Based on the unique 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 managing their expectations for products. At the same time, they must manage their own expectations for industry growth under stringent regulatory conditions, and accumulate product strength over a longer period—traditional mature brands have already built long-term advantages, while new brands are just beginning their journey. The second category we choose to observe and discuss, awaiting its inflection point, is functional foods, which were blown to the forefront over the past two years but are now in an industry adjustment period. 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 with added functional ingredients. The meaning of functional ingredients is also not entirely clear. Commercially, functional ingredients mainly refer to ingredients that, based on the National Health Commission's clear classification as ordinary food ingredients or new resource food ingredients (the new resource food catalog also has strict recognition, such as chia seeds, tea tree flowers, ginseng, GABA, etc.), have been subjected to human or clinical trials by ingredient suppliers, with scientific literature supporting their positive evaluation. Simply put, anything that is beneficial to eat can be called functional food. According to incomplete public statistics, functional foods saw 12 financing events in 2021, with backing from top institutions like Sequoia, GGV Capital, and IDG Capital. Under the banner of health, products such as sleep gummies, enzyme jelly strips, and white kidney bean chewable tablets were pushed to market, often with a snack-like taste. But setbacks followed. Due to the overall consumer downturn in the second half of 2021 and disappointing Double 11 sales, many functional food brands are currently in an inventory digestion period, with slowed 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 unique development history of China's health products industry and entrenched consumer perceptions. These new brands must bear high market education costs on the consumer side, guiding them to manage their expectations for products. They also need to manage their own expectations for industry growth under stringent regulatory conditions, and accumulate product strength over a longer period—traditional mature brands have already built long-term advantages, while new brands are just beginning. Attractive Track: Large Market and Hero 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 characteristic of health products is that strong brand mindshare brings high unit prices and high repurchase rates, leading to a hero product effect, making health products a very attractive track. For example, established brands like Movefree and Swisse have hero products with repurchase rates exceeding 50% or even 60%, dominating their respective efficacy segments. Domestic giant By-Health's hero products, such as glucosamine chondroitin calcium tablets and protein powder, each achieve annual sales exceeding 1 billion yuan in pharmacy channels. There are few consumer tracks with 'high unit price and high repurchase' characteristics left. Benefiting from the maturity of overseas health product markets, domestic factories providing OEM services for overseas brands have accumulated nearly 20 years of growth, forming a relatively complete and stable top-tier landscape. Manufacturers like Fumei Yichao and Xianle Health can provide one-stop services including R&D, design, and manufacturing. The vast market and mature supply chain provide fertile ground for entrepreneurs. However, to survive in a health product market crowded with giants and compete with traditional brands with decades of 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 the Prospective Industry Research Institute shows that from 2013 to 2018, direct sales consistently held about 47% of the sales channel share in China's health food industry. E-commerce channels grew the fastest, from 13.30% to 31.60%, significantly compressing pharmacy sales share. The increase in overseas study returnees bringing back health product consumption habits and the rise of cross-border 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 more adept at traffic play on new channels. Coupled with the unprecedented attention to health awareness brought by the pandemic, the influx of entrepreneurs and capital into this industry over the past two years is indeed not surprising. Some new functional gummy brands on Tmall These entrepreneurs are roughly divided into two categories: most come from cross-industry backgrounds, skilled in marketing, often from growth departments of major companies, adept at managing new brands and data-driven; some enter from a technical angle, emphasizing their professional background and R&D accumulation. They often avoid the hero products of traditional giants, targeting more segmented consumer groups and specific consumption scenarios, such as sleep aid before bed or 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 lacks a clear legal definition for 'health products' (保健品). It generally refers to products with health benefits, a relatively simple and vague concept. Within the legal regulatory scope, they were once called health (functional) foods, now called health foods (保健食品). The definition is: foods that claim to have specific health functions or aim to supplement vitamins and minerals. They are suitable for specific populations, have the function of regulating body functions, are not intended to treat diseases, and do not cause any 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 to national standards and management measures, the introduction of various draft comments and trial versions, and overlapping government functions, leading to a long-term stage of 'heavy approval, light supervision' in China's health product market. On one hand, China has the strictest and most costly entry barriers in the global health food industry. All health food companies must apply for approval numbers for their products to label them with 'Guoshi Jianzi' (national health food approval), commonly known as the 'blue hat' due to its appearance. Data shows that some companies spend over 10 million yuan on 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 masquerading as 'health foods' under the guise 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 auditoriums 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 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 exceeding 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 means that although the total output value of China's health food market exceeded 300 billion yuan in 2017, consumers have moved to two extremes: either completely losing confidence in health foods, or blindly believing in effects like 'curing all diseases,' even abandoning medical treatment. This special development history of health products in China and the polarized 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., 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 solving problems 100%—this will be reflected in repurchase data. In the current context, education is communication, communication is marketing, and marketing is cost. To balance conversion and repurchase, all brands must calculate a total cost. Hype in H1, Cooling in H2 The difficulty of carrying historical baggage is that if the most effective way to acquire new customers for other consumer goods is word-of-mouth and one-to-many seeding, health products need to address group stigmatization and many-to-one weeding: not only must buyers believe 'this is not an IQ tax,' but also their friends must believe 'this is not an IQ tax.' This conversion path has a very high threshold. Especially for new brands just starting from zero, lacking category trust and brand trust, entering the market under the guise of health products often results in low conversion rates. To address this, marketing-background entrepreneurs created the definition of 'functional foods' and often adopt the gummy format (rather than the more common soft capsules and tablets in consumer perception), essentially avoiding a direct mental association with health products. 'I've been in the industry for nearly 20 years. 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. Old health products only talked about function, and other experiences were secondary. Now, obviously, taste and texture are important factors.' This is how Li Weijia, deputy general manager of Guangdong Yichao Biotechnology Co., Ltd., evaluated. For example, 'BUFFX' describes 'deliciousness' as the core difference of its products. The R&D lead for the delicious part comes from top food companies like Mars. It is said the team sampled over 140 times on texture, creating different eating experiences such as soft and sticky, chewy and springy, and micro-bubbly for different products. 'Distinguishing by gummies, soft capsules, and tablets, the proportion of gummy products overseas has exceeded tablets in 2020, but not in China. 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 new demographics. With sufficiently novel product forms, fun and interesting brand connotations, trial prices of tens of yuan that are not expensive, and easily shareable social attributes, under precise traffic push within a limited circle, these new brands achieve high initial conversion rates, delivering monthly sales in the tens of millions in the early stages, making financing a natural next step. Thus, in the first half of 2021, functional foods were pushed to the forefront. BUFFX founder Kang Le predicted to us in March 2021 that by June, more than 60 new brands domestically would be 'doing the same thing as us.' But these brands soon faced the issue that health-related consumption behaviors driven by taste and fun are largely impulsive for young people. Whether they can sustain repurchase in the future will be the next major challenge. A significant portion of these brands' customer base comes from consumers who 'don't care about functionality, only about the gummy taste.' Not to mention competition from traditional candy companies moving toward healthier options, snacks are naturally a category with low repurchase, which will be far from the repurchase rates initially assumed for health products. New brands that experienced rough traffic investment and rapid growth over the past year now need to address the resulting traffic backlash and improper management of consumer expectations. 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 into four types based on efficacy: turning 'discomfort' into 'comfort,' making 'comfort' even 'more comfortable,' preventing 'bad things' that haven't happened, 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, which require long-term adherence and are not immediately effective, should be expanded after consumers trust the brand. Indeed, a large number of emerging functional brands are leaning toward the 'comfort' and 'more comfortable' paths, with typical representatives being the widely launched sleep aid and energy-boosting products. Of course, there are exceptions, such as 'Minayo,' which launched hot control tablets focusing on absorption blocking, iron supplement gummies, and multivitamin gummies. But overall, this represents the limitations in product direction for new brands and reflects the general consumer 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 demand much from 'supplementing vitamins and minerals,' but how they judge the 'regulation of body functions' from 'specific health functions' will again be influenced by the long-standing 'two extremes' perspective. In other words, consumer 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. Take the sleep aid need as an example. There are many factors leading to sleep problems: whether it's the bad habit of using 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 sleep 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 sleep aid effects. 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, the amount of enzymes varies from person to person, leading to more differentiated individual differences in effectiveness 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 in turn affect brand 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 introduced 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 borne by brands in consumer education. Another way to break through is to use solid R&D capabilities to enter, using stronger efficacy to bring higher repurchase rates and meet the desire for certainty among 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 ingredients 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 uses capsules rather than gummies, making it harder to reach a broader young demographic in acquisition and conversion. The brand targets a niche customer group of new elite families aged 30 to 40. KOOYO is more active in advertising to high-end financial and business groups. The image shows Mr. Hurun holding a KOOYO Hurun Wealth exclusive custom gift box. BUFFX's data testing also found that dosage form significantly affects conversion rates but has less impact on repurchase rates. This leads to a divergence in paths for new brands: if high unit price, low repurchase, and high conversion lead to the path of inferior health products as an IQ tax, KOOYO's position leans 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—good initial sales but heavily dependent on traffic investment, especially when VC ammunition is no longer sufficient, the possibility of stalling and dying quickly increases. '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 above the industry average,' Kang Le commented to us. 'Our investment has 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 when we exceed that 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 become number one in a month, then quickly left when the trend turned, sometimes not even lasting a full 90-day sales cycle. Li Weijia also commented to us: 'Not only do consumers need to manage their expectations for health products, but entrepreneurs also need to manage their expectations. Some entrepreneurs we see still carry strong utilitarianism. When making products, they think about creating a hit product today and another 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 theme for domestic functional food brands. According to Li Weijia, as an OEM providing product solutions to brands, Fumei 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 ingredients and dosages by the state for health foods 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-land solutions according to segmented demographics and scenarios, completing the transformation from product to commodity. Some brands lacking R&D capabilities may directly launch OEM solutions with a copycat approach. And although new brands generally have advantages in understanding consumer needs and faster product iteration, compared to traditional brands with decades of history, accumulating dozens or hundreds of patents annually, and having a certain scale and foundation, new brands still have obvious shortcomings in R&D. Fumei Yichao gummy production line Therefore, after the industry entered an adjustment period in the second half of 2021, many brands are actively adjusting their previously somewhat single DTC development strategy. Kang Le and his team are glad that BUFFX began aggressively expanding offline channels like Hema, KKV, and convenience stores in 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 of hero 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 is also planning to launch a sub-brand related to traditional Chinese medicine. These directions will bring BUFFX considerable revenue growth several times over last year. KOOYO, in addition to continuing brand operations, 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, opening its self-developed synthetic ingredients and patented technology 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 domestic 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 hats 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 are expected to launch related products as early as the end of this year. By then, domestic brands are likely to have emerged from the adjustment period, and the market may become lively again. 'The turning point in the development of China's health product industry has appeared; 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 stated, 'We maintain a truth-seeking and open attitude, opening our factory and technology to ecosystem partners, and firmly believe in this broad and segmented track.' 'We still believe it is possible for a magical product like Tesla to emerge in the sleep aid demand, so we are still working very hard to promote R&D. We must believe in the power of time,' Kang Le said. Source: Zhaibo (ID: exact-interaction) Are you 'watching' me?