Find here China Paradigm episode 104. In this interview, Lucas Englehardt tells us about his two contrasting businesses in China: the food delivery platform Waimaichaoren and the oral care business xixilab, which offers teeth straightening products in China.
Full transcript below:
Welcome to China Paradigm, a show powered by Daxue Consulting, where we interview season entrepreneurs and experienced managers in China about their business and experience in the country.
MATTHIEU DAVID:
Hello everyone. I am Matthieu David, the founder of Daxue Consulting and its podcast, China Paradigm and joining me today is Lucas Englehardt. I know you from EO, initially which is an entrepreneurial organisation where we met first. You’re the founder of xixilab and if I quote you, you are on a mission to help China smile confidently and xixilab is a direct to consumer selling invisible braces in China.
So, you can get a survey for free dental assessment and then you will get diagnosed, if I can say, or you will get advice and you will receive a kit. You are an entrepreneur. That is your third business. At the time we met, I was very impressed by the second business you started, which sounded to me to be a very, very local business and a foreigner being in such a local business was such a surprise to me, which was delivery.
Xixilab is two and a half years old now and you are selling different products one is an invisible brace and the other one is whitening and maybe I missed some of them, but generally speaking, it is oral care in China. To give a bit of perspective to the people who are listening to us, the size of the business or the numbers we got, maybe you’ve got better numbers, the size of the business is estimated to be in China about 5 billion USD and in the U.S it is estimated to be about 11.8 billion. So, the size of China as a country and the U.S as a country, China is about 4 times and a half bigger in terms of population. The market is less than half the size. Therefore, we can estimate that the potential is like eight times/ten times bigger, meaning there is a lot of room to grow. I believe from those numbers, we can already deduct that whitening products or products for oral care in China are becoming more and more popular, and the proof of that is the famous KOL who used to be very famous for lipsticks. We are in the market where things seem to happen and that’s certainly something you are going to explain to us, is what you have invested your time, your energy in this market. Thanks for being with us. I am very happy to have you here now and yeah,
Can you tell us the story of Xixilab?
LUCAS ENGLEHARDT:
Thank you for having me Matthieu. It is great to be here and great to see you again after a few years. As mentioned, I have been in China for a while. I have been here for more than 13 years and this is my third business here, actually. I first came here working in finance and then started doing start-ups myself (read more on start-ups in China).
So, specifically with xixilab, I was lucky as a child to have metal braces when I was growing up as it is quite common in the U.S and I think what happened was, the dentist said, “Hey you have some small problems with your teeth. It is nothing major, but if you don’t treat these small problems now, with time these can become big problems” and I think that’s what scared my parents to say, “Okay we will spend one at a time.” Then it wasn’t a small amount of money, but I feel lucky to have done that although they had the ugly metal braces. It was a year and a half of having food kind of caught in there, but I have been lucky to have good teeth ever since and I think that that has helped improve my health. Certainly, it is easy to keep them clean because they are straight. So, when I was looking for another business opportunity, I was really surprised in researching in the market to see that teeth straightening in China is far more expensive as it is in North America and obviously the U.S is not known for cheap health care and average income in China is still below that. So, I thought there is an opportunity here to not only help people look better.
Obviously, there is the vanity aspect of having beautiful teeth and feeling confident when you smile. You see a lot of people when they smile, they kind of cover their mouth because maybe that they are aware that their teeth have some issues. As I mentioned also, it is health care. We are not purely selling a cosmetic product and as you say, it’s a huge market already. The awareness is growing very quickly in China. Things always move at China’s speed and are very fast once they take off and I think we will see huge growth over the next 5 years, but we are looking not really or not only at the market. We have either the metal braces or the invisible braces in China, like we sell, but also really the whole unique market (learn more about orthodontics start-ups).
If you think about all the time and energy and money that people spend on themselves, whether it is their skin or their hair. Cosmetic surgery has become popular over the years and I think this is really an over-100 billion dollar-market-a-year and so, for people now to invest in their teeth, it would make sense. Yeah, that’s who we are. We have been doing this for a couple of years. We have a great product. It is imported plastic and the approved plastic and it is a CFDA approved product. So, it is safe and effective and top date we have 100% average customer referral rates. We really feel that customers are enjoying it and telling their friends.
I should mention, by selling direct to consumer we are able to sell for one-third of the market price, so we are helping solve that issue of the high cost. Additionally, we are able to avoid having customers go to the clinic every month for a dentist check because we can track their progress online using their smartphone. So that is the beauty of these invisible liners because you don’t need then to physically adjust them like you did with the metal braces, but you can just use the invisible liners.
One question I have to understand better your business. It seems to be heavy on the development of the product. Did you import the product and re-brand it for China or did you do the hard work of developing your own product? Could you tell us more about the product itself?
LUCAS ENGLEHARDT:
Yeah sure so, as you mentioned this is my first time doing a medical company. So, my co-founder, Lilian is Hong Kong-British and she has a PhD in medicine and previously has worked in some big pharmaceutical companies managing oral health care brands. So, she is in charge of the product side of things and what we have done is a bit of mixing established products in the market like, for example we have researched worldwide on the best plastic for the invisible liners. We have decided that there’s an American plastic that’s really top quality, but it has to be both soft enough to gently move the teeth into position, but also hard enough that it’s not going to move them, but it’s not going to break or be too brittle. So, we are using that. We import that into China and then we customise it and by that, I mean we 3D print a mould and each step of the way, we form the plastic over the mould. So, it is a completely custom product. Maybe I can sit back and tell you from a customer point of view customers contact us and share some photos of their teeth so that our orthodontist can review whether or not it’s appropriate to treat. If they are, then we send them to our partner clinics, where we have outsourced the 3D scanning and X-ray of that.
Although the customer is in the department clinic, they’re always dealing with our smile consultants, as we refer to ourselves and we guide them through the process. Then we take that 3D scan of their teeth and on the computer, build a 3D model of their teeth and create the plan to step by step, move the teeth into position. Obviously, each step, you can only move a small amount. So, we can gently move them into the ideal position. Our average case takes 6-12 months to complete, with the time being determined by how much each individual’s teeth need to move. After we have done that, we show them a 3D preview of their teeth and if everyone’s okay with the plan, then we produce all the liners. One time we give the customer all the liners at once. So, they have been a plan that they follow, switching every 2 weeks to another set of liners. Most customers don’t need to ever see us again. They can just follow the plan. Of course, we are tracking their progress online with a Smartphone, as I mentioned and if they have any issues, we’re available 7 days a week, online and can arrange for them to see a dentist offline if something were to come up. So, as we said, we think that this is saving both time and money (learn about our strategic market research in China).
As far as I understand, you’re sourcing the best materials you can find internationally, but the modeling and part of the production of invisible braces in China take place here, is it for speed reasons, market proximity?
LUCAS ENGLEHARDT:
That’s right and also because it’s a CFDA product; the Chinese FDA. We have to meet all the local regulations. So, the forming of the product is locally, and then we deliver it to the customer.
How easy was it to get FDA approved products into China?
LUCAS ENGLEHARDT:
Yeah so, I think like any regulatory approval it is not simple. It takes some time and some paperwork and testing. Quality is very important and though we’re selling at a lower price, it does not mean that we’re sacrificing o the quality. It’s quite the contrary. Using already approved materials helps to speed up that process, China recognizes the US FDA approved materials, but certainly, the whole process has to be approved by them and so, it took some time to get that. We spent about a year, in the beginning, to get everything set up and developing the brand and packaging, etc. and then started selling.
MATTHIEU DAVID:
So, it’s one-year development amongst two and a half years of existence of xixilab, that I got from your profile. One year was preparation.
LUCAS ENGLEHARDT: Exactly, yes.
MATTHIEU DAVID:
You mentioned pricing two or three times alreadyyou have different products, but I believe the main product is Xixilab Align. So, for invisible braces in China the price is about 18,000 RMB, which would be what; 2,200 USD and you say competitors are priced at about 50 000 RMB. With actually less customer support than what you provide – according to your website – you provide 24/7 customer support and free reservations, teeth whitening sets on top of Xixilab Align, and so on.
Why is the market for invisible braces in China so expensive?
LUCAS ENGLEHARDT:
Yeah, so that’s a great question. My belief is it’s confounded to mostly supply and demand. So, there is a lack of dentists and orthodontists in China, nationally. If you just look at the number compared to the total population and there’s going to be a huge need over the coming decades more teeth specialists and we believe that although of course, China is producing many new dentists, probably there needs to be a technological jump to be able to treat everyone and that’s why we think it’s so exciting that we can use teledentistry to make this a more efficient model, and to answer your question about the price, additionally, the market leader for invisible braces in China is an imported brand and they’ve been very successful in building the brand here, locally and establishing themselves as a quality leader. They spend an average price of 40-60 000 RMB. There are some Chinese competitors who usually are a little bit cheaper; around 30 or 40 000 RMB.
There are also metal braces that are an option. As we mentioned those are less attractive and also less convenient because you can’t take them out. The invisible braces you can remove them when you eat, or when you brush your teeth. So, by going direct to the consumer, we are able to own the full stack to produce a lot of efficiencies. So, I think we will see in China, and historically we’d like to say a relatively low teeth IQ and a lot of people are only thinking about going to the dentist if they’re having a problem. If they have a toothache then they go to the dentist, but already that’s changing. People are getting in the habit of going annually for teeth cleaning and doing more preventative work and as I mentioned, I think that the cosmetic aspect of it that people want to have great teeth. This is going to drive that much further. So, I grew up in the U.S and in the U.S teeth are kind of like a status symbol, similar to the clothes you wear and the car you drive. If you are a successful person you don’t want to have many crooked teeth or spaces in your teeth. We see that already starting to happen in China and I think it will continue to accelerate.
MATTHIEU DAVID:
I’d like to go back on one thing you said when you spoke of dentists and teeth specialists and tell me if I am wrong, but I feel that China’s health system is based on the public hospital. It is less privatized than in the west, but I feel there is an exception with dentists and health specialists. Because I can see on the first floor, the ground floor of a lot of buildings; main buildings in Beijing, in Shanghai teeth specialists and dentists.
What’s your understanding of the dental market in China and how private it is and how public it is?
LUCAS ENGLEHARDT:
Yeah so, you are right. That’s a great observation. Traditionally, everything was done through the big public hospitals and those were still in a lot of ways what people think of first when they have any medical issue, but the dental industry was one of the first medical industries where the government allowed private clinics to be opened and licensed. So, of course, if businesses want to do invisible braces in China they have to go through a strict licensing procedure, including identifying their real estate and making sure it’s a safe place that meets the government requirements and they’ll give you a license. There are a lot of clinics that have opened up; both small individual clinics or chain clinics. So, we see more and more of those clinics opening up and all of that is educating the market about the importance of simple preventative care. In general, the pricing of the market is these clinics are offering quite cheap teeth cleaning, so you can get your teeth cleaned for 1 or 200 RMB and they use that to get the people to the door and upsell them bigger things; either if it’s cavity filling or teeth removal, teeth whitening, or teeth straightening in China. So, that’s the way the market is now. We see that that’s been an opportunity and by going direct to the consumer with some of these products, obviously not all of them can be done, but we have started with teeth whitening and teeth straightening in China and believe that these can be done safely and effectively from home.
Which platforms or channels do you use to reach consumers of dental care products and services in China?
LUCAS ENGLEHARDT:
For our marketing, we are doing a mix of online and offline, given that this is a medical product and despite the fact that we are less than a third of the market price, it is still a big investment for a lot of people to spend this amount on invisible braces in China. So, it is very important to build trust with them and also to allow them to understand why this online model is safe and effective. So, online certainly we are using all the big social media channels as you mentioned; Weibo, WeChat, Xiaohongshu, and offline we are doing a lot of offline events in offices, in corporate partnerships, and sometimes going into community events. We found it is important for customers to be able to meet us face to face, to build their trust, and to see the product. You actually want to touch it and see it before you purchase and once we build the trust it is much easier to continue the relationship online.
You have another product, which is the teeth whitening product. Is it the entry product where you first connect with the client and then you move onto the other product, or are teeth whitening and invisible braces in China two different markets?
LUCAS ENGLEHARDT:
It sometimes works like that. The whitening part is more of an add-on and so our focus is on teeth straightening in China. Teeth whitening is another technology that’s been around for a while and you can choose to either do it in a clinic or to do it at home with scripts (read more on the toothpaste industry in China). We’ve designed a product to be a precision pen that allows you to fine point their teeth, directly. We have paired that with a blue light, which acts both to protect the gel from getting on the inside of your mouth, but also the blue wavelength activates the gel to speed up the lightening process. So, this is the same active ingredient that is used in the clinic whitening. We use it in a much lower percent. We follow the Australian Dental Association guidelines I term of the percentage of that ingredient. So, we are confident that it is safe and effective. So, we try to get people interested, but really most of our focus is on the straightening.
MATTHIEU DAVID:
Why I am insisting on this product as this product pricing is like 388, which is very Chinese pricing with 88 everywhere and you could sell online, on T-Mall and so no, but you have not mentioned those platforms. Would you mind sharing, what was your assessment, your strategy in choosing basically as far as I understand and correct me if I am wrong, Weibo or WeChat to create traffic offline to interact with people and also create traffic and then the transaction is going on your own website or maybe your WeChat shop which is basically product traffic and not a big marketplace like T-Mall, JD and others.
LUCAS ENGLEHARDT:
Yeah so, we do sell on our own website and also through mini-programs on WeChat. With regards to those big platforms, I think those are a great platform for certain products, but it can be a little bit harder to work with your medical products due to the licensing and also, we felt that as a small company we needed to focus our efforts on one product and our teeth straightening in China was much more differentiated in the market than the teeth whitening. So, we love our teeth whitening products. We have great reviews for it, but we thought despite the lower price point, it was still… people purchase it for 388 and it less than 100 dollars. It makes a great gift, but we thought while we are small, we need to focus our efforts and the teeth straightening in China is where we are really different from the rest of the market.
MATTHIEU DAVID:
Got it. We did some research online and we found out that 7 people on LinkedIn, but LinkedIn is not used by everyone in China. So, I am not sure if it is totally irrelevant.
What is the size of the business now? Would you mind sharing a bit of the size of the business; either it’s revenue, number of employees, number of products, and/or clients?
LUCAS ENGLEHARDT:
Yeah sure, our team is growing. We are about ten people now. Ten people are full time and then, of course, we have outsourced partners. So, we work right now we have launched in Shanghai and Hong Kong. We are looking to launch in other cities in China, but we wanted to make sure we had the process and the product down before we start to expand. So, we will probably start to expand to other cities later this year and as mentioned. We’ve had over 500 smiles transformed and those we had 100% customer referral rate. So, our customer scores are quite high. So, we think now that we have kind of nailed both the product and the process so that we are ready to expand further.
Do you raise the money for the business?
LUCAS ENGLEHARDT:
Yeah so, we have joined the China Accelerator program under SOSV and we are taking part in that now, and other than that, we haven’t raised any outside money.
MATTHIEU DAVID:
I didn’t get that because on your profile it said that you are an advisor at China Accelerator and not that you are part of China Accelerator.
LUCAS ENGLEHARDT:
Yeah so, I do both. I have been an advisor there for a few years and we decided it would be interesting for the team to benefit from the structure that it provides and we’re actually halfway through the program now and we are really loving it. The team is working extremely hard and we found that the structure around lead start-up and preparing and pitching has been quite beneficial and so for me, as an entrepreneur this is my third time in the rodeo, but I think there is always a lot to be learned and having the structure to execute, it can be useful so EO has been a great resource to me also in terms of learning practical tips about how to improve the business. I think that there is no course in university or school that can prepare you for being an entrepreneur and I mean you have to know a bit about everything and be prepared to deal with the emotional rollercoaster that can be start-ups. Obviously, China only helps to amplify the highs and lows and so, for me, the China Accelerator is a place where I both try to give and get a lot.
Would you mind sharing what you get from China Accelerator? You are a senior entrepreneur or what I see as an experienced entrepreneur. You have had two businesses before. You have been in China for 14 years. What is China Accelerator bring to you, that you couldn’t find yourself or with your own resources?
LUCAS ENGLEHARDT:
Yeah so first of all, they do invest a small amount of money to start and then potentially follow on. So, SOSB I think it’s really a top VC fund, globally. They are extremely active and also the partner,ARTESIAN is an Australian fund and one of the top three funds in Australia. So, getting brand name investors and even if it’s a small dollar amount to start, it can be beneficial for validating the business and creating trust with other future investors. There are certain things which are not rocket science, doing elevator pictures, going through the lean start-up program, to continue to test and optimize the processes, the marketing, the sales. These are things that I have done and I have read the book Green Start-up, but it can be very helpful to be surrounded by mentors and people who are experts and to reach out to them and to help push things forward. As I mentioned I am a mentor myself. I am friends with a lot of the other mentors, but the program we have found has been really quite beneficial to say, “Hey, we are going to practice this elevator pitch a couple of times a week, every week, and just force ourselves to elevate.” So, certainly, I can do that on my own, but having that structure we found so hard and is worthwhile and I would recommend it to other start-ups.
How long does the China Accelerator program last? I think there is a duration, right?
LUCAS ENGLEHARDT:
Yeah so it is 3 months intensively and then they support for another 3 months. So, in total it is basically 6 months and then there is a highlight group that they follow on with future investment and then just continue to support as an investor.
MATTHIEU DAVID:
Within the 6 months?
LUCAS ENGLEHARDT:
Even after the 6 months.
MATTHIEU DAVID:
I’d like to go back to the marketing part. I believe that is something you have thought a lot about and your second business is a food delivery business in China and I think you have strong experience in it (learn more about food delivery in China). There is a lot of questions about spending money on platforms to get traffic and these are the questions of using KOL’s and how to assess a good KOL and so on and how to drive this offline to online, which is what you do because you don’t have a physical shop. I understand that it’s more popular stores or events or opportunistic offline visibility.
Could you share a bit more about your strategy and what you see as smart to do now in Shanghai where KOL cost is skyrocketing and there are a lot of questions on spending money on these platforms; media platforms?
LUCAS ENGLEHARDT:
Sure, so this sort of sales and marketing is what I really spend most of my time thinking about. China is much harder to operate in as a start-up. I think if you are in the west, most businesses can very quickly say, “Let’s set up a Facebook Ads account or a Google Ads account” and pump money in with a pretty clear ROY and that is easy to scale. So sadly, China is not no simple. If you use Baidu for marketing, you still have to deal with a salesperson. You can’t just sign off with a credit card and there is a lot of human involvement and so Baidu also cost per click for top key words gets very expensive. It’s very addictive. So, in one of my last businesses to improve delivery, I remember two channels were SEM, search engine marketing with Baidu, and some of the others at 360. So, it can work, but actually, our number one channel for one HRM was doing offline flyers. I think this was probably one of the oldest marketing tools in the book. It’s something that’s hard to scale, but that’s also very effective.
How do you do offline in China?
MATTHIEU DAVID:
A business you operated for 5 years if my memory is good; 5-6 years and you sold to a larger food delivery business in China, offline. That means you got someone with a leaflet at the entrance of a building, or how did you do that?
LUCAS ENGLEHARDT:
Exactly, so food delivery business in China is a very local business that needs to be super targeted, not only what city you are in, but what neighborhood, are there restaurants in your vicinity that can deliver to you and so because of that, the flyers were very effective. We would position part-time staff in between the traffic areas, like in between a subway stop and then on the big buildings to grab people as they are going into the office. A flyer would be half of an A4 sheet; one side simply explaining the service. Remember now, everyone takes online for granted, but when we started, I laughed. We had a lot of big VC’s who told me Chinese people will never order food online. They would just order by phone and it seems that that has changed in the last 5-10 years and the back of the flyer would be a call to action. For example, order lunch with us and get a free coke or get a small discount. So, it was extremely direct and targeted. Handing out flyers sounds simple, but being an effective flyer takes initiative. It’s a tough job. You do it all year round, in the rain, the snow, the cold, the hot and so we found that having part-timers like university students or other part-time staff to do that not only was effective, but they needed to be monitored very closely. If you don’t have someone who you trust looking over them, it is very easy for them to just throw the flyers in the garbage and go have a coffee and so we would have a full-time sales staff monitoring them and tracking them and then our sales department was more tracking our staff and so it was a bit of a pyramid in terms of monitoring everything, but like I said this hard to do operation I think is also a barrier to entry because it takes more work to execute it.
So, we found redemption of between 3 and 5% in the flyers that we gave out on the streets. Some people would of course, just throw them away immediately or throw it down in front of them, but about 100 flyers we gave out on average 3-5 people would actually come and order through the site and we could track them with coupon codes or QR codes, etc. So, I am a big believer in doing things that are hard to scale, especially in China where everything is operational. So, it can be very hard to find third party providers that you can trust and that are reliable in every aspect and also particularly in marketing. So, we scaled the restaurant to 18 cities, 30 000 restaurants, millions of users and we had a team of a few hundred people managing a few thousand part-timers’ handing out millions of flyers every month. I’d like to share that because I think when you are operating in China, you have to do it the local way. We want the one who invented doing flyers for food delivery beer, but we were talking times with Baidu and when Baidu launched their own food delivery platform they had people doing flyers on the streets. So think about that. I mean Baidu has more traffic than god, but yet they’re still relying on offline flyers to drive awareness. I think it is really about how do you find where your target customer is and get to them with a very targeted promotion?
MATTHIEU DAVID:
Exactly. I remember reading about Alibaba ten years ago or twelve years ago and they raised money at that time because they wanted to organize fairs, exhibitions and I think that is an online business. What are they doing raising money for doing this and that way, to get people on the platform? It is a way to actually get people on retailer business, but afterward which is much more profitable. It is a repeat. To make sure people understand who is listening to us, it was a website where you could go to order food. It is not only delivery service. It is also a channel for a restaurant to find clients if I am correct and that is why the flyers make sense because it would distribute those flyers to a segment actually you identify like white collars in China and they would find a place where to order food and drinks and you connect them to the restaurant. Is that correct?
LUCAS ENGLEHARDT:
Yeah, that’s correct. So, I mean I am sure there are listeners here from all over the world, but in China currently Meituan Waimai or Eleme are the market leaders (learn about the leading food delivery platforms in China). Overseas we have Uber Eats or Grab Eats or these sorts of platforms. So, it is a lead generation and sales and marketing for the restaurants, and for some of those orders, we were providing the logistics of the delivery and for others, they would have their own delivery people.
MATTHIEU DAVID:
I have to say I am very, very impressed by what you did with Waimaichaoren. Not that I am not impressed by xixilab, but this business is so local. You have to manage the people who are doing the delivery. You have to get visibility as a website as an independent identity which is so hard in China. People go on T-Mall, JD, Xiaohongshu or whatever because they are market places and that is where the traffic is. You have to push them to download an app, which is hard, again, and to go back to the delivery man, you need plenty of them and I don’t think they are easy people to manage. You did it.
How did you find out that this would be the place where you want to start your second business in China? For me, no foreigner can succeed in this business, but you made it. Could you tell us what your vision was at that time, which made you think you could leave a mark?
LUCAS ENGLEHARDT:
So, it certainly is a very local business, but I believe to be successful in China, regardless, you have to go local and do things sometimes in very local ways. For me, a challenge as a manager is always, how do we bridge the best ideas and the best methods from abroad and locally. I think that that’s extremely challenging, but it is something we all need to continue to work on. For me, we started a food delivery business in China and there were a couple of food delivery sites abroad. Obviously, it was not as common as it is now. I can’t remember the last time I heard anyone call to order food in any country. But we saw this as an interesting face shift. People here in China were already ordering food delivery, but it was just a question of how do they order and how do they find the right restaurant. So, perhaps it was being brash, perhaps it was being foolish, but we just thought that this offline to online thing or face shift is something that is going to happen sooner or later. We got lucky with the timing and helped in a small way to propel the market forward, but we see money going to market in multiple players to train people about the advantages of ordering online.
Yeah, I think you just have to try to see the wave coming and position yourself slightly ahead of it and try to ride the wave and hold on. It can be a wild ride, but what is amazing to me about China is just when things hit a tipping point, how fast they change and so seemingly overnight, those actually years in the making; everyone was ordering online and just like everyone pays for stuff with QR codes now and doesn’t carry cash and other things that have happened basically overnight.
MATTHIEU DAVID:
Yeah, I arrived in China 10 years ago and I remember people ordering online and paying cash at the front door. I guess you saw this evolution, too.
Did you raise money for the delivery business in China?
LUCAS ENGLEHARDT:
Yeah, we raised over $30 million USD and sold it to Delivery Hero, which is a German company and one of the market leaders for food delivery operating in multiple countries. So, sadly they eventually decided to pull out of the Chinese market because it got extremely hot with local players burning money and it continues to be very hot as we have seen still, some consolidation happening, but they Eleme, Meituan now being the largest players. One, of the billion-dollar publically listed company, Meituan, to the company and the other, Meituan, got acquired by Alibaba on a multi-million-dollar deal.
Do you believe that kind of business is profitable? What is your analysis of the food delivery business in China now?
LUCAS ENGLEHARDT:
I think that they said that they are breakeven on their food delivery units. It is hard to say because they are now both larger conglomerates. I mean the food delivery model is one where you’re investing to acquire a user and you need to earn a small commission, but it takes multiple orders to break even and to make money on a customer. So, it is very important to track their costs and product users and how sticky the product is and what the lifetime value is for those customers.
I think here is a good example of how start-ups can be built, how it could be different in the west versus China. So in China, many businesses have been successful by having a big bold explosion of marketing trying to make the brand famous, just burning money to get to be big and then leveraging their size to make small amounts of money on many orders to become huge, right. So, if you look for example, at Alibaba and Taobao, this is how they did it. Using money for ten years and after some dominance in the market obviously, I mean it’s a hugely profitable business. We will see if that happens in food delivery business in China. There is a bit of time in the market and it is a question of how much, how price-sensitive are consumers?
We were the first to establish ourselves in the white-collar office worker market, which was less price-sensitive and cared more about quality and the student market where our competitors had started. So, I think for any brand, it is about finding that niche. There’s a saying you either have to be the cheapest or best. I think that is very hard to win as the cheapest in China, especially as a foreigner. So, for me, it is then a question of how do you be the best and where do you find a niche where your quality is appreciated by the customer and that they are willing to put a premium for that quality product or quality experience. If you can find that, then you can be very successful. If you can’t, it’s going to be very hard.
MATTHIEU DAVID:
( Yeah, but you need a niche then, being the third one on a very mass market. I feel that from the second experience you had as an entrepreneur, a critical experience was the one with Waimaichaoren. I feel that you kept this learning of being local. So, user techniques of marketing and getting clients that are local, but I feel that you have changed two or three things with xixilab, in terms of business. First, you are not selling anymore a very small money unit, like in the food delivery business in China, the earning for every client is very low and the price is very low for each unit. I feel that’s a very big change. The second change you had is that you didn’t raise much money with xixilab, contrary to the second business you had. You told yourself, this time I am not going to do this and this, based on your second experience and is my understanding correct? )
You seem to have learned a lot of lessons from your second business experience because you have a lot of things differently in your third and current business, is that correct?
LUCAS ENGLEHARDT:
A lot of people ask me, why are we doing teeth after food delivery business in China and it may seem at a high level that they are completely unrelated. I usually make a bad joke that after you eat lunch you have to brush your teeth, but it’s a bad joke. For me, from my point of view, I have a lot of experience doing sales and marketing and Internet platforms and this is the third business that we have done that and so in a lot of ways, it can be a bit product diagnostic and this time there were a couple of things that I wanted. One was something that I really felt the product was doing some good in the world, that it was something that we would be proud of selling, that we were helping to improve the human condition and that’s why our first product being teeth straightening. We are using the vanity aspect of straight teeth to kind of convince people to pay more attention to their health and so, in the future there could be additional products. We feel that this is something that is really helping to improve to improve people’s lives.
The second thing, as I just mentioned is finding a niche where people are willing to pay for quality. So, in all honesty, a food delivery business in China struggles to differentiate and people can be very price sensitive (learn more about food delivery apps). If we can say 1RMB can switch from A to B because often we’re in the same restaurant. It’s very hard to get restaurants and exclusive contracts. So, a lot of it comes down to time in the market.
We believe that medical products are different. You are buying something that’s going inside your body, but the quality matters. You’re not just going to order the cheapest thing you’re gonna find on Taobao. By the way, if you go on Taobao you can find a device for 100RMB that says it will straighten your teeth. I don’t know if that will work, personally wouldn’t try it, but there is always a cheaper option out there. So, we believe that customers will pay a small reasonable premium for something that is really quality by international standard, that’s tested and proven to be safe and effective.
The third thing I would say is internally in terms of building the team, my last company was more than 400 staff, all Chinese except for myself. So, I am constantly trying to become a better leader of the team. Here, I really appreciate a lot of the western style or approach of building teams focused on team culture, making it a workplace that people want to go to and are excited to be a part of. Tonight, we have a team dinner for a new staff. So, we are constantly trying to do little things to bring people closer together to create trust relationships. So, this is something that is an ongoing effort. I have learned a lot and have learned a lot of tricks to try to bring people closer, but starting with the basics, like setting very clear company values, mission statements and making sure that everything we do is in line with that. I think the real test of value is if you are willing to take a financial loss to stand up for your values and there have been some decisions that we’ve made over time with respect to team members who are the products of what we offer, that we have done that.
I certainly don’t think selling these products is the easiest way to make money, but in terms of doing something that we think is really good for the world and at the same time, can be a profitable business. We feel quite good about where we are right now and we’ll see. In the future we might be raising more money, but I think that the standard of a successful company shouldn’t be how much money is raised. Too often that is the metric that is used in the media, but really it should be about how much good can be done, how many satisfied customers can you produce, and are you creating an environment where team members can be paid a fair wage and enjoy coming to work and can learn as they work hard.
MATTHIEU DAVID:
True. I feel that’s a more and more shared motivation, to do good when you start a business or run a business. There is this wording like “tech for good,” it could be “entrepreneurship for good” and I think after one or two experiences, I feel when I interview entrepreneurs, entrepreneurs want to move on impactful initiatives and businesses.
That actually is a very good transition to the end of the talk, which is usually a question I ask for interviewees joining us here. The first one is about the books, the books that inspired them the most in their entrepreneur journey. So, what books inspired you most? You have been involved in EO; you have read I believe a lot of the books they suggest. I am sure you have some you would like to share.
LUCAS ENGLEHARDT:
Yeah, I have to think. I think some of the more famous books for people who are in need of start-up’s I think Lean Start-Up is a great place to start in terms of thinking about how do you test and find your market using a scientific method to find a place where you start.
Often, we believe that a great company is just two guys in a garage with a vision from day one, but actually basically most if not all the big successful companies have pivoted once or many times and ended up being successful with stuff that was quite different than what they started off with. So, I think that that’s a great place to start.
I also recently have been exploring more books around goal setting, currently reading a book on goals, thinking about how do you look at your whole process and chain. The book is called Goal. It’s an older book. I think what we are doing now is a digital business and it’s very different, but it is about looking at your conversion funnel, where your leads come in and how you can bring them to customers, where are the bottlenecks and how do we include those? So yeah, that’s just one that I just finished. So, it is at the top of mind.
The book is Goal. What is the name of the author? Is it Guldratt?
LUCAS ENGLEHARDT:
It’s called Goal. It’s by Guldratt, yeah.
Do you have any books to recommend specifically on China? If it’s not books, it could be any format, it could be a movie, it could be even blogs or newsletters you find to learn about China?
LUCAS ENGLEHARDT:
Yeah, so I think about it at a high level, but it’s not related to text stuff, the book by Henry Kissinger on China. That is quite good. Thinking about China as a culture and that’s amazing really, what a long and rich history they have and how there is this kind of innate feeling of being part of a bigger whole, which I think is one of the keys to the country’s success and continued success of becoming the world’s superpower and really be here for the next few centuries. In terms of blogs, I like to read the newsletter Sinocism by Bill Bishop. I highly recommend paying for that version, which covers an overview of China news. I would say that’s probably my number one go-to China read.
What productivity tool do you like most in China? What do you use that you are happy with?
MATTHIEU DAVID:
I feel it is very difficult to find the similar productivity tools we have in the west, Ever note or Monday.com. I feel I have struggled to find something you don’t need a VPN for which is Chinese and international at the same time.
LUCAS ENGLEHARDT:
Yeah, that’s definitely it hard to find tools that are not blocked and are stable. Currently we use two. One is that we have Microsoft Office 365 and that’s the suite of online tools and that’s quite stable for us from everything from e-mail to planning and to manage. The second thing we are using is WeChat for Work and obviously, everything in China is WeChat now and WeChat Work has been useful to allow us to separate work and personal WeChat and also some of the tools in that in terms of tracking holiday time or sick days and some other stuff. It has been quite cool for us.
How long have you been using WeChat Work?
MATTHIEU DAVID:
I feel that it was created four or five years ago, but very few people used it when it was created and now with the lockdown and people not working, I feel that more people are doing it.
LUCAS ENGLEHARDT:
Yeah we started using it around 6 months ago and so, our team was on remote during the virus time here and that’s how we were doing our daily calls and stuff. So, one thing I would say as a start-up is the meetings that are very important and scaling up stuff and we have daily stand up meetings. Actually, we do two now a day; both in the morning and the evening. We do a weekly all hand’s meeting, of course, department meetings, and then quarterly and monthly we do bigger meetings to share and track our goals. So, I am sensitive to not have death by meetings, but I feel it is important for people to have meetings and present things forward. The more people communicate, not just online; be it text messages, be it face to face to say, “Here’s an issue we have. How do we get together to solve it?” “It’s been good. It helped us build faster.”
MATTHIEU DAVID:
How long is the meeting?
LUCAS ENGLEHARDT:
It is about 5 minutes in the morning, covering how are you feeling, what is the most important thing you are doing today and is there anything you need to share and then at the end of the day we are doing a meeting, which is what did you learn today, what did you accomplish and will you be working late? Are you doing overtime today?
MATTHIEU DAVID:
It is incredible how it is impacting all of us. That’s so much of scaling up of EO learners. The last two questions, I really like these two and I am very interested in your answers. What success and failure did you see in China which you were not expecting to see and which is actually showing something bigger happening? I give you an example, I often use this one: Carrefour. To leave China and to sell for only 600M USD after 20 years. For me, that was a failure that shows that e-commerce has taken over. It is finished. The other, the offline shop, you come from the pure player and not the reverse. At the opposite of success, I was very surprised by the success of coffee shops: Starbucks, Luckin in some way. If some numbers are wrong, they are still everywhere in a tea culture country.
So, what is a success or failure you witnessed that was a surprise to you?
LUCAS ENGLEHARDT:
I think what is surprising to me is in some industries, you have kind of a lack of infrastructure, and that allows China to leapfrog the west in some ways. You mentioned mobile payment. Because you didn’t have the credit card infrastructure there, people went directly to mobile payments, and now when I am outside of China, I have to carry cash or a physical credit card. I mean even taking the subway, even when you don’t have a physical card, right? It is all on your phone. You just swipe your phone and you walk through. That’s great.
Coming in and out of the customs at the airport, if you’re on E-channel, the digital thing, it is so much faster and smoother to go both in and out than I have seen in other countries. It is not something everyone has to apply for. Foreigners have to apply, but for most Chinese as long as you have the most up to date passport, you get it by default. So, I think these areas when China says we are going to tackle it, they are just so efficient at developing solutions and rolling them out.
In terms of I guess other successes, I think the power of brands here and that is something that people are so willing to pay a premium for. For example, athletic brands like Nike or Lululemon is doing a great job right now. So, again we come back to you either have to be the cheapest or the best. You can buy yoga pants on Taobao for who knows what, 10RMB and people are willing to spend really a lot of money on a pair of branded yoga pants because they know them as quality and as a status symbol and as a community that they want to be a part of. So, I think it is important for companies operating here to realize that the days of just dumping your old product here are behind us and you really have to invest for the longer term. It is very hard to have any quick wins and if you invest in the long term you could be successful. You said Carrefour’s exit was a failure, but I think it’s okay. Maybe it’s not what they hoped for, but to build a multi-million-dollar business I such a tough market, I think there is a lot to be respected.
MATTHIEU DAVID:
I really liked your answers and I knew I would find very unique answers from you about the pool of brands, the pool of branding in China. Coming from France 10 years ago, I was very amazed how brands were key in the decision making process of the Chinese as attractive. I see that’s the case. Thank you very much for being with us and spending time sharing, I really enjoyed it. I hope you enjoyed it and had a good journey with xixilab.
LUCAS ENGLEHARDT:
Thank you, Matthieu, it was a pleasure and if anyone would like to learn more, please check out xixilab.com.
MATTHIEU DAVID:
Thanks, everyone. Bye-bye.
