Data-driven iteration helped China’s Genki Forest become a $6B beverage giant in 5 years

China’s e-commerce and industrial ecosystem is as different from the Western world as its culture. The country took decades to earn its reputation as the Factory of the World, but it now boasts a supply chain and manufacturing ability that few countries can match.

Creative use of the country’s networked manufacturing and logistics hubs make mass production both cheap and easy. Clothing, electronics, toys, automobiles, musical instruments, furniture — you name it and you’ll find a manufacturer in China who can turn your intangible concept into mass-manufacturable reality in mere days. And they’ll do it for cheaper than anywhere else in the world.

It was just a matter of time until an intrepid Chinese entrepreneur with a tech background decided to take on Coca-Cola and PepsiCo.

China is also home to one of the world’s largest e-commerce and tech ecosystems. Hundreds of startups dot the landscape, and the amount of money being raised and spent on innovating around the country’s industrial heft is mind-boggling.

So it was just a matter of time until an intrepid Chinese entrepreneur with a tech background decided to take on Coca-Cola and PepsiCo. The tech revolution hasn’t yet affected the bottled beverage industry quite as much as it has others. Incumbent giants therefore could lose a sizable chunk of market share if a company could just manage to weave together China’s manufacturing proficiency and agility with the modern tech startup philosophy of “moving fast and breaking stuff.”

Genki Forest, a Chinese direct-to-consumer (D2C) bottled beverage startup, is one such contender. A philosophy centered around iteration informed by data, quick turnarounds and a laser focus on taking advantage of China’s huge e-commerce ecosystem has helped this company’s revenues rise rapidly since it started five years ago. Its sugar-free sodas, milk teas and energy drinks sell in 40 countries and generated revenue of about $450 million in 2020. The company aims to reach $1.2 billion this year.

If anything, Genki Forest’s valuation has shot up even faster. It recently completed its fourth VC round that values it at a whopping $6 billion, triple the price it fetched a year earlier, and it has so far raised at least half a billion dollars.

It’s striking how closely Genki Forest’s operations resemble that of a tech startup. So we thought we should take a closer look and see what this company’s graph can tell us about the new wave of Chinese D2C entrepreneurship looking to take over the globe.

Finding a bigger wave to ride

The bottled beverage industry wasn’t what Genki Forest’s founder, Binsen Tang, initially set out to tackle. His first startup was a successful casual, mostly mobile gaming outfit known as ELEX Technology. It was nowhere near record-breaking, though — some 50 million users logged on to a few popular games in over 40 countries worldwide, including one of the first versions of Happy Farm, a predecessor to Zynga’s Farmville. But Tang wasn’t satisfied and eventually sold ELEX Technology to a publicly listed company for about $400 million in 2014.

Tang would walk away with a few important lessons. He’d learned by now that Chinese products were already competitive globally, whether people realized it or not, and that and geographic arbitrage was real, Happy Farm being the perfect example of this. Lastly, he now knew that it was far more important to choose the right “racetrack” (as Chinese investors and entrepreneurs like to put it) than to have a great product.

Picking the right race to win was perhaps the most important takeaway. It’s also an idea that sets Chinese entrepreneurs apart from their Western counterparts — the most worthwhile endeavors are in identifying the largest and most rewarding market at hand, regardless of one’s previous expertise. It was what led Zhang Yiming to create ByteDance, and Lei Jun to found Xiaomi.

That very philosophy led Tang to build Genki Forest. After selling ELEX Technology, Tang didn’t go back to the business that netted him his first pot of gold. As much as he had benefited from the rise of the mobile internet, he thought there was a far bigger opportunity building a consumer brand and applying the lessons he learned from programming to the manufacture of tangible products.

He soon set up his own investment fund, Challenjers Capital, convinced that the next big tech opportunity in China was in tech’s application to everyday consumer products. He soon began to invest in everything from ramen and hotpots to bottled beverages.

China’s quickly expanding e-commerce ecosystem and the plethora of D2C businesses flourishing on Alibaba and JD.com would also influence his decision to sell directly to his target audience rather than take the traditional route. But to truly understand his motivations, we need to take a look at the extremely unique D2C environment in China and how it has changed over the years.

What’s different about Chinese D2C?

“China doesn’t need any more good platforms,” Tang told his team in an internal email in 2015, “but it does need good products.” Tang was talking about how the age of building infrastructure for e-commerce in China was largely over; it was now time to create brands that could take advantage of the advanced distribution network that had been laid out.

Other investors noticed as well. Albus Yu, principal at China Growth Capital, told me that his fund had stopped making investments in independent consumer-facing platforms or marketplaces for a while. “2014 might have been the last year it was economically feasible to start such a business due to the soaring cost of acquiring customers and the strength of incumbents,” he said.

Indeed, 2015 was the year when CACs began to exceed or at least rival ARPUs for Alibaba and JD.com.

In China, that distribution network was present across the digital and physical worlds. Online, there was immense market power concentrated in the hands of just two players: Alibaba and JD.com, which used to have, and still maintain, 80% or above in market share.

In fact, the dominance of Alibaba, in particular, was so overwhelming that for years, VCs invested not in D2C, but in “Taobao brands,” since that was the only channel one needed to conquer in order to make it.

Customer acquisition was therefore straightforward — throw everything into advertising on Alibaba’s Tmall platform, especially during its annual flagship shopping festival, Singles’ Day. Even today, garnering a top spot in one of the category leaderboards remains a surefire way to build brand awareness, investor interest, as well as sales records.

Physically, the Chinese market also differs greatly from much of the developed West. Years of heavy investment in logistics by the private sector, accelerated by government support and infrastructure buildout, means that delivery costs have come down significantly over the years, even dipping below $0.40 per package wholesale as of this year. Innovations such as return insurance have also sped up customer adoption.

By 2016, China was shipping 30 billion packages a year, already accounting for 44% of global shipments. That number has been doubling every three years and is expected to exceed 100 billion this year. And the low cost of delivery is one of the biggest reasons for China’s outsized e-commerce market — the largest globally and estimated to reach $2.8 trillion in 2021, more than triple that of the No. 2, the U.S.

Express parcels sit stacked at a logistic base of e-commerce giant Suning before the 618 Shopping Festival

Express parcels sit stacked at a logistic base of e-commerce giant Suning before the 618 Shopping Festival. Image Credits: VCG

Present-day China also presents another edge: Proximity to an advanced, flexible manufacturing network and supply chain for the vast majority of consumer products, and the ability to outsource almost everything to them.

The original equipment manufacturers of years past have long since evolved into original design manufacturers. An expected consequence of being “the Factory of the World” for so many years, making goods for some of the best brands in the world, is that some of the knowledge was bound to transfer.

It may be difficult for outsiders to understand just how strong China’s networked manufacturing hubs are these days. What used to take weeks now takes mere days, the lead times shortened drastically by software, robots and other advancements. For example, Chinese cross-border ultra-fast-fashion company Shein has compressed design-to-ship timelines to as little as seven days.

And it’s definitely not just for making crop tops. The turnaround can be astonishingly fast even when manufacturing completely unfamiliar goods, such as when electric vehicle maker BYD turned its factory into the world’s largest face mask plant in just two weeks when the COVID-19 pandemic struck last year.

Companies leverage this manufacturing flexibility and agility for more than just speed. Chinese cosmetics upstart Perfect Diary uses it to launch twice as many SKUs as foreign competitors. In addition, the quick turnaround allows agile brands to take advantage of that most ephemeral of IP, memes.

It’s not to say that the Chinese supply chain is inaccessible to foreign entrepreneurs. Best-selling mattress maker Zinus, for example, is founded by a South Korean, but its products are manufactured in China and sold mostly on Amazon to U.S. customers.

It’s just that very few non-Chinese companies have figured out how to tap as deeply into the supply chain as this new crop of Chinese D2C brands, which can require years of working not just alongside but physically inside the factories, building trust and know-how. Shein, for example, watches carefully what other brands are making by staying close to the factories.

The China opportunity

Before global sensations such as TikTok weakened the mantra, “copy to China” used to be a dominant characterization of Chinese startups. In December 2015, when Tang registered the Genki Forest trademark, that was still very much a relevant strategy.

While Xiaomi may have been inspired by Apple, and WeChat by Kik, for Genki Forest, inspiration would come from the East. The Japanese market was rife with sugar-free teas and other drinks, and as Chinese consumers were becoming more wealthy and health conscious, it was a safe bet that they, too, would be looking for lower sugar content in their beverages.

Genki Forest decided to first tackle the fruit tea market, then carbonated drinks because the latter not only accounted for a large TAM ($14 billion) but the sector was also dominated by slow-moving foreign incumbents.

Finally, much like Miniso, a Chinese retailer inspired by Japan’s Muji, Tang picked a Japanese sounding name, look and feel, in order to take advantage of the Chinese customer’s association of high quality with Japan.

However, a lack of any real experience in the beverage industry meant the Genki Forest team had to spend the initial months in their laboratory, cooking up everything they could think of. Eventually, they launched two fruit teas that were inspired by trending drinks in Japan at the time.

The company’s big break came when Tang and Co. realized that they could use erythritol, an artificial sweetener, as a substitute for sugar. The sweetener was not popular in China, but was used by American and European brands such as BAI.

Importantly, it only has 6% of the caloric content of sugar, but 70% of the sweetness and had passed extensive tests for safety, all of which made it a superb choice for marketing to health-conscious consumers. The problem, though, is that erythritol is more expensive than sugar and much more expensive than other substitutes, by as much as 70 times.

With retail prices hovering around $1 per bottle online, Genki Forest is competitively priced without being cheap, but that means it likely makes less money per bottle than competitors that use less expensive ingredients. When probed on this, Candy Tang, a Genki Forest executive, explained that “it is just one way we try to live up to our mission of giving our customers good products.”

Iterate, rinse, repeat

Easy access to advanced digital and physical infrastructure as well as manufacturing might be important ingredients for success, but it does not explain why Tang picked the bottled beverage industry. To make sense of this, let’s return to the “racetrack” theory, which says choosing the right market is the most important decision that an entrepreneur can make.

Tang had noticed by now that a good number of both global and Chinese top companies were in the beverage industry. It was also a sector that had yet to be remade by software. This fit nicely with a popular theory floating around in Chinese startups, an application of the “dimensionality reduction attack” as envisioned by science fiction author Liu Cixin in the third volume of his trilogy, the Three Body Problem.

The idea is that “higher dimensional beings,” such as tech entrepreneurs harnessing the power of the internet and the scientific, iterative process of software development, could easily defeat the businesses of other companies who were not using this “technology superpower” to their advantage.

Tang realized that his casual game development experience, which revolved around optimizing every step of the user journey from content to distribution, could be applied to the beverage industry.

In keeping with its founder’s tech background, Genki Forest tries to digitize and optimize every step of the process from product development and marketing to sales and distribution. The most difficult aspect of digitalization, Tang says, “is whether the boss can give up the power in his hands, believe in the numbers, and use them to make decisions instead.”

As much as possible, data is collected and analyzed quickly, and fast iterations are prized. This laser focus on data-driven, iterative development lets Genki Forest (like others in this emerging cohort of Chinese D2C brands), remake products in a matter of days, versus the year-plus process that incumbents still utilize.

Just like an internet company, Genki Forest considers data one of its most powerful weapons and will pay handsomely for it, either buying it from third parties, or thinking of ways to procure it.

And just like an internet company, Genki Forest considers data one of its most powerful weapons and will pay handsomely for it, either buying it from third parties, or thinking of ways to procure it.

The company can easily track and experiment with the products it sells online, which accounts for over 30% of its sales. It also does plenty of A/B testing and has apparently even performed some fake door testing. As a general rule, products are sold online first, and offline distribution is unlocked only for the best-performing products.

While Genki Forest’s percentage of online sales is indeed higher than most of its competitors, the bulk, or nearly 70%, of the company’s revenues still come from offline channels, which are notoriously difficult to break into. In fact, the company told me its milk tea series could be bought solely on online stores for a while and only made it into brick-and-mortar stores because enough customers asked about it until traditional distributors noticed.

Fortuitously, Genki Forest happened to be expanding alongside a boom in convenience stores in 2016 to 2018 and was able to sell to them directly. For mom-and-pop shops, which make up the larger share of endpoints, the company goes through distributors.

Aside from the extra costs incurred by selling offline, the largest inconvenience to Genki Forest is that it can’t collect sales data in real time. To fix this, the company is in the process of launching 80,000 IoT smart fridges.

Besides data collection for product development, Genki Forest also focused on aggressive digital marketing, leveraging both existing and new e-commerce infrastructure. For 2019’s 618 Shopping Festival, organized by JD, the company sold over two million bottles, taking first place in the beverage category. That year, it beat Coca-Cola and Pepsi in the year’s largest shopping event, Alibaba’s Singles Day, and took the category crown in 2020.

SHANGHAI, CHINA - APRIL 12: Bottles of soda water manufactured by Chinese beverage firm Genki Forest are displayed for sale at a supermarket on April 12, 2021 in Shanghai, China. (Photo by VCG/VCG via Getty Images)

Image Credits: VCG (opens in a new window) / Getty Images

As for newer digital platforms and formats, the company began selling on China’s No. 2 e-commerce livestream in 2019, which is hosted by Austin Li. For those who are not familiar with the Chinese liveshopping boom, the market is expected to reach $300 billion this year, accounting for 9% of all e-commerce activity in the country.

Later that year, Genki Forest also launched its own RED and Douyin accounts. RED is a lifestyle product discovery platform that is often described as China’s Instagram, and Douyin is the Chinese version of TikTok. While these tactics were already well known for other consumer product categories, Genki Forest was early in adopting them as a beverage company.

Finally, the company fully leverages the Chinese supply chain know-how in order to launch and iterate products quickly. Like other Chinese D2C brands of recent years, it has more SKUs and is growing them faster than traditional competitors. From 2018, its SKUs have grown from just 10 to 50. In comparison, the 12-year-old BAI has just 31 SKUs.

Yet just judging the number of SKUs would also be misleading, as the products themselves have gone through many changes. Alienergy, a Genki Forest sub-brand that was launched in 2020, has already gone through more than three rounds of major packaging redesign. But this shouldn’t surprise anyone. As long as the data supports it, physical changes to the product can be made quickly and cheaply, as going from a beverage bottle concept drawing to a whole manufacturing line setup for mass production can take as little as six days.

It’s not all smooth sailing

Despite the many advantages, the company has plenty of naysayers. Firstly, there is the fact that most D2C brands begin with no manufacturing capabilities and little or no proprietary R&D, leading many investors to discount them as marketing outfits with no real IP.

Public market investors have levied this complaint against another Chinese D2C company, Yatsen Group, maker of Perfect Diary cosmetics, contributing to its 30% drop in stock price. While it’s true that Genki Forest has smartly anticipated these objections and already began manufacturing at its own facilities in late 2020, presumably it will be a while before it can own its entire supply chain.

What’s more, competitors are emerging rapidly, both in the form of new upstarts, including one by a former employee, as well as incumbents who have realized they are falling behind. Most are aiming squarely at the sugar-free soda business, which Genki Forest popularized and still accounts for a reported 70% of its revenues.

Some are even using erythritol, which the company brought to Asia, but has no exclusive hold on. Others are attacking on the distribution side, such as Nongfu, which is promising free drinks for every Nongfu bottle that shopkeepers place in a Genki Forest fridge.

On the IP front, Genki Forest now has a 1,000-person-strong R&D team as well as a research outfit in collaboration with Jiangnan University focused on reducing sugar intake. As for distribution, it is even paying cash rewards to keep its fridges clear of competing products. But all this will eat into margins, and the cautious investor will likely argue that it is much too early to see if the company can maintain its lead.

Finally, like any fast-growing startup, Genki Forest is no stranger to the occasional PR crisis. Earlier this year, the company proactively changed the label of its milk teas from the scientifically accurate but easily misunderstood “no sucrose,” to the more intelligible “low sugar” in an effort to clarify its contents.

Unfortunately, this announcement backfired. Not only did Genki Forest fail to appease critics who had previously accused the brand of using misleading marketing tactics, it ended up causing a social media firestorm. While the company has managed to navigate this maelstrom intact, with such a high profile, it is likely to face similar challenges in the future.

What’s next for Made in China?

The combination of advanced digital e-commerce infrastructure, cheap logistics and networked supply chain hubs are enabling a new generation of Chinese D2C brands to apply the data-driven methods of software development to the design and sales of physical goods.

At five years old, Genki Forest has become the poster child for this new trend. Early VC investor Anna Fang agrees: “Everything feels right about the company — the space, the founder, the products and the back end … they exemplify the new Chinese consumer brand.“

Finally, the “new Chinese consumer brand” is not content to only sell in China. Like Tang realized a decade ago with his gaming startup, good products that work in one market can often work in others just as well.

Genki Forest is wasting no time. Its products are already sold in 40 countries, both offline and on online platforms such as Amazon. It also has 70 employees on its globalization team and recently hired Zhen Liu, a former Uber China exec and ex-head of international at ByteDance, to lead its expansion efforts. According to Candy, who oversees international M&A, the team is actively looking to make acquisitions or investments abroad and may be taking some of these brands back to China.

Either way, Genki Forest is a company to watch in this new wave of Chinese D2C consumer products. Only time will tell if this new spin on “Made In China” — just like “Made in Japan” decades earlier — is on the cusp of becoming something globally important.