Can New Consumer Entrepreneurs 'Counterattack' in 2022?

A couple of years ago, at the end of 2020, when I chatted with some investors, the fervor of new consumer entrepreneurship was written all over their faces. Consumer goods is a fairly traditional industry, and this wave of entrepreneurs, like assassins with daggers, have been steady, accurate, and ruthless, cutting into the rigid structure. When we chatted again in the second half of 2021, my new consumer investor friends were all a bit dejected. Business data was not looking good, the capital market was cooling, and the common anxiety had become: how to get out of the trap. Previously, the primary market always said that people in the secondary market were messing around, because with such high liquidity, chasing gains and cutting losses was just playing with loneliness. Later, some anecdotal data proved that most of those who held Moutai and claimed to be friends with time couldn't hold their heavy positions. Primary market VC and PE investors have less liquidity, which objectively strengthens (or rather, forces) their determination to accompany companies to success. Of course, if the primary market gets stuck, not being able to sell is also quite helpless. Last week, I visited an association and brought up the topic of how in 2021, new consumer and some startup companies quickly became popular and then quickly went silent. The old brother asked me rhetorically, "People in the industry think many brands are not high-quality, so why did they rise?" "Just say xxx (a certain internet-famous shopping mall). At first, people in the industry saw it on their social feeds, went to inspect it, and most came back thinking it wouldn't work—locals go once and don't return, outsiders just join the crowd, the business mix is problematic, why not make it community-oriented with that size? What are the investors thinking?" It's hard for me to explain this clearly to the old brother, because investors and businesspeople have completely different mindsets in the new consumer track.

• One group is looking for the Chinese xxx, while the other is thinking about how many months to recoup the investment.
• One group cares about growth rate in the early stage, while the other cares about whether the next store can continue to make money;
• One group is good at finding opportunities in PPTs and meeting rooms; the other is good at street-walking, tasting, and chatting with shop owners who smoke cigarettes. The cooling of the new consumer track from investment to operations in 2021 finally made entrepreneurs start to realize the importance of business thinking. I also see many entrepreneurs starting to settle down and practice internal skills. However, the external environment has changed significantly over the past year. In 2022, for new consumer startups to break through and find a way out, their own efforts are no longer enough; they must face 'encirclement' from all directions. The Counterattack of Giants Mid-last year, I chatted with a channel partner friend about the issue of internet-famous granola. The granola category did hit several 'success factors' of this new consumer wave at the beginning. First, the potential customer base is high; granola flavors are acceptable across regions and ages; second, consumers are not very familiar with it, which is the norm in a consumer market that likes the new and dislikes the old, so consumers are curious about granola; Third, there are overseas benchmarks; the market cap of giants is right there, making it easy to tell a story; fourth, the supply chain is mature; domestic OEMs have been processing for overseas for many years; fifth, there are few domestic giants, which goes without saying. At the start, everything went smoothly. But in 2021, a startup that ranked quite high on a certain e-commerce platform suffered a Waterloo, with sales halved and then halved again. Consumers were indeed educated, but from the channel data, the ones who finally picked the peach were not the startup brands that worked hard to plant grass and do marketing online, but—Calbee (Japanese food giant) and Cheerios (American giant). There's no way around it; the consumer industry has an iron rule: once you've eaten good things and used good things, you remember the taste. Compared with giant products, what entrepreneurs make still has a clear gap. There are many more examples of traditional giants catching up. For instance, in the broad baking industry, although various baked goods, pastries, and cakes are thriving, what some senior practitioners remember most is Holiland's concept stores. After opening concept stores in Wuhan, Shanghai, Nanjing, and Chengdu, you wouldn't think these were stores from a baking giant you see everywhere on streets and alleys. Blind boxes were started by startup companies. Recently, there was a consumer hot search: KFC blind boxes. Although they were called out, judging from the online buzz, consumers still quite recognize KFC's ability to 'stir things up'. In previous years, many primary market investors thought consumer giants would be killed one by one by internet tactics and Gen Z thinking. However, in 2021, giants kept showing their beastly fangs in the new consumer field, launching a fierce counterattack against new consumer startups. This starts with how new consumer entrepreneurship began. **This round of new consumer entrepreneurship has a very important feature: the background of the founders. If we look at company materials, two fields have contributed many founders—internet giants and marketing agencies. This background makes it easy to stir up waves in traditional industries. They are good at grasping young people's aesthetics, making products, packaging, and stores extremely eye-catching; they understand new media marketing and quickly ignite traffic; they know what stories investors like to hear and are good at getting ammunition from the financing side. After Xiaohongshu influencers write eight hundred or a thousand notes, Douyin posts a hundred or so, and e-commerce platforms slightly 'optimize' the data, a vision of a future Chinese xxx (benchmarked against developed countries) appears. **The problem is that this really doesn't constitute a moat for a consumer company. Marketing and design are only part of a consumer goods company's business—for some categories, even a small part. The industry giants were indeed slow to react, lacked innovation, and lacked talent when they were sneak-attacked by new consumer startups this round. Consumer goods is a fully competitive market (except for Moutai and the like), and the ability to fight is a basic requirement. Judging from the cases of giants renovating themselves over the past years, they are not incapable of doing well in the new consumer field. Once senior management makes up their minds, they can gather talent, form 'special forces', solve budget and finance issues, and their execution is not weak. The new consumer concept is not wrong; the secret to keeping an ancient industry young is to revolutionize the industry and revolutionize yourself. It's just that no one has stipulated that only startups can do new consumer. In product R&D and offline channels, traditional giants are inherently strong. After they figure out marketing and the internet, it will be even harder for new consumer startups to resist the giants' counterattack. **Especially for those startups that only handle packaging and marketing with mature solutions from OEMs, whether they can hold out until they get financing to build their own R&D and production capabilities is a huge question mark. In many new consumer categories, unless the founder has an exclusive secret recipe, they don't have R&D capabilities in the first or second round. At best, the founder can participate in the OEM's R&D process, or even directly take the OEM's formula and start packaging. Some investors are particularly surprised at how quickly some new consumer companies can produce products, concluding that the team has strong execution. I asked a friend at a food processing plant, and he said: 'You want to make xxx? I have a formula here that a big company gave up on. You can just take it and use it.' In this model, entrepreneurs just need to keep raising funds until they have enough to achieve R&D capabilities. Genki Forest is a typical success story, but how many Genki Forests are there in the market? Giants are counterattacking, and startups are holding formulas the giants discarded—this battle is not easy. Once, I had dinner with a friend who invests in low-alcohol drinks. She said that to research the low-alcohol market, she had stocked up on various premixed cocktails, cocktails, and liqueurs at home. The bottles were prettier than each other, the marketing copy far surpassed the giants, and the online presence was among the top in the industry. **There was just one 'small' problem—they didn't taste good. She poured many of them down the toilet after a couple of sips, but put the bottles on the wine cabinet—which at least shows the bottle design was good, able to sit side by side with a famous brand's collectible figurine. In elementary school, I thought the story of buying a box and returning the pearl was absurd, but later I realized it happens around us all the time. Information from consumer channels also confirmed this: in 2021, the best repeat-purchase low-alcohol drink was not these startups' 'works', but Suntory's HOROYOI. As long as it's not a truly innovative industry that appears out of nowhere, all entrepreneurs will eventually face a head-on battle with giants. Being small, fast, and agile is certainly an offensive weapon, but against a powerful opponent, underestimating them both strategically and tactically will cost you. Pressure from the Capital Market The capital market brings two pressures to new consumer startups: market prices and investors. When NAYUKI went public, new consumer companies really boiled over for a while. The secondary market prices and valuations were right there, giving the primary market a reasonable explanation for pricing. The giants opened the IPO path, and investors were one step closer to exiting their investments. However, if you look at the market trends, you'll find—well, you know when you see it. Behind this is the overall stock market situation. Chinese stocks have been falling continuously since after the Spring Festival last year. We still can't be 100% sure whether the decline of leading companies is due to the category or the overall market dragging them down. But the primary market doesn't care about that; this decline has caused a valuation inversion between the primary and secondary markets for leading companies. For other companies about to go public, listing will trap later-round investors, while not listing makes primary market financing harder, and persistently loss-making companies risk bankruptcy if they can't stop the bleeding. The primary market is quite strange. Sometimes investors know that if a company doesn't raise funds, it will die, but having losses on their books is a bigger problem to explain to LPs. Better to drag it out and jump ship with a 'success story' before the company dies. For some earlier-stage companies, it's also awkward. At the beginning of 2021, when everyone was scrambling for projects, the valuation logic was quite simple and crude. A listed leader was valued at 50 million per store. Considering your company is still early and the market is bigger—how about 100 million per store? When the listed leader's stock price fell and a store was only worth a little over 10 million, primary market investors definitely wouldn't accept it—why should your early-stage project be worth 100 million per store?! If the listed leader's stock price rebounds sharply later, will the valuation pressure on early-stage projects ease? **It's not that simple. Startups will also feel pressure from investors, who are visibly becoming smarter. This round of new consumer investment boom brought many investors who didn't originally cover consumer goods into the market. Investors can be unfamiliar with the consumer industry in the short term, but these smart people, graduates of prestigious domestic and overseas universities, quickly learn how the market works. When the pandemic restrictions were just lifted, the investors I knew disappeared, starting to look at projects with a vengeance. Knowing my work was related to the retail industry, quite a few invited me for coffee. Some professional investors I've known for a long time don't need to be told; they're quite professional and ask me questions just to corroborate their views from different angles. Later, more investors who didn't originally invest in consumer goods barged in, and things started to develop in an interesting direction. They would talk about how great the store decoration was, how much they liked the product packaging, and how the taste moved them. And then, after a coffee or a store visit, they'd directly sign a term sheet. That's quite incongruous. Most consumer goods in the market are not made for the investor demographic. Investors have high incomes and a unique lifestyle. The products and services they can buy long-term may not be accepted by consumers. Although 'sugar', 'oil', 'alcohol', 'caffeine', and 'chili' have been proven time and again to be the codes of the consumer market. But every few years, some investors are extremely bullish on salads and light meals, because they, suffering from chronic sub-health, do like to eat something 'veggie'. It's not to say salads and light meals have no chance, but the Chinese market's acceptance still lags behind overseas markets. Hence, countless entrepreneurs have fallen in this field. **Using your own consumer experience to analyze a company has some problems—the consumer goods investors like may not be liked by the actual target consumers. Investors in chips, specialized equipment, and SaaS basically can't be the target users of the invested companies; those investing in energy can't take photovoltaic equipment and fuel cells home; those investing in pharma don't want to become product users. Investing in these industries, investors can view the company's products and market prospects more objectively. Consumer goods is different. Everyone is a consumer, and everyone can comment on consumer goods and have their own preferences. As an investor, the core focus should not be whether you like a product, but whether the target group likes it. On New Year's Day, I chatted with a friend about a tea brand with poor data. One core reason for the misjudgment back then was that he, sitting in his Shanghai office drinking coffee, was moved by the product's cool packaging, interesting brewing experience, and novel flavors. This guy originally invested in To B services, but after a few tough years, he switched to consumer goods—he didn't understand the tea market well. He told me that some entrepreneurs in the first and second rounds pay special attention to whether the product, store, or service can make investors like it as consumers. Some investors, if they enjoy using it, eating and drinking it comfortably, and find it pleasing to the eye, will invest. After mass production and rollout, many encounter growth problems. He was very honest—'What's the use of me liking it? Consumers don't pay.' For these smart people, 1-2 years is enough to understand the deep logic of an industry. By my calculation, new consumer has entered the stage where investors are broadly getting started. To VC is no longer viable. The Encirclement by Local Powers In the new consumer field, store-based models will all encounter this problem. Compared with investors, I've been to more cities and know more businesspeople, and I've discovered an interesting phenomenon. The year before last, coffee was particularly hot; last year, snacks suddenly became hot. Entrepreneurs' PPTs listed grand plans to open stores across the country within a few years. However, when I visited some new first-tier and second-tier cities, I found that stores that were killing it in Beijing, Shanghai, Guangzhou, and Shenzhen had imitators in these places within a short time. After experiencing them, I found that although there was a gap with the leading institutions, they were by no means poor imitations—they were, let's say, affordable alternatives. Some expanded quickly, opening many stores in their provincial capital or prefecture-level city in a short time. **In this era, information is the cheapest thing. In the early days of opening stores, there was a very obvious penetration process from the developed coastal areas to the inland, and from big cities to small cities. Back then, doing business in some prefecture-level cities meant either waiting for new business models to enter the local area before noticing, or making regular trips to Beijing, Shanghai, Guangzhou, and Shenzhen for proactive research—in any case, it was slow. Now, with your phone, you can see all kinds of business and financial content on WeChat official accounts and Douyin. Friends sitting in the Shanghai World Financial Center might not know about a new internet-famous store downstairs in Lujiazui, but people in Chengdu and Xi'an know about it almost the first day. In the past few years of new consumer entrepreneurship, everyone talked about supply chains, but in essence it was still about marketing. Early-stage projects in large consumer categories couldn't yet slam the table with supply chains, so the disadvantage for 'local powers' was not obvious, and in site selection and store expansion, they even had more say locally than the startup stars. Store-opening thinking can be internet-based, but opening stores one by one takes time. Many local powers can seize the time gap of new consumer startups and form local defensive capabilities. Recently, many people working in first-tier cities with business and entrepreneurial ideals have started fleeing Beijing, Shanghai, Guangzhou, and Shenzhen. In thinking, ability, and vision, they have no 'generation gap' with the so-called elites of consumer entrepreneurship in big cities. It's fine to stab at giants with daggers and shoot arrows at blind spots under the feet of giants, but there's also a group of people waiting for others to charge ahead and then picking up the spoils. The Deep Water of Growth Models A common criticism of this round of new consumer is that the business data at the first store and the start of mass production is excellent, but as the customer base grows and the number of stores increases, the single-store model or marketing efficiency begins to decline. A friend of mine seriously squatted outside a certain startup star brand's store to count people. Because they noticed a problem: when companies take investors on tours, they always like to go to the first store, seeing the bustling crowds of consumers. So they kept an eye out and went to other stores to observe. Well, compared with the nearby Mixue Bingcheng and Shuyi Xiancao, it was a bit too pitiful. Another typical example is the top few milk tea chains, whose single-store revenue began to decline in 2021. I've learned that some baking, snack, cake, and coffee categories have similar phenomena. In the era of underdeveloped internet, the typical expansion and growth model for consumer categories was as follows. Constrained by channels or supply chains, consumer goods or brand stores generally started in a certain region. As market data was gradually validated, they began to think about expanding beyond their hometown. For hot pot, expanding to other places requires ensuring supply chain stability and adjusting flavors slightly. Each expansion comes with the challenge of whether consumers will buy it and how to find them. Without full confidence, most companies would still choose to first penetrate their hometown market. New consumer does not follow this path. Using internet platforms—Xiaohongshu and Douyin marketing—new products quickly find consumers interested in them through the platforms' traffic distribution capabilities; on the distribution side, Taobao and JD e-commerce infrastructure can fully serve these scattered consumers. Store-based new consumer is similar. Using the traffic distribution capabilities of short video and local life apps, new consumer brands can quickly gather a group of users interested in new business and new formats in a local area. Such users are not sensitive to distance and will cross half a city to experience it. Yeah, check-in. The different expansion models of traditional and new consumer have created a difference. Traditional consumer cannot find the group most likely to become customers nationwide at the initial stage, but with the help of internet tools, new consumer can easily find the group most willing to become customers. Taobao, Meituan, Douyin, Kuaishou, Xiaohongshu—any platform can put hundreds of millions of users in front of new consumer entrepreneurs from the start. Traditional consumer brands, with each expansion, have new target customers (or high-quality customers) to develop. In their own province, the target customer ratio might be 5% of the overall consumer population; in another province, it's probably not much different from 5%, and each time they have to solve the problem of how to find that 5%. **New consumer, when expanding the customer base and going out of the circle, each time faces customers with weaker stickiness, weaker interest, and less willingness to spend than the previous batch. This is particularly evident in new consumer brands that are purely e-commerce channels. Take freeze-dried coffee, for example. There is always a group of people interested in this novel taste and brewing experience. The proportion may not be high, but the total number is quite large. They contributed most of the early growth of this category, but over time, when brands find customers from the remaining population, they have to face people like me who are not so interested in freeze-dried coffee. Either they use price to break through my mind, or they have to increase advertising spending. As companies scale, customer acquisition costs should be lower—this is a question new consumer must answer for the market in 2022. Although the industry is different, new consumer is very similar to internet vertical platforms. Initially, customer acquisition is done through internet tools to quickly bring together people with similar interests, which investors find mouth-wateringly efficient. As the company develops, to grow customers, the vast majority who didn't become early customers require greater cost and effort in marketing. Bilibili and Zhihu have high costs for going out of the circle and are constantly troubled by this problem. The Consumer's Mind In the face of mature and sophisticated marketing and product design, consumers are powerless. People are curious; as long as you hit the key points of purchase decisions, new products can get consumers to try them. For example, moving consumers with beautiful appearance; or infecting consumers with lifestyle communication; or spending heavily on endorsements to make fans pay for love; or, with finer work, using fan operations to get emotionally close to consumers. Of course, the crudest way is to burn money on subsidies. As long as the price is low enough, most people don't mind spending 1 yuan to buy a loss or a scam, just to try. In the short term, for unfamiliar product types and unheard-of service types, consumers will pay for the added value designed by these elites. Like the low-alcohol drink investor above who 'bought the box and returned the pearl'. **In the long run, only when both use value and added value are recognized can high-stickiness repeat purchases be contributed. To put it bluntly, food and drinks must taste good, clothing must be comfortable, and perfumes and fragrances must smell good—of course, at a reasonable price. Consumers may be intellectually offline in the short term, but in the long run, consumer rationality will inevitably return. I buy capsule coffee myself. Once the novelty wears off, I'll definitely seriously compare its cost-effectiveness with concentrated liquid coffee, the convenience store downstairs, and the bargain of Luckin Coffee. For 'buying the box and returning the pearl' consumption, unless the box can always move the young lady's aesthetic sense, she still has to consider the value of the pearl itself. Besides, if the box is always that beautiful, why put a pearl in it? If the bottle can be a decoration, let's just change it into a fashion home decoration company and stop wasting effort developing cocktails, right? Subsidies will also fail. If you know the product is useless, even 1 yuan is painful to spend. C-end consumers are actually quite 'ruthless', especially when facing low-to-mid-priced goods. They leave without nostalgia when they say they don't like it, just as they can fall in love with an ad at first sight. The loyalty of Moutai and LV relies on years of brand accumulation and沉淀. The loyalty of white-label goods is the ability to sell 3 pairs of socks for 10 yuan with free shipping and still make money. This round of new consumer is about consumption upgrade and consumption substitution—this is a long-term race with consumers. If you go too slow, consumers turn away; if you go too fast, consumers are full of question marks. Everyone knows it's best to lead by half a step, but it's not easy. However, I don't think new consumer has been disproven Many people, when facing new consumer, call it 'sweetheart' when they like it, and 'old wife' when they don't. The track is not the problem; the market opportunity is right there. 1. According to the general laws of the consumer market China will have its own giants in many categories. For example, in mass-consumption categories like coffee, potato chips, cosmetics, and perfume, the difference is only whether entrepreneurs overtake on the curve or giants unify the world. Many consumer goods have typical economies of scale. In this sense, China will have its own Kraft, L'Oréal, Uniqlo, and so on. 2. Market demand side Currently, whether you call it consumption upgrade, K-shaped development, or some other structure, consumer goods at least have a lot of room for 'evolution'. Better looking, more fun, better quality, and more reasonable prices are eternal rigid demands. The Chinese consumer market, like the electronics industry back then, has super industrial capabilities but is still somewhat backward in serving domestic consumers. This is a full market dividend. 3. Market supply side China, a vast country, still has too many excellent raw materials and regional products that need to be repriced and deeply processed. The endgame of the market is not only American-style giants dominating; European and Japanese-style small and beautiful is not only a business opportunity but also more in line with the current goal of common prosperity. The wave of branding simply processed goods has passed most of its cycle. Whether it's Three Squirrels or Genki Forest, they both seized the opportunity of brand upgrading in mass consumer categories. They either found categories that Chinese consumers already know well but have weak brand awareness, or found new market gaps and directly broke through the market before giants reacted. Looking around, there are not many such opportunities left; the easy fruits have been picked. In the future, in this field, the difficulty of entrepreneurship in renovating old varieties is already high. For example, making yogurt or various noodles (yes, I mean various noodles) will have a higher threshold by an order of magnitude. The door for overseas product substitution seems to be gradually closing. The core of substitution is quality substitution—not price substitution. For example, cosmetics, where R&D has obvious shortcomings, are more difficult. Substituting domestic similar varieties for overseas varieties will be smoother—for example, using China's unique raw material advantages to offset R&D and production shortcomings. Brand-new categories are an opportunity. Everyone is on the same starting line, and it depends on who is faster. The most typical is the China-chic opportunity with Chinese characteristics, or a new style of clothing with era characteristics, or new food raw materials created by high technology. But such opportunities are truly rare. There is still huge opportunity in upgrading local brands and primary agricultural products. Here, there are information gaps and capability gaps (here, it's a first tone). The so-called information gap means that many good local brands are still not known by national consumers; the so-called capability gap means that brands lack capabilities in deep processing, branding, and marketing. Going overseas also works. One direction is to directly become an international brand, making it hard to tell which country it's from in terms of taste, design, and tone. This is a display of absolute strength. If GENTLE MONSTER and NUDAKE didn't say, it would be hard to think they are Korean brands. Under this strategy, the domestic market is just an important part of global layout. A large number of young people with international backgrounds and consumer tastes are emerging in batches, and Chinese entrepreneurs are already at the door. Another direction is exporting Chinese goods. Of course, behind this is not just a consumer issue, but more importantly a cultural communication issue. This opportunity is clearer, after all, it aligns with national strategy. There are still many opportunities in the new consumer industry. We can't completely deny it because of some bad practices in the capital market. Don't throw the baby out with the bathwater. For entrepreneurs, the core question is: who will do the new consumer track? Not every giant has fought its way out solely through the capital market. Getting money from VC is fast, but consumers voting with their wallets is more stable. Even if giants unify the world, the growth history of consumer giants worldwide tells us that if startups do well, they will also have acquisition value. The cooling of the new consumer investment track in 2021 proved one thing: relying only on the three axes of entrepreneurship—internet, marketing techniques, and VC ammunition—to 'counterattack' cannot cope with the 'encirclement' from giants, capital markets, competitors, consumers, and model crashes. The axe is indeed sharp, but in this era of hot weapons, it is clearly not enough. Source: 家哥的小黑屋 (ID: wj_blackbox) Author: Oryx王家 -END-