Source: 36Kr (ID: wow36kr) Authors: Yao Lan, Qiao Qian Consumer investment has receded, and the value and authenticity of demand in some tracks are being re-examined. Since the second half of last year, news from a top-tier fund that it would no longer look at consumer deals has, almost overnight, plunged the once-hot new consumer entrepreneurship into an ice age. Under the overturned nest, functional foods, regarded by some investors as the last 100-billion-yuan track in new consumption, have also suffered. According to 36Kr, a dietary supplement brand that shouted "sell 1 billion" in the first half of the year only completed 60% of its sales target by December last year, and due to its high valuation, has been unable to secure a new round of financing. To cope with declining sales, a functional gummy brand offered 40% commission to Taobao affiliates during Double 11, while also giving customers a 30-yuan voucher, meaning a box of gummies priced at dozens of yuan actually cost only about 5 yuan. "It's like drinking poison to quench thirst," a FA in the consumer goods sector told 36Kr. "From now on, this brand is only worth 5 yuan in consumers' minds, and investors will find it hard to invest." According to incomplete public information, there were 12 financing events in this track in 2021, backed by top institutions such as Sequoia, GGV Capital, and IDG Capital. Data from Baoguan Technology shows that in the top 10 functional food brands on Tmall from January to October last year, no new online-born brand favored by capital appeared. (Source: Baoguan Technology) New brands are struggling, but the upstream supply chain has not yet been affected by the cold wave. Twenty kilometers north of West Lake lies the ancient city of Liangzhu, home to Hangzhou Hengmei Food. Whether it's By-Health or many new consumer health products, about 70% of China's meal replacement powders and protein bars are OEM-packed here and shipped nationwide. Starting in 2019, Hangzhou Hengmei, keenly sensing the change in consumption trends, began adjusting its business route, shifting from OEM to ODM (helping clients with design and production), offering full-process services including product planning, sample development, pilot production, market testing, mass production, logistics cloud warehousing, and nutritional support. From 2019 to 2020, Hengmei Food's revenue grew 3 times and 2 times respectively, reaching hundreds of millions, and secured financing at the hundred-million-yuan level. Yang Peng, co-founder of Hengmei, said in an interview that the real high growth came not from traditional large clients but from emerging brand clients that came later. To some extent, a highly developed and concentrated upstream supply chain often means intense involution and homogenization downstream. "After functional snacks became popular this year, everyone rushed in, quickly forming vicious competition," a founder lamented to 36Kr. "Most new brands have no product strength; they design a package and find a factory to OEM. Their life cycle is very short, requiring constant advertising; consumers don't repurchase, eating a lonely meal, and the brand itself is also painful." Institutional investors have also been educated. "Originally, VCs thought 'monthly sales of 10 million' was a threshold, and crossing it meant gaining repurchase and brand momentum, but after half a year of market education, everyone gradually realized it's not that impressive," an investor who has invested in multiple functional food brands told 36Kr. "The gold content of monthly sales of 10 million is not high; it can be achieved through influencer live streaming, distribution, and discounts, but without repurchase, it's hard to sustain to the next 20 million or 30 million; most new brands can only stop abruptly here." On the other hand, the demand for health and wellness among young people seems objectively real: from group clubbing to group health maintenance, the post-80s and post-90s, under high-intensity work rhythms, are deeply troubled by lumbar spine, cervical spine, hair loss, and insomnia. According to "Wangshang Tianxia," among online buyers of premium traditional Chinese medicine, 25-40 years old is the main group, with 25-30-year-olds accounting for a higher proportion than 50-59-year-olds. In 2021, within just 5 minutes of JD.com's "6.18" opening, sales of sports nutrition supplements increased 65 times year-on-year, immune-boosting supplements 42 times, and liver-protecting supplements 39 times. Within 1 hour, cross-border imported health supplements grew 240% year-on-year. During the first hour of Tmall's "Double 11" in 2021, sales of TCM-related products grew 6 times year-on-year... Looking at a longer timeline, despite historical issues such as public opinion and regulation, health products in China have still developed a market of over 190 billion yuan, with a compound annual growth rate exceeding 10%; over the 40 years of reform and opening up, at least three richest people (Zhong Shanshan, Zong Qinghou, and Shi Yuzhu) have found their "first pot of gold" in health products. So, what gaps exist between the very real consumer demand and the market that has not yet exploded? Where will functional food brands go? 36Kr will attempt to answer these questions in this article. The True and False of the 100-Billion Incremental Market This is an industry that has already "eaten" out many internet-famous brands. One example: without capital support, relying solely on a single SKU—a leisure candy made from white kidney bean extract,主打carbohydrate-blocking function—the functional dietary brand Infinite Chang achieved monthly sales of 50 million yuan in its first month on Douyin e-commerce in May 2021, ranking first in Douyin's food category. Beyond new brands, industry giants have also "eaten" benefits from it. In 2018, By-Health, a health product giant with a market value of hundreds of billions, founded the sub-brand "Yep" targeting young female consumers, launching products such as collagen oral liquids, lutein tablets, and probiotic drinks. It is understood that from January to August 2021, By-Health's functional food category sales on Tmall grew 17% year-on-year. Tmall's "2020 Functional Snack Innovation Trends" shows that functional foods are expected to reach a market size of 500 billion yuan in the coming years, with functional snacks expected to account for 150 billion yuan. So, what exactly is "functional food"? Conceptually, functional food has not yet been officially defined. In the Food Safety Law, Chinese food categories can be divided into ordinary food and special food; special food includes health food, but there is no "functional food" in the food classification. Wang Yingyao, deputy secretary-general of the Chinese Nutrition Society, and Liang Xiaoqing, deputy secretary-general of the Health Food Market Working Committee of the China Health Care Association, told 36Kr that in most cases it refers to food with specific nutritional and health functions, suitable for specific groups, with the function of regulating body functions, not for therapeutic purposes. Currently, functional foods on the market mainly come in forms such as gummies, protein bars, meal replacements, powders, drinks, and freeze-dried products, focusing on needs like weight management, sleep improvement, beauty and skincare, and intestinal regulation. Functional foods, which add health product functional ingredients but retain the taste of snacks, sit between "useful" and "delicious," targeting a group of extremely conflicted young people—those who overconsume their bodies due to various factors, have health anxiety but are too lazy to exercise, or cannot spend much time on health due to fast-paced life. Seizing consumers' anxiety about "uncertainty," from this perspective, this is also a "heart-wrenching" industry. Kang Le, founder of BuffX, admitted that considering various factors, some new brands and upstream OEM factories are unwilling to say they are making functional foods, instead calling themselves health foods in the broader health track. A founder of a brand emphasizing emotional value told 36Kr that adding chia seeds to food is very common in Japan, but many Chinese consumers are not yet aware of it. "In fact, it's about using ingredients that are already mature and recognized by consumers abroad in domestic food, but we consider it within the scope of health food, which can be seen as a classification of food, not a new track." "Because of the 'health' concept, when young people choose similar products, they will try to choose 'healthier' ones to reduce psychological burden," the founder said, adding that health food brand is the positioning of their own brand. One important reason for the rise of functional foods might be answered by a sentence once said by Li Haojun, partner at GGV Capital: Without denying human nature, making something healthy is a good starting point. Lin Lu, partner at Northern Light Venture Capital, firmly believes in the trend of "healthy lifestyle," stating that the consumer demand for health foods and healthy leisure foods has been validated in developed markets like the US and Japan, and in China it remains a high-growth incremental market; the rapid rise in demand will in turn accelerate the orderly relaxation of policies. In Japanese drugstores, functional cosmetics, foods, and drugs are sold together, with functional foods becoming an important pillar product, reportedly with sales continuing to rise since the pandemic. Some founders and investors believe China will also develop similar formats, thereby alleviating government medical insurance pressure and promoting the commercialization of health products and functional foods. Qianzhan Industry Research Institute conducted a survey showing that functional foods have a penetration rate of over 50% in the US, about 40% in Japan, but only 20% in China. This is a market that looks full of opportunities and potential. The Hard-to-Wash-Off "Stigma" However, why do functional foods, which hit people's underlying need for "health," always face the controversy of being a "tax on intelligence"? Lack of core technology is the first sin. Domestic functional foods are still in the early stages of development, and new players generally do not have their own R&D teams. Their understanding of the track has not yet risen to issues like raw material origin, extraction processes, or more detailed ingredient ratios; they almost all find OEM factories for white-label processing. OEM factories, which bear the R&D burden, mostly lack the ability to deeply develop user needs, and more often adjust ratios or recombine raw materials, leading to product homogenization. Multiple new brand founders told 36Kr that companies sign exclusive agreements with OEM factories, but this exclusivity is only within a limited scope because startups have limited strength, and factories are mostly OEM (formulas are basically public, "just a matter of sweetness level"), making complete exclusivity impossible. Chinese OEM factories are still at a stage where OEM capability far exceeds ODM capability. If capital does not burn this track, many brands will naturally die. According to 36Kr, the domestic functional food industry is relatively weak in both basic and applied research. Wang Xiaoxia, founder of Jieni, gave an example: for probiotic products, many OEM factories do not understand "water activity" and cannot accurately monitor it, which is a critical control indicator for probiotic product activity. Moreover, in probiotic products, there are more important interactions between different substances. Nestlé's experts and teams have invested heavily in screening and controlling the glass transition temperature of materials; only those truly dedicated to technology and products will study these. "If you just use the snack-making approach, there's no barrier. If I have money, won't the OEM factory make it for me?" A product R&D head at an upstream factory said bluntly: "We dare not buy domestic plant extracts because the extraction process is not standardized and the extraction cost is unclear." The elastin used in his factory is made by Japanese companies and bought from Japan. Many foreign raw material suppliers are willing to invest decades in in-depth basic research, then form relevant clinical validation data and papers, and finally promote globally for commercial product landing. "This is a long cycle; without patience, it won't work." Even if you don't innovate from scratch but just make minor adjustments, the cost is not low. The product R&D head of Bear KoKo (a functional food brand under China Resources Sanjiu) told 36Kr that the white kidney bean blocking tablet went through over 70 rounds of sampling, with the first version lasting nearly half a year. The team did not change the raw material ingredients but made targeted formula blocking ratios based on Chinese dietary supplement standards, while balancing taste, texture, and ensuring effective ingredients are not lost, finally finding a delicious and effective solution, then conducting user trials, repeatedly polishing, with each sampling costing extremely high time and labor. Domestic research on functional ingredients is not very deep; more is processing. "A startup brand with a little financing to invest in R&D definitely cannot afford it because the input-output is very slow." Therefore, new brands generally fear innovation in products, and if the team lacks R&D professionals, it is easy to step into the regulatory red lines of health food laws. While product innovation is difficult, the "function" of functional foods often seems questionable. Due to the gap between the allowed addition amount and the amount that can actually achieve the effect, coupled with individual physical differences, the product's perceived effect has "uncertainty," is hard to quickly perceive, and consumers find it difficult to persist in taking it. Worse, it's expensive. Take Huaxi Bio's first domestic hyaluronic acid drinking water "Shuijiquan" as an example: a 420ml bottle is priced at 8.9 yuan on Tmall flagship store, with promotional pages showing each bottle contains 83mg of food-grade Huaxi hyaluronic acid. Based on the publicly available 2018 average price of 1258.36 yuan/kg for Huaxi food-grade hyaluronic acid, the cost of hyaluronic acid per bottle of "Shuijiquan" is only about 0.1 yuan. An investor was puzzled: "That functional drinking water claims to have expensive ingredients and can sell for over 8 yuan. How many people can afford to drink it regularly? China's consumption upgrade hasn't reached that stage yet." Looking at the currently popular functional sleep gummies, the GABA raw materials in products from Buffx, Wonderlab, and Nelo are all purchased from biotech company Huaxi Bio. Huaxi Bio's 2021 first-half financial report shows that other bioactive raw material businesses (including hyaluronic acid derivatives, GABA, ectoin, ergothioneine, etc.) saw revenue grow significantly by about 106.10% year-on-year, with a gross margin as high as 73.03%. With efficacy difficult to verify, prices not "rational," and such high profits throughout the industry chain, it's hard for this industry not to be criticized. When products lack innovation and differentiation, marketing often becomes important, but this path is also difficult. "Front-end innovation is already hard, and we still need to make breakthroughs in marketing," is the sentiment of a brand founder. Since 2016, health food regulation has shifted from a registration system to a dual-track system of registration and filing, shortening approval from 2-3 years to a few months and simplifying document requirements, but almost all brand founders say that in practice, the production, sales, and promotion channels of functional foods are still strictly controlled by various parties. A brand founder told 36Kr that the concept of "enzyme" has been exaggerated by many unscrupulous merchants as a weight-loss concept, misleading consumers, leading e-commerce platforms to restrict such keywords, making it difficult for merchants making genuine related products to operate normally. According to industry insiders, some dietary supplement companies on Douyin do have the problem of "high ad consumption but low output," because the platform has not yet found a middle ground that meets both regulatory standards and brand demands, making it difficult to provide very detailed and unified advertising standards for brands to know which materials are investable. Li Zhongmin, investment partner at Yuankun Venture Capital, told 36Kr that when you emphasize the "functional" category rather than the "food" category, you need to invest heavily in traffic acquisition and market education. "And young consumers' attention to new things is particularly scattered. Once you stop advertising, or if the product strength doesn't give them the feeling they want, the brand will be immediately abandoned." The Return of Common Sense Not as useful as health products, nor as tasty as ordinary food, where is the next stop for functional foods? Li Zhongmin shared his view: There is a progressive classification among health products, functional foods, and ordinary foods: if the body really has problems, the first consideration is medicine; when you don't need such strong effects, it's health products; further "lighter," it's functional foods with some functional ingredients added to food. Regarding functional foods, whether they are effective is not entirely certain; Western countries may stay at this stage, but China, influenced by traditional Chinese medicine, will evolve functional foods toward the concept of medicine and food homology, developing corresponding products. "For the functional food industry, from now to the next few years, what we see may just be a transitional stage," Li Zhongmin said. Benchmarking the Japanese market, user demand is real, but it is difficult to force maturity with capital in the short term. In the current cold capital environment, everyone needs to return to common sense. For example, the understanding of "repurchase rate." If the repurchase rate is high, it means the product meets user expectations and solves their real needs. But "repurchase rate" can also be polluted. "If you invite Lao Luo to live stream twice a month, the repurchase rate will definitely exceed 50%, but that's Lao Luo's repurchase rate, not the brand's," a brand founder told 36Kr. His approach is to wait until all related models stabilize before considering live streaming actions. Another brand founder holds the same view: large-scale live streaming and private domains can increase product repurchase rates, but this is actually a false repurchase rate. In contrast, "initial conversion rate" is a relatively overlooked but crucial indicator. "Initial conversion rate" refers to whether consumers recognize the concept the product promotes. If a product is exposed to 100 users and 17 purchase, it means those 17 users agree with the product's concept. "Take Snickers as an example; regardless of its taste, its ads have deep scenario thinking and do hit many users' hearts." LemonBox founder Weng Binbin believes that new brands mainly target the 25-35 age group, which emphasizes brand form, so only by "making your own concept in the product" and appearing at reasonable prices in reasonable channels can you capture young consumers' minds. Where to find traffic has clearly become a core proposition for new brands starting online. A founder of an oral beauty brand told 36Kr that new brands still have significant growth space on Douyin, and Douyin has increasingly high requirements for material quality; only truly valuable materials can perform well in promotion, so focusing on building a quality content team is essential to enjoy Douyin's dividends. A possibly not-yet-obvious change is that this wave of new brands is moving from pursuing "formal correctness" to thinking about users' real needs, whether physical or psychological. Minayo founder Hu Ran shared an observation: in earlier years, searching for nutritional products for children on e-commerce platforms might lead to "Growth Happiness," and for adults, "Centrum"; but now consumers tend to search for specific ingredients like Vitamin B or Vitamin C. This shift signals that consumers' ingredient awareness is improving; whoever can first associate ingredients with their brand will be the first to seize the current market opportunity. Compared to the fierce competition in the functional food track, the more serious new consumer health products are less crowded. "China's health product industry has existed for over 20 years, and the health needs behind it have always been there, so what we do is simple: rejuvenating traditional health products." Xu Yuanheng, founder of unomi, told 36Kr. As an oral beauty brand targeting Gen Z, unomi has had monthly sales of nearly 10 million yuan since April last year, with positive net profit. "Investing in consumption is often related to intuition. If you feel on the first day that a category isn't very big, it probably won't be very big in the end. Just relying on a meal replacement powder to become a 10-billion-dollar company sounds strange. In many cases, investors should stand from the perspective of ordinary consumers and subjectively feel it," an investor told 36Kr. To do well in functional foods, perhaps one should start by accepting that it is "not such a big business." Are you "watching" me?