Deal focus: Serving coffee at scale in China

China-based coffee chain M Stand emerged into the zeitgeist in 2021 as an impromptu photography studio. Long queues formed outside stores comprising snap-happy consumers who wanted pictures of themselves in front of the sleek and modern yet often quirky design aesthetic.

Investors noted the buzz and moved to capitalize on it. CMC Capital led M Stand’s Series A in early 2021 and re-upped in a CNY 500m (USD 77m) Series B led by BA Capital and GenBridge Capital several months later. Even as PE investment in China cratered – falling from USD 130bn in 2021 to USD 64bn in 2022 and USD 8bn in the first quarter of 2023 – M Stand prospered.

The company recently closed a Series B extension amounting to several hundred million renminbi led by local social commerce platform Little Red Book. Like everyone else, Little Red Book was sold on a compelling expansion story. M Stand had only 10 stores in 2021. There are now 350 directly operated outlets in core shopping districts across 30 cities, positioned as Starbucks for the younger generation.

Kimi Ge, CEO and founder of M Stand, observes that every crisis can turn into an opportunity. Launched in 2017, the company was prudent in its expansion, adding one new store each year. The pandemic changed everything. M Stand survived as many of its competitors faded away, enabling Ge to negotiate attractive leases with a string of shopping malls in 2020.

He was not deterred, even when a second round of COVID-19 swept through China, prompting widespread lockdowns and leading to more retail casualties.

“Launching a business involves taking risks regardless of the market conditions. We believe China’s coffee shop industry has entered a new era of opportunity in the past two years, and I didn’t want to miss out. This kind of chance may not come again,” said Ge. “Staying true to your beliefs and holding course is very important, but you must also understand the competition and the market dynamics.”

CMC also acted quickly, according to Ophelia Zhang, a director at the private equity firm. The entire process, from due diligence to signing the investment agreement, took a little over one month.

“It was a quick decision, but not a hasty one. We had conducted extensive research on the market and studied many participating companies over a two-year period, which left us with a wealth of knowledge,” Zhang said. “M Stand was a perfect match for our investment strategy – in terms of unit economics and potential for growth.”

Heavy traffic

To a certain extent, M Stand is part of a new generation of offline-to-online Chinese brands. In 2021, with customer acquisition costs out of control and traffic saturated, investors realised that the online growth story was topping out. CMC calculated that pure online players hit an invisible ceiling as annual revenue neared CNY 1bn and return on investment decreased significantly thereafter.

“In contrast, offline growth is more linear,” Zhang added. “If we don't consider single-store sales growth, overall growth is linked to the number of stores. Companies such as Starbucks and Luckin Coffee have demonstrated the potential upside of having 10,000 stores in China – a much higher threshold than in the e-commerce space.”

That said, the private equity firm wasn’t overly concerned about M Stand’s growth potential. The key question was whether the company had the capability to sustain robust unit economics when so many retail chains evidently did not. The industry was peppered with binary outcomes: some stores perform very well; others were wiped out.

Zhang’s research led to the conclusion that M Stand’s brand was strong enough to prevail in high streets and shopping malls across different cities. The company needed capital to scale.

Despite the rapid expansion, M Stand adhered to many of its guiding principles. For example, each location features a unique design that is tailored to its surroundings, which turned it into a photo hotspot and helped drive traffic – an attractive proposition for any shopping mall. Today, though, these idiosyncrasies are essential to the company’s vision to enrich consumption scenarios.

There is a roughly equal split between two store types: large premises of 100-150 square metres and small ones of about 50 sqm. M Stand matches store types and locations based on geographical position, the surrounding customer base, and the needs of the local consumer scene, Ge explained.

“Coffee has rich consumption scenarios: it could be pay-and-go or a place to engage in pleasant conversation. We cover those different scenarios using various store types and sizes,” he said.

Quality counts

M Stand has sought to shift its profile from background to a thousand photos to quality coffee at affordable prices. Menu prices might be high, but customers who sign up to the membership programme receive discounts of up to 50%, depending on their purchase history. The average price paid is CNY 5-CNY 10 cheaper than Starbucks.

Most traditional coffee shops use dark roast coffee beans, known for their long shelf lives and stability. M Stand opts for the light roast variety because they are fresher and retain more of the original flavour. These beans are also relatively sweet tasting – a popular characteristic among Chinese consumers.

At the same time, the company embraces innovation. Top sellers include coconut ice coffee (infused with a whole coconut) and oatmeal cookie latte (served in edible cups made of oatmeal cookies).

Zhang recognises the importance of product-market fit and competitive pricing but argues that companies must do more to build strong brands. What impressed her about M Stand was the detail. She recalls seeing a barista with a tattoo bearing the company’s slogan: Stop wishing, start doing and thinking it resonated effectively with younger generations.

Ge suggests that M Stand’s growth ambitions are the most powerful force binding the brand to its employees. “We are a young and fast-growing brand. Growth is a keyword in our corporate culture: we want to achieve it with our employees and share it with our customers,” he said.

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• Topics
• Greater China
• Expansion
• Consumer
• China
• CMC Capital
• BA Capital
• GenBridge Capital