In the sinking market, what should new consumer brands do to tell a good "new story"?

Faced with the cold reception of capital and the decline in revenue, new consumer brands have chosen to sink into the market to "save themselves". What problems will they encounter in the process of sinking? How should they adjust? This article provides answers and analysis to this question, hoping to bring inspiration to you who are interested in new consumer brands.

First-tier cities are no longer enough for new consumer brands to "show their strength". As the market tends to be saturated, prices are "involuted", and the capital market is cold, new consumer brands have started a new round of "self-rescue", and exploring the sinking market has become one of the important means.

Since last year, new consumer brands such as Hutouju and Heytea have changed their direct sales models and, through franchising and cooperation, have started business partnerships with suitable store formats in non-first-tier cities and expanded their stores to second- and third-tier cities, hoping to tap into profit margins in the sinking market.

Leaning down to the sinking market to dig for gold may find new opportunities for the new consumption track that is currently slowing down in growth. The golden growth era of new consumption in first- and second-tier cities has passed. Can sinking to county towns become the second curve for new consumption brands?

1. Capital cooling and revenue decline, new consumption urgently needs new markets

The reason why new consumer brands are accelerating their expansion into lower-tier cities and are willing to change their business models is that the industry has gradually cooled down from its explosive growth period, and capital and the market as a whole have fallen into a certain silence. New consumer brands are in urgent need of telling new stories.

According to data from iResearch, except for January and March when the financing amount exceeded 5 billion yuan, the financing amount in the other 10 months remained at around 2 billion yuan. The financing amount in December was only 1.159 billion yuan, the lowest in history.

Comparison of new consumer financing in the past three years, source: Clour

In 2022, Heytea laid off a large number of employees, involving 30% of the total number of employees, and even some departments were completely laid off. Not only that, according to public media data, in the first half of 2022, there were only 241 financing events in the new consumption track, with a cumulative amount of just over 10 billion yuan, which was almost "halved" compared with 2021.

At the same time, under the influence of objective external factors such as the epidemic, many new consumer brands with offline layouts have entered a state of "not making ends meet". Under huge operating pressure, many brands have begun to announce the closure of some stores to reduce losses. For example, Cha Yan Yue Se announced in mid-2022 that it would temporarily close about 70 to 80 stores in Changsha, and this is already its third concentrated temporary store closure in 2022.

In addition to the "internal worries" of the cooling of their own market environment, new consumer brands are also facing the "external worries" of their market share being divided. As a track that relies on new market demands and marketing methods, new consumer brands often do not have brand heritage and product advantages. Product production mainly adopts factory OEM, with relatively low production threshold and strong replicability. Under such conditions, not only new brands emerge in an endless stream, but traditional brands can also easily produce products with the supply chain capabilities accumulated over a long period of time.

For example, Nongfu Spring is accelerating its layout of sparkling water, and Moutai is launching ice cream products that young people love... These are all attempts by traditional brands to enter the new consumer track, and they have quickly seized market share by relying on a huge dealer system, brand power and other factors, and have had a certain impact on new consumer brands in the corresponding track.

The combination of the above factors has put the development of new consumer brands into a new bottleneck, and they urgently need to break the inherent business thinking. Under such circumstances, the sinking market has become a breakthrough point targeted by brands, and many brands have begun to expand to third-tier cities and below.

2. Franchise and price cuts: New consumption is concentrated in the lower-tier cities

At present, new consumer brands are facing two problems: "no money" and the gradual saturation of first- and second-tier markets. Under such conditions, prosperous and high-consumption first- and second-tier cities are no longer the first priority for brands to expand. Under the premise of controlling costs, the model of franchising and partnership provides the possibility for brands to develop in low-tier cities.

On November 3 last year, Heytea announced that it planned to develop business partnerships in non-first-tier cities with suitable store formats. From the perspective of the single-store model, the original Heytea direct-operated stores were all opened in commercial centers, with high rents and high consumption, which limited the expansion of the number of stores. The business partnership store area listed by Heytea is controlled at 37.6-45 square meters, and the large store model of direct-operated stores is no longer used. This can control the operating costs of the sinking market and thus increase the gross profit margin.

Lower operating costs have enabled Heytea’s franchise stores to expand faster. This model allows the company to penetrate lower-tier markets with a lighter model, thereby achieving economies of scale and ultimately increasing overall revenue.

Heytea adopts a franchise model that has been proven effective by the market.

Starting from 2021, Luckin Coffee, which has always insisted on the direct sales route, launched the "New Retail Partner" plan and chose to open franchise rights to third- and fourth-tier cities. According to public data, in 2022, Luckin Coffee's franchise stores increased by an average of more than 200 stores per quarter. As of the third quarter, the number of franchise stores has reached 2,473, accounting for 31.5% of Luckin Coffee's total stores. Franchise stores in small cities have brought faster revenue growth to Luckin Coffee.

Perhaps because of the benefits of its business model, Luckin Coffee chose to continue the franchise model and continue to explore new market space. Brand chairman and CEO Guo Jinyi said at the performance briefing that Luckin Coffee will continue to open up a new round of joint venture partners in the sinking market.

For new consumer brands, the reason why the sinking market is profitable is that young people in the sinking market have relatively less life pressure, more disposable income, and a much larger population base than first- and second-tier cities. By creating relatively low-priced targeted products, there is considerable market demand to tap.

From the perspective of marketing methods, the marketing of new consumer brands in the sinking market mainly revolves around the two keywords of low price and localization. Take the "ice cream assassin" Zhong Xuegao as an example. At the beginning of this year, Zhong Xuegao announced the launch of an affordable sub-brand "Zhong Xue Bu Gao", with a product price of 3.5 yuan, rich flavors, and mainly targeting the sinking market. Coincidentally, before opening the franchise model, Heytea announced that the price of all products began to drop, and the mainstream products were priced between 19 yuan and 29 yuan, and new low-priced products ranging from 9 yuan to 19 yuan were added.

From creating sub-brands to launching new product lines, the core purpose of new consumer brands is to cover more consumer groups and meet the needs of consumers at different levels, thereby achieving a diversified business layout.

With products targeting the lower-tier markets, brands have taken advantage of the short video platform to develop local life, and quickly captured the minds of young people in small cities through live broadcasts and short videos. A series of discounts that are only available in offline stores, such as 9.9 yuan a cup of milk tea and buy-one-get-one-free ice cream, have attracted the attention of young people in small towns through online channels, bringing new customers to offline stores.

Overall, new consumer brands mainly adopt the model of franchising and partnership to enter the lower-tier markets, and then attract the first batch of young consumers through local life and low-price strategies, which ultimately drives the sales of offline store products. However, this approach, which seems to be a "dimensionality reduction attack" on the lower-tier markets, faces huge challenges in terms of supply chain and management.

3. It is difficult to balance people, goods and places. Supply chain and management are the key

As open franchising is rapidly expanding to lower-end markets, new consumer brands are facing new challenges in their internal management, and need to re-plan and adapt in various aspects, including personnel training, store supervision, food safety and quality control, and supply chain construction.

For example, Heytea mainly adopts a store dividend mechanism for its franchise stores. In order to maintain the brand's long-standing product and brand power, Heytea needs to formulate a set of top-down management standards. At the same time, it provides training for managers and store employees, which is a challenging task for a brand that has always adopted a direct sales model.

At the same time, it is quite difficult for brands to supervise franchise stores as a whole. With more than 20,000 stores, Mixue Ice City has been punished for food problems many times and has become a hot topic. According to relevant information, Mixue Ice City's prospectus clearly states: "The company's production and operation chain is long and there are many management links. Product quality problems may occur due to management negligence or unforeseen factors." As the number of franchise stores increases, the negative public opinion caused by the supervision of individual stores is something that brands do not want to see.
In the overall operation of stores in the sinking market, product supply is also a headache for many new consumer brands. As we all know, offline stores of new consumer brands are mainly concentrated in bustling central areas. However, the bustling areas in the sinking market are limited, and building a central kitchen and logistics system specifically for limited stores is somewhat unprofitable for the brand. How to balance the cost of building a supply chain while maintaining the quality of products and raw materials is the key to the early stage of brand sinking.

On the consumer side, local brands in low-tier cities often focus on cultivating familiar customers, and achieve growth in the target population through the model of familiar customers bringing in new customers. Therefore, consumers in small cities are relatively less willing to try new things, and even after trying them once, they will still choose local brands they are familiar with. This causes new consumer brands that have just arrived to encounter "water and soil incompatibility" and it is difficult to ensure consumer stickiness. In addition, the population density in the sinking market is not large, and how to increase the frequency of consumers visiting stores is also an issue that new consumer brands must consider when sinking.

Overall, new consumer brands are facing comprehensive challenges in terms of people, goods, and markets when they move to lower-tier cities. For consumers, brands need to seize consumer groups from local brands and achieve long-term retention; for goods supply, they need to ensure product quality and control the cost of supply chain construction; for sales channels, they need to rationally plan store locations and manage franchise stores as effectively as possible.

4. Final Thoughts

After a long period of development and expansion, new consumer brands are no longer “new” to consumers. Brands must explore new market boundaries to bring new business space and value to themselves. In this regard, the sinking market does have unique advantages.

However, the business environment and consumer groups in the lower-tier markets are different from those in first- and second-tier cities. New consumer brands need to adjust their business thinking and, while rationally planning the supply chain, better understand the needs and behaviors of users in the lower-tier markets to reduce costs and increase efficiency. Only by striving to adapt to the needs and preferences of the target audience can their willingness to consume be strengthened.

Today, the development of small cities is on the fast track, and the acceptance and purchasing power of "small city youth" are getting higher and higher. When new consumer brands bring new products and new ways of playing to small cities, the new stories of the industry in the sinking market will become more novel and exciting.

Author: Dake; Editor: Ji Nan

Source: TopKlout