E-cigarette entrepreneurs are collectively rushing into a new startup trend—low-alcohol beverages. Since the first half of 2020, at least six founders or executives from e-cigarette companies have launched low-alcohol beverage startups. These include Chen Yicheng, co-founder of Snow+ e-cigarettes; Liu Shuo, former national channel sales head at Snow+; Liu Zhe, former executive at FOLO e-cigarettes; and Zheng Bohan, former product partner at YOOZ e-cigarettes. They have founded low-alcohol brands such as Mali Duntun, Zouqi Qingniang, Shidian Yike, and Lanzhou, all of which have secured funding. Additionally, an industry insider told Shenran that Luo Yonghao, who entered e-cigarette entrepreneurship in 2019, is collaborating with an e-commerce platform on a fruit wine, though it has not yet launched. This information has not been confirmed by the parties involved. The current low-alcohol beverage startup track is very similar to the e-cigarette scene in early 2019—trend-following entrepreneurs, aggressive players, and heavy capital investment. According to public information, prominent investment institutions such as Sequoia Capital, Matrix Partners China, Tiantu Capital, ZhenFund, and Bertelsmann have all entered the field. Both tobacco and alcohol are addictive, and apart from gambling and drugs, they are among the few legal startup areas with strong repeat purchases. Moreover, both are trillion-yuan markets. China's tobacco industry alone generates over one trillion yuan in annual tax and profit (pre-tax profit), and Moutai's market value exceeds two trillion yuan, ranking first on the A-share market. As the saying goes, "tobacco and alcohol are inseparable." In the past, many street-side tobacco and alcohol shops sold both. When e-cigarettes became a startup trend two years ago, they attracted people from the alcohol industry. Now that e-cigarettes are regulated, entrepreneurs are turning their attention to low-alcohol beverages and attempting to apply e-cigarette strategies. Beyond business comparisons, low-alcohol beverages and e-cigarettes share a key commonality—they target young people. In today's world where young people are increasingly willing to spend, teaching them to smoke and drink has become a lucrative business.

-01- E-cigarettes cool down, low-alcohol beverages heat up "Low-alcohol beverages" is a broad term that includes fruit wines, soda wines, sparkling wines, rice wines, and premixed drinks familiar to many consumers. This is a new category distinct from the four major alcoholic beverages (baijiu, beer, wine, and yellow wine), and it became exceptionally hot in the second half of 2020. Interestingly, the explosion of low-alcohol beverages is very similar to that of e-cigarettes two years ago. Many entered the market with the goal of making big money. One entrepreneur told Shenran about his initial motivation for entering the e-cigarette business in 2019: At the end of 2018, he saw news that JUUL, an American e-cigarette startup founded less than four years earlier, sold 35% of its equity for $12.8 billion, valuing the company at $38 billion, with 1,500 employees sharing $2 billion in bonuses, thanks to its over 70% market share. Such real-life overnight wealth stories are highly compelling. "Overnight, e-cigarette projects sprang up like mushrooms, and everyone wanted to replicate JUUL in China," he said. Now, a similar situation is unfolding in the low-alcohol beverage industry. In the U.S. market, a trendy sparkling wine brand called White Claw captured 60% of the hard seltzer market in just three years, with sales exceeding 10.5 billion yuan in 2019. It's worth noting that RELX, the top e-cigarette brand in China, had revenue of only 3.8 billion yuan in 2020. This greatly stimulated Chinese entrepreneurs. They believe that in the low-alcohol beverage market, China might also produce a White Claw, just like RELX in the e-cigarette industry. As a result, a large number of e-cigarette players entered the market. Snow+, FOLO, and YOOZ were three very active e-cigarette brands in 2019. Snow+ was known for aggressive marketing and heavy subsidies. Last year, Chen Yicheng, co-founder of Snow+, and Liu Shuo, national channel sales head, left Snow+ and founded Mali Duntun and Zouqi Qingniang, respectively. FOLO was founded by Zhu Xiaomu, Luo Yonghao's old partner. A person close to FOLO told Shenran that after Matrix Partners China invested in FOLO in 2019, investor Liu Zhe parachuted in as an executive. Last year, Liu Zhe left to found "Shidian Yike," a sugar-free sparkling wine. YOOZ was founded by Cai Yuedong, former founder of "Tongdao Dashu," and was also a star project. Last year, YOOZ product partner Zheng Bohan founded the low-alcohol brand Lanzhou. These are just the top-tier star entrepreneurs entering the field. Another entrepreneur, who wished to remain anonymous, told Shenran that after shutting down his e-cigarette project last year, he launched a plum wine. Zhou Lin, founder of Yuanqi e-cigarettes, after exiting the e-cigarette business, founded Jiulaoda, which is currently engaged in alcohol distribution. Wang Zeqi, CEO of Bode e-cigarettes, once told Shenran that after the online sales ban on e-cigarettes in November 2019, most small and medium players exited, and the number of active national e-cigarette brands decreased by 90%. Now, many entrepreneurs who left the e-cigarette industry are entering low-alcohol beverage startups. Meanwhile, capital that previously invested in e-cigarettes is also "shopping" in the low-alcohol beverage track. In the e-cigarette track, Sequoia Capital invested in RELX, Matrix Partners China invested in FOLO, and ZhenFund invested in MOTI; in the low-alcohol beverage track, Sequoia invested in Yuliang Liquor (the company behind "Shidian Yike"), Matrix invested in Berry Sweetheart, and ZhenFund invested in Likou Bai. Indeed, tobacco and alcohol are inseparable, and there is significant overlap among entrepreneurs. This gives China's low-alcohol beverage startups a strong tobacco flavor. In fact, if we look back at history, the first low-alcohol beverage to gain popularity in China was RIO, which once held an 80% share of the premixed drink market and was frequently seen in KTVs and variety shows in previous years. However, the founder of this drink came from a traditional cigarette factory background, with his first job at Lanzhou Cigarette Factory. Flexibly jumping between the tobacco and alcohol startup trends is a typical characteristic of entrepreneurs in this field. When e-cigarettes fell from the trend, they turned to low-alcohol beverages. This time, they brought their original teams, venture capital, and mature e-cigarette strategies.

-02- Using e-cigarette strategies to sell alcohol Many startups are trying to become the next RELX. This young e-cigarette company went public on the U.S. stock market in just three years, with a market value exceeding $45 billion on its first day of trading. So some are calculating: if tobacco can create RELX, can alcohol also produce a RELX? Low-alcohol beverages target the incremental market of young people, not converting middle-aged baijiu drinkers. Since young people don't drink baijiu, the idea is to create low-alcohol, better-tasting, and more visually appealing drinks to sell to them. In the past, drinking was about purity, not taste. The most typical example is that beer is often called "horse urine," and baijiu is even harder to swallow, with a high barrier for novices. Low-alcohol beverages claim to solve these traditional problems. Zheng Bohan, founder of the low-alcohol brand Lanzhou, told Shenran that low-alcohol beverages follow the same logic as e-cigarettes. E-cigarettes are easier to inhale and carry than traditional tobacco, retaining nicotine while eliminating unpleasant aspects. Low-alcohol beverages are similar: they retain the pleasure of alcohol but are easier to drink, taste better, and are more acceptable. Allowing consumers to enjoy the happiness brought by alcohol is his starting point for entering this track. So now almost all low-alcohol beverage brands are trying every means to get close to young people, with some even precisely targeting young women. They want to use low-alcohol beverages, a low-barrier product, to bring young people into the world of alcohol. And e-cigarette strategies are being replicated pixel by pixel in the low-alcohol beverage track. Like e-cigarettes, a rich variety of flavors is a key point to attract young people to try new products. Zheng Bohan previously handled products at YOOZ, including flavor development for pods. He believes that e-cigarettes are essentially flavored tobacco, and the current new-style alcoholic drinks are not accurately described as low-alcohol; at least Lanzhou is entering the flavored alcohol track. Low-alcohol beverage brands are making a big deal out of flavors, and young people are easily swayed by them. Fruit flavors are the most common in low-alcohol beverages. For example, Lanzhou currently has four flavors: green plum, peach, mint, and mulberry; Shidian Yike has a wide variety—sea salt grapefruit, white peach oolong, strawberry rose, and coffee whiskey. These flavor names look very similar to e-cigarette pod names and share commonalities with Genki Forest sparkling water. Health is also a major selling point that low-alcohol beverages try to emphasize. Many low-alcohol beverage brands use the concept of "tipsy" to create a stark contrast with the harm of strong spirits, and young people are easily persuaded to buy. One important reason for White Claw's success in the U.S. is its brand positioning of low alcohol content, low calories, and health. Shidian Yike, launched by former FOLO executive Liu Zhe, is touted as a sugar-free sparkling wine, promoting the concept of 0 sugar and 0 fat. But no matter how it's marketed, the biggest difference between low-alcohol beverages and other drinks is addictiveness. "Tobacco, alcohol, and tea are definitely the best three categories in the entire consumer goods industry, and tobacco and alcohol have the highest addictiveness and consumption frequency. Addictiveness means repeat purchases," said Zhou Lin, CEO of Jiulaoda, to Shenran. Among tobacco and alcohol, alcohol is relatively safer. One startup CEO told Shenran: "Gambling, drugs, and prostitution are the three best businesses in human history, but they are illegal. Tobacco and alcohol have this potential. E-cigarettes skirted the edge and were immediately regulated, but alcohol is a legal consumer product with strong addictiveness." Even so, the low-alcohol beverage track remains controversial. Multiple low-alcohol beverage entrepreneurs told Shenran that the addictiveness of low-alcohol beverages is much lower than that of high-alcohol beverages, leading to low repeat purchase rates, far below those of e-cigarettes.

-03- How profitable can low-alcohol beverages be? Like e-cigarettes, many people assume that low-alcohol beverages are a highly profitable business. However, this is not the case. Entrepreneur Xu Feirong made a plum wine and told Shenran about its creation process: first think of a brand name, then find a distillery, choose a formula from the distillery's offerings or propose requirements for a custom formula, then produce and bottle it, and finally distribute and sell it. OEM (original equipment manufacturing) is the current approach for most low-alcohol beverage brands, a so-called asset-light operation, similar to e-cigarette startups two years ago. Xu Feirong calculated: the cost of his wine is less than 10 yuan, plus bottle and other miscellaneous costs, the total cost is about 15 yuan, with a final retail price of 59 yuan, a 4x markup. If you only compare production costs and retail prices, low-alcohol beverages seem very profitable. However, between production and sales, there are lengthy distribution channels, and most of the costs are actually "eaten" by the channels. Xu Feirong told Shenran that a 4-5x markup is common practice in the consumer goods industry. But for brand owners, the price to first-tier distributors is much lower than the retail price, and brands typically control gross margins at around 50%. For example, in 2020, the gross margins of Budweiser, Tsingtao Beer, and China Resources Beer were 52%, 40%, and 38%, respectively. For low-alcohol beverages, this means that for a bottle with an ex-factory price of 15 yuan, the brand might sell to first-tier distributors at 30 yuan, and after layers of agents, the final shelf price is 59 yuan. For some in-demand channels, brands also have to pay entry fees, shelf fees, and other costs, which further erode brand profits. As for e-commerce channels, "online traffic is expensive, with a single click costing two or three yuan," Xu Feirong said. He also invested in some influencers on Xiaohongshu, "with single placements ranging from 100 to 1,000 yuan, but a campaign requires tens of thousands of yuan, and it needs to be continuous." This is somewhat similar to the early days of the "thousand e-cigarette war" in China in 2019: new brands had to spend heavily to build the market, and brands worked for the channels. Of course, this is also related to the early stage of the low-alcohol beverage industry; national brands have not yet emerged, and nurturing new brands requires time and capital. Another variable affecting the profitability of low-alcohol beverages is taxation. For addictive substances like tobacco and alcohol, countries have historically used taxation as a regulatory measure. In China, annual tobacco taxes reach trillions of yuan. In Japan, beer tax is one of the government's important revenue sources. During the Russo-Japanese War, Japan raised beer taxes to expand military spending. But in China, the tax rate difference between low-alcohol and high-alcohol beverages is not significant, leaving little room for policy arbitrage, unlike e-cigarettes and cigarettes, which are taxed as tobacco and electronic products, respectively. According to an analysis by Fengrui Capital, based on the proportion of alcohol tax to price, most alcoholic beverages in China have a tax rate of about 10%. The actual tax rate for baijiu ranges from 8% to 16%, beer from 4% to 9%, and many low-alcohol beverages, including premixed and prepared wines, are taxed as "other wines" at a rate of about 10%. Therefore, low-alcohol beverages have no tax advantage as new market players, and the possibility of developing low-alcohol products for tax avoidance is relatively lower.

-04- The internet launches a war on alcoholic beverages Alcohol is a traditional industry. In the past, the internet disrupted many products, and now it has finally set its sights on alcohol. Duan Zi, head of the low-alcohol beverage category at Tmall, told Shenran that in February last year, Tmall noticed a significant increase in players and capital in the low-alcohol beverage industry, so Tmall began to invest heavily in developing the category. "What we need to do is further heat up the track, truly expand it, and work with brands to open up the market." But unlike e-cigarettes, which were born with aggressive marketing and quickly entered price wars, the low-alcohol beverage track is still far from an explosion. "We are far from the stage of head-on competition and price wars; now it's about building awareness," Duan Zi said. To strengthen user awareness, many brands are spending money on advertising, ranking, and seeding. Xiaohongshu and Douyin are the main seeding channels. Searching for the keyword "women's wine" on Xiaohongshu yields over 100,000 notes, most of which are fruit wines. However, the effectiveness of these placements is mediocre. Zheng Bohan told Shenran, "Online ROI (return on investment) is mostly very low, often unimaginably low, and most are losing money." Currently, no brand has an absolute advantage online. A detail: the sales rankings of low-alcohol beverage brands on Tmall change very quickly, with the monthly ranking structure completely different each month. Duan Zi explained that because the category is so new, the rankings change rapidly. Large-scale marketing and price wars have not yet arrived. But Zheng Bohan believes that if online capital groups burn money together, they can definitely create one or two brands. If this war really starts, it might recreate the "thousand e-cigarette war" scene. Because the barrier to entry for low-alcohol beverages is very low, this means more players and more intense and chaotic competition. Compared with alcoholic beverages like beer, low-alcohol beverages occupy a special position between beer and mixed drinks. "Every new baijiu product requires filing, but fruit wine is treated as ordinary food, similar to the early days of e-cigarettes, without clear standards," Xu Feirong told Shenran. He revealed that many low-alcohol beverages are produced like soft drinks: "Food flavorings, food-grade alcohol, and water are mixed together, and some even add fruit juice." The current low-alcohol beverage industry has such a low barrier that it's like a small workshop; anyone can brew some wine, bottle it, and sell it, and novice users can't tell the difference. Everyone is betting on the broad prospects of low-alcohol beverages in China, but the risk of losing is real. After all, premixed drinks represented by RIO appeared in China many years ago, and to this day, no follower like White Claw has risen in China. A former executive of a liquor company once said in an interview with Third Bridge that around 2016 was the peak period for premixed drinks in China, but a few years later, many brands exited the market, partly because they found that the market capacity was not as large as imagined. Many consumers were attracted by overwhelming advertising and bought for novelty, creating an illusion of huge market potential. This led many manufacturers to believe the premixed drink market would explode and quickly enter, causing channel inventory to pile up and terminal sales to stagnate. Now, the domestic low-alcohol beverage industry seems to be at a similar tipping point as before. This time, what stories will the rushing entrepreneurs and profit-seeking capital bring to this ancient industry? Source: Shenran (ID: shenrancaijing) Tips will be paid 400-2000 yuan upon adoption.