme.

Huatai RIS (Huatai Securities Research Intelligence System)

Overview 2023

China’s food and beverage market has grown against the downtrend in 2023. Seventy-six listed companies in the food and beverage sector have seen positive net profit growth, and 14 companies have turned a profit, according to industry data. Among the leading brands, Luckin Coffee surpassed Starbucks for the first time and rose to the top of the industry in the second quarter of 2023; its revenue climbed by 84.9% year over year in the third quarter. Starbucks' fourth quarter and full fiscal year 2023 earnings results ended October 1 showed that its fourth-quarter revenue in China grew 15% from the previous year to $840.6 million. In the first half of 2023, HeyTea achieved six consecutive months of continuous growth in monthly store sales, both on a year-on-year and month-on-month basis. Nayuki’s revenue in the first half of 2023 increased by 26.8% year-on-year. McDonald’s saw a 64.34% year-on-year growth in its net profit margin on sales in the first half of 2023. In 2023, the beverage industry has also achieved a breakthrough in store count. In the second quarter of 2023, Luckin Coffee became the first Chinese coffee brand to own over 10,000 stores, with a total number of 13,273 stores by the end of the third quarter. As of August 31, new tea drink stores increased by more than 36% compared to 2020. Honey Snow City ranked first with 20,000+ stores. Heytea stores grew 48% quarter-over-quarter. CHAGEE stores climbed by 32% from quarter to quarter. More than 20 new tea drink brands have scaled their total number of stores to 1,000 by October. Furthermore, 46,000 new enterprises have registered in the coffee segment as of October 1, 2023, according to relevant data platforms. Fruity drinks, yogurt, lemon tea, functional beverages, and sugar-free tea drinks are also gaining a share in the market, and some new popular segments have begun to emerge. However, the increasingly expanded market size has also brought new challenges for the food and beverage industry.

Challenge

• Leading brands are racing towards the "era of ten thousand stores," marking the beginning of a new round of tests and challenges.

• Shifting to lower-tier markets and expanding customer bases are driving brand product innovation, prompting iterations in pricing and marketing strategies.

• The trend of industrial concentration is increasingly shrinking the survival space for small and medium-sized brands.

For top brands, competitors have turned to franchise mode, rushing to scale their stores to over 10,000. It is extremely urgent to obtain a large amount of cash flow in a saturated market to survive another round of market share grabbing. Simultaneously, as consumer growth gradually shifts to lower-tier markets, brands that have long focused on high-end customers find themselves unprepared. Adapting to the expansion of customer bases and balancing revenue growth with brand identity conflicts, brands are compelled to step out of their comfort zones, undergoing mass iterations of familiar marketing strategies. As for small and medium-sized brands, industrial concentration is increasingly shrinking their living space, making it harder than ever to stand out in an increasingly competitive market. Moreover, brands are required to focus on and put more effort into product innovation, supply chain resilience, and brand enhancement.

Action

It is easy to see that brands that are eager to “seek new sources of growth in a saturated market” are actively engaging in frequent collaborations in the red ocean market of food and beverage. In 2023, Luckin Coffee frequently released positive news on social media platforms. The coffee chain's co-branded drink with the cartoon IP Line Puppy for the year’s Qixi Festival has set a single-day sales record of 7.27 million cups. Its Moutai Latte, a type of alcohol-infused coffee launched in collaboration with Chinese high-end liquor brand Kweichow Moutai, has gone viral online, with more than 5.24 million cups sold on the debut day and a staggering revenue of over ¥100 million. Subsequently, the brand launched the Mascarpone Cheese Latte, a product co-branded with the animation Tom and Jerry, selling over 16.24 million cups in the first week of its launch and attracting a staggering over 300 million views on Weibo by its related topics. Heytea’s collaboration with luxury brand FENDI set a new record for the first-day sales of its new drinks since 2022 and effectively drove the daily growth of its WeChat Index by 235%. With a record-breaking 1.46 million cups sold on its first day of launch, Nayuki's Fantasy Music Universe series—which was co-launched with Mints, a digital collection platform—became a social media sensation. The food industry, represented by the senior player McDonald's, is also firing on all cylinders in the fashion sector and consumer market through collaborations with diverse fashion IPs. In March 2023, McDonald’s China partnered with CLOT, a streetwear label founded by Edison Chen, to launch a collection inspired by its iconic McSpicy products. In addition to giving McDonald’s packaging and uniforms a fresh makeover, CLOT also opened five CLOT x McSpicy pop-up stores, offering co-branded fashion items such as hoodies, tote bags, and water bottles. McDonald’s WeChat Index jumped by 118% on the day of the teaser campaign, and the subsequent May campaign generated continuous buzz, resulting in a huge rush for co-branded fashion items such as baseball caps, backpacks, and T-shirts. The hashtag #McSpicyCLOTcollaboration has attracted over 21.17 million views on Weibo and has been used in over 3900 posts on Xiaohongshu. Then, in November, McDonald’s launched a co-branded collection with famous foam clog maker Crocs. The related hashtags received over 20 million views on Weibo, and several related items were sold out within three days after the release. The brand's partnership with Japanese pop artist Verdy generated another round of buzz on social media in the same month. Brand collaborations continuously boost the brand’s sales and volume. Under the leadership of top brands, more and more food and beverage players are engaging in collaborations. According to incomplete statistics from relevant platforms, there were more than 236 collaborations in the beverage sector in the first three quarters of 2023.

GROWTH in 2024

Observing the business trends of leading brands, it is easy to see that cross-industry collaborations are gradually becoming a powerful engine for performance growth, driven by strong market appeal and the advantages of resource sharing.

• Leverage the powerful combination of gathered momentum from both sides to help new products fast crack the consumer market.

• Empower products with scarcity and stimulate purchasing with a “low threshold yet high tone” positioning strategy.

• Use co-branded peripherals to enhance products’ social value, user stickiness, and brand communication.

• Team up and share traffic pools to boost hero product sales and social expansion.

And more

Of all these non-fashion industries, the food and beverage industry may be the fastest to catch the express train of the “collaboration economy” in 2023. When facing this thrilling sales data, will brands, despite their eagerness to take a share of the spoils, be sober enough to raise these questions: Is the path of Luckin Coffee x Moutai success replicable in other cases when there is only one Moutai in the world? How do I attract big IPs, leading brands, and top fashion IPs when I am not as trending as Heytea or own 10,000+ stores like Luckin? Since McDonald’s didn't acquire its sensitivity and appeal to the fashion market overnight, how can I build such a brand DNA? Perhaps the biggest question is: Will collaboration be a panacea for the food and beverage industry's growth? The existing skepticism is precisely what brands need to be vigilant about. In the short term, brands can fast crack the consumer market through collaborations. When choosing collaborators, brands can bet on hot events and collaborate with classic IPs to generate buzz and boost sales of their new products. They can also create scarcity in collaboration with artists and designers and leverage the sense of contrast between “low threshold” and “high tone” to trigger discussion and stimulate purchasing desires. In the long run, brand collaborations enable both parties to become lifestyle and cultural symbols that connect with all walks of life, build new consumer scenarios, and expand their customer bases through shared traffic pools. In addition, co-branded peripherals will enhance brands’ social attributes and allow users to recreate, thus enhancing consumer experience and user stickiness. However, if a brand fails to choose collaborators in light of long-term brand building, communicate with consumers sincerely, integrate its resource advantages, or differentiate itself in its marketing during the collaboration campaign, it will easily fall into the trap of the eyeball economy and ultimately suffer from the backfiring of the shortsighted approach. From the perspective of product innovation, marketing upgrading, customer retention and acquisition, channel and scenario expansion, and low-price competition avoidance, collaboration is indeed one of the “most cost-effective” brand strategies. However, more crucially, collaborative efforts are not the sole driving factor for the growth of brands, as mentioned earlier. While brands should conscientiously craft partnerships, they must also continuously enhance their capabilities in understanding the needs of their target audience, innovating new products, establishing a robust supply chain, strategically positioning in digital transformation, and fostering brand awareness. Only then can cross-industry collaborations truly become the elixir that creates an absolute advantage for brands in the competitive landscape.