2020 White Paper on China’s Food & Beverage Industry

China's food and beverage consumption has evolved dramatically over the past 40 years, and gradually transformed from an industry-driven to a consumption-driven market. The accelerating pace of change of consumer preferences and bargaining power has been the catalyst behind this transformation. Also, the increase in consumers' disposable income and their willingness to spend more has given rise to new categories and brands. Since 2018 China's food consumption has gradually entered the era of experience economy where consumers place more value on the need of consuming food and beverage for enjoyment and they are prepared to pay more for products that fulfill this need.

The reason for consuming beverages has gradually shifted from satisfying basic needs, such as thirst quenching, to physiological and psychological satisfaction such as function, taste and differentiation. Changes in demand are stimulating changes in supply. From 2018, beverage retailers have sped up research and development with major brands constantly launching new products with functions such as bubbles, probiotics, and slimming which quickly fulfilled rich taste and blending functions. Meanwhile, the market share of mixed-taste drinks has been increasing. This combination of changing preferences and the ability of manufacturers to quickly respond with new innovations to meet these needs has transformed the beverage industry and allowed manufacturers to upgrade their shoppers to multi-functional products which they are prepared to pay a higher price for. The above findings are from the 2020 White Paper on China's Diet Service Industry (Drinks), jointly published by Kantar Worldpanel and Hosen Capital.

As GDP increases, more premium categories have seen consumers change their behaviour from being a category they occasionally brought to one which they consume on a much more regular basis. As the most basic function, the importance of thirst quenching needs has increased in recent years. From 2016 to 2019, ready-made tea shops increased rapidly nationwide and achieved nearly 100% growth over the 3 years. Under the fierce competition of major brands, new brands such as Modern China Tea Shop and Ancient Tea achieved rapid expansion.

On the other hand, with the flourish of ready-made drinks, packaged drinks retailers are facing increased competition but also new opportunities which they have captured by launching more new tastes and multi-functional drinks. We have also witnessed ready-made drinks and packaged drinks brands extending their brand into the other field. Relying on the brands influence, some ready-made drinks players are eager to launch packaged drinks, hoping to cover more consumption occasions and improve the penetration, whilst some packaged drinks players are also trying to enter the ready-made drink industry by opening new shops, to interact with consumers directly.

According to the booming development in recent years, the report summarizes some beverage industry trends and insights

• Thirst quenching, awaken and flavour preference are important reasons for consumption, while self-satisfaction and social satisfaction are options with higher conversion rate.
• The well-known beverage brands pay attention to the complete consumer experience. Facing the omni-experience needs of consumers, how to satisfy the consumers from taste, health, interest and enjoyment will become the key to success.
• Now, ready-made drinks have basically completed the overall upgrade of the supply chain. Compared with the powder tea in the first stage and the street tea in the second stage, the current ready-made tea has better raw materials, richer blending and more convenient delivery.
• From the cases of HEYTEA and Mixue, we can find that the products with seemingly different experiences and price bands are essentially in line with the upgrade trend of the consumers’ lifestyle.
• With the accelerated penetration of home delivery and e-commerce channels, the demand for drinks has further increased, and the scene of drinks delivery has changed greatly. At the same time, the trend of "near-field" has also put forward higher requirements for the selection of existing tea shops.

Jason Yu, General Manager of Kantar WorldpanelGreater China, said?“With the rapid rise of a new generation consumers and improvement of their income, consumers' needs have been obviously upgraded, and their concerns and value composition have become more delicate and diverse. From functions and low prices to richer cost performance, higher quality, personalization, sharing and interaction, and recognition. All of these put forward higher requirements for practitioners in the food consumption industry. Facing consumers' omni-experience demand and building omni-experience, will become a common issue for the whole food service industrial chain.”

Although ready-made drinks and packaged drinks are competitors in the same category for consumers, Hosen Capital believes that they are essentially two different industrial chain logics, and the core driving factors of their supply chains are quite different. Zhang Tianli, founding partner of Hosen Capital, said: "From the price of per liter and the cost, ready-made drinks will always be higher than packaged drinks. In addition, the two business models have different capabilities in supply chain and sales. The two players enter each other's field, need to carefully consider the core business elements in this field and comprehensively evaluate their own abilities.”