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Find here the China paradigm episode 27. Martin Papp has been active in the market for tea in China for more than 5 years. He has been developing a beverage company since 2014, PAPP’S TEA which is headquartered in Beijing. He sells through private channels but also through Wagas. He is one of the first players in the market for kombucha in China

What is the size of your tea business in China?

Martin Papp: Started in 2014, myself and my wife invested around 300,000 usd of our money and registered a company in Hong Kong. In 2015 we opened our office and worked on sales and we got our first b2b client in 2016. We now have 85 b2b clients, our product is high quality, all natural, full leaf tea and we sell in around 350 locations throughout China. We also do tea drinks and R&D in tea recipe creation. As well as being competitors in the market for tea in China we are also the pioneer in the market for kombucha in China. We began working with Wagas in 2016 and we work with lots of other Western F&B clients. We are heavily b2b right now but as a start-up we are flexible and always looking at new possibilities.

Our monthly revenue is generally around 700,000 rmb per month. Over a million USD annually.

We have always envisioned ourselves as a b2c brand. B2b was a good way to enter the market but ultimately we want to go more into b2c.

We need investment to make that happen, we went through one round of angel funding in 2017 worth around 500,000 usd with bits & bites. At that time our sales were around 200,000 rmb per month. We’ve added some high calibre people to our team, including the head of finance from Twinning’s China who obviously would be very familiar with the market for tea in China.

We still see ourselves as a start-up and are operating under the goal of fast growth.

When did you break even?

Martin Papp: Since summer 2017 we have had positive cash flow, 3 years after we started.

How did you break into the market for tea in China? A market which most people would assume to be a very red ocean full of strong competitors. How did you find a niche in China?

Martin Papp: We differentiated ourselves from the competition. The great thing about being here is that if you find a niche in China, it can represent 10 million people across 2 cities, which would be big enough to represent a whole country in Europe. If you focus very directly on a small niche in China, it is easy to start generating enough revenue to justify your business.

Although there are hundreds and thousands of tea producers in China, you can still find a small niche in the market for tea in China across 2 or 3 cities which consists of a few million potential customers. We found our niche and our niche is creating high-end Western concept teas. We introduce tea trends such as kombucha, turmeric or chai tea or yerba maté that have taken off in the west and a lot of Chinese tea producers are slow to jump on these trends. Most Chinese companies involved in the market for tea in China have chosen to target a high-end, older demographic. And then there are the stores like Hey Tea, Coco and other bubble tea establishments which target young consumers. We targeted where we felt there was a void, which was people between those age groups who are generally 25 – 35, white-collar, have exposure to Western culture, and wanting a high-quality tea experience without necessarily having to go into a tea house. And we have had very positive feedback from businesses who are looking for our kinds of products. So it proves that it is not too difficult to find a niche in China.

Can you describe the products you sell in China?

Martin Papp: Loose leaf tea where you buy it in bulk, also we do tea bags, and bottled tea like kombucha.

Unlike most start-ups we have a very high number of products. We have around 150 SKUs. It was more but we learned to scale back as much as possible.

So you don’t really follow the Pareto Principle in terms of just focusing on a small handful of your best selling products and getting rid of everything else?

Martin Papp: Well that’s how it works in our business too but if a customer comes to us with an interesting suggestion for a tea, we will actually go and try to make it for them. It’s a lot of work but the advantage of being a start-up is that you don’t have to follow the 80/20 principle religiously. We can be more flexible than a big producer. We can win more customers over to our brand because we listen to them more because it’s worth it for us to have them as a customer whereas it’s not worth it for a big tea brand to make customized products.

What’s the regulation situation like in China? Is it difficult to start a drinks business in China?

Martin Papp: Compared to the US, running a beverage business in China is very hard. There’s a lot of red tape, you need to have scale, and you need to have a lot of capital. Kombucha was very hard to get though all the regulation processes, if I had just started a kombucha brand I would be in trouble now but the other products we sell in the market for tea in China have kept our heads above water as we tackle the regulation nightmares of entering the market for kombucha in China.

One of the ways you can get through the tough regulations is to find partners. Don’t build a factory yourself. I have outsourced my production of most teas to another factory in China but that won’t work for kombucha because there are no other producers. You need to find a manufacturing partner who can customize their production facilities to your specifications without paying huge fees or having to meet huge MOQs. So the process of finding this partner was long and hard, we literally visited over 30 factories and talked with over 100 on the phone.

In the end we were unable to find a factory which could both produce and bottle the kombucha so we outsource these 2 jobs to 2 different factories.

What are the main issues you face with potential production partners in China?

Martin Papp: Consistency, making the sure every batch of the product is the exact same. But really, every step of the production you’re going to run into problems. It’s going to take several iterations before you find the product you’re satisfied with. We are on our third version of kombucha. In China, I have found the best way to do business is to follow the Lean Start-Up method.

In China you have to be fast in terms of updating your products, the market will not allow you to change only 10% of your products every year, you need to be changing as much as 50% of what you offer to keep ahead of competition. This is an advantage for us because we are smaller and more flexible.

How did you find investors in China?

Martin Papp: I read a news article by bits & bites where they said they were looking for products like ours to invest in and I told a friend and he said he would be interested in investing. So I met with 4 people and I got investment from 2 of them. However, in 2018 I tried to raise another round and met with over 20 VCs and I failed to get investment from any of them. I plan on doing a new round at the end of 2019.

Surprisingly, in 2018 I thought I had a better pitch deck, had better sales but none of them were interested. Do then I stopped looking and decided to focus on sales and adding key members to our team to better prepare myself for the next round.

What do you need the funding for?

Martin Papp: We want to do more b2c, we want to do a lot of online and offline sales channels, and go to trade shows because these are important when you want to compete in the market for tea in China. And usually, I get paid 60 days after an order so we need capital to hold us over until then because it’s so hard to get loans as a start-up from banks in China.

How often did you meet with investors at the start?

Martin Papp: Initially it was a call once a week for the first 6 months, then about once a month, and now it’s on an ad hoc basis. However, they were very helpful, it was always them asking how they could help me.

Can you define a little bit the market for kombucha in China?

Martin Papp:Interestingly kombucha started its life in China before dying out in popularity and resurfacing in the west where it is now a billion dollar industry in the US. We are taking this healthy drink with ancient Chinese origins, putting a western spin on it and re-launching it in China because we were the first commercial supplier in the market for kombucha in China. But actually the difficulty is that in China consumers are already well educated about the benefits of fermented beverages, so there are already so many fermented drink products that you need to compete with and differentiate yourself from. Currently we target expats looking for kombucha, and 25 – 35 year old Chinese, white collar workers with exposure to Western culture.

However in the future we will look to have a broader appeal, people looking for healthy drinks with low calories and low sugar and have the purchasing power to try craft products. Because our retail price is 28 rmb per 280 ml bottle. We are looking at the athletic community, also kombucha sells really well in some craft bars as a non-alcoholic drink substitute.

Also we will be trying to go on all major ecommerce platforms in China, we will work with KOLs for that.

There is a market problem in China and it is not that young people do not like tea, in fact China’s youth are overwhelmingly tea rather than coffee drinkers. The problem in the market for tea in China is that the insular and sacred nature of a tea house experience is uncool to young Chinese consumers. There was no Starbucks style tea-house, which meant that young consumers looking for something trendy just started going to Starbucks, but this gap is being filled very quickly.