Click to read the original article for details Source: China Business Journal

The low-alcohol beverage market is booming. Following established brands like Jiangxiaobai Meijian and RIO cocktails, a large number of new brands including Berry Sweet, Drunk Goose Lady, and Lanzhou have entered the market, along with various capital investors. What are the motivations behind the competition between new and old brands in the low-alcohol market? Will it become a trend?

Major Brands Enter the Low-Alcohol Market

Recently, PepsiCo filed a trademark application indicating plans to sell alcoholic beverages under the "Rockstar" brand, and also sought to register brand names in categories such as beer and alcoholic fruit cocktails.

Just recently, Coca-Cola China launched its first Topo Chico hard seltzer, and Nongfu Spring also released its first rice wine + sparkling wine product, TOT sparkling drink, in May.

The direct reason for these giants to act might be the flourishing scene in the low-alcohol market.

Currently, besides traditional low-alcohol products like Jiangxiaobai Meijian and RIO cocktails, there are many products from new brands, such as Lion's Song under Drunk Goose Lady, Xi Xiaoque under Three Squirrels, Berry Sweet, Lanzhou, Mali Duntun, Likou Bai, Zouqi Qingniang, Youshi Fruit Wine, etc.

At the same time, several new brands have received olive branches from the capital market. It is understood that since last year, many investors including Matrix Partners China, ZhenFund, C Capital, Tiantu Capital, JD Digits, and Dexun Investment have entered the low-alcohol market.

Data shows that from the beginning of this year to May, there were 27 financing events in the alcohol sector, with a total amount of about 2.508 billion yuan. For example, Berry Sweet completed three rounds of financing in 12 months, while Fubixing completed three rounds in four months.

On the other hand, traditional baijiu brands are also trying to enter the low-alcohol market. Luzhou Laojiao released three new low-temperature fermented blueberry wines at the beginning of this year, and Wuliangye executives also stated they would focus on developing original fruit wines represented by Xianlin green plum wine.

It is understood that low-alcohol beverages in the market generally refer to fruit wine, pre-mixed drinks, rice wine, sparkling wine, etc. Relevant data shows that during this year's Tmall "6·18" shopping festival, sales of low-alcohol beverages increased by over 90% year-on-year, with fruit wine and plum wine increasing by 100% and 200% respectively.

Why does capital favor low-alcohol beverages? Liu Chang, chief analyst of food and beverage at TF Securities, told China Business Journal reporters that the reason is the large market demand for low-alcohol beverages.

First, the consumer base for low-alcohol beverages is broader, including women and young people; second, the consumption scenarios are expanding, including overtime work, solitude, and gatherings; third, the penetration of low-alcohol beverages in light social occasions is already high.

Sun Wei, partner at Huaying Capital, an investor in Panda Craft Brewing, also told China Business Journal reporters that on one hand, the post-90s and post-00s generations are becoming the main consumer force, and the change in consumer demographics brings unprecedented opportunities for low-alcohol beverages; on the other hand, in the rapidly rising and powerful female market, low-alcohol beverages focusing on the experience of slight intoxication have a great advantage.

Different Motives

Why are large, medium, and small brands all getting involved in low-alcohol beverages? Liu Xiaowei, a baijiu analyst at Rongze Consulting, told China Business Journal reporters that the alcohol market itself has huge development space.

Among them, compared to the traditional alcohol market with fierce competition and many giants, the low-alcohol market is relatively moderate, with few first- and second-tier brands involved or strategically positioned, providing fertile ground for new brands to grow rapidly.

Wang Qiang, founder of the green plum wine brand Bingqing, entered the low-alcohol market for this reason.

"When we founded the brand, we thought about which category we could become the industry leader in. The baijiu category is too competitive, beer is dominated by big brands, wine is mostly led by foreign brands, and huangjiu is popular in Jiangsu and Zhejiang but hard to go national. Under the trend of low-alcohol and health in the alcohol industry, only the fruit wine market lacks a leading enterprise, so there is still an opportunity," Wang Qiang told China Business Journal reporters.

China Business Journal reporters learned that Wang Qiang is a traditional alcohol industry professional. Before founding Bingqing, he worked at an alcohol design company that had cooperated with many traditional baijiu enterprises such as Wuliangye, Luzhou Laojiao, Shuijingfang, and Shede, giving him a deep understanding of the baijiu industry.

Unlike Wang Qiang, some newcomers to the low-alcohol market come from other industries. For example, Zheng Bohan, founder of the Lanzhou brand, previously worked on e-cigarettes.

When talking about why he entered the low-alcohol market, he told China Business Journal reporters, "When I was doing e-cigarettes, I found that once consumers tried new flavors like passion fruit or watermelon, most would not go back to traditional flavors. The same applies to alcohol. In the past, the high-alcohol market only had baijiu, and the low-alcohol market only had beer. Now we are introducing new-style drinks, giving consumers more choices, and they will naturally 'vote with their feet' and choose drinks that better meet their needs."

Tang Huimin, founder of Berry Sweet, told China Business Journal reporters that online platforms like Xiaohongshu and Douyin provide new penetration opportunities. In offline channels, based on Berry Sweet's offline user profile, areas with high concentrations of single people and stores near campuses have good sell-through, indicating that the single economy trend brings new opportunities to the offline low-alcohol market.

Li Ying, founder of Lion's Song, told China Business Journal reporters, "Our research found that consumers like to drink high-quality fruit wine. There are many good products in the fruit wine market, but they fall short in packaging and branding. So our approach is to first find suitable wine, then package it into a fruit wine brand that young people like, with childlike innocence, healing, and cute style."

Hot Topics and Controversies

However, the low-alcohol market is also controversial despite its popularity.

For example, whether the OEM (Original Equipment Manufacturer) model adopted by most brands in the industry affects product quality, and how companies should differentiate themselves among many brands and build their own brand moats, are issues facing many new low-alcohol brands.

Liu Xiaowei mentioned that as a sub-category, low-alcohol beverages have not deviated from the alcohol marketing model in terms of product quality, production processes, and sales channels. The quality, craftsmanship, and sales channels of alcohol products are not secrets in the market; everyone can imitate or use existing models, so homogeneous competition is inevitable.

Liu Chang also believes that low-alcohol beverages are a product between alcohol and beverages, with stronger brand loyalty than beverages but weaker than beer. Low-alcohol companies need to build brand moats by telling consumers the differences between themselves and other brands in terms of production and craftsmanship.

In this regard, Wang Qiang has his "trump card."

"Unlike most new low-alcohol brands on the market, we made early investments in the front end, acquiring fruit wine production factories and owning our own plum base. Our base, winery, and production area ensure good product quality, which is our brand moat."

Panda Craft Brewing is similar. Sun Wei told China Business Journal reporters that after receiving investment, Panda Craft Brewing invested heavily in building its own supply chain and factory, which is the only way to truly scale up while maintaining quality.

Zheng Bohan disagrees. "Building your own factory is a story told by traditional baijiu companies. The real industrial era must have full social division of labor. There are those responsible for factories, brands, and channels. We use the money that would have been spent on building a factory for quality control, which is more effective."

How does Zheng Bohan solve the problem of product homogeneity? He said that new-style drinks can use hundreds of fruits and various processes to produce sparkling wine, fermented wine, and prepared wine, which means homogeneity is much weaker than traditional baijiu.

"Brand differentiation tests each company's operational capabilities. Each has its own positioning and corresponding hit products. Lanzhou is positioned as a national-style small wine, which is our unique tone."

Li Ying also mentioned, "We deeply cultivate the consumer mindset of our target users, directly address consumption pain points, and seize market opportunities to create exclusive hit flavors for the youth market, such as Lion's Song lychee and grapefruit."

Trend or Flash in the Pan?

Is the once-hot low-alcohol market a long-term business? Can the confident entrants truly make friends with time?

Liu Xiaowei admitted that the development trend of the alcohol industry is light drinking and healthy drinking. From this perspective, low-alcohol beverages align with the consumption habits of young consumers and have a bright future.

However, the brand and market operation of low-alcohol beverages is not simply about reducing alcohol content. It requires precise positioning of target groups, accurate grasp of consumer psychology, insight and creation of consumption scenarios, and reshaping and constructing consumption value.

At present, the development path of the low-alcohol market is still long.

Chen Muli, a researcher at Shenzhen Zhongwei Zhiyan Consulting Co., Ltd., told China Business Journal reporters that overall, low-alcohol beverages are the future development trend of the alcohol market.

Currently, baijiu and beer sectors are starting to develop low-alcohol products because young people and women will be the core consumer groups in the future. Low-alcohol beverages can solve the pain points and functional needs of these groups for alcohol consumption.

Wang Qiang believes that low-alcohol and health are the general trends in the future alcohol industry.

From international experience, in Japan, which pursues a healthy lifestyle, alcohol consumption in 2018 was 7.8 million tons, of which fruit wine consumption was 1.7 million tons, and plum wine was the main fruit wine, about 1 million tons. Currently, the domestic fruit wine industry still has great development potential.

Tang Huimin also believes that the current low-alcohol market size in China is about 15-20 billion yuan, which is still significantly behind the beer market of 600 billion yuan, with low-alcohol beverages accounting for only 3% of the beer market.

Compared to Japan, where the low-alcohol market is more mature, this proportion can reach 30%, indicating huge development space for China's low-alcohol market.

In addition, the domestic low-alcohol market will show characteristics such as local brands dominating, rising female consumption power, continuously increasing drinking rates, and widespread demand for "small drinks" due to the culture of living alone.

Zheng Bohan said that RIO has been around for 20 years, and Jiangxiaobai for 10 years, showing that new-style drinks are a long-term business.

"New-style drinks" as Zheng Bohan refers to include fruit wine, prepared wine, sparkling wine, and cocktails, excluding traditional baijiu, beer, and wine. In his view, current new-style drinks are mainly low-alcohol, but in the future, the company may launch new-style high-alcohol products different from baijiu.

"It is estimated that the short-term market size for new-style drinks is 100 billion yuan, and the medium-to-long-term size is 500 billion yuan."

Sun Wei told China Business Journal reporters that the low-alcohol track has a 5-10 year investment return period. According to Tmall big data, the entire low-alcohol brand is in the early stage of a boom, maintaining a very fast growth rate, and this is only online data. It can be said that the future of low-alcohol beverages is broad.

However, an investment manager deeply involved in the consumer goods industry told China Business Journal reporters that low-alcohol beverages can indeed solve the problem of lacking products for women's gatherings and provide consumers with more choices, so they have certain development prospects.

But low-alcohol consumption relies more on offline dining, and the catering channel is controlled by Tsingtao Beer, China Resources Beer, Budweiser, and some baijiu leaders. Low-alcohol beverages have lower profit margins and offer less profit to channels, making it difficult to grab share from traditional alcohol companies.

In addition, low-alcohol beverages also face competition from fruit-flavored beer. Therefore, it is expected that it will be difficult for a low-alcohol brand to generate revenue exceeding 5 billion yuan in the future.

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