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Tencent and ByteDance fight for a seat at the dinner table (Part 1 of 2)

Written by Lin Lingyi Published on     6 mins read

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China’s tech giants have started a new proxy war in the food and beverage industry.

On 8 July 2021, Hefu Noodle, a popular chain hailed as the Chinese version of McDonald’s for noodles, announced an RMB 800 million (USD 122 million) Series E funding round from a list of investors, including Tencent.

This is neither Tencent’s first bet on the noodle expert nor its first gamble on China’s fast-growing food and beverage (F&B) startups. The Chinese social media and gaming giant led Hefu’s RMB 450 million (USD 69 million) Series D round last September, in addition to a series of investments into the local F&B sector covering companies from restaurants to coffee and tea-drink chains.

Around the same time as Hefu’s most recent funding, ByteDance also, through a subsidiary, wrote a check for a more than 10% stake in Ningji (meaning lemon season) Tea to support its expansion to more than 100 stores this year, adding a new portfolio to its collection of F&B investees.

Two of the largest Chinese social media giants are taking their competition from the online space to a new frontier: China’s consumption market.

A flurry of investments

Over the years, Tencent has accelerated its investments in China’s catering industry.

In August 2019, it purchased a stake in premium tea-drink brand HeyTea. Then, barely a month later, it pumped hundreds of millions of RMB into Canadian coffee and donut giant Tim Hortons to expedite the expansion of the latecomer to china’s coffee market.

Aside from investing in more commonplace food offerings like noodles and tea, Tencent has also waded into more niche areas. For instance, it invested tens of millions of RMB in hot brine brand Shengxiangting in April 2021, which then had a valuation close to RMB 1 billion (USD 153 million). In early July, media speculation suggested that Tencent had invested a hefty sum in Chinese-style pastry chain Momo Dim Sum Bureau—although the latter denied this.

Bytedance is also keen to leave its mark in the sector—by casting a wider net.

Earlier in June 2021, ByteDance invested in Manner Coffee, known as an affordable boutique coffee chain. A month later, it picked up a stake in Weinian, a well-established multi-channel network (MCN) incubator in China. MCNs are companies that rely on their strong network of partnerships to boost their clients’ outreach. Weinian, in particular, contracts with Li Ziqi, one of China’s most popular vloggers, is known for making food and handicraft preparation videos and boasts 55 million and 10 million fans on Douyin and Kuaishou, respectively.

ByteDance’s investment in Weinian is thus a clever move to consolidate its relationships with China’s most popular influencers and simultaneously keep a close watch on celebrity F&B trends ahead of its move into the industry.

A rocky start

But ByteDance’s foray into the industry has not always been smooth sailing. It has attempted to break ground for some time already, but not to great success. For instance, one of its subsidiaries launched Suiwo Xiaojiu, an internet brand of baijiu (a classic Chinese liquor) that’s marketed as a premium brand with an affordable price tag, targeting the younger generation of Chinese alcohol drinkers.

When it launched, ByteDance promoted the brand through its social media properties such as Douyin and Toutiao, counting on them to drive traffic to the alcohol drink brand. But the strategy didn’t work. Suiwo Xiaojiu failed to generate much attention and, after dismal sales, gradually fizzled out.

After falling at the first fence, ByteDance took a different tack by investing instead of taking things into its own hands. Its investments span multiple categories, ranging from hotpot to alcohol, snacks, coffee, and tea.

Hotpot, in particular, has been enjoying the highest growth rate in the Chinese catering industry. In May 2020, ByteDance invested tens of millions of RMB in Lazy Bear Hotpot’s angel round. It then followed up seven months later with further investment in Lazy Bear’s Series A round.

Aside from this, ByteDance has also amassed a stake in health food brand Shark Fett. With over 11% shareholding, ByteDance is its largest institutional shareholder at present.

ByteDance has not neglected the beverage sector either. In June 2020, it invested in tea-drink brand InWe, which received RMB 500 million (USD 76 million) from JD.com.

Aside from holding a direct stake in many of these up-and-coming F&B brands, ByteDance has also leveraged its connection with venture capital fund Black Ant Capital to draw brands such as Genki Forest, HeyTea, and Jiangxiaobai close. Black Ant Capital’s founding partner, He Yu, previously headed ByteDance’s strategic investments business prior to setting up the fund in 2017. The VC fund is known to have scored capital injections from ByteDance at least three times and boasts a strong record with its portfolio of F&B brands.

ByteDance’s grip on the F&B industry is slowly taking shape. Because its investees are still in their initial throes, they have yet to bring much financial contribution to the table, even if some do turn a profit, it’s negligible when compared to the size of ByteDance. But if it can seize the F&B industry, ByteDance will surely shine more in the lifestyle and e-commerce sectors. In addition, this helps it diversify from its other foundling business—the gaming industry—which Tencent already guards jealously.

Coffee frenzy 

Even with Luckin’s infamous downfall, China’s coffee frenzy is not at an end. ByteDance and Tencent made their bets on Manner and Tim Hortons, respectively.

Both brands share roots in Shanghai—Manner was founded there, while Tim Hortons chose Shanghai as its launchpad for the China market. The proxy war between the two giants in the coffee chain sector was sealed once ByteDance claimed its stake in Manner on June 16. The very next day, Tim Hortons China, backed by Tencent, made a grand show of the opening of its 200th store in Suzhou.

With fresh capital from their backers, ByteDance and Tencent, respectively, the duo has begun to accelerate nationwide expansion in a bid to outcompete each other. Manner intends to accelerate its expansion plans and hit 400 to 500 stores by year-end. Tim Hortons also announced that it would open 200 new stores by year-end and aim for 1500 stores within the next few years.

In terms of brand positioning, pricing, and geographical distribution, Tim Hortons China and Manner overlap significantly. Unlike Starbucks’ goal of becoming a premium “third space” in its customers’ daily lives, the two Chinese brands focus on selling so-called boutique coffee at relatively affordable prices. Most drinks at the two chains range from RMB 15 to 20 (USD 2 to 3). In terms of store layout, Manner’s street-facing shops are usually less than 10 square meters and are takeaway only. On the other hand, although Tim Hortons does have its mid- to high-end flagship and regular stores, it has also launched Tims Go, a takeaway version of its stores.

The two compete to fill a gap in the Chinese market for low-to-mid end coffee following Luckin Coffee’s downfall. Investigations into the latter’s questionable financial practices put the brakes on its breakneck growth and led to a complete management reshuffle. It will be hard for Luckin to recover from the scandal and raise fresh funds. In contrast, Manner and Tim Hortons have built up their financial reserves with investment not only from the two tech giants but from a variety of other top-tier venture capital funds as well.

Coffee is a beverage consumed at a frenetic pace by its adherents. Thus, the ability to seize traffic and thus seize control of this high-frequency pattern of consumption is key. In addition, consumers nowadays prefer to place orders online for later offline pickups, making the importance of seizing online traffic important early on; that’s where Tencent and ByteDance could come to the rescue with their social media clouts.

Tencent’s strength lies in WeChat and its ability to leverage mini-apps to sneak into consumers’ lives. For instance, HeyTea boasted over 35 million members on its WeChat mini-app by 2020 year-end, with online orders accounting for 81% of total orders. Similarly, Tim Hortons leverages Tencent’s mini-apps for its online operations and has dedicated store personnel to guide users in registering on the app. To date, its mini-app has nearly 4 million members, with over 80% of orders placed online.

Similarly, with Douyin and Toutiao, ByteDance has its own strengths in the competition for eyeballs. However, its relative inability to channel eyeballs into direct consumption limits its ability to help Manner obtain traffic. An intuitive example of this asymmetry is reflected in how Manner created its WeChat mini-app for online orders from an early stage but did not have a verified Douyin account until 2021, which only has 1100 fans and a handful of posts to date.

Overall, competition between the coffee chains is guided by how much their backers can support its strategic needs. At the moment, Tencent has an advantage in its walled garden of traffic, with consumers able to place orders directly on its mini-apps. ByteDance will need to think seriously about how it can help channel traffic to Manner going ahead.

This piece originally appeared in Zimubang, and was written by Yanfei.

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