China's beverage industry began in the 1980s and took only 20 years to nearly complete the 80-year development process of European and American beverage industries. The beverage market has always been an important goldmine in China's food industry and a startup paradise where dark horses frequently emerge.

Since 2013, the Chinese beverage market, which has maintained double-digit high growth and crossed the trillion-yuan scale, has quietly undergone new changes amid deep market adjustments and economic downturn.

Thirty years east, thirty years west; after 30 years of rapid development, China's food industry began to slow down from 2012, with growth rates declining from over 20% to over 10%, and entering 2015, growth fell to single digits.

The market is changing, and consumers' consumption concepts are also changing. Looking at the beverage industry, in the face of the global wave of consumption upgrade, whether it's international giants like Coca-Cola and PepsiCo, or domestic companies like Wahaha, Master Kong, and Uni-President, they have all encountered development bottlenecks and shown varying degrees of inability to sustain growth, seemingly increasingly unable to meet the segmented market demands of the new era.

1 The beverage business is harder than before

In 2017, Fortune magazine released the new Fortune Global 500 list, and almost all food and beverage companies showed a downward trend in the new year's rankings. Except for Nestlé, AB InBev, and Kraft Heinz, which just made the list this year, other giants all saw their rankings slip.

Under the overall weak consumption trend in the beverage industry, industry "giants" are usually the first to bear the brunt; it can be said that they have been quite frustrated in their development in recent years.

According to Coca-Cola's financial report, the company's net profit in 2017 was $1.18 billion, a year-on-year decrease of 81%. Meanwhile, another international giant, PepsiCo, supported by products like potato chips, achieved a net profit of $4.85 billion, but that was 23% less than the previous year, and the decline in the beverage segment was also quite significant.

Data source: Coca-Cola financial report

Domestic companies like Uni-President and Master Kong also had unsatisfactory sales performance in 2016. The 2017 sales reports released by Master Kong and Uni-President showed that their beverage sales increased compared to 2016, but not significantly, failing to reverse the overall downward trend in both sales value and volume in the domestic beverage industry.

The giants' experiences in the market are also a microcosm of the entire beverage industry entering a winter.

According to statistics, since 2014, the growth rate has fallen below 10% and has continued to decline, even turning negative in 2017. In fact, as early as the end of 2015, many industry insiders pointed out that the traditional beverage industry had reached its bottleneck period, and sluggish growth had become an industry-wide problem.

The decline of major categories does not mean the entire beverage industry has become silent; on the contrary, a wave of emerging brands and new forces are performing actively. According to statistics, in 2017, there were approximately 264,000 new food and beverage products launched globally, an average of over 700 per day; in China, the number of new consumer goods in 2017 increased by 15% compared to 2015. These category innovations have brought prosperity to a large number of emerging food and beverage companies.

Although the overall growth of the consumer goods market is slow, the capacity has not decreased but slightly increased. It seems that the sales lost by those giants have been snatched away by some small brands.

2 Why the old path no longer works

Consumer polarization: either interesting or healthy

Verday chlorophyll water. Image source: Eat. Drink. Shrink

After 30 years of rapid development, the Chinese beverage market has now seen consumer polarization: on one hand, young people who drank beverages a decade or more ago have now become middle-aged, and their beverage tastes have shifted from the original high-sugar, high-additive options to healthy, natural plant-based beverages, healthy cold-chain lactic acid bacteria beverages, energy drinks like Red Bull and Mizone, and then mineral water and salt-containing beverages. These consumers focus on brand, health, and safety, and they want trust.

Capsule beverage brand Drinkfinity

On the other hand, there are the younger generation, the post-90s and even post-00s, whose personalities are more assertive and who need to express their uniqueness. Therefore, when choosing beverages, they consider whether it's fun and novel. So now the beverage industry has a youth beverage category. These beverages don't care much about the brand or what the product is; the key point is to match the characteristics of this consumer group, and they want fashion and fun.

So, one pole is rational health consumption, needing healthy beverages; the other pole is emotional personalized consumption, needing fashionable beverages. It can be said that China's beverage market has entered a "new consumption period," and this trend in terminal consumption will inevitably determine that traditional types of products can no longer impress current consumers.

The logic of "big single product" is becoming increasingly inefficient

The fragmentation of the entire society has led to the so-called "mass" consumers no longer existing in many aspects: many people want to be different from mainstream society or culture; in today's society, everyone is "non-mainstream." Previously, mainstream products emphasized practical value; now the market, especially the youth market, emphasizes interest.

Coca-Cola Japan seasonal limited edition products

For personalized needs, the logic of "big single product" is clearly difficult to follow. Remember the advertising slogan of a certain jelly? "Have one for leisure and entertainment, have one for traveling, have one for friend gatherings..." This kind of product and communication method that sets up N consumers and N consumption scenarios will become increasingly inefficient. Many brands have also faded away because of this. In 2014, Nestlé's Nestea stopped production and exited the Chinese market, gradually being marginalized from a popular category. Uni-President launched Fresh Orange in China in 2001, once holding half of the market for several years. Now, its market share has been declining, and Evergrande Spring, once hailed as the "catfish" of China's FMCG industry, also changed hands in 2016.

Analysis from the marketing channel level

The marginal benefits of channel dividends have emerged. If mainstream brands want to rely on existing brands to extract increments from channels, it is very difficult and cannot make up for the gap in declining sales. In addition, China's economic growth has entered a new normal, having bid farewell to high-speed growth, and urbanization has gradually slowed down. There are not many opportunities for first-line brands to dig gold from channels with existing products. Marketing innovation cannot solve the problems of increased consumer choices and consumption upgrades. The overall industry trend is transitioning to high value-added and diversified categories. If brands still stick to the old ways, it will be difficult to escape the current decline.

However, as the control of major brands like Wahaha, Uni-President, Master Kong, Coca-Cola, and PepsiCo over the market and traditional channels gradually weakens, it has provided opportunities for the development of many emerging category brands.

Impact of offline beverage store formats

According to Meituan's 2018 catering report: In 2017, the order volume and order amount growth of the beverage segment both exceeded 200%, ranking first. Among the most searched category keywords on Meituan-Dianping in 2017, coffee and milk tea were on the list. Among the most searched brand keywords, three of the top five were beverage brands: Starbucks, Yidiandian, and Heytea.

The explosion of beverages stems from the rise of lifestyle dining. Beverages characterized by freshly mixed, freshly squeezed, and freshly ground have taken over a portion of the market share of FMCG products such as carbonated drinks, bottled juices, and instant coffee. From the perspective of consumption scenarios, beverages have a wide range of scenarios. Whether it's shopping, dining, entertainment, takeout, or office, as long as there is a consumption scenario, there is the possibility of selling various types and price points of freshly made beverages.

3 What is the future trend of beverages?

Health and balance

REBBL organic herbal beverage

The diversification of food and beverages is increasingly important to provide consumers with positive solutions that align with their personal health concepts. This opens the door to new market opportunities. Different forms, formulas, and portions of food and beverages may emerge to provide consumers with product choices that fit their personal dietary plans (such as health and wellness) and current emotions or improve their mood. In the future, self-caring consumers will seek nutrient-rich, beneficial ingredients, products, and beverage pairings.

Personalization and exclusivity

The increasing variety of retail channels for food and beverages (such as communities and group buying) gives brands more opportunities to provide product recommendations, exclusive promotions, and personalized innovative services based on consumers' actual behavior patterns.

This is an opportunity, but it may also cause brands to be drowned out and brand loyalty to decline, because new channels typically prioritize convenience, cost-effectiveness, or time-saving benefits, which weaken brand value. So, for well-known brands, this is a tricky problem, but for startups, it is a very good breakthrough point. In the new era, the diversity of shopping channels will force all brands to become closer to consumer needs, more efficient in service, and more affordable in price to maintain customer loyalty.

Brands not only need to create personalized products but also need to provide channels for customers to express their personality through the brand. In the future, more brands will launch products and services that allow consumers to be more authentic, enabling them to continuously explore and express their inner selves.

Category innovation trends

In the past, when creating new products in the mass era, the choice was usually the one with the highest total score, but now the choice is the one with the best single subject score. In recent years, several successful single products targeting young people, such as Chabi, Xiaoming Classmate, or Weilong Spicy Strips, do not emphasize how delicious the product is, how many nutrients it adds, or what functions it has; they focus more on resonating with the target audience.

Finally, with new market changes, the product logic of "one Spring Festival Gala satisfying the whole country" is no longer applicable. Only beverage brands that meet the needs of segmented groups with small brands, small categories, and small emotions will win opportunities for future market development.

Source: Tsingshan Capital

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