Deal focus: Qiming bets on resilience in China’s coffee space

Two years after co-leading a CNY 300m (USD 43.5m) Series B round for Chinese coffee brand Tasogare, Qiming Venture Partners has re-upped. According to Bonnie Wang, a partner at the venture capital firm, Tasogare’s valuation has doubled in the interim.

This is a rare achievement. PE investment in China’s consumer products and services space – which encompasses a wealth of emerging domestic brands – spiked to USD 4.4bn in the first half of 2021 with nearly 100 companies getting funding. It slumped thereafter, reaching USD 1bn and USD 1.6bn in the first and second halves of 2022 as investors became uncomfortable with sky-high valuations.

Activity has been minimal so far this year, with AVCJ Research tracking only a handful of deals. There have been some quietly executed flat rounds and down rounds, but other start-ups have been rewarded for their resilience.

“Last year, many retail companies were severely impacted by the pandemic. However, those that were able to buck the trend and deliver strong growth, becoming leaders in their categories, will definitely get a fair price in the market right now,” she said.

The size of Tasogare’s recent Series C was not disclosed – there was only a reference to a generic several hundred million renminbi figure. It was led by Yijing Capital and state-controlled Jiande Group, with Qiming and Bu’er Capital, another existing investor, also participating. Yijing led the Series B with Qiming, while Shenzhen Qianhai Xingwang Investment and InvesTarget provided Series A funding in 2020.

Wang began studying coffee start-ups in 2019, her interest having been piqued by rapid industry growth, especially through online channels. The market was worth CNY 382bn in 2021 and it is on course to reach CNY 1trn by 2025, according to an Alibaba Group report released last year. Sales of coffee products on e-commerce platforms rose 350% between 2016 and 2021.

“We have a general framework for investing in consumer goods, which is the three highs: high stickiness, high growth, and high repurchase rate. Coffee is one of the few consumer product categories that can simultaneously achieve a high ceiling and a high growth rate,” said Wang.

Qiming’s first impression was that e-commerce is preferable to offline coffee shop chains. Part of it is mass-market accessibility: buy a cup of coffee in a café and you’re paying CNY 20-CNY 30; purchase online and it is only CNY 2-CNY 3. Moreover, offline competition is fierce, with coffee shop operators paying substantial premiums for prime locations in top-tier cities.

Of the online contenders, Tasogare stood out. The company is well-known for its high-quality black coffee, which Qiming found resonated more strongly with younger consumers than the Nestlé-dominated instant segment with its pre-set combination of coffee, milk and sugar.

Hao Lin, the company's founder, was previously the China representative for Japanese coffee brands UCC and AGF Maxim. The name Tasogare – a Japanese term for twilight or dusk – references his experience living in the country.

The company has signed exclusive supply agreements with coffee producers in Japan and Brazil. It is also building domestic supply chains. A local factory with an annual production capacity of more than 1.3bn cups of coffee is scheduled to come online in 2024. It is estimated this will reduce costs by 30%.

“Consumer start-ups follow the barrel effect. A company may start out with a very obvious strength, but they need to address any weaknesses quickly or these will become the focal point of attacks by competitors. Tasogare’s advantage is in supply chain and product development, but it has made rapid progress on marketing and branding,” said Wang.

Tasogare has sold more than 1bn cups of coffee to date through an omnichannel sales engine that encompasses e-commerce platforms, live-streaming and new media, as well as hotels, supermarkets, and convenience stores. It has been one of the best-selling coffee brands on Tmall for three consecutive years.

On the marketing front, the company has engaged popular actor Zhan Xiao to represent the brand and become an exclusive coffee sponsor for Hangzhou 2023 Asian Games. These actions have significantly improved visibility.

Wang observed that overall consumer activity in China is rebounding strongly, pointing to long queues in shopping malls and the latest data. Total retail sales of consumer goods grew 3.5% year-on-year in the first two months of 2023, after declining in each of the previous three months.

For Qiming, the primary areas of interest within China’s consumer sphere exist where the sector meets technology and healthcare. The consumer team may collaborate with the hard-tech team on robot vacuum cleaner deals or the healthcare team on pet medicine plays, Wang explained.

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• Topics
• Greater China
• Expansion
• Consumer
• China
• Qiming Venture Partners
• food & beverage