Chinese consumer spending is so weak that even Starbucks is considering selling a stake in its China franchise, but one venture capital firm is bucking the trend by finding growth in niche sectors despite overall weakness.
Shanghai-based company BA Capital, a long term backer of China’s “blind box” toy franchise Pop Mart and jeweller Laopu Gold, is finding promising firms from small cities in China’s “county-level economy”, as well as digging up gems in the “nighttime” and “silver” economies, which refer to activities after sunset and those involving senior citizens, respectively, as well as rejuvenating traditional brands.
“Consumer businesses can be categorised into two types: experience-driven or efficiency-driven. Top companies excel by reaching the pinnacle of one dimension,” Michael Zhang Peiyuan, founder of the firm, said in a recent interview with the South China Morning Post.
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BA Capital was established in 2016 by David He Yu, a former strategic investment head at ByteDance and vice-president of Orchid Asia, along with Zhang and serial entrepreneur Chen Feng, who later left BA to start his own venture. At the time, it was taken for granted that China’s consumer market would take off, driven by a rising middle class.
A woman carries several bags of toy products purchased from Pop Mart in Bangkok on September 20, 2023. Photo: EPA-EFE alt=A woman carries several bags of toy products purchased from Pop Mart in Bangkok on September 20, 2023. Photo: EPA-EFE>
However, the pandemic hurt consumer spending, which has remained subdued as Beijing’s policies continue to pivot to investment and exports. According to data from China’s National Bureau of Statistics, retail sales in October rose 4.8 per cent year on year. Yet, the consumer price index edged up just 0.3 per cent, signalling concerns about deflationary pressures and weak demand.
BA Capital, meanwhile, was able to tap into niche areas to grow into a firm with both US and Chinese yuan funds, with in total 10 billion yuan (US$1.38 billion) under management.
Its latest bet is Kaida Hengye, a frozen French fries and crisp supplier with potato farms in Inner Mongolia’s Ulanqab city. The company, which is able to cut prices by double-digit percentages compared with industry averages, received 4 billion yuan in a funding round led by BA Capital.
Zhang said local players are increasingly replacing foreign brands in the consumer market, as well as in the supply chain upstream. “Consumers are becoming more sophisticated in choices rather than blindly trusting in foreign brands,” he said.
In another example, Yuanji Yunjiao, a dumpling chain backed by BA, has expanded to over 4,000 locations, generating 4.7 billion yuan in revenue last year thanks to its self-established production and logistics network. Similarly, MMHM Group, a snack retailer targeting lower-tier cities, has grown to more than 13,000 stores this year by providing a wide range of affordable goods.
Zhang said the key to bucking the downward growth trend was enhancing efficiency and lowering costs, thereby offering consumers more affordable goods without compromising quality.
Elderly people rest at a park in Fuyang, in China’s eastern Anhui province, on September 13. Photo: AFP alt=Elderly people rest at a park in Fuyang, in China’s eastern Anhui province, on September 13. Photo: AFP>
At the same time, Zhang noticed that Chinese consumers are increasingly willing to spend on items of “emotional value”. One example is British toymaker Jellycat’s cafe-inspired pop-up in Shanghai. It created a buzz because staff would create and package the food or beverage items during checkout, providing a theatrical-like experience which drew long lines of shoppers outside the store every day.
The success of Hong Kong-listed Pop Mart, which offers collectible toys in “blind” packaging to maintain surprise, also underscores this trend. The blind-box toy retailer reported 4.56 billion yuan in revenue in the first half of the year, a 62 per cent increase from a year earlier, driven by an expanded portfolio of licensed intellectual properties and finely tuned operations.
In the third quarter, its overseas revenue grew to more than four times that of the previous year. Shares in Pop Mart have soared by more than 366 per cent this year, giving the company a market capitalisation of HK$124.83 billion (US$16 billion).
Compared with capital-intensive hi-tech start-ups, Zhang sees consumer-focused businesses as having relatively lower risks. He also opts for companies with healthy cash flows and leveraged capital to help speed up growth.
“While initial public offerings remain the most desirable exit strategy, often offering the highest potential returns, we’ve also seen alternatives such as dividends, mergers and acquisitions, and buy-backs,” he said.
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