"Orders are down 60%, and it's hard to find replacement customers in the short term." Che Ming, an oat milk entrepreneur, told Huxiu that his business is suffering a cold winter due to the closure of coffee shops and tea houses in Shanghai and Beijing amid the pandemic.

After two years of frenzied growth from 2020 to 2021, oat milk has become a standard in China's coffee circle: at Starbucks, Luckin Coffee, Manner Coffee, and Costa stores, you can find coffee drinks containing oat milk, and in the past two years, these leading coffee brands have even promoted new "oat milk series" products.

But oat milk is also facing the dilemma of "success and failure both tied to coffee": when coffee shops in Shanghai and Beijing shut down, the growth engine of the oat milk track also stalled instantly.

Like most entrepreneurs in the circle, Che Ming's oat milk business is highly dependent on coffee shops: from 2020 to 2021, 26 coffee shops in Shanghai contributed about 35% of Che Ming's product sales. Unlike international oat milk giants like OATLY, Che Ming's company is smaller, making it difficult to secure orders from Starbucks or Nayuki; his customers are mostly independent cafes.

Lisa, who has run a specialty coffee shop in Shanghai for six years, is one of Che Ming's customers. Before this wave of the pandemic, her store sold an average of 35-45 cups of coffee per day, of which about 8-12 cups used oat milk as an ingredient. "Sometimes I think, whether it's coffee or oat milk, for small shops and small brands like us, it's a humble business."

What makes Lisa feel humble is not just that "business is hard." She feels that she and Che Ming are both "bound" by an invisible giant chain.

"When oat milk suddenly became popular, customers would come in and specifically order coffee with oat milk; when ice bock (a type of milk) became a hit, if your store didn't have it, you'd be looked down upon; when coconut milk was trendy, it felt like your store had to smell like coconut to be authentic... What is the line between meeting demand and blindly catering? I don't know."

The anxiety caused by the pandemic is not limited to these "small figures" in the oat milk world. OATLY's latest financial report shows that due to the pandemic, this star oat milk company is facing "China troubles."

In the earnings call, OATLY CEO Toni Petersson said: "In China, our team is going through a very difficult environment. We have a significant portion of our business in Shanghai. Among the retail and food service stores where OATLY is present in China, more than 17,000 stores were closed in the first quarter due to lockdowns."

OATLY is a key benchmark in China's oat milk investment circle: since OATLY entered the Chinese market in 2018, a wave of brands imitating OATLY quickly emerged (highly imitating product design and positioning, even brand names; and in development models, also referencing its path of "emphasizing marketing + heavily betting on coffee channels"). OATLY's listing in 2021 further intensified this imitation wave.

The "OATLY imitation show" has not made this track healthier.

An investor who "invested in oat milk in 2020 but did not continue investing in this track" told Huxiu that before OATLY's listing in May 2021, the capital market's enthusiasm for oat milk investment was already cooling, because homogenized products led to "rapid saturation of the limited market." The investor believes that the hottest investment wave for oat milk was in 2020, which was global; after the pandemic recovery, plant-based beverages saw a strong rebound, and OATLY's story boosted domestic investors' confidence.

But what followed was that OATLY held orders from mainstream domestic coffee brands, while dairy giants like Yili and Mengniu quickly brought their plant-based products into existing retail channels. The result: oat milk startup brands found it difficult to compete head-on with OATLY in the B2B market and with dairy giants in the retail C-end. "But ultimately, it's a problem of product strength. This circle focuses too much on marketing and gimmicks, lacking product refinement and benchmark products."

Xiangsong Capital director Shen Meng told Huxiu that oat milk is similar to previous concept-driven marketing models. "The short-term valuation inflation cycle triggered by topics, as market competition intensifies and capital investment bubbles, the later you exit, the higher the risk. Oat milk grew rapidly under the halo of plant protein health concepts and was driven by internet-famous concepts, but the product itself shows no particular differentiation. Whether it is sustainable or another product meteor created by capital will likely be revealed soon."

Oat Milk Trapped in Channels

Local oat milk is worried about channels.

"The challenge for oat milk is single channels and single scenarios," Zhu Danpeng, an analyst at China Food Industry, told Huxiu.

At the end of 2021, people related to Meituan and Pinduoduo's community group buying businesses noticed a phenomenon: more oat milk brands began to approach them, hoping to use community group buying channels to "go down" to the market. Earlier, the oat milk circle had just fought a fierce battle around "instant retail channels" from late 2020 to Q1 2021.

At that time, some brands were willing to "concede profits" for channels. One oat milk brand fought for channels at the cost of losing about 2 yuan per bottle sold, and another brand tried to obtain channel resources by giving up equity.

Since OATLY entered the Chinese market in 2018, the coffee channel has become a battleground for oat milk, and it has become a red ocean: most leading coffee chains are customers of brands like OATLY; mid-tier chain coffee brands have become the "cornerstone" of local leading oat milk companies; small oat milk brands can only fight for some independent cafes.

The core reason why cafes have become an indispensable channel for oat milk is: it is one of the few scenarios that can bring certainty to oat milk.

In the coffee circle, to solve the "milk coffee" needs of lactose-intolerant users, baristas have long chosen "soy milk." But the unique beany flavor of soy milk can affect the taste of some coffees. After the rise of the specialty hand-brewing wave in 2018, the disadvantage of soy milk was further amplified.

Barista Xika told Huxiu that in the specialty hand-brewing era, consumers are experiencing the "flavor" of coffee beans. In the past two years, some lightly roasted coffee beans have become very popular, further putting soy milk in a "replaced" state.

"Compared to soy milk, oat milk has fewer off-flavors, and with the influence of international top baristas after 2014, oat milk has become a standard in the coffee circle," Xika said. In the Chinese market, Starbucks has a special demonstration effect, and since Starbucks adopted oat milk for its plant-based milk, the Chinese coffee circle has almost regarded oat milk as a "standard answer."

But outside coffee, oat milk has not found such strong "certainty" in other channels in the Chinese market.

Take hot pot as an example: some oat milk brands have tried to "break into" the hot pot "soy milk" track. An operations head of a leading hot pot brand in Sichuan-Chongqing told Huxiu that they are cautious about replacing traditional soy milk. "Because soy milk has become part of hot pot culture, we can try oat milk, but we dare not push it strongly to consumers—when a drink becomes an element of a food culture, it's hard to make structural adjustments."

Even in "study and exam scenarios," oat milk is not as "certain" as walnut and almond milk.

A market head of an established dairy company told Huxiu that from 2020 to 2021, the best-selling plant-based milk products in supermarket channels were walnut milk and almond milk. "In traditional Chinese consumer cognition, walnuts and almonds have a stronger impression." The head said that in household milk consumption decisions, the female head of the household usually has the decision-making power, and the most certain consumption scenarios for plant-based milk are: family members (especially children) who are lactose intolerant but need protein, and the "brain-boosting" need during exam periods.

"This is also why local Chinese plant-based milk has not taken the route of strengthening oat milk in the past three decades, but instead took the route of walnut milk and almond milk," the head said. Cultural cognition led to this result: in the context of Chinese food culture, eating walnuts has a stronger intuitive connection to "brain-boosting," while oat brain-boosting is not common knowledge for most consumers.

"Oat milk is not a necessary consumer demand; it's just overlaying marketing concepts like high-end and health. Therefore, there is enough marketing space in the B-end, while the C-end is relatively weak, " Shen Meng told Huxiu.

But B-end channels suitable for oat milk, like coffee shops, are limited.

It is known that the largest local coffee chains, Starbucks, Luckin, and Manner Coffee, are all customers or partners of OATLY. In barista training institutions in Shanghai, Yunnan, and other places, OATLY provides some "free samples"—meaning local baristas are influenced by OATLY early in their minds.

What makes the market more intense is that after 2018, traditional dairy companies like Yili and Mengniu began to accelerate their efforts in oat milk, and these dairy companies have huge advantages in channels like supermarkets and small shops—their new oat milk products can be "distributed" to "capillary-like" sales networks at the first time.

One result is that local oat milk brands can only fight for the blank areas of giants: small independent cafes, retail platforms not yet developed by giants, and lower-tier markets. "Local oat milk brands that rose in 2020 are all trying to find ways to survive in the C-end world."

But the C-end market is not easy.

"The positioning of oat milk in the C-end is currently not clear—whether it replaces milk as a necessity or is a new beverage is vague in consumer cognition," Zhang Wen, executive general manager of Qingtong Capital, told Huxiu. Oat milk faces many challenges: "If it is to replace milk, there are many difficulties to overcome, because domestic consumers have drunk milk for decades, and consumption habits are hard to change in the short term; if positioned as a beverage, the taste needs further improvement, and product iteration is also important. In addition, market placement and marketing have not yet achieved large-scale coverage. For a new category to quickly occupy consumer cognition, it needs short-term bombardment exposure. If a single brand can do that, it can quickly establish the huge advantage of brand-as-category, like Coconut Palm Juice and Wanglaoji herbal tea. Currently, brands are still cautious in marketing investment."

The Unrepeatable OATLY Path

Che Ming nervously opened the video. It was late at night on May 10, and he was connecting remotely with his customer.

Three days earlier, Che Ming's new oat milk product had finally been delivered to the customer, and this night was the critical moment for "remote inspection."

The customer Che Ming was eagerly awaiting was an entrepreneur born in 1994 who owned three small coffee shops outside Beijing's Fifth Ring Road. Che Ming met him in a coffee shop owner WeChat group, and after two months of communication, he was allowed to "send samples for a try."

Che Ming knew that even if the deal was reached, the "purchase volume" from this 1994-born owner would not be high, but Che Ming valued the circle behind him: the small circle of baristas can quickly "spread" a product through "social fission" in a "one-to-ten" way—this "popularity" is sometimes regional; baristas with good relationships in a region often like to try the same ingredients, and based on this, they increase conversation topics and real-world friendships.

This night's inspection started with making milk foam and ended with a cappuccino—the 1994-born owner specifically used Che Ming's oat milk to try latte art. Throughout the process, Che Ming avoided "selling," which is an unwritten rule in the coffee circle: for many young and individualistic baristas, noisy sales pitches are often looked down upon or imply "product flaws."

The final result pleased Che Ming: the 1994-born owner agreed to trial the product in his stores after the pandemic: Che Ming would provide three days of free oat milk to his stores. "It's already lucky to have a store willing to try your product. A small loss is better than losing everything."

"The market is not mature, but it's somewhat red ocean. Everyone is imitating OATLY's model, but it's hard to replicate. Local oat milk should explore its own path," an oat milk entrepreneur told Huxiu. People in the circle like to talk about OATLY's marketing, but ignore the company's strength: "Over more than two decades, OATLY has accumulated a lot of technology and patents in the oat milk field."

A little-known detail is that before OATLY became Starbucks' "official oat milk" provider in European and American markets, it was already somewhat famous in the barista circle: at that time, in the European and American coffee circle, some consumers would order plant-based milk lattes, but many plant-based milks couldn't foam like milk (due to lack of fats and other substances). OATLY's Barista series gradually broke through precisely because of its "ability to foam."

"In 2020, some domestic brands also bid," the entrepreneur said. At that time, some large coffee and catering brands had public tenders, but some local oat milk companies that participated did not win in the end. "Oat milk actually has high technical barriers." But such statements and stories are not what many insiders like to hear; people prefer another story: OATLY rose rapidly through clever marketing.

In 2014, Toni Petersson became CEO of OATLY and began to focus on coffee shop channels—because at that time, trends like "Mediterranean diet," "natural therapy," and "plant-based diet" were rising worldwide, and chain coffee shops like Starbucks and chain restaurants like McDonald's were trying to "cater" to this trend.

A key detail worth noting is that at this time, Toni Petersson began to lead OATLY to become a "strong marketing company": in European and American markets, OATLY's promotions and placements from 2014 to 2020 mostly focused on concepts like "environmental protection" and "vegan."

For chain restaurants and coffee brands, when OATLY oat milk is placed in stores, their attitude of "siding with environmental protection" is self-evident. (An industry insider said that in European and American markets, there is a large base of people who care about "environmental protection" and "vegan" and are willing to pay for it, which is the core reason why Beyond Meat and OATLY focus on "environmental protection, vegan concepts" in marketing in foreign markets, but the situation is different in the Chinese market.)

The impact of "marketing" and "positioning" on OATLY is obvious. In 2012, OATLY was just a "niche category" company with sales maintained at $20-30 million. After entering channels like Starbucks and successfully shaping the "environmental protection" and "vegan" concepts in public opinion, the company gained explosive attention and doubled sales, eventually listing in 2021.

"But marketing burns money," an anonymous investor said. In 2020, some oat milk companies, after receiving financing, did try to influence user minds through burning money, but it ultimately proved difficult: new-style yogurt, fresh milk, other plant-based milks, and milk coffee drinks in the new consumption field were also burning money—compared to other tracks with "more diverse consumption scenarios," oat milk companies received relatively less financing, which destined that it would be difficult to burn out a Chinese OATLY in the short term.

Moreover, burning money on marketing cannot solve the deeper problems of the oat milk track.

In 2021, leading oat milk companies began to receive "personalized orders" from B-end customers. Due to the extremely fierce "new product war" in the coffee circle, coffee brands are trying every means to "launch new products first" at the raw material end. For oat milk companies, this means restructuring from R&D to production capacity: ultimately, this evolved into a wave of factory construction starting in 2021.

In the C-end user market, more oat milk brands began to realize that marketing cannot solve the key issue of "repurchase rate." What ultimately affects consumers is not the beautiful images in advertising videos, but the instant feeling of oat milk entering the mouth.

This is also the key issue facing local oat milk entrepreneurs. The pandemic has deeply affected the coffee market in Shanghai and Beijing, and also affected the overall situation of oat milk: under the influence of "more intense competition" and "weaker coffee consumption power" in 2022, will oat milk enter a reshuffling cycle?

*Cover image: Visual China

(At the request of the interviewee, Che Ming is a pseudonym)

Source: Ten Billion Consumers (ID: gjgc168)

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