Why did VCs shun away from low-alcohol drinks in China this year?
"It turns out that the logic of replacing baijiu with low-alcohol drinks doesn't stand. Gen Z will most likely go with baijiu after they grow up."
Do you know that the largest company in China is neither Tencent nor Alibaba? Ranking by market capitalization, the crown is taken by Kweichow Moutai, the liquor giant producing Chinese baijiu (a type of distilled spirit). [Updated note: On Oct.7, Tencent went back to the first place, replacing Kweichow Moutai]. There have been a lot of disputes about whether spicy baijiu really tastes good, but most people would agree that baijiu is a secure choice in China's stock market and it would weather all sorts of storms.
On the other hand, colorful low-alcohol drinks have gained many fans, especially among Chinese youngsters. Some even made bold predictions that low-alcohol drinks might replace the traditional baijiu one day.
Do low-alcohol drinks really have the potential? Well, China's venture capitals already gave a negative answer. The following article by Yang Wenjing 杨文静 under the title of VCs shun away from low-alcohol drinks this year 今年，VC不看低度酒了 , which was posted on the WeChat account of PEdaily.cn 投资界 on Sept. 18, sheds light on the internal defects of the low-alcohol industry and the strong cultural and social tradition that holds up China's baijiu business.
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"We're over with low-alcohol drinks," said Lu Bin, an employee of a Beijing-based VC (venture capital) company during the conversation.
All of a sudden, people start to notice that there are hardly any companies financing low-alcohol drinks now. "At this time of this year, the entire VC circle is investing in science and technology now, and low-alcohol drinks cannot even make it to the investment committee in most cases." Lu Bin revealed that the company he works for discussed several low-alcohol drinks projects last year, but the team focusing on consumer brands had totally abandoned such projects this year.
Low-alcohol drinks seem to be one of the new consumption fields to be abandoned first. The so-called low-alcohol drinks usually refer to drinks with 0.5 to 20 percent alcohol by volume (or 0.5 to 15 percent ABV). Broadly speaking, low-alcohol drinks include wine, huangjiu (a fermented liquor with a much lower potency than baijiu), beer, fruit wine, sake, ready-to-drink, rice wine, and sparkling wine. Compared with the strong baijiu, low-alcohol drinks taste sweeter, thus gaining a lot of popularity among young consumers.
About a year ago, low-alcohol drinks were the darling of Chinese VCs. According to incomplete data from the investment circle, there were 20 cases of financing in the low-alcohol industry in 2020, and there were 56 in 2021, with a total investment of about 2.5 billion yuan (about 351 million U.S. dollars). Most of the brands that received funding were only one or two years old, but leading VC funds chased after them anyway.
Among them, JOJO sparkling wine JOJO气泡酒, WAT, Houxue Liquor 厚雪酒业, Fubixing 赋比兴, Zouma Brewing 走岂清酿, Xuanbo Beer 轩博啤酒, Lanzhou 兰舟, and RISSE 锐肆酒馆 won two rounds of financing consecutively in 2021. MissBerry 贝瑞甜心 even won three rounds of financing, with the money raised totaling more than 100 million yuan easily.
Yesterday low-alcohol brands were like the crown jewels, and today they are kicked aside like pebbles. Ever since 2022, cases of financing have taken a nose dive. Investors once expected low-alcohol drinks to have a fighting chance of replacing baijiu due to Generation Z consumers. But the vision never came true. "It turns out that the logic of replacing baijiu with low-alcohol drinks doesn't stand. Gen Z will most likely go with baijiu after they grow up," Lu sighed.
VCs went crazy last year
"Are there any VCs considering investing in low-alcohol drinks now?"
The boom of low-alcohol drinks last year is every bit as fresh today.
As the countdown of "three, two, one" resounded in Douyin live streaming rooms, fans were ready for panic buying. In just five minutes, hundreds of thousands of bottles of low-alcohol drinks flew off the shelves. Back then, the low-alcohol drinks industry was the envy of all. An investor cited the data with excitement: the market of low-alcohol drinks is expected to exceed 500 billion yuan in 2022.
China's low-alcohol drinks can be traced back to the 1990s. Liu Xiaodong 刘晓东, founder of RIO, was the pioneer in the business. During business chats at nightclubs in Shanghai, he found that the annual sales of artificial flavorings in the whole country were less than the monthly sales of a set of cocktails in 13 Shanghai nightclubs. Liu spotted the business opportunity immediately. He mixed juice and vodka to get a new cocktail, thus giving birth to the first well-known low-alcohol drinks brand in China.
Liu's way to success was a bumpy one. The brand explored sales channels of nightclubs and bars, repositioned females in big cities as its target customers, and underwent a protracted price war with Breezer. In 2014, RIO finally earned a place in the market through advertisements in China's movies and TV shows like Keep Running 《奔跑吧兄弟》, and fostered a group of low-alcohol drinks consumers. It was also in those years that the low-alcohol drinks companies started to emerge in China.
It was a hit in China's VC circle. According to Tianyancha, there are over 115,000 companies related to low-alcohol drinks in China, of which nearly 40 percent were founded within five years. With over 1500 related companies registered, the year 2016 and 2017 were the climax of establishing new companies in the business.
Starting in 2020, low-alcohol drinks startups prospered again. Another interesting phenomenon was that executives in the e-cigarette business flocked to low-alcohol drinks. Similar to e-cigarettes, alcohol is also somewhat addictive, which is why low-alcohol drinks got all that attention back then.
In 2021, low-alcohol drinks saw the first IPO coming—Helen’s 海伦司, a franchise pub. In 2009, its founder Xu Bingzhong opened the first pub in Wudaokou, Beijing, with his first bucket of gold from operating a pub in Laos. It costs only 50 yuan to drink all night for average customer, so Helen's keeps expanding.
Based on the expansion of pubs, Helen's also offers customers craft beers, fruit beers, and lactic acid bacteria beverages made by the company on its own. In September 2021, Helen's was officially listed on the Hong Kong Stock Exchange, and the price of its shares rose by nearly 23 percent on the first day. When the market closed that day, Helen's market value reached 30.2 billion HK dollars (about 3.85 billion U.S. dollars).
Another star of the year is the plum wine "Mei Jian 梅见." In August 2019, Jiang Xiaobai 江小白 (Mei Jian's parent brand), a new baijiu brand, joined the game and officially launched a green plum wine brand. What impressed investors was that in a live stream in 2021, the brand sold 100,000 bottles of wine in 5 minutes. And in the following 618 online shopping event, the transaction volume of Mei Jian on Tmall [an e-commerce platform owned by Alibaba Group] increased eight times year on year. And Mei Jian quickly became the second most important battleground for its parent brand Jiang Xiaobai.
What happened last year remains fresh in many people's memory: while the financing of new Ramen noodles restaurants and bakeries was booming, low-alcohol drinks also flourished.
Let's walk through what happened quickly. In February 2021, Beijing Quantum Leap Technology Co., Ltd., a company owned by ByteDance, became a shareholder of Houxue Liquor, which is the parent company of the hard soda brand "Kongka 空卡." In March, Suzhou Yuanchu Investment Partnership Enterprise (Limited partnership), a company owned by Alibaba and Tencent, also became a shareholder of Houxue Liquor. Since then, Houxue Liquor has gathered three Internet giants, ByteDance, Alibaba and Tencent together.
MissBerry 贝瑞甜心 had a similar story. In May 2021, MissBerry completed an A+ round of financing worth about 100 million yuan. Established in 2019, the brand focuses on the segment market of low-alcohol fruit wine for females, aiming at women's drinking needs in various situations such as girlfriends' parties and sipping alone. Within just two years, MissBerry won five rounds of financing from investors like Matrix Partners 经纬创投, Country Garden Venture Capital 碧桂园创投, and CPE Yuanfeng CPE源峰, with total financing worth more than 100 million yuan.
Accompanying the boom was the thriving of the low-alcohol industry's supply chain. In August 2021, led by Eastern bell Capital, Fubixing concluded a 100 million yuan Series B round of financing. Founded in 2018, the founder Yang Zhe 杨哲 positioned Fubixing positioned as a new industry-level wine supply chain service provider. So far, Fubixing has been the supplier for over 100 well-known brands, including Zui E Niang 醉鹅娘, Three Squirrels 三只松鼠, Shanghai Guijiu 上海贵酒, Lifease 网易严选, KKV, Gome 国美, etc.
In addition, over 50 brands have completed financing between 2020 and 2021, Including "Luo Yin" 落饮, a brand featuring Chinese style tea wine and fruit wine, the ready-to-drink brand "WAT", ready-to-drink sparkling wine "JOJO", TAYU 她语果酒, a fruit wine brand aiming at generation Z, low-alcohol sparkling fruit wine Belong, cider brand "Hoopos", new drink brand "Meihuali" 梅花里, the innovative ready-to-drink brand "RUCKIN" 烈奇, and "≥9," a brand featuring zero fat, light calorie and healthy drinks. The track was once packed with investors.
However, as the investment in the new consumption field cools down in 2022, low-alcohol drinks seem to be one of the first to be cast aside. The financing of the low-alcohol industry has shrunk dramatically. "I don't think I've heard much about low-alcohol drinks financing in the past nine months," the investor sighed, adding that "Is there any fellow investor still considering investing in low-alcohol drinks now?"
Why do customers stop buying low-alcohol drinks?
The industry is shuffling the cards.
"Low-alcohol drinks are hard to sell," a low-alcohol entrepreneur once asked investors at an event, "It seems that the market is very small, should we carry on?"
Anxiety is trickling down to entrepreneurs. Other drinks belonging to the same beverage category still hold their popularity, such as new Chinese tea brands, sparkling water brands, and yogurt brands. In the "618" (June 18) online shopping event of 2022, dairy brands like ADOPT A COW 认养一头牛, and coffee brands like SATURNBIRD 三顿半, TASOGAREDE 隅田川, were on the best-selling list for drinks. However, no low-alcohol brands have made it into the top ten.
Why do customers stop buying low-alcohol drinks? The answer might be found through a customer's experience. In the fall of 2021, Liao Jie, who was working in Shenzhen, saw the fancy display of low-alcohol fruit wines in a shopping mall. Attracted by the elaborate layout and the pink wine in the bottles, she immediately spent 12 yuan on a bottle of peach-flavored wine. "I had no idea that I would have this sudden crush on a delicate bottle, considering I always reject consumerism on normal days."
The bottle still stands in Liao Jie's cupboard today, but the freshness faded away as she emptied the bottle. "I haven't had a low-alcohol drink since then." Liao's experience is not singular. Most people buy low-alcohol drinks for novelty. And the low repurchase rate remains an obstacle hard to get around for low-alcohol drinks.
Many consumers from tier-one cities told investors that their first taste of low-alcohol drinks was at a friend's recommendation or at a casual party, and most of the time they wouldn't drink alcohol alone. In other words, low-alcohol drinks satisfy the social needs of some young people, but few will pour themselves a glass of wine and enjoy a "tipsy" time after a tiring day.
"There are very few settings for low-alcohol drinks," said an Internet marketer based in Hangzhou, the capital of eastern China's Zhejiang Province. After a long-term analysis, he found that young people rarely buy low-alcohol drinks for enjoyment at home. Except for dormitories and shared apartments, parties, bars and outdoor activities, which often happen at a low frequency, are the only scenarios left for low-alcohol drinks. However, there are other beverage options available. In other words, there aren't enough youngsters to support all these low-alcohol brands.
There is even a joke saying that the growth of young consumers of low-alcohol drinks cannot keep up with that of low-alcohol brands. Every new product needs a process of fostering the market. But last year, low-alcohol brands sprung up too fast, so there aren't enough young customers. As a result, the competition of the nascent industry is becoming increasingly fierce.
When a large number of low-alcohol brands are fighting over a small number of consumers, brands work hard on SKU (stock keeping unit), mixed fruit flavors, packaging and marketing to retain old customers and find new ones. But the same Japanese style over and over again has led to aesthetic fatigue for customers.
In a rough survey, many consumers complained, "After drinking so many low-alcohol drinks, I can't tell one brand from the other. They all taste and look the same."
"It is not that easy to make low-alcohol drinks." Li Yun, an insider of the business, believed that though there's an explosive growth of low-alcohol startups and the industry seemed to have a low threshold of entry, low-alcohol drinks require much more complicated winemaking techniques than baijiu with high-alcohol content. Many enterprises that rushed into business had neither the technology nor the equipment. They make products by adding water to wines with high-alcohol content, or adding edible artificial flavorings. And these companies are at risk of being eliminated from the market.
In addition, low-alcohol drinks are hard to keep, and a large amount of money needed to build supply chains and sales channels can also knock out a bunch of people. "Without at least 50 million yuan, it's hard to get a low-alcohol brand operating." In the "trap avoidance" group in Douban [a Chinese social platform resembling Reddit], some small brands' supply and marketing channels are meager, so they often fail to deliver the products when there're too many orders. As a result, customers of the discussion group labeled these brands as "never gonna buy for a second time."
The hesitation of China's VCs is also a signal for the elimination in the market, and the low-alcohol industry reshuffles. Those who rushed into this industry will probably be struck out.
After all the twists and turns,
Young people may end up drinking baijiu
China boasts a long history of wine culture and the market is broad. Previously, VCs optimistic about low-alcohol drinks often mentioned that with the rise of new consumer groups born in the 1990s and 2000s, low-alcohol drinks may replace baijiu in the adult world. As we know, China's baijiu industry is a giant. The market value of Kweichow Moutai [贵州]茅台 alone reaches two trillion yuan.
"It turns out the logic that low-alcohol drinks will replace baijiu might be wrong. And when Gen Z grows up, they will most likely choose baijiu," in retrospect, Lu Bin explained why the team was still eyeing baijiu.
The reality is that low-alcohol drinks cooled down this year, but baijiu is still witnessing massive financing.
In March 2022, the Maotai-flavor liquor brand "Forty-nine Union" 肆拾玖坊 closed its B+ round of financing. Prior to this, Forty-nine Union had already finished two rounds of financing last year. Investors included Cathay Capital 凯辉基金, CMC Capital CMC资本 and Chuangxiang Huanju Investment 创享欢聚投资. And its B round of financing amounted to 600 million yuan. Zhang Chuanzong 张传宗, the founder of Forty-nine Union, revealed that the company would complete the IPO work during the 14th Five-Year Plan period.
In the latest blockbuster case, in August, Dayone Capital 日初资本 invested hundreds of millions of yuan in the leading Maotai-flavor liquor brand Guotai Liquor 国台酒业. Established in 2001, Guotai Liquor is the second-largest brewing enterprise in Maotai Town. In 2021, its sales exceeded 10 billion yuan. Since its income doubled for several consecutive years, the company is quickly ranked among the top Maotai-flavor liquors.
“Baijiu is a golden industry in the field of consumer goods," said Chen Feng 陈峰, a managing partner of Dayone Capital, who once shared the investment logic behind: At present, a new round of technological revolution has bred the unique trend of investment opportunities, and we also pay continuous attention to and keep optimistic views about baijiu industry that is unfading, unchanged and unique to China. The baijiu industry is moving in the direction of high-end, Maotai-flavored and centralization. Among them, Maotai-flavor liquors are under a structural adjustment that happens once in 20 years, so investing in Maotai-flavor liquors is investing in "the friend of time" “时间的朋友”.
Why are investors optimistic about baijiu? After a lot of research, Lu Bin said bluntly, "Because baijiu is still the wine served on dinner tables today."
Many low-alcohol entrepreneurs also mentioned this, “As a new category, although low-alcohol drinks have a great potential for growth, the ceiling is so low that the market has saturated." However, the development trend for baijiu is different. Data shows that the total sales of baijiu in 2020 were about 590 billion yuan, and the market size of the baijiu industry will reach around 600 billion yuan in 2022. It is still expanding. "Even in its prime time, the sales of low-alcohol drinks fail to match a fraction of the sales of baijiu."
"In the end, young people choosing low-alcohol drinks will turn to baijiu in most cases." several investors expressed the same view. In essence, other than being attracted by low-alcohol drinks' beautiful appearance and novel taste, young people also see them as a rebellion against the traditional drinking culture. Mainly born in the 1990s and 2000s, youngsters dislike the tradition where drinking determines close relationships and close relationships bring orders, so they label low-alcohol drinks as free and casual.
But judging from the evolution of consumer groups, young people will eventually become the core consumers of baijiu. Baijiu's consumption is mainly driven by business and social relationships for business dinners and handing out gifts rather than personal enjoyment. The social settings that every generation needs to face means that modern young people will need baijiu one day." And after getting used to baijiu, the young generation will eventually try stronger flavored baijiu due to social pressure or the rising ability to drink alcohol.
"Young people haven't got the taste for liquor." In the huge domestic liquor market, low-alcohol drinks are more like a unique subculture popular among the youth. But after all the twists and turns, young people may grow to need baijiu eventually.
Note: Lu Bin, Liao Jie and Li Yun in the article are pseudonyms.