Product Innovation: Fruit Tea & Soft European Bread Pairing

Nayuki introduced the “fruit tea and soft European bread pairing” as its signature product to the market. Although product pairing has been widely used in the retail industry, it was quite an audacious move for Nayuki to make. Most of Nayuki’s competitors in the industry, including Starbucks and Hey Tea, choose to stay “focused” and stick to one category only, no matter it is coffee or tea. With unique insights into the psychology of Chinese female consumers, Nayuki’s founder Peng Xin, however, considered “Fruit tea & European bread” a great combination that meet “two kinds of needs in a single scenario” and the sales number of the soft bread take up no less than 50% of Nayuki’s total sales nowadays.

Source: Sina Weibo, Nayuki’s soft European bread and tea pairing

Behind the success of Nayuki’s product innovations are its high-quality raw materials and stable supply chain. In order to ensure the quality and distinct taste of Nayuki’s products, Peng Xin and her team have visited and signed contracts with several renowned tea plantations across China and Taiwan. Nayuki has also built its own factories to manufacture fruit in season, which further enhanced the stability of its supply chain.

Aesthetic-Centered Marketing

Although China’s new style tea market is quite a large cake to share, getting a slice of it is not easy considering relatively low barriers to enter the industry and fierce competitions from both local and foreign companies in China. According to the white paper for 2019 new style tea consumptions co-published by Nayuki and 36kr, about half the consumers of new style teas in China belong to the post-90s generation and female consumers take up 70% of the market. Targeting a young and female-dominated market, Nayuki has been taking an aesthetic-centered marketing approach.

Nayuki has been working on a branding project called “Nayuki Cupseum” since 2019, which has been quite successful so far. The concept of the project is to exhibit artworks made by world-renowned artists using Nayuki teacups. So far, Nayuki has held three series of exhibitions which include “Big hugs to you” collaborating with American artist Christopher David Ryan during May 2020, “Being A Cat” with Pepe Shimada and “Ni Hao New Year” with Cinyee Chiu. Apart from the “Nayuki Cupseum” galleries, Nayuki cooperated with the 50th Anniversary of Anderson Lifetime Achievement Award in September 2019, during which every store would exhibit paintings of “The Ugly Duckling,” “The daughter of the sea,” and “Gorrila.”

Source: Nipic, Nayuki Poster

“Marketing isn’t just about advertising. Product development, space design, developing new techniques are all marketing,” according to Peng Xin, the founder of Nayuki. The emphasis on Nayuki’s aesthetic appeal is reflected on its physical stores as well, from lighting, to color tone, to location, all tailored to the needs of young female consumers, such as taking pictures inside the store to publish on social media. The in-store experience seems to be no less important than the quality of the tea itself for consumers. Nayuki is selling more than a cup of tea, but a whole package of experiences from purchasing online, to picking up at the store, to taking a selfie with its beautifully made teacup, which at its core is a reflection of a lifestyle ideal consumers have been longing to have.

Nayuki’s Cultural Appeal: The Arts of Cultural borrowing

Nayuki might strike consumers as a Japanese brand, but it is in essence a local Chinese company that borrowed a Japanese name. This should not come as a surprise as this kind of cultural borrowing is hardly an uncommon practice, especially in the fashion industry. The rising of Nayuki implies the strong influence of the Japanese cultural exports among Chinese consumers. Although tea-drinking culture originated from China and later exported to Japan, the Japanese tea-drinking culture has evolved a system of its own and become quite different from the modern-day Chinese tea-drinking culture. Therefore, taking on a Japanese brand image has facilitated Nayuki’s success by differentiating itself from other local Chinese beverage brands.

Post-Pandemic Age: What to Expect for Nayuki and China’s New style tea Market?

Although the coronavirus has been contained very well in China, consumption patterns have largely shifted from offline to online, which might continue to be the new normal until the vaccines come out. In the meanwhile, new challenges have been raised for the China’s new style tea market and brought new opportunities for Nayuki as well. In response to consumers’ expectations for a higher security standard, Nayuki has adopted a new operating mode that requires no direct human contact. According to Baidu index search frequency data, the search volume for Nayuki peaked in middle of the pandemic on April 1^st, during which Nayuki brought 3,000 free drinks to cheer up the doctors and nurses at the Leishen Mountain hospital in Wuhan.

Data Source: Baidu Index, Search Index for Nayuki from January to August 2020

The pandemic has also rushed China’s new style tea market into digital transformation. During the period when Covid-19 was at its peak in China, Nayuki offered free delivery for all online orders. As a result, the total number of transactions completed on Nayuki’s WeChat mini program have doubled compared to the previous year. However, such transformation requires both financial and technological support, which might imply a reshuffle of the market. Although major companies such as Hey Tea and Nayuki could probably make through the pandemic with enough funding to adjust to the new normal, small beverage stores might find it very difficult and eventually exit the market.

What we can learn from Nayuki’s success

• Nayuki conducted market research to precisely identify their target consumers, then focused their marketing tactics on them. Nayuki has a clear brand positioning that targets 25 to 29 year old women. Nayuki’s marketing campaigns such as the “Nayuki Cupseum” projects and art exhibits with the Anderson Lifetime Achievement Awards are both tailored to satisfy the cultural and aesthetic needs of a young female audience.
• Nayuki differentiated itself from the myriad of other new-style tea brands on the market with its product pairing and store aesthetic. Additionally, the brand borrowed a Japanese name which is unique and stands out.
• The tea-store used an O2O marketing strategy to establish online presence, which was especially useful during the COVID-19 pandemic. Consumers are raising their standards for safety and convenience, which is particularly important for brands to establish online presence during a pandemic. Relying on third-party platforms like WeChat, Nayuki realized digital transformation and made it through the pandemic.

Author: Isabella Li

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This article The success of Nayuki, the Chinese new-style tea store going global is the first one to appear on Daxue Consulting - Market Research China.

Bayer AG is a global enterprise with core competencies in the life science fields of health care and agriculture. Bayer, headquartered in Leverkusen, Germany, is one of the most famous companies among the world’s top 500 enterprises. In 2019, the total number of Bayer’s employees was 103,824 and the annual sales were 43.5 billion euros. Bayer’s products cover high polymer material, medical and health products, chemical industry products, and agricultural products. Bayer puts a lot of emphasis on its research and development. Its capital expenditures amounted to 2.9 billion euros, R&D expenses to 5.3 billion euros in 2019.

Bayer’s current state in China

Bayer entered the Chinese market in 1982. Bayer has operated its business in Hong Kong, Taiwan, and mainland China. Currently, China has become one of the largest markets for Bayer globally and an important driver for the growth of Bayer’s business. In 2019, Bayer’s sales in Greater China reached 3.724 billion euros. As of December 2019, Bayer has more than 9,000 employees in Greater China.

Bayer is deeply rooted in the Chinese market

Source: Quanjing, China’s pharmaceutical industry

The Chinese market is a crucial driver of Bayer’s growth. Bayer complies with the policy and regulations of China, exploring its business in line with specific rules in China. Two examples that Bayer China firmly supports China’s regulations are as follows.

Bayer cuts price largely to win contracts with the Chinese government

In 2018, China’s government launched the centralized procurement program, in order to lower drug prices. A lot of drug companies are invited to place bids after the number of different kinds of drugs that will be needed in the public hospitals are determined by China’s health care security authorities. Under this centralized procurement program, the drug company which offers the lowest price will become the supplier of a certain drug. The Chinese government aims to reshuffle China’s pharmaceutical industry through the price war, and both foreign and domestic players have to come up with survival strategies to secure the market.

According to Chinese media, in January 2020, 77 pharmaceutical companies won contracts with the government by cutting drugs’ prices by 53% on average. Among them, Bayer made a big offer in the bidding. For example, it cut the price of its off-patent acarbose for diabetes (which affects a large part of the Chinese population) by almost 90%, and the new price is 78.5% lower than the price ceiling set by the Chinese government in December 2019.

By adopting an ultra-low-price strategy in the price war, Bayer hopes to expand its market share of some drugs like acarbose. In this way, it can secure its Chinese market and earn more profits in the future. For Bayer, the Chinese market is so important that it worth taking the large price cut to support the price war launched by the government.

Bayer fired an employee for breaking home quarantine rule during COVID-19

Bayer fired an Australian Chinese employee for breaking the coronavirus quarantine rule in China. In March 2020, a video of the woman gbreaking the home quarantine policy to go on a run went viral on the Chinese social network and drew widespread criticism from the public.

Bayer’s response reflects that it firmly follows laws and regulations in China, and supports the coronavirus rules of the Chinese government. This decision has been widely applauded by Chinese netizens and the company is considered as responsible and compliant. Hence, Bayer China has built a positive image through this crisis. 

Boosting innovation and advance digitalization

In 2016, China announced the Healthy China 2030 Blueprint. Currently, China is speeding up the initiative and improving patients’ access to medicines by increasing their affordability. “With the mission of helping China achieve health goals, Bayer China will make unremitting efforts to bring innovations faster to Chinese patients and provide more complete medical services.” Jiang Wei, executive vice president and managing director of Bayer China, said.

Bayer strengthened R&D and innovation

Under the Healthy China 2030 plan, China has promulgated policies from various aspects to increase support for the development of innovative drugs. Many pharmaceutical companies, including Bayer, are seizing opportunities and making full use of policy support to accelerate the approval of various new drugs in China.

Since 2017, Bayer has brought 14 innovative drugs to China. As an important part of the “China Innovation Strategy”, Bayer is continuously accelerating the introduction of more innovative products into China through the China R&D Center. The China R&D center, established by Bayer Health Consumer in Qidong, Jiangsu, is also actively carrying out category innovation, and enhancing the technical support and protection level of existing listed products.

At the same time, Bayer establishes long-term strategic cooperation with China’s top scientific research institutes including Tsinghua University and Peking University and strives to apply more cooperation results to the in clinical practice. Also, Bayer China is exploring cooperation opportunities with Chinese pharmaceutical companies and biological start-ups, leveraging the complementary advantages of both parties to fully develop innovative results. For example, Bayer and CStone Pharmaceuticals collaborate to evaluate D-L1 monoclonal antibody CS1001in combination with regorafenib as a treatment for multiple cancers.

Bayer China embraces digital transformation

Source: creamandpartners.com, Bayer cooperates with VeChain

Bayer has seen great potential to foster digitalization in China’s pharmaceutical industry, and has sped up its digitalization.

In 2017, Bayer teaeds up with Alibaba Health (AliHealth) to provide Chinese patients with healthcare services ‘at their fingertips’. At the same time, Bayer China can follow health trends of Chinese people and better satisfy their self-care demands by leveraging the big data advantages of the Alibaba platform.

Bayer re-started the ‘Bayer G4A China’ program in 2019, a global digital health startup partnership program to select Chinese startups that have digital potential. In 2019, Bayer China forms a co-operation agreement with Yaoshibang, a domestic online B2B pharma platform, to offer a new digitized medicine and health services solution in China. During this collaboration, the parties will exploit their advantages in the fields of medicine, health, and the internet.

In 2020, Bayer announced its partnership with VeChain, a pioneering public blockchain startup, to co-establish CSecure, a blockchain-based traceability platform for drugs. This new blockchain-powered solution will allow Bayer to track clinical drugs across the supply chain digitally.

Bayer considers digitalization as its vital strategy in China’s pharmaceutical industry. Digital transformation will enable Bayer to provide patients with new drugs and personalized treatment faster, improve the efficiency of healthcare service, and ultimately better serve patients. 

Bayer’s China Vision & Mission

Source: Bayer China’s Weibo, Bayer’s logo

With its strong marketing strategies, crisis management, and cooperation with the government, Bayer China devotes itself to provide better products and services for Chinese in the areas of health and nutrition. Bayer is a key player in helping China achieve the Healthy China 2030 plan, which makes the future outlook for the pharmaceutical brand’s development in China very promising.

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This article Bayer in China: How the Pharma giant gained the strong approval of Chinese consumers is the first one to appear on Daxue Consulting - Market Research China.

Full transcript below:

Welcome to China Paradigm, a show powered by Daxue Consulting where we interview season entrepreneurs and experienced managers in China about their business and experience in the country.

Matthieu David: Hi everyone. I am Matthieu David, the founder of Daxue Consulting and its’ podcast, China Paradigm. Joining me today is Philippe Ricard, the founder and still CEO of the restaurant called La Creperie. For those who have lived in Shanghai and now, in Hong Kong, and Vietnam as well, they all know La Creperie. That’s kind of the restaurant which we can call an institution because they have been in place for 13 years and, you know, when a restaurant becomes an institution when other restaurants around them have changed, when the Greek restaurants become French restaurants in front of you and all the restaurants are closing and opening again and they have different names, but they are still here. That is why I am calling those restaurants an institution and I went yesterday to your place in Dong Ping Lu to check the reopening a restaurant after the Coronavirus’s crisis. The restaurant, but also the people inside and how the place was. It is still the same; very nice lighting, very nice environment, a lot of decoration, music just at the right level in terms of volume and very welcoming staff. The only difference I could see is that change in opening hours and the fact that you insist on the fact that everyone has a green code in Shanghai, that they have this green card code. Anyway, I am not going into too much detail. Thanks for being with us. I am very happy to have you here and as I said before, La Creperie is for me a little bit like a well-known place like Starbucks because I can tell someone, “Let’s go to La Creperie.” I don’t have to send the address; I don’t have to tell them where it is. They know it and that’s why I am calling it an institution. Thanks for being with us again, Philippe and so what is the situation of the restaurants now?

Philippe Ricard: Thank you for all the nice words about La Creperie. It’s true that we’ve been in Shanghai for more than 13 years. It is also pleasant to hear that we are kind of an institution. At least we try to really do our best to always provide quality in terms of products and service that is very stable, and I think that’s what we have been recognized for and I think this is what makes us successful today in running a crepe restaurant in Shanghai. I am not here to pretend to be something that we are not like fine dining, but what we try to do is to provide a food experience, as we say to our customers. It goes to a lot of details like the music, like the small salt and pepper you would find on the tables and so that’s what we are trying to do. We are trying to make people travel when they come to our restaurant with the food and the environment.

Matthieu David: Could you tell us now, more about the number of restaurants you have? I didn’t say precisely how many restaurants you have and what kinds of restaurants you have. As far as I understand, you have your first one in Shanghai; two with this specificity of crepes, which is like small pancakes, for people who know French food and for people who don’t know, I will explain. It is very light pancakes from Britany, and you can eat them for breakfast, lunch, and dinner inside different ingredients. You have two of them; one is in Dong Ping Lu, one is in the city center and you have La Cabane, which is more kind of food from the Alps if I understand correctly, with fondue and so on and then you have one in Hong Kong and one in Vietnam as well. Is that correct?

Philippe Ricard: Yes, that’s right. Three restaurants in Shanghai and two La Creperie and La Cabane, which is like a restaurant that specializes in food from Savoy; so, the French Alps. We have one restaurant in Hong Kong now. We had two and we had to close one last January, but we were kicked out by the building because they were renovating the whole thing. So, we are now looking for some new opportunities. Other, we have one restaurant in the city, but that has been open already for many years. We opened in December 2008.

Matthieu David: And you are living in Hong Kong?

Philippe Ricard: Yes. In fact, I’ve been based in Shanghai for 14 years. I have been in Hong Kong for two years. It is also nice to see the city from the inside.

Matthieu David: Today is the 20^th of April 2020 and everyone is thinking about one thing, which is the crisis sparked by the virus and the first businesses which have been impacted are restaurants, coffee shops, places where you have to go to consume something, even though you can deliver more and more. I got some statistics. If we look at the restaurants in China, it is about two-thirds of them that were closed and about coffee shops, it is about 80% (learn more about the post-lockdown situation for restaurants in China). The right statistic is I think 85 or 88%. Anyway, it is massive.  That has lasted for some time, for weeks, and even when you went back, I understood form actually what your restaurants’ information that you open only for lunch or only for dinner. How was the situation for you, more in detail? How has it been financially speaking, because I believe that what happened to you can very instructive for people currently in the West? In France, Europe in the U.S; they have to know how to react, what to do when reopening a restaurant after the Coronavirus’s crisis, and how to soften the loss maybe with online delivery or maybe by readjusting and doing different things (learn more about the delivery sector during the outbreak in China)?

Philippe Ricard: Yes indeed. It has been a terrible time. Mostly for restaurants, it has been a really challenging time to find ways to survive, but I think somehow we are lucky because our restaurant has been in Shanghai for so many years. So, we have a cash flow that helps us to survive this time. Also, we have a good team and I am very happy and proud of them because when the time came when we had to close and to shut down the restaurant for a few weeks, it was not easy and until we started again, they all agreed, for example, to risk the time they would be working on the salary that they would get in proportion and this is something that helps our business. So, it is everybody’s effort that makes the difference in the end. This is something that is going to help us to rebuild and to face the situation.

Matthieu David: What was your first reaction when you knew you had to close down? Was it that you would you go to contact someone to see how you could deliver more food, was it that you would send an e-mail to all your past clients? I am not sure if it would be possible to contact them all on WeChat or whatever to tell them, “We can deliver to you” or you had to close down the whole kitchen? What were your first actions?

Philippe Ricard: In fact, we didn’t have a choice. We had to close everything. The kitchen had to be closed. We couldn’t do any delivery for a long time and then finally, when we could reopen the restaurant after the Coronavirus’s crisis , that is one of the main changes that we decided to operate, is that we wanted to push even more the delivery because that is one way to also increase our sales and making possible the fact that we are going to cover all the fixed costs, I would say. It’s working. We have done the same in others, where we faced the same situation and where delivery is becoming more and more popular. There are many restaurants I know who didn’t do deliveries before who has started to do it now. In La Creperie we have always been very cautious with delivery because we wanted to make sure that we keep quality in our products that is really at the highest and when you do deliveries, sometimes when you do control, it means that at the end at the customer’s place, it could be different, but we are taking this time to rework our recipes, our presentation, our packaging to make sure that the product at the end is still the same. The feedback we get at the moment is very good. So, we are going to push even more this possibility of delivery.

Matthieu David: Actually, very interesting to see how you thought about deliveries, not only by delivering just the product you eat but also the packaging and surroundings. Would you mind sharing how you could actually give a similar experience to people who go to your restaurant because they don’t only go to your restaurant for your food? There’s such a beautiful environment. When you go to La Creperie, you feel Brittany. When you go to La Cabane, you feel you are in the French Alps. You have paintings and you feel you are in the French Alps. Have you thought about how to convey still this feeling in some way, also through delivery?

Philippe Ricard: That’s a very good question. That is very challenging when running a crepe restaurant in Shanghai. I don’t know honestly how I could make this option, but I think that is part of the deal when you go to the restaurant you come for a real experience, and I am not sure we could find a way to make it the same at your place. What we do I beside delivery, if the people really want to have the full experience is that we do catering and it means that we can go to a person’s place with our machines and a chef and then we would make the crepes at their place.

Matthieu David: This is new or post-virus?

Philippe Ricard: It is not new, but this is something that we have been doing in the past sometimes, and now we are also pushing it, let’s say because of some people like the city experience and of course we are not going to do it for one or two people. That would be too costly for them, I guess, but if there is a group offer of let’s say 30, 40 people gathering, which becomes possible now I think it’s something that many people could be interested in because what the people like is that they can order on the spot and we do the crepes on the spot in front of them and so there is like illumination. So, if there is like a birthday party, for example, or any kind of celebrations, people would be very happy and then t is not only a question of serving the food there, but we can also allow the people to try to make the crepes, which is also fun. The people really enjoy that.

Matthieu David: True. So, we talked about the time during the crisis and you had a spot where you can compare three different locations; Shanghai, Hong Kong, HCMC and how do you feel the crisis was managed differently from different cities and what tips do you get from those cities that could be useful for people now in Europe or in the U.S while looking at the time when people will come back or things will go to a new normal because we know it’s not going to go back to normal. There is a new normal.

Philippe Ricard: Yeah, I think that is a very complicated question to answer. I think the visibility today on the market is still not clear. The markets are different between Hong Kong and Shanghai, even in terms of response from governments on the restrictions. In Shanghai, it’s been very effective because we had to shut down. In Hong Kong, we didn’t have to shut down, but we can still do deliveres and takeaways.  In Hong Kong, we didn’t have to shut down. We could have some customers come in, but of course many just didn’t want to go out. So, the business was very little. Now, in Hong Kong, the restriction makes it that we cannot have more than 50% of our restaurant full. So, it means that 50% of the tables are unoccupied and so it makes the business very complicated because of course, the sales are still not high enough to cover all the costs.

Matthieu David: How many people do you need in your restaurant to cover the costs or to be two-thirds full or what is the level?

Philippe Ricard: I think it’s that we need to be almost full because the cost is so high for the rent. In Hong Kong, if you don’t have a business that is really working very well, it is very hard to adapt and to keep alive, so you need to be good at rent negotiation in China. So, yes so, we just hope that it is going to come back soon. There is a good sign and there are good signs. Last weekend, for example, and this weekend it was very good. We had many people come in and so it shows that we are in the right direction. We just hope that there won’t be a whole new wave of cases coming after reopening a restaurant after the Coronavirus’s crisis . That’s always the risk. We have to live with it. In Shanghai, we see that it’s already one step ahead, compared to Hong Kong. From the feedback I have because I have in fact, not been to Shanghai for several weeks now, but the feedback from my team shows that more and more people are coming back to the reopening the restaurant after the Coronavirus’s crisis . People are willing to react and enjoy it a bit more. They feel less at risk. I understood also that the westerners maybe are keener on going out than the locals who are more cautious. We believe that it’s going to come back probably not as like a big after a crisis, but probably something more progressive, but it is coming back. I think there is a trend and I am not so convinced like many people are saying, “Well, things would be very different.” I think most of the things will be the same as before because people have a tendency to forget about the problems, which is a good thing because there are so many problems happening. If we have to remember all of them all the time, that would be terrible. So, I think in a country like China where the economy is still good at developing where I think everybody is still enjoying a better life the following year. I think things will come back to what it was before. That is my opinion. Of course, there will be some little changes happening, but it is not going to affect the global change in the economy of the country. Of course, there are problems, but China is strong. It is not going to be a big problem, in the long run, let’s say.

Matthieu David: You make me feel that China is following a V curve like when it is down and coming up and Hong Kong is like a W curb because it had problems two months ago, then things went back. I was in Hong Kong a year and a half ago and things were pretty okay, actually. People were going to the gym and everything, like normal and then now it is still more strict again. So, indeed we see a few different perspectives from Hong Kong as well as China. I’d like to go back to the beginning because that is not the first crisis you went through when running a crepe restaurant in Shanghai. In 2008, just as you started actually. 2010 was not that good either. So, you went through different crises, but I would like to go to the start. You had no experience in the restaurant in 2007 and you actually worked before in optics and glasses. Would you mind telling us what was in your mind at the beginning to running a crepe restaurant in Shanghai? Was it opportunistic, was it something you planned for some time and then you were able to put everything together? How was the beginning?

Philippe Ricard: In fact, yes, I am not from the business at the beginning. I was in the optical business. I was sent by my company in France to open a subsidiary in Shanghai in 2004. I was in charge of all the regions of Asia Pacific and so some subsidiaries and some distributors. In fact, I was even before that, I was traveling a lot because I was a director of this company. I think at some point in time, I wanted to stop traveling so much and still meet people because this is what I love and one of the ideas I had was that maybe I should just settle in Shanghai, stop traveling all around and make a business where the people will come to me and rather than me going to see them. I studied different projects and very naturally I would say, one that really popped up was running a crepe restaurant in Shanghai because I am originally from Brittany and Brittany is the region in France where we do all these kinds of crepes and I knew at that time there were a lot of people missing this food in Shanghai. So, I decided to change my life. I went on to be a new entrepreneur, but I did it with knowing a lot of people already in Shanghai who could really support me in running a crepe restaurant in Shanghai.  I think that is something that was really important at that time because I had already been in Shanghai for several years. So, I had some network. I had already opened a business and so I knew how to do it, but yeah after I had two neighbors and that was also quite a challenge, but it was really a passion and since then I never give up on this.

Matthieu David: What are the other ideas you were looking at and how did you compare to them?

Philippe Ricard: Well, the first idea I had was to open a bakery because at that time there were not so many people talking about bakeries; French bakeries and I learned that there was probably at the time a big French baker coming to Shanghai with big money and the will to invest and develop. So, a few people I knew at that time told me, “Maybe it’s not a good idea right now because it would be too competitive for you.” I decided to quit even though my grandfather was a baker. It was not easy to forget that idea. Then I had the second idea, which was to open a fine grocery. So, in fact, there was also no fine grocery in China at that time. So, I went to France to find a lot of products, but also there I had some friends in the logistics and they told me, “Well Philippe it is not easy to import products in China. Many times, they will be stuck in the past tense and then if you have perishable goods, then for sure it is very dangerous. You have a big risk that you are going to lose everything.” The rules change very often too. So, finally, I decided to also give up on that project. So, the shared project was La Creperie and I said, “Okay I am not giving up on this one. I am going to go to the end of running a crepe restaurant in Shanghai.” That was the beginning of that story.

Matthieu David: Got it and how did it evolve, the businesses from 2007 until now? I see a couple of evolutions in your sector and tell me if I am correct or not. One is clients, many foreigners, many French who maybe have two-thirds of Chinese now. I went to your restaurant yesterday at Dong Ping Lu and I think it was like a strong half of Chinese. You have 4/5 people eating alone, actually and Chinese and then you have two or three couples of friends eating, and you have a French family. So, it was quite mixed, but it was a strong half of Chinese people. La Cabane was similar; strong half or two-thirds of Chinese. I believe that is one and the second element is that when we talk about 2008, we all think about the crisis, but in China, for food and beverage, it was another crisis. When this scandal happened in China, then China became much stricter on food and food safety, controlling much more. That started in 2008 and that’s another evolution as well on how to running a crepe restaurant in Shanghai to have a much stricter rule than in the beginning (learn more about the 2008 food crisis). Can you tell us your perception of what is the evolution of running a crepe restaurant in Shanghai from 2007 up until now?

Philippe Ricard: Yes, it’s true that there has been ups and downs because of the crisis, but I think what our strengths were, was that we were able to adapt quite quickly to our environment because we remained a small business. So even I opened all the restaurants, I try to manage my business with a lot of flexibility in trying to adapt very fast. I think that’s the main key. I have also tried to do all the time is we are always focusing on quality and quality is not about only the things that you see in the surveys or in your dish. It is also what is behind in terms of process and in terms of groups, in terms of knowledge of our staff, of training. I think it is very, very important that all the things that the customer doesn’t see are also very well organized and controlled when running a crepe restaurant in Shanghai. I think this is very important for me because I come from a background and a big experience in Johnsons & Johnsons, for example. It is very house oriented. It is a company with a lot of ethics, and I think this is something that for me is very important. It is not only superficial. I think what we try to do is even in the back office, I would say, in the kitchen everything we do, we try to make it very clean, we try to make it well done as probably what a customer is expecting it to be. So, after I was also lucky to have people with me who are very strong, who are very competent, who are in different fields and that, of course, is helping a lot for the scaling up a restaurant chain in Asia. It is not Philippe alone. It is Philippe and his team. Without a strong team, it would be also very difficult to scale up a restaurant chain in Asia.

Matthieu David: How have the clients evolved? Is it true to say that it was mainly foreigners and now it is much more mixed with Chinese and what is the perception of your restaurants towards Chinese because I am not sure if it is very well known La Cabane from Brittany is in China, right? So, you have to talk about it to explain it. What image do they have of your restaurant?

Philippe Ricard: I think we have a very good mix now of customers; foreigners and locals in every city where we work and it’s really true in Shanghai. At the very beginning yes, we had mostly French people come in and then more and more foreigners and then locals. We can even see now that in one of the restaurants it is like 50/50 maybe. It took some time for sure to make the people know about our products, but I think with the time I think we were able to gain more confidence, more I’d say people get to know our place from friends. There are many, for example, French families or French companies who are bringing their staff or their friends to our place and that makes our place more known from the locals. That’s for sure. Something that I really enjoy is that when they come to our restaurant, we have a big map on the wall and many people; whether they are from Brittany or they would know Brittany because they go there for their holidays in France, they love to show to their Chinese friends, “Oh, this is Brittany.” They tell a lot of stories about it and it is really nice because this is why I opened this restaurant. There is a big culture behind it and there are many stories to tell about this region of Brittany and the culture.

Matthieu David: You found something in your box to deliver and it came with a map to Brittany. Another question I had is, I feel that the scaling up a restaurant chain in Asia is not easy, but you did it with three restaurants and actually, you did it internationally with Vietnam and Hong Kong. How do you scale up a restaurant chain in Asia because I feel you need to restart again? You need to find new clients; you need to find a new place. The only thing you get from your experience in Shanghai is intuition, you have the sourcing of food and material because also one thing that people may not know if they have not been in your restaurant, it is very well decorated and since I know the restaurant; the chairs are the same. They are the same style. I believe you have to replace some of them, but that’s such a style and as you said, the paper is very Brittany and so on. So, you have those assets, but that’s it. You don’t have more skill. When you sell a product, you can sell it everywhere. You just have to export it to go through the borders and so how do you scale up a restaurant chain in Asia? What is the use of scaling?

Philippe Ricard: Yes, there are many people who told me in the past, “Philippe, why don’t you centralize a certain number of services or open central kitchens” or this kind of thing, but I have never been much into this because I think it increases the cost a lot and before you do this, I think you need to have a lot of restaurants open to making it really efficient. I think when you work in different countries it is even more difficult. So, we don’t make much savings because of the scale, I would say. We have to restart a bit from scratch; everything in every restaurant or every city. We are quite strong anyway at controlling our cost. The experience from the first restaurants is at first, rent negotiation in China, for our products, with our suppliers and we know also better where we can get the quality we need. We sell a lot of cider; apple cider because this is the main drink in our restaurant. I have suppliers in France from whom I order directly because of the volume that we do; we are bound to get some good prices. So, that is one thing you can do.

Matthieu David: I’d like to stop on one thing. You said you learned how to do rent negotiation in China. I think that’s a topic that would interest a lot of people. How do you negotiate with a landlord in Shanghai? To give a bit of an idea, we did some research on the cost of renting restaurants and when we look at another restaurant; an Italian restaurant, it is about 88 000 NMB for 100 square meters, per month and it represents something like 16-20% of the revenues. That is something I have and it’s about 15-20% of the revenues in the rent and that is much more than New York, for instance, but on the other hand, the labor cost is lower. Could you tell us how you do rent negotiation in China? Do you sign a contract for 10 years or is it stable with an increase every year or what is the way of negotiating?

Philippe Ricard: I think it’s a very complex strategy to get the best from the landlords. It will depend a lot on the locations and on the size of the place. One chance we have is that we have quite a unique concept and so it happens also regularly that some locations are asking us to come or if we are competing with some other restaurants or other shops, other brands; we have them because first, we are not new on the market. We have some experience and we can show that our business is profitable and then it means that we can pay our rent. Also, we are stable in the timing. So, that is what some landlords are looking for because we are not a challenge for them. We don’t pay late. They don’t need to find another tenant. We can show this. Also, I think I have also a background from business and so, of course, one of my duties, when I was in other companies, was to negotiate and so I have probably some skills from that experience. For every landlord it would be a different rent negotiation in China, I guess.

Matthieu David: Did you get a discount because of the crisis (learn about the government measures during the oubreak)?

Philippe Ricard: With some of them I would say, yes. With some of them, not that easy, but yes globally, we can manage.

Matthieu David: I interviewed a lawyer in another podcast we have called Daxue Talks. It’s another format where he told me that some people got one month rent for free when they were renting through the government or places owned by the government like for the month of February it was for free. Offices got a 20-30% discount on their rent for the rest of the year. So, is it something similar you are experiencing lie one month for free, one month, or lower rent for the rest of the year?

Philippe Ricard: Yes, in fact, again it depends on the locations. There are locations where we could get one month free. There are locations who say they will give something, but we are still waiting. Some gave some detail about what they would offer. We are still negotiating and still waiting for some feedback on this. We got some confirmation already, but we need more. I think it is very, very important. I think that the fight is everywhere the same for the tenants. If the economy, the environment is falling apart for some time, all the tenants need some support from their landlords because it is just impossible to survive, otherwise. In Hong Kong, we were lucky to have some subsidies from the government also, and so that is really helpful.

Matthieu David: Was money given to you, was a loan given to you? What was it?

Philippe Ricard: It was money given by the government in a very short time after the application It was really, really good. We were also lucky to have someone like Li Ka-shing, who is one of the richest men in Hong Kong who was also helping at some point in time the F&B business (learn more on how Li Ka-shing has helped the local F&B industry). So that is really good for us. Every small thing is welcome. In Shanghai, I know we also have some support from the government with postponing some payments. I guess they are also pushing the landlords to give some support and it is true that as the government in China is controlling a lot of real estates, then it is also quite easy for them to push it. So yes, we need all this help, for sure.

Matthieu David: You mentioned something I am very interested in. You said that some department stores and malls are asking you to join. They are calling you because you have been the place for some time, and they recognize you as a brand? So, that is something I had the feeling you have built a brand. What was your idea of building this brand? It was structured in your mind, initially or it came, it happened naturally that it was recognized as a brand?

Philippe Ricard: No, it came after. I think what I really wanted at the beginning was to build my restaurant and really enjoy the contact with all my customers. Many of them have become friends. That is what I really had in mind at the time, to enjoy the work, even becoming a waiter, a bartender. All the jokes in the restaurant, I just didn’t touch on the kitchen too much because I think it was better to have a real pro to take care of it. I was so much interested in being on the floor and talking with my customers and that is where I wanted to be. After I think it came quite naturally later on that I developed from the time when I opened the second restaurant in 2010 in Hong Kong. We were very successful from the beginning, there. Then we decided to open another one. Then one more and then it is true with the fact that I really wanted something different from one restaurant to another in terms of the image because I wanted the people to experience the same thing. I wanted them to really feel like they go to Brittany when they come to our place. So, of course, I tried to design a lot of things that would make the people travel and feel the same, even if they are in Shanghai or in Hong Kong and that’s the way naturally the bone came together.

Matthieu David: Did you get the trademark La Creperie in all those countries? I believe when something has lasted for some time and you are successful, you get copied with a similar name or the same name.

Philippe Ricard: Yes, La Creperie is a registered trademark. To copy is not only a question of making crepes. It is a full concept. I think people can easily recognize if it is a real one or a fake one because there are many details that people can see when they are in the restaurant and it is true that when they come to Shanghai or Hong Kong or the other, they would immediately feel the same spirit. They will see the quality of the dish. There are some brown, some ciders that we use and that is where we have some exclusivity and I think it is easy to recognize our brand.

Matthieu David: When you opened in Vietnam was it because you had someone over there who maybe worked with you in Shanghai and had to go to Vietnam or is it because you had the idea that the French community was big enough to start also in Vietnam? What was in your mind because it is far and complicated to run a crepe restaurant in Shanghai and in other locations. You have three countries to manage. You have different legislations, too. It is a very different way of managing the business.

Philippe Ricard: Yes, that’s right. I think I developed my business a lot at the beginning with opportunities, meaning that I had someone coming to my restaurant in Shanghai who loved La Creperie in Shanghai and he was not living in Shanghai. He lived in France, but his wife was Vietnamese. He had a son in the F&B business in France. Then he told me, “Okay Philippe, you know I love your restaurant. My wife and my kid would love to go back to Vietnam to work there and so do you think we could do something together?” That’s the way we approached that market. We made the study and thought, yes, indeed there were a lot of French people living there (learn more about our market research methods in China). It as a dynamic city. So, we thought it could be great. There is good potential in that city.

Matthieu David: What stopped you from franchising because that is a bit of what you did in Vietnam sort of franchising with your branding. When you do a franchise, you bring the branding. You bring the sourcing very often and the way to easily decorate your restaurant.

Philippe Ricard: Yes, so far it has been a kind of franchise. It works like a franchise even though I have some shares in every restaurant. I think what is important for me is beyond the franchise system is although the process that goes with that, I try to bring also in all my restaurants and that is something that is very important for me, is that every restaurant, even its… you can recognize La Creperie. They all have their own soul brought by their team, their manager, by the partners because I don’t want to just make a copy and paste. I think it is… I see the soul of the restaurant and that is very important. We are not fast food; we are not fine dining. We are a bit in the middle. We are a traditional restaurant and I think the contact with the manager or the team or the chef with the customers is very important. It creates a relationship that we love.

Matthieu David: Because you invested money and time into it, even if you may share the equity, what would convince you if someone comes to you to give him your branding, give him your knowledge and actually give him some money to start as well?

Philippe Ricard: There are several things which are important. I think the main point to scale up a restaurant chain in Asia is, to feel good with the person I have in front of me. When you start a business, it is going to be for many years. So, the money is, of course, important, but it is far from being everything. Money comes and goes. The person you have in front of you is going to stay there for a while and he is not going to change that much. So, it’s super important for me to have someone I can talk with, with very open and easy to talk to. Not everything is positive, I would say in business life and so there are some very complicated decisions to take sometimes and we need to be able to talk about them so we can move on in good conditions.

Matthieu David: You are talking about personalities. You talk a lot about the personality, but what makes you believe that a business plan is going to work, that it is going to be successful at some point, I understand that it may be for years, but at some point, it has to be successful otherwise it’s a waste of time and money. Do you come up with numbers, do you do research on how many French people are in the city? What would you look at? What are your criteria?

Philippe Ricard: I would say now it depends on where I am open. There are places that I know quite well because I have been living in this place for many years, like Shanghai or Hong Kong. Saigon, I know also a bit less. So, of course, we need a study and we need to understand what is going on in the district, in the city, but I think it is like marketing. You can put on the paper a lot of things about what’s going on. On marketing, it just helps you ask a lot of questions for the market study, but it could also bring you to the time where there is no end to these questions. I mean, also because the answer is changing all the time. So, I think for me now, what is very important is to have a good knowledge of what is happening, but also not to think too much long term to scaling up a restaurant chain in Asia. I think it is very important today to control the fixed cost because you never know. The virus, the protest in Hong Kong; you don’t know what is going to happen in 3, 4 years from today. If you were not able to control your fixed cost, then it is going to kill you, for sure. Today the main idea I keep in my mind from this experience, having inner flexibility in your business to be able to survive the bad times.

Matthieu David: We are close to one hour of talking. You have sustained for one hour. Before we started, we were saying how long do you have to survive. It is like already an hour. You have survived. I have a few questions I ask in the talk, usually. The first one is about the books; the books which have inspired you in business as an entrepreneur. Would you mind sharing a few resources? It could be a book and it could be also other sources like newspapers or others like blogs.

Philippe Ricard: Okay it is a bit difficult for me to talk about some specific books or reviews. In fact, I try to diversify a lot of the things I read. So, it’s, of course, there is part of the business, but business is mostly about the economy. I would say what is happening; like for sure today I think everybody is focusing on when is the COVID going to disappear so we can finally come back to normal life? Even for this, I mean I try to follow different sources to compare to get a better understanding. For example, I read something on the Washington Post.  I would read some notes from the government and I would also read some articles from different newspapers; non-diplomatic even. I get also a lot of insight from my Chinese wife. I don’t read Chinese, so she can then help me with that. It is good to have different points of view.

Matthieu David: Do you work together with your wife?

Philippe Ricard: No, she is not working in the restaurant. So yes, I think it is good also to escape from work. It is also something I love to do is to really read some what we call in France like travel experience from different people around the world. That’s for me important. That is what I like to do in my restaurants. I also need it myself.

Matthieu David: I see you are really from Brittany. People from Brittany love to travel all over the world. They are the strongest community of French all over the world. I would like to end with two last questions, but I will ask them at the same time. What success have you witnessed in China and what failure have you witnessed in China? Not about yourself, but about what you have seen that was surprising to you? Why I am asking this question is because when you look at the success which was surprising, very often you give an idea of what is changing. It’s a signal of a bigger picture of something that is changing. I arrived in China a few years ago and people were paying cash when they get deliveries and now it is like, middle ages. You pay with WeChat and Alipay. That is a success I would not have expected. What about you? What success or failure did you see that you did not expect?

Philippe Ricard: I think there is one thing that I could mention. It was in 2010, during the international expo (learn more about the 2010 expo in China). I experienced that time in Shanghai and I must say that I was very impressed with the way China is able to organize events and make very successful experiences for people. I think this event had a lot of Shanghai to really open. It was already open to foreigners, but I think at that time it made it even more open. For me, I mean I would think I would speak more globally. I think I am very amazed by the way China is moving on. It is very fast. Of course, nothing is perfect anywhere, even in France. I think the way that they are doing it in China is incredible. Managing one billion, 300 million people is certainly not the simplest thing, but they do it. Everybody is moving. We all know that there might be some big challenges ahead for them because of the economy, but still, I think they have this power to build and this power to bounce back, which is very strong. I think that is what I like in China. There is this dynamic. People are very different here in China or even mini Hong Kong or Vietnam. Everybody has their specificities and for me, I am almost more international than French today because I have been living here a lot and traveling a lot. Of course, I love my routes, but I love to see the difference between the countries, the people and I see everybody is doing well in China, compared to all the problems that we are facing and I think China is particularly doing well when we look at all the problems they have to face because of such a big community.

Matthieu David: What do you think about when you shave in the morning because a journalist asked him before and he said, “I am thinking of 1.4 billion feet which are going to touch the ground” and indeed the massive amount of people is something which has been managed. You talked about success, but what about the failure? Some way Paul came with a lot of money and means and didn’t succeed (learn more about the failure of Paul in China). What about a failure in China which has surprised you?

Philippe Ricard: I would say there has been a lot of success and failures. Of course, along the road. In my own company I opened, but I also closed some restaurants.

Matthieu David: How many did you close?

Philippe Ricard: I closed two restaurants for different reasons. One in Taiwan several years ago. It was too early for the market. For the restaurant industry, location is the key point.

Matthieu David: In Taipei?

Philippe Ricard: In Taipei, that’s right. Hong Kong I would say is we had to close, but we had no choice because we were kicked out of the building. Yeah, failure is part of the business. I mean, I think if you don’t lose anything at some point in time, you are very lucky. I don’t many people top who it doesn’t happen. If I need to say one example that I have in mind, then of course it is one that everybody had in mind in Shanghai is the baker. I would not talk about the reason for his failure, but that was a very tough time after a big success for many years. Nobody could have expected this.

Matthieu David: Yeah indeed, to the people who don’t know; Fahen was a very, very successful bakery and it was shut down again it seems from E-chain things and it brought a lot of doubt into the community about managing a business in Shanghai and it was very successful before. Actually, no other case happened since then, that massive and that talked about. Thanks, Philippe, for your time. I hope that things are going to go back to ‘normal’ or new normal as people are using now when we are getting out of this virus. I hope you enjoyed it. I did and I hope everyone enjoyed listening.

Philippe Ricard: Yes, it was very interesting. It was nice to talk to you. Hopefully, your words will help others and I wish all the best to everyone to cross the crisis.

Matthieu David: Thanks, everyone. Bye-bye.

Philippe Ricard: Take care.

This article China Paradigm transcript #103: Running a crepe restaurant in Shanghai in a post-coronavirus context is the first one to appear on Daxue Consulting - Market Research China.

Full transcript below:

Welcome to China Paradigm, the show powered by Daxue Consulting where we interview season entrepreneurs and experienced managers in China about their business and experience in the country. 

Matthieu David: Hello everyone. I’m Matthieu David, the founder of Daxue Consulting and its podcast, China Paradigm, and today, I’m with someone who I think will be very interesting to interview. To give you a sense of who she is, Cotton Ding is from Hunan and started her business at the age of 26 and she has been running a restaurant in Shanghai for 17 years.

I don’t think you have many restaurants in Shanghai which have survived 17 years. You studied at the time which now resonates even more than before. You started in 2003 during the SARS (learn more about the SARS impact on China). At least it was during this year that we had this outbreak of SARS and currently, in 2020, we are late March 2020, we are in the middle of an epidemic in Europe and the US and it seems that we have handled it in China.

You have two venues now. You had three in the past and that’s something that can be very interesting to understand as well; how you did manage all of them. A few numbers about the industry. First, this is the Food & Beverage business in China that has been hit hard by the Coronavirus recently. It’s about 90 million people in all China who lost their jobs temporarily and it’s about – in terms of revenues- 70-80% down for the first quarter (learn more about the impact of the virus on the restaurant industry in China).

So, it has been damaging a lot of the industry, an industry which is about 1.8 trillion yuan for January, last year in 2019 in China. It is a sizeable industry that represents about 6% of the economy. So, coronavirus’ impact on restaurants and bars in China has been affecting a lot of people. It has been hard to navigate. Some companies, large companies, were saying that they had only two months of cash, and if the epidemic was here to stay, they would be out of business. So, running a restaurant in Shanghai during these times will certainly be a challenge, but you have been here for 17 years now, managing a few restaurants and we have a lot of questions for you, Cotton. Thank you for being with us. 

Cotton Ding: Hi everyone, hello Matthieu. Nice to be here.

Matthieu David: What would you say about my introduction? Anything you would like to add or anything you would like to correct?

Cotton Ding: It’s quite a good introduction. I opened Cotton’s in 2003; 17 years ago, and for the past 17 years we have been here. We now have two locations and it was quite a good journey. The interesting thing is that we opened in 2003 during SARS (learn more about SARS impact on Chinese economy) and now we have the Coronavirus and I mean, quarantine. 

Matthieu David: Right now, you are in quarantine because your husband came back from overseas and you have to stay in quarantine with him. China is being very strict about it. I just finished my quarantine.

I’d like to go back to the start. You have been working in a factory in Shanghai 20 years ago, coming from Hunan. Hunan is a province in China that is famous for a few things. Its food is very spicy and it is also was where the mother tongue was born. It’s a big province. I think there are about 60 million people and you came from Hunan to Shanghai to initially work in a factory. Then, you worked as a bartender in Shanghai and you had the idea of running a restaurant in Shanghai when someone asked you, “Oh, you are the owner of the restaurant or the bar? You should do this and that.” Then came to you the idea that you could be the manager. Could you tell us more about the start? 

Cotton Ding: Yeah, that’s quite an interesting one. So, I was in Shanghai in ’97. I was a factory worker. So, I was making about 350 RMB per month. So, I had been working at the factory for about a year and then I went back to Hotan and then in 2000 – 2001 I came back to Shanghai, again and then the story, actually, you already described very well how I started. How I started from

working as a bartender in Shanghai to running a restaurant in Shanghai. So, the small story is that I had just graduated and moved to Shanghai. I know the final draw was Graphic Design and I went back to work as a bartender in Shanghai in a restaurant again. Just after seven months.

Matthieu Davi : Sorry to interrupt. There must’ve been a lot of frustration. You studied interior design and you then found a job as a bartender in Shanghai. Wasn’t that frustrating?

Cotton Ding: Actually, it was very frustrating. I came to Shanghai and I was broken all the way. All my money went to university. My dream was broken because I wanted to be an interior designer, but I couldn’t. So, I took a job to

work as a bartender in Shanghai when I was saving money to go to university and my heart was broken with my boyfriend. So, I can say I was broken all the way. 

Matthieu David: And you found the energy to be about there for 7 months. 7 months working as a bartender in Shanghai and what happened there?

Cotton Ding: So, I think the key point for me or the key turning point in my life was that I decided that I was tired of being broken. So, I decided to find the job I wanted. Then, I would take the job I am doing to be my dream job. So, that’s the decision that changed everything. I loved to work as a bartender in Shanghai and I was good. So, once you change your mind, your life changes. 

Matthieu David: What do you like about it? 

Cotton Ding: Everything. I love the interaction with the customers. I love being behind a bar. So, I always help people. So, behind the bar, it is a stage. Who you are and how you… we are in the business currently with people to connect with them, talk with them and make them feel good.

Matthieu David: I see. It makes sense now that I understand the transition better. You like sociability. You like to interact with people and then it makes sense that at some point you wanted to run a restaurant in Shanghai or have your own venues because you like to listen to your clients and customers and interact with them. I’d like to now give a sense to the new current business situation now because that is usually actually the question I started with.

I went to one of your venues two years ago and I saw the picture of the other ones. It’s beautiful. Inside is beautiful. We see that you like the design, the colors, the lights. There are gardens as well. So, restaurants with gardens. You have a capacity you said, of 200 people for each place. You can go up to 800 if it is booked for an event. Would you mind sharing a bit more about now; 2020? What is the size of your business? Any numbers in terms of team revenues and as we said, the number of seats. You already disclosed it. It is 200 people at each venue.

Cotton Ding: Yes, for both of the locations, they are beautiful and historic and so the capacity is about 200 if we sit down and id there is a party going on; so, we could host around 800 or even 1000 Khotan. So, if you imagine the scope of the businesses we cater about; between both venues about 400 guests per day and on a weekend, we are catering about 800 guests a day and the average bill is about 200 RMB per person. So, you do the math. 

Matthieu David: Okay good. For people who are good at math, they would calculate, but basically, you are about 40 000 if I make a calculation, per day. You would certainly be about 80 000 more every day on the weekend. To make people understand where you are; the location is in Xinhua road. It’s a very good location. I think it is expensive to rent it. You started 17 years ago. So, I believe cost-wise and we understand that now your top revenue is 200 people around 200 RMB per person, on average. What about the cost? I feel a lot of businesses don’t survive ten years or even five years or even a year because of the rent increase. Could you share more about the cost of the rent and how you have been able to manage it over the last 17 years in a very good place?

Cotton Ding: So, the rent increase between both places almost doubled for the last nine years. So, it’s quite a big increase, compared with how much we or our prices increase. We try to house the business. We look at the rent and we try to match the rent to 20% of the revenue. 

Matthieu David: I see. That is a good metric.

Cotton Ding: Yes, if you manage your rent, 20% of the revenue, you are in a very good financial business shape. 

Matthieu David: That’s your goal, right? Your goal is to stay at 20%.

Cotton Ding: Yeah that’s the goal. So, we have to with the increase in the rent. We need to increase our Food & Beverage businesses in China. Push more business. From the beginning, we don’t open for lunch. We don’t open for afternoon tea. So, we open only for 6 pm, right? So, we started to open for lunch from 11:00-14:00 and then afternoon tea. So, you expand your business hours.

Matthieu David: What we are saying for the Food & Beverage businesses in China is that there is nothing more expensive than an empty seat, right? So, that is what you did. You tried to have someone in a seat all day long; for lunch, for afternoon tea, and so on.

Cotton Ding: Yeah and the ones that we did very well were for brunches. So, I think the one in the year that we had just opened, we had very few customers for brunch and now our brunch is active every day and every weekend. So, this year due to the coronavirus’ impact on restaurants and bars in China, what we try to do is open for brunch every day. So, that again, the business hours and we tried to do it. If the formula is working, then you push in more.

Matthieu David: I’m not getting it; the link with the coronavirus’ impact on restaurants and bars in China. You open for brunch every day now, including the weekdays because people don’t have to go to the office, right? 

Cotton Ding: Yeah, even during the weekdays we are open for brunch now. Before we were only open for brunch on Saturday and Sunday and Saturday and Sunday we are always full. We already have 200 guests, just for the brunch. 

Matthieu David: Very interesting. That’s why I am liking your story. You can innovate step by step with key changes like this. Like the coronavirus’ impact on restaurants and bars in China is happening. People have more free time because they don’t go to the office during the weekday, right? They are not authorized to commute too much, to go too far or whatever. So, let’s do brunch every day and that is very, very interesting learning.

Cotton Ding: Yeah and what we are doing now is that we are trying to do it in a new way. So, delivery was a disaster before. We never really paid any attention to delivery and then this year we tried to go to delivery. The number is still very small, but it is increasing every day. So, we see the effort.

Matthieu David: I’d like to go into delivery and online later on more deeply, but first, I’d like to finish on the revenue and cost. So, you said about 20% for the rent and what about the team? You said that the rent has doubled over ten years. To be honest, I am not that surprised and I feel even you matched quite well the increase because I think my apartment over ten years, it may have more than doubled or it has doubled, I would say as rent, but I would have expected that a place like you would have more than doubled.

So, that’s not something I am very surprised at. You said that you were making 450 GMB in ’97 and so I believe that the salaries may have increased even more for Food & Beverage businesses in China. Would you mind sharing more about the cost salaries ad what do you have to do? What do you have to pay when you buy people in the restaurant business? To give more insight and background stories, I remember talking to people in Beijing. I used to work in Beijing. They told me that they have to pay for the rent for the workers, they have to pay for waiters and waitresses, they have to pay for the chauffeur and to find the dormitories and to provide them and of course, there is a salary. Would you mind sharing a bit more about what your costs?

Cotton Ding: Compared to the number of how much the salary we paid to now, it has increased by 400%. 

Matthieu David: Sorry, 400 times? So, plus 300%? Four times, right?

Cotton Ding: Yeah, four times. When I first started in food and beverage in 1998, my salary was about 500 and in 2003, if you hire someone you pay about 1500 RMB and now, you cannot find anyone below 5000, I think. 

Matthieu David: When you say 5000, you say with taxes and so on or it is net for them; net 5000?

Cotton Ding: It is net. 

Matthieu David: Do you provide accommodation?

Cotton Ding: We provide a dormitory. We provide a food allowance and so the salary structure of what we have is very flexible. We have a basic salary, but we also have a bonus and other benefits.

Matthieu David: I see. Are there other costs we are missing here that are viable costs for the food you buy, the drinks you buy, and so on? Are there other costs we are missing except for the fixed cost?

Cotton Ding: We always talk about it… the fixed cost is always different from the salary, right? So, that’s a fixed cost and the food and drink cost is between 21%-31%.

Matthieu David: Wow you are very precise. Why 21-31%?

Cotton Ding: Different restaurants have different price structures and it depends on how well you look after the costs.

Matthieu David: Okay, interesting.

Cotton Ding: So, really very well managed restaurants. They could go for the drinks, down 21%. That’s what we talk about. Very good managers of the restaurant and if you go to 31%, you’re still okay, but over 31%, it’s difficult for business. You don’t have any margin.

Matthieu David: I see. I think one of the difficulties of managing a restaurant is to make sure you don’t waste food (learn more about waste food in China). You don’t waste your drinks. When you open a bottle of wine, you make sure to finish it because you cannot re-use it the day after. Would you mind sharing how you manage your inventory and purchasing every day when you are not sure of how many people are going to come and how many will order? 

Cotton Ding: Okay, we talk about managing a lot. I remember a few years ago people asking me, “How do you manage so many people?” We have around 50 food staff and actually, around 30 casuals and so my answer is always, “No, I don’t manage it at all. I really don’t like the word ‘manager’. I would more say the style of how I empower people.” So, in my business, we talk about the cost and I allow them to decide. The Chef knows. After one week he knows how many fish per day we sell and what is the most popular and what is the ingredients we use. They understand it better than me. So too, with the bartender because he is the one who manages the daily operation.

Matthieu David: I see.

Cotton Ding: We have a procedure for running a restaurant in Shanghai. We have checklists. We have minimal storage for each item, but people are the key ingredients in this process.

Matthieu David: How do you make it happen? How do you empower them because the difficulty or I mean the idea is nice and I think a lot of entrepreneurs want to do that but implementing it is hard because it is hard to make everyone aware and responsible for the fate of the company? Is it that you do a profit-sharing model? Is it because of you… is it the way you interact with them? You let them speak. How do you do it?

Cotton Ding: There are a few ways. I mentioned about salaries earlier and so, not everybody has a fixed salary, of course. You have a basic salary, but then you also have a bonus and an incentive. So, when business is good, your income is better and so, everybody is striving to have better good business because if business is good, then everybody’s income is better and the same with chefs. So, if the cost is lower, they have also a better bonus. 

Matthieu David: I see. Would you mind sharing about how sizeable the bonus can be? Are we talking about +10%, +20%, +5% for them on a monthly basis?

Cotton Ding: So, the bonus should be, structural you have a basic salary and then there is a 30% difference in a good month and a bad month. 

Matthieu David: It is very sizeable. Which month is good, for instance? Is it December? Is it February?

Cotton Ding: The best month are September, May, and October. So, when the weather is good, we have good business because we really depend on the garden. So, when the weather is bad, then the business is not so good.  

Matthieu David: You said you motivate your team by a bonus. So, for profit-sharing, you look at the revenue, manage the cost and in some way, you give them a percentage. It is interesting because it is exactly what we do, actually, in our company. What else do you do to create this team spirit where people are willing to share and contribute and so on?

Cotton Ding: We have a company culture training and so every year, if we have a new team member, I make sure that with me they go through the company culture training. So, for me, I don’t’ believe people will work for me forever, and also, I don’t believe they will work for me. They work for themselves and a better future and I am a provider of a good platform for them. So, they use it and once they are ready, they could start running a restaurant in Shanghai. They can take off. So, that’s our atmosphere at Cotton’s.

Matthieu David: I see, interesting. I am not sure opening a restaurant now is in some way as reachable that when you did in 2003?

Cotton Ding: What I see is that when people work for somebody else, it is a different feeling than it is to work for yourself. For everyone in Cotton’s, they feel they are working for themselves. It is a very different working atmosphere.

Matthieu David: There is a saying from people from Wenzhou saying that they would prefer to sleep on the floor and have their own business than working in a company for someone. It seems that it’s a little bit your mindset rally, to master your own destiny and your own life and your own business if I’m correct?  

Cotton Ding: Yeah and also it is a friendly working environment. You interact with people and that is what we try also to do. 

Matthieu David: I’d like to talk a little bit about what has happened in January, February and march in China and what is happening now in the rest of the world and the coronavirus’ impact on restaurants and bars in China. So, I’d like to talk about it with two perspectives. The first one is a Chinese perspective to understand what happened and the second one is an inspiring perspective to inspire people in the West and all over the world, actually; business owners and restaurant owners on how to manage and if they could manage it the same way in their own country. I’d like to share a few numbers.

So, as we said, the food and beverage industry is about 6% of the GDP in China so it is sizeable (impact of the coronavirus on the F&B industry in China). It is about 9 million people who have been laid off during that time. It has been very strongly impacted. We have seen the same in the West. The weight for different segments, for instance, for fast food (learn more the about fast-food industry in China). 62% of the restaurants were shut down at some point during the epidemic. Coffee shops were like 83%, bars were like 66% and basically, we are talking about two thirds to 80% of shut down for a few weeks and some for a few months. I’m talking about Wuhan.

China is specific because it’s very digitalized. Delivery is working. I mean, I don’t know how you would say it, but it is very common to get delivered and you have digital payment very widespread. So, in some way, it will be different than Europe and the West. Which is not as developed on those elements. Would you mind sharing about how you manage those hard times and the coronavirus’ impact on restaurants and bars in China? What decisions did you make when you knew it would be hard and you knew you would be shut down?

Cotton Ding: We sat down actually, January 2004 and there was a new one out and I knew we would not be open for the whole of February. So, we’d be closed for 5 weeks and we opened on 1 March and so now, we have been open for one month now. So, the moment I heard about this outbreak, I panicked. I really was… I couldn’t sleep and I was really worried about my business because I know that in 2003 during the SARS, 35% the Food & Beverage businesses in China didn’t survive. They closed their doors forever. I know something very big is coming and we should be in survival mode. 

Matthieu David: Seabay, a very big restaurant chain very openly communicated in the press saying that they have three months of cash if they are still closed and I was very surprised that I saw a lot of people buying Seabay online. I think it was a very smart move, actually, from the manager to say, “We only have three months to survive” and I feel the deeper boat online and got delivered through Seabay. Would you mind sharing a bit more about the actions you made because the restaurant was shut down, but does it mean that delivery was shut down as well?

Cotton Ding: The Food & Beverage businesses in China were shut down and our delivery was also shut down. So, basically, we closed for 5 weeks. Seabay was alright and most restaurants only had three months’ cash to run. Since we are a business for 17 years and also, our business is very seasonal. We have summertime very good business and wintertime, very slow business.

So, in our business, we have money saved for a rainy day. We have a little bit extra cash saved because we know that business is not always good and we save cash for two reasons. One is we save for a rainy day and the second one is that we save if the opportunity comes, maybe we move to a new location and so when the business is good in the summer, we always try to save. We don’t spend it all. We always try to save and I think that is something which we have been doing for ten to fifteen years and this is something we saw last time and this time, we have a better chance to survive, long term.

Matthieu David: I heard an interpretation that February is a low season and I am speaking for a lot of Food & Beverage businesses in China because people don’t work. I have a sense of that has a bit softened the coronavirus’ impact on restaurants and bars in China; the economic impact. Is it correct?

Cotton Ding: Yes. Indeed, February is always slower. So, when we predict cashflow we already in February we won’t generate a lot of income. So, we already saved for February. 

Matthieu David: It is as if the crisis in Europe or the US would happen in August where actually a lot of companies are closing and business is very slow. I feel in some way, that has softened the coronavirus’ impact on restaurants and bars in China. What about the after-crisis? So, let me understand. You shut down for 4 weeks. No business at all. Nobody could join your restaurant and you couldn’t deliver either. You had to pay your rent, you certainly had to pay most of the salaries.

What about 1^st of March and the month of March? What did you see in the habits of people? How did it change? One learning we have is you said earlier that you implemented brunch all over the week so that because people don’t go to the office anymore because they work in a more remote way, they would come actually, in the morning to your restaurant or they would look for a place and in a coffee shop, I think it took time for Starbucks to reopen fully. So, coffee shops may not have been opened as well. What else has changed in terms of consumer habits, in terms of the way of running a restaurant in Shanghai? You mentioned as well delivery. You did more delivery. Would you mind sharing it?

Cotton Ding: We always used to be an evening business. So, revenue was always like 80% or even 90% and now, we already notice in the day time; brunch time has increased. Basically, since March our brunch business is better than last year in the day time and so we increased our brunch business and people feel more… after time people don’t feel… people don’t want to go out. In the day time when the sun is out, the people fear going out for brunch and going out to have a coffee. So, we have to really push our brunch. That’s the one thing we did and for delivery, but we still are working very hard. Delivery is not there. Before, it was 0.1% and now maybe we have 0.5% of our business, but it still couldn’t pay the bill.

Matthieu David: Why do you say couldn’t pay the bill, because delivery (learn more on food delievery in China) in some way, you just shared a percentage of the revenues with a delivery platform. Is it because they take 10-15% that is damaging so much your margin that you cannot be profitable?

Cotton Ding: Because of our business model, I think. Our business model is still… it is not only food, but it is the social perspective. People can always have a burger and a sandwich at home, but the social aspect cannot be taken away.

Matthieu David: I see, so the drinks basically, right? When you socialize, you consume drinks and alcohol and this is where the margin is higher than food. When you deliver only food, you may have a lower margin.

Cotton Ding: Yeah. 

Matthieu David: Okay, I’ve got it. What about working with a platform? How do they work? What do you have to consider when you work with those platforms and who much margin does it take you?

Cotton Ding: So, with Ele.me, last year they take 18% and this year they took 20%.

Matthieu David: Okay, they increased.

Cotton Ding: Yeah, the same with shoppers. I think shoppers also do 20%.

Matthieu David: It’s huge. 20% of revenues, right?

Cotton Ding: Yes. It is very big and the service took 20% and Shoppers has them encouraged. So, if you are doing more delivery in percentage, then they will come, but we are still in this 20% range. 

Matthieu David: Does it change because of the weather? I heard from someone who managed coffee shops that… the coffee price point may be lower than you so we are talking about 10, 15, 20 RMB. She has to pay more when it is raining. Is this the case? 

Cotton Ding: No, it is the same, basically. 

Matthieu David: Yeah, we understand that you change your opening hours and what you offer to be more balanced throughout the day; one thing. Another thing, running from the Coronavirus and change in consumers. The second element is more delivery which is a bit obvious in China because it is so well-organized and so easy to deliver. Does it mean that Shoppers are bringing you new clients or is it your own clients go to the platform to buy from you?

Cotton Ding: Maybe a little bit of both. I don’t really know the number yet. The database is still in the back office, but I think it is all clients.

Matthieu David: Okay objectives should be also to bring new clients and that is why they may justify the 20% which is pretty high.

Cotton Ding: I agree. It is helpful in the future because we have not been working with them for very long. We still only tried to push for last month. So, it’s still too short to say.

Matthieu David: You mentioned in one interview in the past, that you have been able to go through a lot and without being hit by license violations, development, etc. Would you mind sharing about the big mistake that restaurants are making, that shut them down, not only businesses? So, we understand if you don’t make a profit you have to shut down. That is the case for many businesses and now what about a license violation that you say, the open development. Are there three common threats to Food & Beverage businesses in China?

Cotton Ding: I am more conservative when doing business because there are so many elements for a business to fail. For me, before I sign a contract, I need to make sure we could have the proper license. So, this is something that I will not risk. 

Matthieu David: Is it hard to get it? Why do people manage their restaurants wihtout it? Is it hard to get?

Cotton Ding: Yes, it is. It is hard to get. 

Matthieu David: Why is it hard, because it takes control, it takes time and it is expensive?

Cotton Ding: It is difficult because you need food and drink license, then they’re also very strict on the location size, but I think it definitely was worth it to go through all the troubles. Of course, it was a lot of trouble. It took one month, two months, three months to get a proper license for my Food & Beverage businesses in China, but always get a license because the law stops business and the risk is too high not to have that.  

Matthieu David: Yeah there is a misconception between the West and I mean, the West toward China and business in China. A lot of Western people still think that China is not very regulated, but actually, you have a lot of regulations and you have to follow them in China. You have taxes and salaries. You have social insurance to pay, which is not small even compared to Europe. It is actually comparable to Europe and that is a misconception. Do you feel the same?

Cotton Ding: I think maybe before 2010 or back in 2003 it was a cowboy country. There were a lot of grey area. People could get away with running a restaurant in Shanghai without a license, but this is a risk matter for each individual and after 2010 after the world expo, if you don’t have a business license you are shut down. 

Matthieu David: One thing I’d like to dig in more is especially because you have a background of interior design. You insist on some articles on having your own identity. So, I understood that you have your own identity with your team? You have your own values. You have your own culture and you have developed it. What about the identity towards the customers; the people who join for lunch, for lunch and now, brunch. Would you mind sharing about the identity over the last 17 years and why you have built this identity? Is it because of yourself? Is it because of actually, the contact of the customers? Is it because it is working and you have found an opportunity?

Cotton Ding: You have been to Cotton’s and so both Cotton’s are located in historic homes, basically. So, you don’t feel like you are going to a restaurant. You feel like you are going to your home; maybe your grandma’s home. So, that is the idea I try to create is we go to a friend’s home. We go to a friends’ living room. So, this ambiance is what I try to create. 

Matthieu David: I see and you do it yourself for the interior design and so on or do you hire people to do that?

Cotton Ding: I have a designer that I work with from England. We have been working together for all my projects. So, Peter; a good friend of mine. He understands what I want very well and we work together to create a living environment, a home away from home. That is what I always tell Peter. 

Matthieu David: What changes have you followed in the identity of the brand since 2003? I believe it has changed. In one article you said that in 2003, let’s say 90% of your clients were foreigners and I mean now, the date of the article is a few years ago. You had 40% of local people from Shanghai. I believe that is affecting also the way you communicate your identity; your brand identity. Would you mind sharing about your clients, how they have evolved, and how it has evolved the identity? 

Cotton Ding: Well, when we just opened it was like almost 100% for foreign communities. Now, we have about 55% foreigners and then we have 45% of the Chinese community and they are very important. So, with the new clientele and a new community. So, we have to design the menu to also appeal to them, even the way of service. 

Matthieu David: Very interesting. Can we dig deeper into it? What are the elements that had to change?

Cotton Ding: Definitely we had a lot of different juices. We had various different teas. We need also in the menu the Asian favorite. So, a few Asian dishes to be added in there for the clientele.

Matthieu David: Spicier, compared to… Chinese would feel like French food very untasty because it is not spicy enough, for instance. What do you feel you had to adapt and not only because it is Asian only, but because the effect of Western food and the enjoyment of Western food is different?

Cotton Ding: So, for most clients, they come to Cotton’s and they come here not to eat Chinese food, but they come here actually for less than food. They like original Western food. So, I think they are clear about their ingredients and so where does the tea come from and that is something. They come for Western food and to try different ingredients, I think.

Matthieu David: I am curious about yourself and the way you are running a restaurants in Shanghai. You said that it is mostly for dinner in the past. Does it mean that you were staying in the restaurant and then sacrificing all your evenings to the restaurant? How do you manage your life with a business which is the opposite of a personal life because you have to be there when people have free time and so you don’t have free time when the rest of the world has free time? How do you manage that?

Cotton Ding: I think that’s the nature of the the Food & Beverage businesses in China. Everyone in food and beverage; you know, we never have Christmas and we love our Chinese New Year. We are working. We rarely have holidays and when everyone is on a happy holiday, we are working. I love it. I’m not a morning person. 

Matthieu David: It is interesting. I think that is something we don’t see, but you choose business as well when you start a business which may fit also who you are. You are a morning person or if you are an evening person. If you are a person who likes to socialize or if you are someone who likes more technical things and not too socialized. Is that also a choice you have to make and be aware of when you start a business, right?

Cotton Ding: I agree. I think so. I think you have to understand who you are and what is your nature and the best quality or passion you can offer. If you do something that is against it, it is difficult, right?

Matthieu David: Yeah, it’s not only about the product and the profit, right? It is also about the fitting of your own way of life because if it fits, you will thrive and if it doesn’t fit you will suffer from it and it’s already hard to start a business.

Cotton Ding: I believe a business is not a job. It is not like, okay, you go to work 09:00-17:00. It is a lifestyle, for me, I don’t really consider myself going to work or an off day. You are working 3-4 hours and so it is a lifestyle you create for yourself. So, it is better to be suited.

Matthieu David: I have a few questions to end the interview. I believe we sent them to you earlier. What books or it could be books, it could be movies, it could be poems; whatever has inspired you in your entrepreneurial journey? It could be meeting with people, but what has inspired you the most?

Cotton Ding: Yeah, it is interesting because I really love reading and I read a lot. So, the last time we spoke there were many categories and so for me, what has inspired me is when people enjoy what they do. That is also empowering.

Matthieu David: If you had one book to recommend to emphasize this element, to do what you love and by the way, the name of the third venue you have; Litchi, was coming from Yun Gu Fei, which was one of the concubines of the emperor a long time ago and you got the label, Litchi, from the south of China. It was very expensive at the time. So, I see that from what you do, you try to find a route to give the sense to find something which is a bit more with substance. So, would you mind sharing with us one book, if you have, which is representing or embodying what you just said or two books, if it easier?

Cotton Ding: Wow, I have tried to find something. Okay, let me just… give me a second. I just pulled out a book from my bookshelf. The strategy of War. Robert Greene. For me, I think this is a very good business book. I believe in a way, life is a war, and business is a war, too. To really be able to win the battle, you really need to understand your own strengths and also your opponents. 

Matthieu David: What do you fight for because when there is a war, we fight for something? Is it for making your mark in the world? What do you fight for?

Cotton Ding: I believe what we fight for, of course, is to overcome the Coronavirus. To survive, to be here, and to make a difference. To keep intact for whoever works for you; like your staff and then also give a positive impact to your customers to be remembered as this is something that we fought for; to be remembered, not forgiven.

Matthieu David: To be remembered. Interesting. What do you read to be up to date about business in China? For instance, we are in a world that is changing fast. Myself, I am reading tech Crunch, for instance, to understand about technology. I am reading the New York Times to understand more about the world. I am reading the Morning Post to know more about China. What would you read to know more about China and your industry? Would it be your WeChat groups? Would it be LinkedIn? A lot of people tell me that, but it could be…

Cotton Ding: If I tell you the answer you are going to laugh at me. I read WeChat. 

Matthieu David: Yeah, but actually that’s something I found out. A lot of people say WeChat and LinkedIn for some reason. The reason is that you have your own group which focuses on a topic. I believe you have groups about food and beverage and restaurants and then you can interact with your people who provide you information to say is it true? How did you do it? You cannot do that with a journalist. You cannot do that with a paper and finally, you get the news quickly because when something happens, you know it and it’s now. Journalists may take a few weeks to react.

Cotton Ding: Yeah that’s very true because we have a lot of different groups; a restaurant group, a customer group, supplier group, management group, and the communication is very fast and direct and you have really a close connection with your customers.

Matthieu David: True. One thing I see as a danger is that I am seeing some people spreading fake news and false information and so, I am balancing it a little bit of Google search, sometimes to make sure that it is really something issued by the government because sometimes I feel there is a little bit, especially during the time of the Coronavirus, when we have to act fast and there is a bit of fear everywhere. They get fake information.

Cotton Ding: Yeah, I saw it during the Coronavirus. Everybody is trying to send information and that creates panic and it creates unnecessary panic and then people all react. I was finding fault with that because of panic; there is no good outcome that comes from panic. We could only do what we could manage and especially in this difficult time. We have to be positive. 

Matthieu David: Exactly. My conclusion is that critical thinking that is the ability to be critical in screening information and to use critical thinking can be key; more and more key and more and more important in the coming years, to make sure that when there is information that looks a bit weird or surprising to be able to know that, “This one I need to be able to check.” About China, what books would you suggest to foreigners to read about China? What would you recommend? It could be a book. It could be a movie as well, but what would you suggest foreigners read, to watch, to do, to know more about China?

Cotton Ding: The book is called Dark Heart and a Thick Face. It is a business book on how to understand how to do business and all the Chinese philosophy and how to do business in China.

Matthieu David: By whom?

Cotton Ding: I can’t remember the author, but the name is called Thick Face and a Black Heart.

Matthieu David: Thick, like a bit fatty, right?

Cotton Ding: Yeah.

Matthieu David: What productivity tool do you like most to use? We understand that we use WeChat, but WeChat seems to be an unproductive tool because it takes too much time. Sometimes you wonder what to doon WeChat. Do you have some productivity tools? I am especially interested in this question because I have a sense that you are very good with your numbers. You say 45% is our local customers 55% are foreigners. Someone who does not look at numbers will always say it is 50/50 or half-half. You come up with very precise numbers. So, what do you use as a productivity tool or digital tool to understand your business and to be productive?

Cotton Ding: I don’t use many tools. Because basically, I spend most of my time in the restaurant and so my back office is quite bad, but now thanks to the Coronavirus, I have time during quarantine to understand the numbers. 

Matthieu David: That’s a very good point. This time of shut down, you can worry a lot and spend your time worrying, but you can also look at your numbers and think about what is next or what changes you can make. By the way, after the Coronavirus crisis, have you seen more business or less business?

Cotton Ding: I will say that this will be a very good year. I am quite positive about 2020. I know we had a very tough start, but I am still quite positive for this year.

Matthieu David: About March? What about March? Was it better this March than last March?

Cotton Ding: No. My business is 50%.  

Matthieu David: I see because some people argue that people have been home for one month with only sad news and so they would like to go out, to do things, to meet with people, but it is still not the case, right?

Cotton Ding: Not yet. It is much more positive. I saw that maybe April, people were already going out and celebrating and now because it is not only happening in China. It is also happening globally. So, if we could go back to normal, that is already positive.

Matthieu David: If you had extra time to do something else, what idea would you like to work on, or what business, or what may be action you would like to dedicate more of your time to?

Cotton Ding: For me, it will be always Cotton’s. That is something I know. So, just focus on things you know and get better. 

Matthieu David: So, really focused. That’s one other rule of success, right is to focus.

Cotton Ding: Focus. So, I think this year maybe I could be better. I may even because of this Coronavirus, we may even have a different opportunity to open a new one. We don’t know, but we keep our eyes open.

Matthieu David: Do you think you have an opportunity because rent is going down? Do you see that rent is going down or is it that people consume differently so you believe that they may behave differently?

Cotton Ding: I think the rent is going down. 

Matthieu David: Okay, it is very clear?

Cotton Ding: 10 or 20% should be expected. There’s a lot of empty shops out of there now.

Matthieu David: I have two last questions. I really love this question and I really would like to have your view on it. Over the years; 17 years of managing your business, what has been more surprising for you to see happening in China? I was very surprised by how people got used to paying digitally (learn more about the China’s digital transformation). When I arrived in China 10 years ago, for instance, people were paying cash when they got deliveries. What do you feel has been very surprising to you; a success over the years in China?

Cotton Ding: One thing is about popularity. I remember in 2003, my opening I had to send out 1000 mails to let people know that I opened and now, we just use WeChat to say, “Okay, we have a party. We have a promotion.” So, I think the way people communicate is amazing. It is amazing how efficient, how immediate and how can you reach data from abroad. That is something that like really blew my mind, I think. 

Matthieu David: Perfect. What have you seen as a failure in China? It could be a business or something in society that you have witnessed and you wouldn’t have expected it to fail?

Cotton Ding: I remember when I was very young, I remember Friday and I was like, “Wow, that is very good business” and they were so busy, but they didn’t make it in Shanghai.

Matthieu David: Which one? Which business?

Cotton Ding: It’s called Friday.

Matthieu David: What is it about?

Cotton Ding: It’s a restaurant.

Matthieu David: Okay. Oh, is it Thank god it’s Friday?

Cotton Ding: No, not this one.

Matthieu David: was from overseas ?

Cotton Ding: Yeah, so you are surprised to see a brand that really is successful overseas, but you are thinking as well that you are really happening in China, but it is somehow, past tense.

Matthieu David: My conclusion on brands that enter under China is that they need to really on the core community which knows them from overseas, but they also have to reinvent their brand. Some brands which are famous in the West are not known here and they have to redo again. They can only rely on people who have studied and worked overseas as Chinese or foreign people. So, it’s a whole new job for them.

Cotton Ding: Yeah and also you see the goods like the ones which maybe I don’t want to give all the names, but the ones who are really popular ten years ago and now they are quieter in the background. I think this is because they stop seeing the market anymore. They fail to change with the market. 

Matthieu David: Thank you very much for your time. It was very interesting. I learned a lot. I think people listening to us have learned a lot as well. I hope the crisis is going to be resolved soon. I think China is in a good way and I share your optimism at least for China. I hope you enjoyed it and I thank everyone for listening. Take care and stay safe. 

China paradigm is a China business podcast sponsored by Daxue Consulting where we interview successful entrepreneurs about their businesses in China. You can access all available episodes from the China paradigm Youtube page.

Do not hesitate to reach out our project managers at dx@daxue-consulting.com to get all answers to your questions

This article China Paradigm transcript #99: Business management in a crisis workshop: Running a restaurant in Shanghai is the first one to appear on Daxue Consulting - Market Research China.

Since the 2008 melamine scandal, the domestic milk market in China has had a hard time gaining the trust of consumers. This scandal hurt all players, including Mengniu Dairy and Yili Group, which are the leaders of the Chinese dairy industry. The crisis has also influenced milk consumers in China to purchase milk and dairy products from foreign brands, putting domestic milk producers at a disadvantage.

Even though the evolving consumer perception of milk in China has facilitated the growth of import and consumption of foreign milk firms, domestic milk firms in China still have dominated the milk market in China. Moreover, according to MarketLine, regarding the overall performance, from 2015 to 2019, the milk market in China has seen steady growth. Thus the market is anticipated to grow in the future.

Analysis of China’s milk market

Size of China’s milk market is gradually expanding

Chinese consumers are turning on to the nutritional benefits of milk products. It is predicted that sales of milk in China will increase from 11.95 billion RMB  (2018) to 12.83 billion RMB (2022), with a 1.7% annual growth rate. Thus the market size of milk in China has been growing steadily.

Data source: MarketLine, China’s milk market value  

Consumption of milk in China has grown four-fold since 2012

Due to the influence of traditional dietary habits and limits of economic development, in 2012, each person consumed only about 6.39 kilograms of milk per year. That was only about 1/3 of the consumption of an average Indian consumer and 1/10 that of a western consumer. Moreover, the consumption of powder milk in China ranks at the top among all countries in the world.

In 2020, the consumption of milk in China has increased remarkably. The consumption of milk per capita is projected to reach 28 kilograms in 2020 and 41 kilograms in 2030.

Data source: Qianzhan, Sales volume of the milk market in China  

Data source: Qianzhan, Sales value of milk in China 

Domestic brands regain trust, imported milk in China faces fierce competition

According to IBISWorld, due to the preference of milk consumers in China and demand for middle and high-end milk, import volume has increased steadily. With rising import volume and average prices, the import value of milk in China reached $5.47 billion in 2019, with a YOY growth of 7.6%.

Since domestic Chinese milk brands have dedicate to enhancing the quality of milk they are replacing some import products, which has led to a declining proportion of imports in the domestic demand of milk market in China. As a result, in 2019, imported milk represented 7.5% of domestic demand for milk in China, which decreased from 10.1% in 2014.

Data source: IBISWorld, Import partners of milk market in China (2019)

The price of milk in China is gradually increasing

Overall, the price of milk in China has a rising trend. The increasing price attributes to the rapid growth of consumption of milk in China and the condition of upstream supply chains.

Data source: ruzhipincy & chyxx, Price evolution of milk in China  

UHT milk is the most popular milk among Chinese consumers

The product segmentation of milk in China is mainly categorized into liquid milk and powdered milk. They are similar in terms of nutrients while different in terms of taste, form and price. Powdered milk consists of the process of dehydration and evaporation, which helps preserve it. Even though it loses its flavor during the dehydration process, it perfectly matches with smoothies, tea and filtered coffee. On the other hand, fresh milk contains more nutrition than powdered milk does and has a better taste.

Liquid milk is the largest segment. According to MarketLine, UHT milk is more popular with milk consumers in China, in contrast to  western consumers who prefer fresh liquid milk. 

The milk powder segment in China targets both adults and infants. According to Nielsen China, online and offline milk powder sales reached 1.8 billion RMB and 1.5 billion respectively in 2018. Specifically, according to IBISWorld, the infant milk powder segment has been experiencing rapid growth and highly profitable. The market size reached 175.5 billion RMB in 2019 and is expected to reach 216.3 billion RMB by 2024. With the implementation of the two-child policy, demand for infant milk powder is increasing rapidly.

Consumption of milk powder for adults, especially for families, has been rising steadily. Online shopping has facilitated the growth of this segment. The milk powder for adults in China is in the early stage of the product lifecycle by considering its market scale and profitability. Hence the market size of this segment remains stable as milk consumers in China lack product awareness.  

The supermarket is the most important distribution channel in China’s milk market

According to IBISWorld, Supermarkets are the largest suppliers of milk and offer the most extensive product range. Regarding food wholesalers, the majority of milk brands in China sell their products in local regions. They often establish wholesalers in the target province and are in charge of recruiting and managing distributors in tier-two or three cities. Regarding food retailers convenience stores, the revenue generated from these channels has experienced continuous growth. Other markets, including online shopping, have been developing rapidly in recent years. Milk consumers in China purchase milk from online shops due to its convenience and low prices.

Data source: IBISWorld, Distribution Channels of Milk Market in China (2019)

‘Safety’ is the number one concern of Chinese milk consumers. Consumers from different regions and segment groups in China consume milk in different ways.

Regarding Chinese consumers’ attributes of milk, consumers from developed areas value “safety first” while consumers from less developed regions value quality and brand. In general, both of the groups value safety certification, shelf life, nutrition, taste, brand organic, etc.

Families are likely to purchase a large amount of milk on the weekends and prefer fresh milk; office workers and students prefer buying liquid milk with paperboard packaging in the morning.

Milk packaging in China

Regarding the packaging of milk in China, paperboard, plastic and glass are common materials. Domestic milk firms in China mainly outsource both paperboard and plastic packaging to foreign firms such as Tetra Pak, PrePack and SIG Combibloc. Paperboard packaging is normally used in preserving both UHT milk and fresh milk. It helps preserve the quality of the milk. Thus the quality is less likely to go bad easily and can preserve more than six months. Plastic and glass are used in preserving fresh milk. The size of the packaging is mainly standardized as 250 ml.

Photo source: Zhihu, Packaging of milk in China

Chinese prefer to purchase milk in smaller packaging than westerners do. Owing to the habit of some milk consumers in China, it is convenient for students and office workers to carry a single serving size of milk with them. Secondly, the established supply chain and logistics in China cannot support the transportation of fresh milk perfectly. Hence milk with paperboard packaging is more prevalent in the milk market in China as it can preserve for an extended period and does not require a sophisticated logistics system to preserve the quality.

Does being lactose intolerant stop Chinese from consuming milk?   

Even though research shows that Asians, including Chinese, are mostly lactose-intolerant, it does not affect the sales of milk in China significantly. According to Zhihu, their consistent milk consumption can be explained by:

1. Consumers perceive that a small amount of milk would not aggravate the discomfort of lactose-intolerance, and this might is another reason why packaging milk in small portions popular in China.
2. Some people do not even realize they suffer from lactose-intolerance since their symptoms are not obvious.
3. Some of them perceive that the ingredients of Chinese milk are adapted to eliminate the effect caused by lactose-intolerance, that is, ingredients such as water and chemicals are added to dilute the lactose.

Brand analysis of China’s milk market

Domestic Chinese milk brands are making a return after being tarnished by scandals

Among the top 10 dairy milk companies, 9 are local brands. Mengniu, Yili, Guangming, Wangzai, Wandashan, Weita Milk and Chenguang are the top seven Chinese domestic brands with two producers originating from Taiwan and Hong Kong. Founded in 1999, Mengniu is the largest dairy milk company in China. It possesses over 20 branches in 15 provinces and exports its products to the US, Canada, Mongolia and South-East Asia. Although it maintains a good reputation, not even Mengniu can escape from the melamine scandal. As a 2008 Olympic Games sponsor, Yili, the second-largest dairy company, has explored a new way to market its product and overcome the scandal.

In 2020, Mengniu and Yili have further consolidated their leading positions in China’s milk market, with more than 30% of market share. Both firms have developed differentiated milk products to capture market share aggressively.

Data source: Euromonitor, Company Shares of Milk in China (2019)

Yili has focused on high-end milk products   

Regarding milk products of Yili, even though the company has developed a variety of milk products, it aims to focus on its high-end segment. Its representative product, Yili and Satine, according to Euromonitor, earned the third (7.4%) and fourth (6.7%) place respectively, in the brand shares of milk product (2019). Satine is positioned as the high-end brand as Yili has significant investment across different business units. Shuhua is a lactose-free product and targets lactose-intolerant consumers. School milk targets students and solely sells to schools in China while QQ Star targets kids in China. Wei Ke Zi is the flavored milk product.   

Photo source: Yili, Milk Products of Yili

Mengniu has adhered to the product differentiation strategy

Likewise, Mengniu has developed various milk products to tailor to different competing with Yili. According to Euromonitor, Mengniu and Deluxe are the pure milk and earned the first (7.9%) and second (7.4%) place respectively, in the brand shares of milk product (2019). Deluxe is the high-end pure milk product. Future Star targets kid consumers in China while Xin Yang Dao targets lactose-intolerant consumers. Mengniu has also developed flavored milk such as Zhen Guo Li and Nai Te. Zhe Zhi Niu Lai (This cow) is the milk product that targets university students in China. Mengniu has also expanded its product lines to fresh milk (i.e. Shiny Meadow and Green House) which Yili has yet to focus on.

Photo source: Mengniu, Milk Products of Mengniu

Influence of COVID-19 and future trends

The outbreak of COVID-19 has affected lots of industries, including China’s milk market. The pandemic has affected each business unit of the milk’s value chain in China.

The value chain of China’s milk market goes through the process of feed manufacturing, milk production, delivery, processing, packaging, distribution, and lastly, retail. Regarding the upstream business, the pandemic has affected the production of

As the situation is gradually recovering in China, so does the milk market. The government in China has implemented particular policies and subsidized the business involved in the milk’s value chain. These actions have sped up the recovery of the milk market in China.

Fresh liquid milk is the future trend

In 2019, the trend of “freshness” has emerged in the milk market. Key industry players such as Yili and Mengniu have started to invest in fresh milk significantly. The outbreak of Covid-19 may foster the growth of this trend since the National Health Commission of China recommends drinking milk. The government sector has suggested that drinking milk is an effective method to strengthen the immune system. Moreover, milk consumers in China have consistently perceived drinking milk as a means of calcium supplement and skincare. Thus it helps to cure osteoporosis and facilitates growing height. As more and more milk consumers in China value nutrition, taste and freshness, nutrition-added fresh liquid milk is likely to be the future trend in China’s milk market.

Photo source: Sohu, Nutritious and fresh liquid milk sold in small cartons in the Chinese market

Creative product packaging can draw consumers’ attention

In comparison with traditional promotion tools such as advertising and direct selling, creative product packaging is a cost-effective tool to promote products and is popular with young consumers. Hence more and more companies have gradually applied this tool.

Photo source: adquan, Creative product packaging of New Hope Group’s milk 

New Hope Group has applied the creative product packaging successfully on its flavored milk. With this co-creation strategy, New Hope Group has collected a list of mottos via social media in China and printed them on the packaging. Meanwhile, the company has designed cute images that are popular among Chinese consumers. These mottos reflect the current Chinese culture and humor of self-depreciating optimism, or passive acceptance of negativity. They are relatable and effectively tease young people’s lifestyles in a lighthearted way.  

In conclusion, China’s milk market is experiencing a steady growth in market size and revenue. Domestic milk brands have occupied the majority of the market share. Currently, the dominant milk product in this market is long-life liquid milk. Nonetheless, with the changing consumers’ perception and improving logistics, fresh liquid milk is projected to be the future trend in this market. Moreover, creative packaging is a useful promotional tool to appeal to milk consumers in China effectively.

Author: Amelia Han

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This article The milk market in China: consumers’ perception of nutrition has sustained the growth of this sector is the first one to appear on Daxue Consulting - Market Research China.

60% of Chinese families eat soup every day, meaning about 500 million bowls of soup are consumed nationwide every day, 320 billion bowls of soup every year. The average person consumes 4.6 bowls of soup per week. That is to say, the magnitude of the soup market in China is enormous, dynamic, and recession-proof.

Overview of the ready-to-eat market in China

Soup is one of the most popular ready-to-eat foods in China. As people’s lifestyles change, the demand for ready-to-eat food is expected to grow faster than in the past five years. There is a growing demand for ready-to-eat food, especially for middle-income and high-income consumers, who can afford higher prices. Meanwhile, the ready-to-eat soup market in China reached a new high during COVID-19. On the one hand, the epidemic has led to the offline consumption of leisure snacks to be interrupted and forced consumers to shift to online shopping; on the other hand, ready-to-eat food is accelerating to become a powerful consumption supplement for the catering industry.

Ready-to-eat soups are healthier and tastier alternatives and the convenience of instant soups supports these consumers’ fast-paced lifestyles. Factors such as high availability, less cooking time and travel friendly packaging push the development of the ready-to-eat soup market.

China Dominates the ready-to-eat soup market in Asia-Pacific Region

The expansion of the instant food market will further support the growth of the ready-to-eat soup market in China. Manufacturers are using various methods to increase their share on the ready-to-eat soup market in China. This include distributing innovative products, strengthening their presence in new markets or regions, as well as their base in existing markets.

Market size in China peaked during COVID-19

Under the influence of Covid-19, ready-to-eat food is quickly growing in China. Since February 2020, data shows that the overall sales of ready-to-eat food on Tmall have increased nearly sevenfold from a year earlier.

It is expected that by 2020, the business of soup market in China will reach US $4.818 billion in revenue. The average revenue of soup segmentation in China in 2020 will be US $3.33 per capita. In terms of volume, China’s per capita consumption of soup food will be 0.5 kg in 2020.

Source: Statista.com-Revenue in the soup segment in China (Forecast adjusted for expected impact of COVID-19), June 2020

According to data from the ecommerce PinDuoDuo, sales of more than 1,000 products including fresh fruits, ready-to-eat food and leisure snacks exceeded 100,000 during the “Not closing for the Spring Festival Campaign” in 2020. According to Tmall international, ready-to-eat food has become the new choice for ‘staying at home’.

Korean instant rice, Vietnamese instant noodles with salted egg yolk, Japanese vegetable miso ready-to eat soup and Australian whole wheat instant cereal are all popular dishes for home diners. The data shows that sales of imported instant noodles rose 12 times year on year, while ready-to-eat soup and instant rice rose more than 80% year on year.

Consumption upgrade in ready-to-eat foods

Since 2013, the consumption of instant noodles in China has seriously declined. In recent years, Chinese people pay more and more attention to their health, so ready-to-eat market in China is also forced to either upgrade or lose consumers. This trend in consumer preference contributes to the rise of premium ready-to-eat foods.

In line with consumption upgrading, the large traditional ready-to-eat food companies have successively launched premium ready-to-eat products, ‘original soup’ instead of seasoning powder and ‘meat slices instead of dehydrated meat. Ready-to-eat food has got rid of the marketing message of ‘make you full’ and is moving towards ‘nutritious, delicious and convenient’.

After the outbreak, ready-to-eat food may become a daily consumer product

Ready-to-eat food will be one of the six annual food trends for 2020, according to Tmall’s 2019-2020 national taste data released at the end of 2019. Sales of semi-finished food rose 111% year-on-year in 2019. Sales of ready-to-eat foods such as ready-to-eat soup and self-heating hotpot grew by more than 50% on Tmall.

The epidemic has helped shift the nature of ready-to-eat food from a popular trend online to a daily consumer product.Therefore, if the ready-to-eat industry and enterprises can grasp the changes in consumer demand after the epidemic and promote the ‘return’ of health value from a strategic perspective, they will surely achieve the greater development after the epidemic.

Competing brands in China’s ready-to-eat soup market

Source: taobao.com – 5 flavors of ready-to-eat soup from Su Bo

Combined with the ranking and evaluation of soup brands on Chinese e-commerce sales channels and Chinese brands ranking websites such as Paizi10.com,Qiang100.com and Sougou Guide, the following brands in the ready-to-eat soup market in China are summarized.

Chinese ready-to-eat soup brands

SuBo (苏伯)

Source: taobao.com – Spinach egg soup from Su Bo

‘SuBo’ is similar to the pronunciation of ‘soup’. It originally comes from Shandong Province. The brand is one of the best performers in the soup market in China in terms of overall performance. It is not only a popular Chinese soup brand in China, but also in Europe, America, Japan, Southeast Asia and other countries. Today, the ready-to-eat soup of this brand is sold in Chinese supermarkets, fast food chains, high-speed trains and on the Internet.

XinMeiXiang(新美香)

‘Xin Mei Xiang’, a company from Hubei province, produces and sells ready-to-eat soup, cooking package, freeze-dried fruit, dehydrated seafood, meat, vegetables and other products. ‘Xin’ means new, ‘Mei’s stands for beautiful, while ‘Xiang’ goes for appetizing.

The products are exported to the United States, Japan, South Korea and other countries. The company has several freeze-drying production lines and vacuum freeze-drying technology to give the customers innovative and appetizing experiences.

Xiao Yao Lao Yang Jia（逍遥老杨家)

This Chinese soup brand name means free and unfettered Mr.YANG. This brand, from Henan Province, is famous for its ‘Hu La Soup’. ‘Hu La’ soup is a famous kind of local cuisine in Henan province which is made with pepper, chili, and bone soup. ‘Hu La soup’ differentiates itself with its spicy taste.

Source: Taobao.com – Hu La soup from Xiao Yao Lao Yang Jia

A Yi Bo（阿一波）

A Yi bo Food Industry and Trade Co., LTD., originated from Jinjiang City, Fujian Province, was established in 1990. It is a well-known brand of nori, and a large enterprise specializing agricultural products deep processing and focusing on the production of Marine green food. In terms of instant soup, Nori ready-to-eat soup from A Yi Bo has an outstanding performance on Taobao sales.

Source: paizi10.com – Nori egg drop soup from A Yi Duo

Li Ziqi’s flagship store on T-mall（李子柒旗舰店）

Li Ziqi is a KOL who makes short food videos. With more than 25 million followers on Weibo, 38.9 million followers on Tiktok, and more than 11 million on YouTube, she is known as the “The expert of oriental food and lifestyle”.

Source: Youtube.com – The youtube homepage of Li ZiQi, Chinese food KOL

Li Ziqi’s flagship is her online food store (most of which are ready-to-eat food) on T-mall, which sells a variety of delicacies including a variety of ready-to-eat soup.

According to the total sales data of 21 products currently sold in Li Ziqi’s flagship store, the e-commerce wholly-owned news calculated that its total sales volume exceeded 1.3 million, and the total sales value reached 71 million RMB.

Haifusheng（海福盛）

Established by Xinsanhe (Yantai) Food Co., LTD., Haifusheng brand is specialized in the R&D, production and sales of high-end ready-to-eat food, such as instant soup, instant porridge, instant noodles, instant fruit and other ready-to-eat food.

Tian Li (天利)

Tian Li Food (Xuzhou) Co., LTD., founded in September 2009, is invested by Hong Kong Tian Yi International Group Co., LTD., located in Xuzhou, China. The company takes arctium burdock as the main raw material to form a green deep processing industry of agricultural and sideline products, among which the Wu Xing vegetable soup is deeply loved by the public. (The Wu Xing, also known as the Five Elements, is a fivefold conceptual scheme that many traditional Chinese fields used to explain a wide array of phenomena, from cosmic cycles to the interaction between internal organs and from the succession of political regimes to the properties of medicinal drugs. The “Five Phases” are Fire, Water, Wood, Metal and Earth.)

Han Chang (酣畅)

Han Chang brand was founded in 2010. As a professional brand of western food, it has been focusing on western food for 7 years and advocating the life concept of “Eating stylish western food and living a good-quality life”. The brand’s ready-to-eat western thick soups, such as mushroom cream soup, chicken corn soup, borscht, are popular among Chinese soup consumers.

Super Hi(超级嗨)

Super Hi, a brand from Sichuan province, has flagship stores on JD.com and Taobao. The brand began selling self-heating products, with popular categories such as self-heating rice and self-heating hotpot. The products have been well received by Chinese soup consumers. The chicken soup and duck soup from Super Hi have been recognized for their original taste. Since the Spring Festival 2020, the online orders of Super Hi have increased by 200%-300%, which is remarkable.

Source: Taobao.com – Chicken soup from Super Hi

Foreign ready-to-eat soup brands in China

Jia Le家乐 (Knorr)

Founded in 1838, Jia Le (Knorr) is the world’s No.1 condiment brand owned by Unilever. Its products are sold in more than 100 countries and are consumed by 320 million people worldwide. The products from the brand Jia Le (Knorr) has always been committed to producing high-quality products and bringing fresh and delicious ingredients to consumers. Its breakthrough innovation in flavoring products not only satisfies the taste of global consumers, but also adds endless fun to the gourmet life.

In 1993, Jia Le (Knorr) came to China, launching Jia Le chicken powder, leading to a new concept of health. Subsequently, in order to continuously satisfy the taste of Chinese soup consumers, Jia Le introduced other soup powder products and sauce products. In September 2007, Jia Le launched Thick soup Bao, a kind of ready-to-eat soup in China, which opened a new page for the seasoning market of the Chinese catering industry.

Chinese ready-to-eat soup consumer characteristics

Chinese soup customers have a higher degree of trust in brands

Brand is what Chinese soup consumers value most when choosing soup. The branded soup gives people a much greater sense of security than non-branded soup. Also, word of mouth plays an important role in consumers’ choice of ready-to-eat soup.

Young “Zhai people” in China are bursting out with great consumption potential

The expression of Zhai people (宅人群) refers to men and women who depend on the internet to meet their daily needs without leaving their homes. Also, people who don’t like to go out except for work and prefer to stay at home are described as ‘zhai’. These people usually rely on food delivery services, but because of the COVID-19 outbreak, ready-to-eat food has become their first choice.

On the other hand, with 240 million single people, the ‘single economy’ in China is flourishing. Also, people living alone also have a greater need for ready-to-eat food. This group of consumers will become the new target group of the soup market in China. Moreover, ready-to-eat soup fits this demographic’s spending habits.

‘Healthy’ has become the new rigid demand for the soup market in China

With the further enhancement of health awareness, ‘healthy’ has become the new rigid demand. The health-related products, knowledge, content and activities have attracted more attention of Chinese soup customers.

Author: Qing Zheng

Learn more about China’s ready-to-eat market

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China is a traditional fishing country that accounts for two-thirds of worldwide aquaculture. With the growing middle class and the rise of disposable income, the Chinese purchase a progressively more diverse basket of seafood products and the premium seafood market in China is expanding.

Demand for luxury seafood products has increased significantly in China over the past few years. For example, in 2015, China accounted for approximately 20% of the luxury seafood consumption globally. With polluted and overfished waters at home, China is importing a lot of premium seafood. Wealthier Chinese consumers who can afford to avoid scandal-plagued chicken and pork have in some cases switched to seafood. 

Chinese consumers are looking more and more to foreign countries for premium seafood products. For instance, according to the Norwegian Seafood Council, the value of Norwegian salmon exports to China reached $54.8 million in the first half of 2018. This was a rise of 544% year-on-year.

[Data Source: Global Times, ‘Norwegian salmon exports to China’]

Luxury seafood products on the Chinese tables are becoming more easily accessible

The list of premium seafood on the table is becoming longer with the increase of luxury seafood imports to China. According to Eva Kam, Project Manager at Daxue, all the high-end seafood was from Hong Kong before but China has now its own providers in foreign countries. Luxury seafood appreciated by Chinese consumers include lobster, crab, salmon, oysters, sea cucumbers and many others. The luxury seafood consumers are not only rich people but also the emerging middle class in China. The rising incomes and the growing middle class contribute to an attractive outlook to the premium seafood market in China.

Imported premium seafood is more welcomed in China

Most seafood advertisements use the words fresh and live (鲜活), France（法国), imported with original packaging （原装进口, Ready to eat （即食). They highlight foreign origin of seafood, as Chinese people tend to trust it more.

Source: 5tu.cn, Advertisement of seafood, both using word “fresh”

The pollution of China’s own waters create demand for imported seafood, especially for the higher-value species like crabs, lobster and salmon. Chinese consumers have also become more food safety-conscious. This underlines the importance of clear and precise information about seafood products.  For example, Canada and Denmark are famous for its caridean shrimp (pandalus borealis), Russia and Chile for king crabs, France for oysters and Norway and Australia for salmon.

Data Source: Under Current News, China’s fresh salmon imports by country

The perception of Norwegian salmon is positive in China

Norway is one of the primary countries of origin for seafood by Chinese consumers. Over the past few years, awareness about Norway as a seafood producer has grown from 7% in 2012 to 22% in 2018. In the same period, awareness of Japan as a seafood nation fell from 52% to 28%. Salmon is probably the most famous Norwegian product in China.  About 44% of Chinese consumers prefer Norway as a country of origin for salmon, an increase of 25% compared with a few years ago.

Australian seafood is gaining momentum

Australian seafood enjoys an extremely strong reputation in China. In particular, Australian rock lobster and abalone are held with a high regard.  Such perceptions express local media and WeChat discussions that promote the quality of Australian seafood. In Ningbo and Qingdao in 2017, for example, local media reported with excitement about the first direct sales of Australian rock lobster. Specific promotional events help to highlight Australian seafood, for example: an Australian lobster tasting event in Chongqing; Lobster fest in Shanghai; and the Australian Lobster Festival in Yongcheng, Henan.

Exports to China from Australia reached $658 million in 2017–18, making China the most valuable export destination that year for Australian fisheries products. The increase in export value was driven by an increase in the value of Rock Lobsters, Salmonids and Abalone species.

Data Source: Australian Bureau of Statistics, Australian seafood exports to China

Australia’s coronavirus-battered exports of premium seafood are recovering as China gradually moved out of lockdown. China’s demand for premium seafood is gradually on the rise again, though it remains sporadic and prices are much lower compared to pre COVID-19 levels.
Barry Dun, CEO of Australian Reef Fish Trading Co (ARF), told the company’s exports to China had recovered to 15 to 25 percent of the pre-outbreak volume.

Foreign oyster brands are popular in China

The perceptions of French oyster brands are very positive in China. For example, oysters of Gillardeau (吉拉多) brand have the reputation of “Rolls-Royce in oysters”, having strong salty tang of the sea. Another French brand Belon promotes their oysters as “rare”, “expensive” and “king of oysters”. Other popular French oyster brands include Fine de Claire (芬迪克莱尔), Ostra Regal (皇御) and Fleurdeseaux (水中花). All of them highlight the exclusiveness of their products.

Most restaurants selling premium seafood are western-oriented

Analyzing restaurants that sell oysters in Shanghai and Beijing, we can see that mostly they sell imported oysters, and most often as a side dish. Only some places exclusively sell oysters as a key element of the restaurant. The price varies from 30 to 150 yuan per dish. The key feature of the restaurants selling oysters is that most of them are western-oriented. For example, popular Beijing restaurant Maison FLO awarded as Michelin Plate, sells oysters as a side dish for 118 yuan.  Most restaurants sell cooked oysters rather than raw.

Source: Dianping, Western-oriented restaurants with oysters in Shanghai

Some examples of restaurants in China serving oysters:

• The Plump oyster       
  • Gillardeau: 89 RMB
  • French L’emeraude Oyster: 69RMB
  • Providing cost-effective combo of oysters
• OTTIMO
  • Gillardeau: 78RMB
  • Special oyster cooked by three ways: 78RMB
  • Famous for oysters and wine
• Oysteria
  • Fresh oyster:10RMB for each
  • Cost-effective combo of oysters

Premium seafood restaurants use VIP membership to attract customers

Seafood restaurants in China actively promote on social media with discounts and offers. For example, some restaurants offer VIP membership for those who order for more than 500 yuan. Also, customers who order for more than 300 yuan get free beer and soft drinks.

Some restaurant in Dalian came up with the advertising campaign on Valentines’ Day in 2018 offering discounts to people coming with their significant other. They could have a discount up to 65%. Through this well-planned marketing campaign, the restaurant created double the sales volume and attracted 5,000 customers.

Social media contribute to the growing premium seafood consumption

Seafood promotion in China increasingly relies on social media platforms such as Dianping (大众点评) or WeChat (微信). Thanks to the boom of e-commerce in China, consumers can buy their favorite premium seafood on electronic commerce platforms such as Tmall and JD, which are both reputable and reliable operating systems. For example, Canadian lobsters are available on Tmall.com as well as fresh Australian lobsters and oysters too. Chinese consumers can also buy raw oysters on WeChat.

[Australian fresh lobster on Chinese E-Commerce Platform Tmall]

Taobao and Tmall as e-commerce channels for the premium seafood products in China

During the severe epidemic period, the sales volume of seafood online declined by 55.8%. Once the epidemic was alleviated in March, the sales volume bounce back with a great growth of 136%. However, the sales volume of seafood dramatically dropped by 62% since the Xifadi incident. Two breakouts of coronavirus in seafood markets exerted negative impact on seafood industry, since people associate seafood as a channel of transmission, even though there was no evidence to prove it.

Data Source: Taosj.com, The sales of seafood in Taobao and Tmall Apr-June 2020

The price range of seafood is from 10-150RMB, most of price centers at 50-150 RMB, meaning online sellers mainly target middle and working-class consumers. Those online consumers prefer domestic brands to foreign brands.

Crawfish is the most popular seafood on Taobao & Tmall. In terms of oysters, mainland ones are the best sellers in Taobao. The sales volume of mainland oysters are 95 times that of French oysters. The sales of oysters on Taobao and Tmall in April 2020 was 27 million (27,588,327) RMB, the volume of sales was 465,441 items. In May there was a slight decline, the sales of oysters in Taobao and Tmall in May were 16 million (16,253,835) RMB.

Hema supports seafood farmers

Since the beginning of the year, the entire seafood and aquatic industry has been affected, and the recovery is still slow. Recently, a new round of outbreaks has caused consumers to worry about imported seafood, and it has affected the entire aquatic product category, and sales have declined significantly.

Hema app launched activities related to agricultural assistance. Oysters and crabs farmers have suffered heavy losses. During the New Year, they suffered a 70%-80% decline in sales from previous years. In June, only 40% of the previous year’s sales recovered. “Save Domestic Seafood” on the Hema app has about a dozen types of seafood sold at a reduced price. For example, the price for gentian grouper has been reduced from the original 59.9/piece to the current 39.9/piece. The price for abalone dropped from 11.9 yuan/piece to 6.9 yuan/piece. 

Food bloggers and KOLs promote premium seafood consumption in China

Many Chinese food bloggers pay attention to premium seafood in their blogs. For example, popular Chinese blogger Mi Zijun (密子君), who has 6.15 million followers on Weibo. She went to the famous Xu Ji Seafood restaurant in Changsha and ordered 60 pounds of seafood including shrimps, hairy crabs, oysters and ate it in one hour. She shared her experience with followers and advised to visit this restaurant. 

Source: Eat More, Chinese blogger Mi Zijun tries seafood

There are several food KOLs in China each with their own approach. What they all have in common is they like to take photos of food or restaurants. For example, 羽萱的妈妈 had some posts about some seafood, such as shrimps and crabs.

Source: Weibo, Dragon Social, Example of post of blogger 羽萱的妈妈 on weibo

Douyin (TikTok)

Many people use Douyin to share their seafood experience. So-called “mukbangs”, which is a Korean term to describe those who eat a large amount of food during live-streams, are especially popular.

Answering the question on Zhihu “Why are videos about seafood are so popular on TikTok?”, one user claimed that there are a lot of ways to eat seafood (raw, cooked), so bloggers can gain the attention of audience. Besides, many people eager to try it, but not many have a chance, so they watch videos about it instead.

For example, girl from a small town in Jiangsu province named Zhang Xiuling (张秀玲) became a celebrity with 440,000 followers on Douyin. Jiansu is not only a place for seafood, but also a large seafood distribution center. Over the years, wholesalers have transported the seafood to all parts of the country through trucks. In recent years, young people in the town have started selling seafood online using Douyin for promotion.

Source: Sohu, Douyin, Blogger Zhang Xiuling promotes seafood on TikTok

Weibo and WeChat offer new ways of promotion for the premium seafood market in China

Very premium seafood such as sea cucumbers sell very well on Taobao.  However, Taobao’s algorithms make it so high-selling shops can get more orders, additionally, the promotion cost of Taobao is very high. Therefore, many premium seafood producers are developing some new sales ideas, such as promotion through WeChat. In addition, WeChat can also allow old customers to attract their circle of friends.

Source: Zhuanlan.zhihu, Sea cucumber advertisement on Weibo

Besides, at present, there are many manufacturers of sea cucumbers, crabs and other seafoods promoting through Weibo. The advertisement adopts the sales method through WeChat and offers delivery. The purpose of the advertisement is to attract more users in WeChat. During the process of the advertisement, it has received a total of 718 reposts, 1,327 comments and more than 5,000 likes. 

Premium seafood is a seasonal product in China

Chinese primarily consume seafood at banquets, events and other social functions. The close associations between luxury seafood and banqueting is partly because of the increased importance of Cantonese cuisine. The strong influence of Cantonese cuisine affects the types of seafood served and the ways they are prepared. Some of the important dishes at these banquets typically include: lobster, geoduck, crabs, abalone, shark fin, sea cucumbers, and reef fish.

Imported premium seafood is increasingly taking a place at the Chinese New Year dinner table.  Not only are Chinese families spending more on seafood at Chinese New Year, but the variety of imported and premium categories such as lobster and king crab is also increasing. In the past two years, large-scale imports of shrimp, as well as high-end lobster, king crab and salmon have witnessed “explosive growth” during the Chinese New Year.  For example, prices for king crab rise by as much as 30 percent before the Chinese New Year.

Baidu index: search frequency for “lobster” peaks during Chinese New Year

Lobster market in China

China’s lobster industry is booming

A new generation of Chinese consumers attaches great importance to health, and they have higher requirements for lobsters. Therefore, the lobster market in China tries to ensure the quality of lobster and sends them to the consumers faster. New refrigeration logistics help to transport lobster to reduce damage and maintain high quality lobster during long-distance transportation. In addition, established tracking systems have created an open and transparent market environment. It helps customers follow the production process from farm to table.

From a national perspective, the main lobster producing areas are the Yangtze River Delta region as well as Hubei, Anhui, Hunan, and Jiangxi provinces.

[Data Source: Baijiahao, ‘Share of lobster production in China’]

According to statistics, yearly lobster consumption in China in 2018 reached 1.3 million tons, an increase of 22.56% from the previous year. 80% of retailers sell lobster through dine-in channels (including supper stalls). 20% of retailers sell lobster through Internet channels.

[Data Source: Aquatic Products Association, Guanyan World Data Center, ‘Lobster market in China’]

Big cities have larger lobster consumption

At present, the consumption of lobster in China has appeared all over the country. In recent years, the consumption of lobster has developed from large cities to the south and northwest China. This progression is due to the development of e-commerce in conjuncton with lobster cooked food products. Currently the lobster market in China in the northwest, south, and northeast regions continues to grow. However, cities such as Beijing, Hangzhou, Shanghai and Changsha still have the highest levels of consumption.

Baidu index: searching frequency for “lobster” in Chiense cities

China is the fastest growing market for Boston lobster

The premium seafood market in China is one of the most important for the American lobster industry. In 2016, total US lobster exports to China had reached around 8 million kilograms, valued at $136 million, accounting for 14% of total US lobster exports. In 2018 import of lobster from the US to China reached 1,232 metric tons. However, in 2019 this value was down 91% year-on-year over the period, due to Chinese tariffs.

[Data Source: UCN, ITC, Chinese customs, ‘China’s imports of American lobster’]

The Chinese New Year is the busiest season for the American lobster industry, as demand is growing. China’s monthly lobster imports peak before Chinese New Year. In January 2019, China imported 2.3 metric tons of live or fresh lobster. In February 2018, during the end of the festival, the figure was 2.4 metric tons. This is a rise from January 2017, with 1.9 metric tons.

Increasing consumption of premium seafood in China

Crab market in China

According to statistics, the output of crab reached about 800,000 tons in 2018 in the premium seafood market in China. The industrial scale was 64.8 billion yuan in 2016. It was about 77.8 billion yuan in 2017, with an annual growth rate of about 20%. In 2019 China’s crab market reached 100 billion yuan.

[Data Source: Baijiahao, ‘Market scale of crab industry in China’]

The top ten crab production areas in China are Jiangsu, Anhui, Hubei, Shanghai, Jiangxi, Henan and Taiwan. The total output of Jiangsu accounts for about 44% of the country. Hubei accounts for 22%, Anhui accounts for 13%, and other regions account for 21%. 

Due to the entry of e-commerce giants, the industry scale of crabs is increasing year by year. For example, JD.com adopts the “airline + refrigerated truck” transportation matrix. It adds air routes, airport express lanes and truck transportation routes to ensure that the delivery time of crabs is not more than 48 hours. SF Express sends them directly from multiple lake areas. It opened more than 22,000 shipping directions, ensuring the supply of crabs and safe delivery.

Data Source: Baidu Index, Search frequency for “crabs” 2017-2020, search frequency for crabs peaks during hairy crab season in the fall

Data Source: Baidu Index, Search frequency for “crabs” in 2020, Chinese new year is also a primary occasion for crab consumption.

According to Baidu index, the demand for crabs in 2020 was quite low, comparing to 2017-2019. The reason could be the coronavirus outbreak in China. In 2020 the demand was higher during Chinese New Year, as people tend to eat premium seafood during that time.

Sea cucumber in the premium seafood market in China

Sea cucumber is a premium product with large popularity in China. Asia is the largest consumer market of sea cucumber in the world, with a market share of more than 70%, followed by North America.

The Chinese sea cucumber industry shows an overall stable trend. Farm-gate prices have continued on an upward trend in the past two years. Production volumes and stocked amounts have also increased significantly. The growth in consumption of sea cucumbers increased from 3.8 million tons in 2014 to 4.1 million tons in 2018. By 2025 the consumption of sea cucumbers in China will be around 5.9 million tons.

Data Source: Baidu Index, Search frequency for “sea cucumber” 2017-2020

Data Source: Baidu Index, Search frequency for “sea cucumber” in 2020

Due to coronavirus outbreak in China, the demand for sea cucumber in 2020 was lower comparing to 2017-2019. During 2020 the demand was quite stable, except increasing during Chinese New Year period.

Caviar industry in China

With the development of China’s economy and improvement of living standards, the caviar industry has also developed rapidly. By the end of 2014, there were 63 sturgeon farming units in China, including 40 raw sturgeon farming units. From 2006 to 2012, China’s production of artificially cultured caviar increased from 0.7 tons to 28.8 tons, with a compound annual growth rate of more than 85%.

In 2018, world caviar output reached 271 tons, while China’s caviar output was around 100 tons. China plans to rely on artificially cultured sturgeon to become the main exporter of caviar in the world.

Data Source: Baidu Index, Search frequency for “caviar” 2017-2020

Data Source: Baidu Index, Search frequency for “caviar” in 2020

The demand for caviar was stable during 2017-2019, however due to COVID-19 outbreak, in 2020 it saw a decline. 

Oysters industry in China

Chinese consumers are more and more demanding about the quality of oysters they buy. Therefore, they are willing to pay a high price for high-quality oysters. Chinese consumers tend to choose imported premium seafood products. Imported oysters come from Japan, the US and Australia.

Eating raw oysters is a relatively new concept in China. Data from the China Fishery Statistical Yearbook 2019 shows that China’s oyster aquaculture production reached 5.1 million tons in 2018, a year-on-year increase of 5.3%. In 2017 it was 4.8 million tons.

[Data Source: China Fisheries Yearbook 2019, ‘China’s oyster production’]

The main producing areas of Chinese oysters are in Fujian and Guangdong provinces. Fujian has a long history of oyster farming and has so far become China’s largest oyster farming area. In 2018, Fujian oyster aquaculture production reached 1.8 million tons, ranking first in the country. Guangdong oyster production was 1.1 million tons, taking second place.

Despite the outbreak of coronavirus in 2020, demand is gradually returning to the 2019 level. During the peak of COVID-19 outbreak in China (February-March 2020), the demand for oysters decreased significantly. But since mid-March, it showed stable dynamic. Analyzing Baidu index from April-June 2020, we can see that the demand for oysters was stable during April-May. However, there was a slight decrease in June due to discovery of COVID-19 on the chopping board of a seller of imported salmon at Beijing’s main wholesale seafood market.

Data Source: Baidu Index, Search frequency for “oysters” 2017-2020

Data Source: Baidu Index, Search frequency for “oysters” in 2020

Data Source: Baidu Index, Search frequency for “oysters” April-June 2020

COVID-19 impact on the premium seafood market in China

Fall in prices for lobsters

Lobster prices have plummeted to the lowest levels in four years after the spread of coronavirus halted charter flights to Asia. It happened at a time when sales usually boom for Chinese New Year celebrations. That is why the lobster industry was particularly affected. Prices for a whole lobster weighing 1.5 pounds have tumbled 17% since January 20, falling to $8.10. This is the lowest price since 2016. Demand for live Canadian lobster has dwindled to 5% of normal volumes in mainland China.

After the coronavirus outbreak in China restaurants started canceling reservations and people stayed home. When it comes to premium seafood exports, the most affected countries were the US, Canada and Australia, as they are the main exporters of lobsters to China. For example, the US company Lobster Co saw an inventory loss of 40% of its value as shore prices dipped from $7.45 to $4.38. They had to sell 50,000 pounds at a loss. In Australia fishers and wholesalers began trying to offload the premium product in local retail markets.

Salmon industry saw the decrease in sales from COVID-19

The discovery of COVID-19 on the chopping board of a seller of imported salmon at Beijing’s main wholesale seafood market is set to disrupt demand for product in the Chinese market. Carrefour in China and Wumart were among the supermarkets to stop selling the product.

It may be possible for salmon to be contaminated by virus-contaminated water during processing, transportation or packaging. Despite this, the outbreak in the seafood market will inevitably impact demand, with consumers fearful of any possibility of transmission.

Chile, Norway and the Faroes are the main suppliers, with rapid growth in the market in recent years playing a key role in producers’ strategies. Norway held 45 percent market share of fresh salmon to China from January to April 2020. The Norwegian Seafood Council claimed last week of June exports fell to 240 tones – a decline of 34 percent.

“As the probe into the cause of the latest outbreak is underway, salmon business around the world will be affected,” Cui He, president of the China Aquatic Products Processing and Marketing Alliance (CAPPMA), told the Global Times Sunday.

The premium seafood market in China after COVID-19

According to the statistics, import of seafood in China in the first quarter of 2020 fell by 27% from the fourth quarter of 2019.

    
[Data source: Statista, ‘China’s import of seafood’]

By the first quarter of 2020, consumption was almost stagnant. Besides, the import and transportation of Chinese seafood was blocked. Although China’s premium seafood imports slowed in 2020, consumption has a potential to grow.  The coronavirus epidemic in China will have a serious economic impact on the Chinese and global premium seafood market and supply chain. It will also have an impact on both supply and demand of seafood in Asian countries.  However, the Chinese market has recovered earlier than other countries around the world. There is hope that once the supply chain of seafood regains balance, the industry will function normally.

After the epidemic is over, experts expect that the public will experience retaliatory consumption. Gradually the demand for seafood is returning to normal. For example, the frequency of searching “lobster” on Baidu increased after the epidemic situation got better.

Baidu index: search frequency for “lobster” increased after COVID-19 outbreak

Key takeaways for China’s luxury seafood market

• The premium seafood market in China has great potential due to rising living standards in the country.
• Although premium seafood is particularly popular during the Chinese New Year, it may soon become a regular meal in middle-class Chinese families.
• The coronavirus outbreak had a huge impact on the premium seafood market in China. It interrupted the supply chain and reduced consumption. However, the trend shows that China is returning to normal life and demand for premium seafood will soon be restored.

See our report on China’s seafood market:

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Data source: Zhiyan consulting, Size of China’s tableware market

Currently, China’s tableware market is mainly segmented into metal tableware, ceramic tableware, glass tableware, plastic tableware and wooden tableware. Metalware accounted for 53% of the market in 2017, followed by ceramicware (24.6%). Disposable tableware occupies 15.8% of the total market, and the primary product is disposable chopsticks.

Data source: Huajing Industrial Research Institute, China’s tableware market share

Segmentation tableware market in China

China’s main eating utensil – chopsticks

Worldly recognized as central to east Asian culture, Chopsticks are a necessary household item. Chinese chopsticks are normally made of unfinished wood or bamboo. Chinese were taught to use chopsticks long before spoons and forks were invented in Europe (the knife is older, not as an instrument for dining but as a weapon). Chopsticks were strongly advocated by the great Chinese philosopher Confucius (孔子) who believes a dining table should be free of sharp objects. Chinese people, under the cultivation of Confucianism, consider the knife and fork bearing sort of violence, like cold weapons. However, chopsticks reflect gentleness and benevolence, the main moral lesson of Confucianism. Chopsticks make a large part of China’s tableware market, and disproportionately represent the disposable tableware segment.

China’s stainless steel tableware market

Due to traditional eating habits, Chinese people tend to use wooden or plastic chopsticks and ceramic tableware, while western people use more stainless steel tableware. Following industrial and economic growth, revenue for global stainless steel tableware sales increased from 5.96 billion US dollars in 2012 to 10.38 billion US dollars in 2017. In China’s stainless steel tableware market, exports account for more than half of production volume with increasing growth in recent years. 

Data source: China Customs, Exports of China’s stainless steel tableware market

China’s ceramic tableware market

Ceramic tableware is a ceramic product close to people’s daily lives. Recent years have witnessed volatile growth in the size of the industry. According to statistics, the scale of the ceramic tableware market in China increased from 44.45 billion yuan in 2011 to 52.38 billion yuan in 2017, increasing by 17.84%.

The ceramic tableware industry is mainly driven by an increase in the number of households and a rise in the renovation of kitchens. Rapid growth in the food & beverage and home décor market in China is largely responsible for the growth of ceramic tableware consumption.

With increasing quality requirements of imported ceramic tableware products in overseas markets and the overall rising manufacturing cost of domestic manufacturing, ceramic tableware manufacturers that do not pay attention to product quality will face pressure.

China’s disposable tableware market

Data source: Huajing Industrial Research Institute, Size of China’s disposable tableware market

The booming of China’s food delivery market has been contributing to the rapid growth in the disposable tableware market in China. In 2016, the scale of China’s disposable tableware market  was 30.47 billion yuan, which increased to 33.59 billion yuan in 2017. According to analysis, one disposable lunch box is consumed for 15 yuan. China consumed 19.8 billion disposable food boxes in 2017, so the consumption of disposable food boxes in China exceeded 40 billion in 2019. It is predicted that this number will reach 45 billion in 2020. Considering the strong growth of  China’s food delivery market and takeout industry, the number of disposable tableware driven by the food delivery sector in the future will be huge.

Data source: China Business Research Institute, Size of the disposable food boxes market in China

Relevant eco-friendly policy inhibits the growth

With the tightening of China’s environmental protection policy, the prevention and control of plastic pollution will be further strengthened. In the near future, the raw materials of China’s disposable food box will be converting from non-degradable plastic materials to more environmentally friendly and degradable materials.

On January 19, 2020, the National Development and Reform Commission and the Ministry of Ecology and Environment announced the “Opinions on Further Strengthening the Control of Plastic Pollution“. The policy points out that the use of bio-based products that meet food safety requirements should be encouraged in the food and beverage delivery industry. By the end of 2020, the use of non-degradable disposable plastic straws will be prohibited in the catering industry nationwide. With the introduction of the environmental protection policy, many offline restaurants and online takeaway platforms have responded quickly, saying they would not actively provide disposable tableware.

The outlook of China’s disposable tableware market

Overall, with the growth of the food delivery and takeout sector, China’s disposable tableware market still maintains a steady growth trend, and the market prospects are still good. However, with the conversion of plastic materials to environmentally friendly materials, the cost of disposable tableware will rise. In the future, enterprises that have scale advantages of eco-friendly tableware and can effectively control costs will gain competitiveness in the industry. Small companies with poor quality disposable tableware will be gradually eliminated, and the market share of large enterprises will continue to increase.

Tableware brands in China

One of the top Chinese tableware brands: Supor (苏泊尔)

Supor (苏泊尔) is China’s biggest and the world’s second-biggest kitchenware research manufacture. There are five research bases located in Hangzhou (杭州), Yuhuan (玉环), Shaoxing (绍兴), Wuhan (武汉) and Vietnam, with more than 10,000 workers. The company sells its products in 41 countries and territories. ASD is also a Zhejiang (浙江) company, which was founded in 1978. It mainly produces kitchenware and kitchen appliance. It controls its own research, manufacturing and marketing for its products.

Western tableware brands in China: Zwilling (双立人)
ZWILLING J.A.HENCKELS, founded in 1731, is a knife manufacturer based in Solingen, Germany. Henckels is one of the largest and oldest manufacturers of kitchen knives, scissors, cookware and flatware. It has been a part of the Werhahn-Group since the year 1970. The company maintains several brands, including Zwilling J.A. Henckels, J.A. Henckels International and BSF. Currently, the brand with a long history is still thriving, seeing growth (including acquisitions) of about 8 percent per year since 1995. It earned sales of around €700 million in 2017. In addition, the company independently operates its retail shops, studios and partnerships both in Germany and internationally, with over 200 shop-in-shops in China. In April 2018, ZWILLING opened its world’s largest flagship store in Shanghai. The store includes a shop presenting the full ZWILLING range, a cooking school, a classic elegant bar and a restaurant called ‘The Twins’. 

Source: Zwilling’s Weibo account

ZWILLING attaches great importance to the Chinese market due to the growth of the Chinese middle class. “Today, China is the most important and the largest market for the Zwilling world, bigger than the USA and bigger than Germany,” Dr. Schiffers, Zwilling’s global CEO, said.

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Matthieu David interviews Gennadii Bochkar and Chen Feng (Fiona) partners and Co-founders at BIBIMI Group with 10 venues in Shanghai. Situated between the fast-casual and casual dining experiences, the BIBIMI group manages 10 venues successfully and planning to open new spots and even night clubs. But how do they manage such a managerial workload, what principles do they rely upon when building a new venue and how important is social media for their business? Find out the answers to these questions and more on this new China Paradigm interview.

• 4:48 Current size of BIBIMI group and revenue
• 7:19 Brief group history
• 15:06 What was the vision of scaling from Bites&Brew to the BIBIMI group?
• 16:54 Fast casual and casual dining – why is the BIBIMI group in between?
• 20:31 The Beginning – was money raised to start or to grow the business?
• 22:02 What were the investments required to scale the business?
• 27:54 The principles involved in building a new concept for a restaurant
• 31:46 Leveraging social media for building new restaurant concepts
• 38:17 How does BIBIMI group’s competition look like?
• 41:02 Did the coronavirus outbreak affect the BIBIMI group’s business in a positive way?
• 43:47 What economy of scale strategies can BIBIMI group employ in the future?
• 46:18 It’s all about having a great backend strategy
• 47:52 What software does the BIBIMI group rely upon in their day to day business?
• 50:48 What are Fiona’s responsibilities within the group?
• 53:43 Is the interior design service internalized or externalized?
• 57:37 Paying back investors – a BIBIMI group timeline
• 1:01:00 How does Fiona handle Gennadii not being involved in the business full time?
• 1:03:10 What books have inspired Fiona in her entrepreneurial journey?
• 1:06:12 What books have inspired Gennadii in his entrepreneurial journey?

The relevant episodes

We believe, that China, with 20% of world population and as the second world economy, is impacting every single business, small to big. That is why it is a new paradigm. How does China impact your business is the ultimate question we will answer through those podcasts.

China paradigm is a China business podcast sponsored by Daxue Consulting where we interview successful entrepreneurs about their businesses in China. You can access all available episodes from the China paradigm Youtube page.

This article China Paradigm 112: Opening 8 Shanghai restaurants & clubs in 4 years based on data and tactful branding is the first one to appear on Daxue Consulting - Market Research China.

Suspicions of fraud had already been hanging around for several months after the investment firm Muddy Waters released a report based on 11,260 hours of store traffic video. The report highlights Luckin coffee’s fraud by cross-checking actual orders and customers, and the company’s bottom line.

Source: Luckin Coffee stock price, Luckin’s stock plummeted from $50 to $3.82

As a result, Luckin Coffee stock price plummeted from USD 50 to less than USD 2 in a matter of months. But does this may not mean the end of Luckin. With such a low stock price and a high tech eco-system, there is a possibility to extend the rein of Luckin. Hence, we speculate who could buy the company that once was capturing Starbuck’s share on the coffee market in China?

The fantastic story of an internet company selling coffee

Luckin Coffee is an internet company. Coffee is the product sold by this company which operates more like other Chinese tech startups than a coffee shop. Indeed, Luckin Coffee digitalized and standardized the operation of an offline retail business.

Concretely, Luckin coffee users order through an application and pickup in store, a vast contrast from the large, cushy relaxation areas of its competitor Starbucks. Luckin coffee’s business model is based on new retail in China. This means that the online shopping experience of buying a coffee is supplemented by offline actions of going into a store and being served by a real employee.

Source: Luckin app, Forbes, Luckin Coffee’s business model embodies new retail in China through on app orders needed to be offline picked up

What else defines Luckin coffee as an internet company is the classic cash-burning process to quickly acquire users and scale-up. This method enabled Luckin Coffee to raise the right amount of money to promptly establish thousands of stores across China before going public by a USD 640 million IPO in May 2019 on the Nasdaq. Another interesting finding is that the company’s IPO documents insist on Luckin Coffee’s new retail business model, rather than on its F&B products.

Following the IPO, the company quickly raised USD 1.1 billion in January 2020. The same month, the company made the headlines by becoming the first coffee chain in China. Thanks to its highly praised business model, the company now exceeds the number of Starbucks stores, with more than 6,500 locations.

But the story was too good to be true. Right after the IPO, the company is reported having fabricated financial and operating numbers.

Luckin Coffee’s fraud highlights a fundamentally broken business

On January 31, 2020, short-seller Muddy Waters published an 89-pages anonymous report, claiming that the company had falsified financial and operational figures. Not only claiming that, the report says Luckin Coffee “was a fundamentally broken business that was attempting to instill the culture of drinking coffee into Chinese consumers.”

The report says the number of items sold per store per day was inflated by at least 69% in 2019 3Q and 88% in 2019 4Q. According to the writers, they employed 92 full-time and 1,418 part-time staff to record traffic in 620 Luckin Coffee stores. The data accumulation is impressive, with the collection of thousands of receipts, as displayed below.

Source: Muddy Waters’ anonymous report

Faking in-store order numbers

According to the investigation document, Luckin coffee’s fraud would likely have started occurring around November 23, 2019, when the company started to inflate its own app online order volume.

As all orders are placed online and retrieved from the store, a sequential order number appears on the receipt (such as when ordering at McDonald’s). Therefore, paying attention to these numbers could give a clear idea of how many orders have been placed per day for a specific store.

However, this method cannot be used if Luckin intentionally jumps and skips numbers during the day to purposely distort the tracking results. This is exactly what happened, as evidenced by this screenshot in the report.

Source: Muddy Waters’ anonymous report, Wechat screenshot evidences the inflation of Luckin Coffee’s order volume as one of the methods to manipulate operation figures

Shortly after the revelations of the report, Luckin published a press release to deny the allegations. The company evoked the strength of its business model, combined with the booming coffee market in China: “Luckin Coffee firmly stands by its business model and is confident in benefiting from the strong growth of China’s coffee market in the future.”

The fact that Luckin Coffee’s stock price didn’t drop after the publication of the report, until Luckin’s own internal audit, shows strong trust from the investors in the company’s business model.

But was the magic business model of Luckin Coffee enough to prove that the business could ever reach profitability?

Were Chinese people even ready to drink more coffee?

Data from the International Coffee Organization (ICO) show that the coffee market in China experienced strong growth between 2007 and 2015. But for the past few years, growth has stalled, especially since the players which target the core functional coffee demand are well established and more numerous (Starbucks, Costa Coffee, McCafé).

Source: International Coffee Organization (ICO) 2018, Unroasted coffee beans consumption in China

Coffee consumption is driven by culture rather than economic development

Increasing disposable income does not mean that their small consumption of coffee will explode overnight. Obviously, the coffee market in China was a boon for those who managed to capture the emerging demand in the 2010s (Hello Starbucks). In fact, the global coffee consumption comparison across countries indicates that coffee consumption per capita level is primarily driven by culture rather than economic development.

Indeed, China’s coffee bean consumption per capita is not only significantly behind developed countries such as Japan but also way lower than developing countries such as Vietnam.

More Westernized developing countries such as Vietnam (a former colony of France) and the Philippines (a former colony of Spain and the US) have high coffee consumptions. By contrast, in countries with strong tea cultures, such as China, India, and Sri Lanka, coffee consumptions are low.

Therefore, it’s no wonder that Luckin Coffee burned billions of investors’ dollars without meeting the expected success.

Source: International Coffee Organization (ICO) 2018, Per-capita Coffee cups consumed across Asia

Time for a Business turnaround in China

Even if Chinese people only consume 7 coffee cups per year, they do like coffee. Luckin coffee’s scandal does not contradict this. Rather, it highlights the fact that burning billions won’t make people drink coffee even faster. However, if Chinese people won’t drink more coffee, they will drink more tea.

While the number of tea stores demonstrated a continuous growth trend, the number of freshly brewed coffee stores declined from 121,000 stores in 2016 to 105,000 stores in 2018. Hence, the coffee supply network coverage is not the issue. There is just not enough demand yet.

Data source: Meituan, 2019 Chinese Beverage Industry’s Development Trend Report, The growing number of tea stores highlight the strong growth of the tea market in China

Following these observations, Luckin Coffee did try a business turnaround by starting a new type of product called Luckin Tea in May 2019. But business turnaround in China requires more than starting a new range of products.

Daxue Consulting’s China business turnaround expertise

In order to help a client build its business turnaround in China, Daxue Consulting developed a four-step plan, beginning with an audit of the situation. It consists of identifying where the brand had potential improvement and re-orientation needs. It includes distribution screening (data-collection through Store-Checks in China), brand image, and positioning in its competitive frame (through Benchmark). The following steps include consumer research, marketing activation portfolio, and monitoring plan.

It turns out this article briefly tackles step 1 of daxue’s business turnaround consulting service in China. We identified where Luckin has potential improvement – in tea – but we still need to assess its tea competitive frame.

Could Luckin Coffee’s future be with tea products?

Tea is an entirely different market from coffee. Nowadays, the tea market in China is made up of ‘new style tea 新式茶饮’ which is made of fresh tea leaves and concentrated liquid, such as milk or cream. It also includes topping like jellies, tapioca pearls, and fruit. Hence, while demand is not the limiting factor for the tea market in China, the main challenges lie in supply chain management and in-store production.

Source: Daxue Consulting report, The Tea Market in China

Could Luckin Coffee’s future be with Luckin Tea?

Part of a more aggressive turnaround strategy, Luckin Tea was separated from Luckin Coffee as an independently operated brand in September 2019. However, Luckin Tea in-store production and supply chain management is designed for Coffee products, which are fundamentally different from the new-style tea products.

In a China Paradigm podcast interview, Martin Papp, co-founder of PAPP’S TEA told Daxue Consulting young Chinese are going to Starbucks because they can’t find a tea location that fits their lifestyle. They want a more modern, fashionable, and cool tea brand. And while Luckin Coffee and its spin-off brand Luckin Tea are focusing on digital and financial engineering, HEYTEA appears to be focusing on thrilling their customers via its product development.

This new-style tea brand has lines out of doors in China and proven demand for their fresh flavored elaborated teas. While Luckin Tea products are basically made of blended NFC juice, frozen fruits, and artificial pigment, HEYTEA’s products have an uneven texture with distinct layers of tea, fruits, and hand-made cheese milk topping.

Source: Luckin Coffee, HEYTEA, could Luckin Coffee’s future be with Luckin Tea?

HEYTEA also has extensive capabilities in continually refreshing the menu with new product introduction. It is something quite far from Luckin Tea, whose in-store standardization process leaves little room for product customization.

Could Luckin Coffee’s future be with HEYTEA?

Let’s summarize. Luckin Coffee grew up like a tech company using investors’ money to open more than 6,000 outlets – more than Starbucks – without ever reaching profitability.  The company has been accused of faking its financial and operational figures, which turned out to be true. As a result, Luckin Coffee’s stock price plunged and will soon be delisted from the NASDAQ stock exchange. In a last attempt, Luckin Coffee created Luckin Tea, which turns out to be no more than a desperate move to capture new-style tea lovers with a tea that cannot fall in this category of products.  

On the other hand, HEYTEA is thrilling Chinese customers. The brand is growing based on its traffic, not investor capital, just like Starbucks did in China. The brand has 400 stores, regularly taken by storm by tea lovers. In fact, HEYTEA is Starbucks’ most interesting competitor now. Simply because we saw that it has a tailwind that neither Starbucks nor Luckin Coffee has – a significant, proven and enthusiastic demand.

Should HEYTEA buy Luckin Coffee?

Moreover, HEYTEA is recently moving into coffee. They quickly adopted a Chinese new-retail business model as Luckin did, merging pickup stores and their ordering app called “HEYTEA GO.” The brand is now growing on Luckin Coffe’s field, which previously tried to grow on HEYTEA’s one. The strong difference between the two is that HEYTEA succeeded in its ‘home’ market while Luckin Coffee is slowly dying on its.

Source: EqualOcean, HEYTEA GO pickup stores, could Luckin Coffe’s future be with HEYTEA?

Then the question comes naturally: Should HEYTEA buy Luckin Coffee?

HEYTEA is already doing great at creating popular products that thrill Chinese consumers. But unlike Starbucks, it still doesn’t have a quality footprint of good locations across China. Therefore, according to Jeff Towson, “The next logical move is for HEYTEA is to find a partner to scale up on the real estate aspects.”

Could the tea brand buy Luckin? It could. It could get HEYTEA +6,000 locations in a snap. However, according to Mike Vinkenborg, project leader at Daxue Consulting: “Part of HEYTEA’s mystery is their lines. If the brand becomes too mass, it may lose its level of mystery.”

Still, we could easily imagine HEYTEA buying Luckin Coffee. The new-style tea brand could use it as a strong asset to develop its coffee branch by only selecting a few thousand premium quality Luckin Coffee stores to further threaten its biggest rival, Starbucks.

If Luckin Coffee’s future is uncertain, HEYTEA could be interested in buying the broken business. If not, possibilities are endless for other hot drink businesses to take over the brand. And if not again, let’s see if Luckin Coffee’s business turnaround in China can strengthen its capabilities to turn off rumors of bankruptcy.

Author: Maxime Bennehard

Curious to learn more about China’s tea market?

Check out our official report on the tea market in China!

See our China paradigms episode with a tea entrepreneur

This article Business turnaround in China: What is the future for Luckin Coffee? is the first one to appear on Daxue Consulting - Market Research China.