Based on the special development history of China's health products industry and entrenched consumer perceptions, new functional food brands must bear high market education costs to guide consumers in setting proper expectations for products, while also managing their own expectations for industry growth under strict regulatory conditions. Additionally, they need more time to accumulate product strength—traditional mature brands have already built long-term advantages, while new brands are just beginning their journey.
Functional foods currently lack a strict legal definition. In the industry, functional foods typically include all health foods (with blue hat certification) and ordinary foods that contain certain functional ingredients.
The meaning of functional ingredients is also not entirely clear. Commercially, functional ingredients mainly refer to ingredients that, based on being clearly recognized as ordinary food ingredients or new resource food ingredients by the National Health Commission (with strict recognition in the new resource food catalog, such as chia seeds, tea tree flowers, ginseng, GABA, etc.), have undergone human or clinical trials by ingredient suppliers, supported by scientific literature for their positive evaluation.
Simply put, anything that is beneficial to eat can be called functional food.
According to incomplete public information, functional foods saw 12 financing events in 2021, backed by top institutions such as Sequoia, GGV Capital, and IDG Capital. Under the banner of health, products like sleep gummies, enzyme jelly strips, and white kidney bean chewable tablets were launched, often with a snack-like taste.
But setbacks followed. Due to the overall downturn in consumption in the second half of 2021 and disappointing Double 11 sales, many functional food brands are currently in a period of inventory digestion, with slowed new product launches and frequent 50% discounts. Some have already exited early. The functional food market seems not to have exploded as expected.
The reason lies in the special development history of China's health products industry and entrenched consumer perceptions. These new brands must bear high market education costs to guide consumers in setting proper expectations for products, while also managing their own expectations for industry growth under strict regulatory conditions. Additionally, they need more time to accumulate product strength—traditional mature brands have already built long-term advantages, while new brands are just beginning their journey.
****Attractive Track: Large Market and Big Single Products, High Unit Price and High Repurchase
In terms of market space, China is the world's second-largest health products consumer market after the United States, with a market penetration rate of less than 20%, compared to 55% in the U.S., theoretically doubling the space.
The characteristics of health products are strong brand mindshare leading to high unit prices and high repurchase rates, resulting in a big single product effect, making health products a very attractive track.
For example, established brands like Movefree and Swisse have big single products with repurchase rates exceeding 50% or even 60%, occupying an absolute position in their corresponding efficacy categories. Domestic giant By-Health's big single products, such as glucosamine chondroitin calcium tablets and protein powder, each achieve annual sales of over 1 billion yuan in pharmacy channels.
There are few consumer tracks with the traits of "high unit price and high repurchase," and benefiting from the maturity of overseas health products markets, domestic factories providing OEM services for overseas brands have accumulated nearly 20 years of development, forming a relatively complete and stable head pattern. Manufacturers like Fuwei Yichao and Xianle Health can provide one-stop services including research, design, and manufacturing.
The vast market and mature supply chain provide soil for entrepreneurs. But to survive in a health products market crowded with giants, competing with traditional brands that have decades of development history, entrepreneurs need to wait for new opportunities.
New brands founded from 2020 are targeting new opportunities brought by structural changes in new demographics and new channels. Data from Qianzhan Industry Research Institute shows that from 2013 to 2018, in terms of sales channels in China's health food industry, direct sales consistently held about 47% of the share, while e-commerce channels grew the fastest, from 13.30% to 31.60%, significantly compressing the share from pharmacies.
The increase in overseas study returnees bringing back health product consumption habits and the rise of cross-border online shopping are also contributing factors. A report by Jieshu Consulting also shows that in 2020, in e-commerce sales of health foods, traditional e-commerce platforms contributed 60% of the share; daigou (personal shopping agents) accounted for 24%, mainly operating overseas brands; cross-border e-commerce accounted for 16%, for direct-operated platforms with overseas brand endorsements.
Traditional brands are usually slow to respond to changes. Entrepreneurs are often more insightful about the consumption needs of new demographics (such as new white-collar workers and Gen Z) and are more adept at traffic play in new channels. Coupled with the unprecedented attention to health brought by the pandemic, the influx of entrepreneurs and capital in this industry over the past two years seems indeed unsurprising.
△ Some new functional gummy brands on Tmall
These incoming entrepreneurs are roughly divided into two categories: most are cross-industry, skilled in marketing, often from growth departments of major companies, good at new brand management and data performance; some entrepreneurs enter from a technical angle, emphasizing their professional background and R&D accumulation.
They often avoid the advantageous single products of traditional giants, targeting more segmented consumer groups and more specific consumption scenarios, such as sleep aid before bed, hangover relief before drinking, aiming to carve out a blue ocean.
****Old Problems of Health Products
But in China, health products have always been a special and contradictory industry.
First, China does not have a clear legal definition for "health products" (保健品). It generally refers to a broad term for products with health benefits, a relatively simple and vague concept.
Within the scope of legal regulation, they were once called health (functional) foods, now called health foods. The definition is: foods that claim and have specific health functions or aim to supplement vitamins and minerals. That is, foods suitable for specific populations, with the function of regulating body functions, not for treating diseases, and causing no acute, subacute, or chronic harm to the human body.
Since the first systematic regulation of health foods in 2003, the approval and supervision authority has shifted from the health department to the drug regulatory department, and then to the State Administration for Market Regulation. This has been accompanied by revisions of national standards and management measures, the introduction of various draft and trial versions, and overlapping government functions, leading to a long-term stage of "heavy approval, light supervision" in China's health products market.
On one hand, China has the strictest and most costly entry barriers in the global health food industry. All health food companies need to apply for approval numbers for their products to label them with "Guoshi Jianzi" (national health food approval number), also known as the "blue hat" due to its appearance.
Data shows that some companies spend over 10 million yuan in various fees for blue hat approval, with approval cycles lasting three to seven years.
On the other hand, from the 1990s' Taiyang Shen and Sanzhu to the 2019 Quanjian incident, there have been multiple cases of counterfeit products posing as "health foods" under the name of "health products," as well as health foods that exaggerated efficacy claims after obtaining blue hat approval.
Direct selling has also long been criticized for this. In meeting rooms or halls accommodating dozens to hundreds of people, a lecturer on stage passionately sells expensive health products to the audience, becoming a typical sales scene in consumers' minds.
Since coming to the mainstream stage in 2003, direct selling has been an important sales method for health foods, often contributing over 50% of industry sales. By 2018, Infinitus achieved annual sales of over 20 billion yuan, marking the peak of direct selling companies, until the Quanjian incident triggered a turning point for the entire industry.
The repeated occurrence of such negative incidents has led consumers to two extremes: either completely losing confidence in health foods, or blindly believing in effects like "curing all diseases," even abandoning medical treatment for this reason.
This special development history of health products in China and the extreme consumer perceptions have made health products a category with high user education costs.
User education is divided into two types: one is to encourage users to try (i.e., customer acquisition and conversion), and the other is to guide users to have reasonable expectations for the effects after trying: achieving certain health benefits, but not curing all diseases or 100% solving problems—this will be reflected in repurchase data.
Currently, education is communication, communication is marketing, and marketing is cost. To balance conversion and repurchase, all brands need to calculate a total account.
****Hype in H1, Cooling in H2
The difficulty of carrying historical baggage is that if the most effective way for other consumer goods to acquire new customers is word-of-mouth and one-to-many seeding, then health products need to solve group stigmatization and many-to-one weeding: not only making buyers believe "this is not a智商税" (IQ tax), but also making buyers' friends believe "this is not an IQ tax." This conversion path has a very high threshold.
Especially for new brands just starting from 0 to 1, lacking category trust and brand trust, entering the market under the name of health products usually results in low conversion rates.
In response, entrepreneurs with marketing backgrounds created the definition of "functional foods" and mostly adopted the gummy form (rather than the more common soft capsules and tablets in consumer perception), essentially avoiding direct mental association with health products.
"I've been in the industry for nearly 20 years, and I feel the biggest difference between these new brands and old brands is that new brands' products have a certain communicability and topicality in the market, unlike previous approaches. In the past, health products only talked about function, and other experiences were secondary. Now, obviously, being tasty and having good taste is an important factor," commented Li Weijia, deputy general manager of Guangdong Yichao Biotechnology Co., Ltd.
For example, "BUFFX" describes "deliciousness" as the core difference of its products. Their product R&D lead for the taste part comes from top food companies like Mars. It is said the team sampled over 140 times on the taste dimension, creating different eating experiences such as soft and sticky, chewy and springy, and slightly fizzy for different products.
"Distinguishing by the three forms of gummies, soft capsules, and tablets, the proportion of gummy products abroad has exceeded tablets in 2020, but in China it's not comparable. Our current development scenario is that most things that can be done with tablets should also be solved with gummies," Li Weijia said.
In addition to taste, high-quality packaging design, creative gummy shapes, and cross-industry collaborations with other brands or industries are also reasons these functional food brands attract attention from new demographics.
With sufficiently novel product forms, fun and interesting brand connotations, trial prices of tens of yuan not being expensive, and easy-to-share social attributes, under precise traffic push within a limited circle, these new brands achieved high initial conversion rates, delivering monthly sales of tens of millions in the early stage, and securing financing naturally.
So in the first half of 2021, functional foods were pushed to the forefront. BUFFX founder Kang Le predicted to us in March 2021: by June, there would be over 60 new brands "doing the same thing as us."
But these brands soon faced the problem: for young people, consumption behaviors that are tasty, fun, and health-related have a large proportion of impulsive consumption. Whether they can sustain repurchase in the future will be the next important challenge.
A considerable portion of these brands' customers come from consumers who "don't care about functionality, only about tasty gummies." Not to mention facing competition from traditional candy companies moving toward healthier options, snacks are naturally a category with low repurchase rates, which will be far from the repurchase rates initially assumed for health products.
New brands that have been recklessly investing and growing rapidly over the past year now need to solve the resulting traffic backlash and improper consumer expectation management. Functional foods are constrained by old industry problems, making this challenge particularly prominent.
****Consumer Education and Path Divergence
Investment institution K2VC once categorized health products by efficacy into four types: turning consumers' "discomfort" into "comfort," making "comfort" even "more comfortable," preventing "bad things" that haven't happened from happening, and long-term health nourishment.
K2VC believes that new brands can do all four types, but in the early stage from 0 to 1, they should first design products around the first two. The latter two, because they require long-term adherence and are hard to show immediate results, should be expanded after consumers trust the brand.
Indeed, a large number of emerging functional brands are moving toward "comfort" and "more comfortable," with typical representatives being sleep aid and energy-boosting products launched in large numbers. Of course, there are exceptions, such as "Minayo," which launched heat control tablets focusing on blocking absorption, iron supplement gummies, and multivitamin gummies.
But overall, this represents the limitations on product direction for new brands and also reflects consumers' general demand for functional foods: physically perceptible and fast-acting.
As mentioned earlier, the definition of health foods is "foods with specific health functions or aimed at supplementing vitamins and minerals." Consumers obviously won't have high expectations for "supplementing vitamins and minerals," but how consumers judge the "regulating body functions" of "specific health functions" will again be influenced by the long-term "two extremes" perspective.
In other words, user education for functional foods will also include an important content: how to make consumers have reasonable expectations for the effects of their products. This will significantly affect repurchase data.
Still taking the sleep aid demand as an example, there are many inducing factors for sleep problems: whether it's the bad habit of playing with phones before bed, psychological anxiety and stress, or related to specific stages like jet lag. Different causes lead to different solutions, but on the consumer side, they obviously expect the simplest and most direct solution.
Melatonin is a common sleep aid ingredient that directly acts on the central nervous system with ideal effects, but long-term use may affect the endocrine system, so China's blue hat system has strict requirements for it. New brands more often promote GABA (γ-aminobutyric acid), which provides corresponding nutrients that are synthesized by enzymes in the body to indirectly form melatonin, achieving a sleep aid effect.
GABA is a natural active ingredient with less impact on the human body and can be used in ordinary foods, making it more favored by new brands. However, because it goes through the intermediate step of enzyme synthesis, and the amount of enzymes varies from person to person, the effect will show more differentiated individual differences compared to melatonin.
This leads to situations where some people use GABA correctly but see little effect due to physiological reasons; some don't use the product correctly and simply classify it as ineffective; and some find it very effective. The first two groups determine the upper limit of repurchase and may leave negative reviews, which will affect the brand's customer acquisition efficiency, adding to the already fragile consumer trust in health products, creating a vicious cycle.
One way to address negative reviews is that many brands have launched a "7-day free return" policy. If consumers feel no effect after a few days, they can contact customer service for an adjustment plan. If the adjustment plan still doesn't improve, the product can be returned within seven days of opening.
The principle of trial first and refund if ineffective is essentially an additional cost brands pay for consumer education.
Another way to break the deadlock is to enter with solid R&D capabilities, using stronger efficacy to bring higher repurchase rates and meet the demand for certainty from some precise consumers. "KOOYO," which proposed the concept of "serious health products" echoing functional foods, has built a research-driven team under the leadership of its chief scientist, Nobel laureate Professor Thomas Robert Cech. Each product uses exclusive patented formulas developed by its AI-based formulation development platform SYNFECT®.
This platform performs molecular dynamics modeling with higher accuracy, reliability, and computational efficiency, predicting the physicochemical and biomedical properties of candidate raw materials and formulations, and conducting targeted design of functional bioactive substances and formulations, solid form selection, and other key aspects.
At the same time, to be closer to the concept of "serious health products" and differentiate from contemporary functional foods, KOOYO mostly uses capsules rather than gummies, making it harder to approach a broader young demographic in customer acquisition. The brand positions its target customer group as the new generation of elite families aged 30 to 40.
△ KOOYO is relatively active in advertising to high-end financial and economic groups. The picture shows Mr. Hurun holding a KOOYO exclusive custom gift box for the Hurun Wealth list.
BUFFX's data testing also found that the dosage form has a significant impact on conversion rates, but less so on repurchase rates.
The resulting path divergence among new brands is: if high unit price, low repurchase, and high conversion lead to the path of inferior health products as an IQ tax, KOOYO's position is more toward high unit price, high repurchase, high barriers, and low conversion. More functional food brands face the current situation of medium-to-low unit price, low repurchase, and high conversion—initial sales are good, but heavily dependent on traffic investment, especially when VC ammunition is no longer sufficient, the possibility of stalling and dying increases rapidly.
"Today BUFFX is still working hard to improve our product strength. Excluding factors like private domain traffic, the overall natural repurchase rate in the sleep industry is not high, basically around 10%, with few exceeding 10%. We are just a little higher than the industry average," Kang Le commented to us.
"Our investment has always been very restrained. We haven't reached a repurchase rate of 50% or 60% yet, but I think at least 30% repurchase is a basic requirement. Only after exceeding this number will we step on the gas more aggressively."
****Entering Adjustment Period, Waiting for New Variables
Under the hype, capital overflow inevitably led to some deformation in the actions of entrepreneurs in the industry. Some new brands quickly launched products within a month, burned money on traffic to sell to the top within a month, and then quickly left when they found the trend was wrong, sometimes not even lasting a full 90-day sales cycle.
Li Weijia also commented to us: "Not only do consumers need to set proper expectations for health products, but entrepreneurs also need to set expectations. Some entrepreneurs we see still carry strong utilitarianism. When making products, they think about making a hit product today and another hit product tomorrow. The hit product mindset is right, but in this industry, there aren't that many hit products to make."
Dancing in chains remains the main tone for domestic functional food brands. According to Li Weijia, as an OEM providing product solutions to brands, Fuwei Yichao can offer hundreds of landing solutions to overseas brands, but due to regulatory restrictions, domestic brands can only use a few dozen. The strict restrictions on various ingredients and dosages by the state will inevitably lead to product homogenization.
Another reason for product homogenization is that new brands still have too little accumulation. Relatively excellent new brands will, based on the general solutions provided by OEMs, combine their own R&D validation and market demand, adjust and re-implement solutions according to segmented populations and scenarios, completing the transformation from product to commodity. Brands lacking R&D capabilities may directly launch OEM solutions without modification.
Moreover, although being more attuned to consumer needs and faster product iteration are common advantages of new brands, compared to traditional brands with decades of development history, accumulating dozens or hundreds of patents annually, and having a certain scale and foundation, new brands' shortcomings in R&D are still very obvious.
△ Fuwei Yichao gummy production line
Therefore, after the industry entered an adjustment period in the second half of 2021, many brands are also actively adjusting their previously somewhat single DTC development strategies.
Kang Le and his team are glad that BUFFX has been vigorously expanding offline channels such as Hema, KKV, and convenience stores since March last year, and now online and offline revenue is basically balanced. BUFFX has also not given up on continuous R&D in sleep solutions, retaining a small team all-in on sleep, preparing for a long-term battle with big single products and strong mindshare.
The rest of the BUFFX team has shifted to expanding into product directions with more sales certainty, such as launching high-calcium gummies. According to Kang Le, BUFFX also plans to launch a sub-brand related to traditional Chinese medicine. These directions will bring BUFFX several times the revenue growth compared to last year.
In addition to continuing to operate its brand, KOOYO has also proposed a B+C+D ecosystem development strategy. After its own factory was completed and put into operation in January this year, KOOYO will focus on the B-end next, opening its self-developed synthetic raw materials and patented technologies to partners, and providing research services to the D-end, promoting the dual helix development of its biotech and consumer businesses. It is reported that KOOYO has reached deep cooperation with a new functional food brand under a leading local pharmaceutical company.
New variables are also brewing. On one hand, in June 2021, the filing system for gummies was relaxed, further simplifying the approval process for blue hat certification and shortening the application cycle to about half a year, which is an important positive for the industry. On the other hand, although traditional overseas brands have been slow to respond to the domestic market, they have seen the rapid development of this market over the past year, and it is expected that related products will be launched as early as the end of this year.
By then, domestic brands will likely have emerged from the adjustment period, and the market may become lively again.
"The turning point in the development of China's health products industry has appeared, and this is an opportunity given by the times. But how to turn increasing penetration from a goal into a result requires every practitioner to work together, with healthy cooperation and competition, to promote industry breakthroughs," KOOYO said. "We maintain a truth-seeking and open attitude, opening factories and technologies to ecological partners, and firmly believe in this broad and segmented track."
"We still believe it is possible for a magical single product like Tesla to appear in the sleep aid demand, so we are still working very hard to promote R&D. We must still believe in the power of time," Kang Le said.
Source: Zhibo (ID: exact-interaction), Author: Xiao Chao
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