Find here the China paradigm episode 27. Learn more about Martin Papp’s story in China and find all the details and additional links below.
Full transcript below:
MATTHIEU DAVID: Good morning, everyone. I’m Matthieu David. I’m part of Daxue Consulting and its China business podcast, China Paradigm. Today, I’m with Martin Papp, the founder of PAPP’S TEA, and also you are very involved in Kombucha in China. I’m not sure if I pronounced correctly? You are going to correct me later on, and you have a very strong experience in the music industry in China that I’d like to go through with you.
First of all, talking about the tea industry in China; you have developed this tea brand in China by yourself, and you are now selling in China, you are based, or the headquarters of the company is based in Beijing, and you are selling the products also in Wagas and not only through your own retail presence or your own online presence, but also through Digas since 2014 already so you have a sight able… lots of experience in this industry and the tea industry in China. First of all, the first question, could you give us an idea of the size of your business, your innovative tea brand in China? It could be the number of clients; it could be the number of places you sell, it could be the size of your team; anything that could help the audience to understand what’s your size now, in which stage you are in terms of development?
MARTIN PAPP: Sure. First, thanks for having me. I sorted of started tea in 2014, and so I started with opening a Hong Kong company, but with the intent of operating a business out of Beijing. At that time, we had zero clients and zero income, but… and two connections, but we ended up growing the company to about over 85 B2B clients, currently. Now we’re selling over 350 locations around China mostly selling high-quality full-leaf all natural teas. We’re also doing tea drinks; recipe creation, tea innovation and as you said, we entered Wagas actually in 2016, and so we work with a lot of western FNB clients operating in China. Currently, our revenues are generally around 700 000 RNB per month, so we’re over a million dollars USD annually, which is…
MATTHIEU DAVID: you’re talking about what you said B2B?
MARTIN PAPP: It includes them both, so our business is heavily B2B right now, but as a brand and as a start-up everything is about transitioning and pivoting at the right time so we have all envisioned ourselves as a B2C brand. We’re really focused on brand building, and B2B was really a good way to enter the market as a start-up, but the ultimate goal would still have the majority of sales to be from consumers, and we are on our way to do that, and we have also been…
I went through one round of angel funding in 2017 through Bits x Bites in Shanghai. I also now have some pretty high caliber members on the team. We recently just had the head of finance from Twinning’s from China join our teams so we’ve got some really good momentum moving forward and so we still plan on… we still see ourselves as a start-up. We are still operating under the goal of growth; fast growth and we’ve been able to operate already; operationally at a good break-even.
MATTHIEU DAVID: When did you break even?
MARTIN PAPP: You said when did we break even?
MATTHIEU DAVID: Yeah.
MARTIN PAPP: We started… so I mean we hadn’t re-cooped our investment, but we started operating with positive cash flow basically since the summer of 2017.
MATTHIEU DAVID: So, 3 years after you started?
MARTIN PAPP: Yeah. So the first… we made it passed those first dangerous 3 years.
MATTHIEU DAVID: Congrats. That shouldn’t have been easy especially when you deal with a product… I see a lot of service companies which is pretty easy with not many costs, but when you are dealing with products you have to… with a product you have to create; you have to make it different, basically. Could you tell us more about how one can have market share in a product; in a market that is very Chinese or where you have on your deposit very big companies? How have you been able to do that?
MARTIN PAPP: Well I mean it’s really always about differentiating yourself and finding a niche, and the one thing that’s great about China is that even if you find a very small niche; that is large enough to have a viable business. You know, so I thought long about some brands the other day that are doing… small tea brands in China and kombucha in China and you know, a brief example: I had a friend from Denmark that’s waning to do kombucha in China and you know, we were talking about market size and a model of their business for the whole country you know, of a population of I think it’s less than 6 million people and for me., I China it’s like well if I just focus on a very small niche of people in Beijing and Shanghai I am already at 10 million people, so…
MATTHIEU DAVID: It’s a district, right?
MARTIN PAPP: Yeah so that’s the beauty of China that it’s so… there’s really no point as a start-up to try to capture a large shaft of it when you very much can start a profitable business being very niche and being very focused on who your target market is and then, so that’s where I think we succeed is that why there are hundreds if not thousands of tea brands in China. You know, there’s still a place for us if we’re creating high-end western concept tea.
So we import teas to China, we create creative blends, we’re very much always introducing to China a lot of western trends so adding things like for example, kombucha in China or kind of super words like Turmeric or Chai Tea or these types of products that have taken off in the west and we bring it to China and that’s maybe something that a lot of maybe Chinese companies are a bit slower on or not as familiar with. You know, we’re actually one of the first companies to educate Chinese customers about mate; yerba mate from South America.
So there’s a lot of fun element in our business of kind of introducing new products that are familiar to Chinese and yet they know little about and surprisingly most tea brands in China have taken the path of very high-end or on older demographic and then you have a lot of Chinese companies that do the food and beverage in China, the cocoa teas, the bubble teas and so there was really actually avoid and this is where I kind of came in because I did not feel like there was a brand; a ta brand that was really speaking to my generation; young, white collar folks that are looking for good tea brands in China, but they also don’t want to go to a traditional tea house.
So we make tea in China a lot more accessible and also providing a high-quality product and not going down to something really cheap and so there’s definitely a market for that, and we’ve had a lot of good response from businesses especially those that are looking for those kinds of products and now the next step for us is to start leveraging that in expanding into more B2C channels, online sales using the T-Malls and the WeChat as well as your more traditional B2C channels working through supermarkets, maybe directly through gyms and things like that where customers can get to your product.
MATTHIEU DAVID: Tell us a bit about what your products are? Can you tell us what the format is? Is it sold in a can? Is it sold… is it leaves you to sell? Is it in hand, in a basket? Could you tell us what the format is?
MARTIN PAPP: Sure. So out formats are… it’s loose leaf tea so you are buying bulk bags of tea also in tea bags and this is where you are getting 3 grams in one single tea bag, and then we also do bottled drinkable teas; RTD’s and that’s what the kombucha is. We are fermenting the tea with yeast and bacteria to create a bottled tea drink. So, we do the whole game and that’s actually one of our start-ups is probably different than most start-up’s is that our SKU’s and the number of products we offer as a start-up is pretty enormous and requires a lot of work. We probably have, I think 150 skews.
MATTHIEU DAVID: Wow, that’s huge.
MARTIN PAPP: Yeah. I think it is more. It was more than that, but we’ve learned to scale back as much as possible and not decided to do too much.
MATTHIEU DAVID: I see; very interesting because I guess when you have so many skews and some of them truly are selling very little and some others; maybe 20 units with the deliverable of 2080 so sitting at 20% and making 80% on sales.
MARTIN PAPP: Correct and on top of that, we are a company that you know, is opportunistic so I mean I think you have to be when you’re a start-up, an entrepreneur in China and so a lot of people even after they look at all of those teas, “Why don’t you have a tea with you know, a strawberry flavor that’s mixed with green tea?” And I’m like, “Crap; I don’t have that. I’ll go make it for you.” So doing a lot of… we end up continuing to customize and build on our SKU’s even when we have so many options, but again I think that’s also and I think this is a good point for this China business podcast you know, people look at this and say, “Oh my God, that’s a lot of you know, work and you should focus on the 80/20 principle; like, you know like don’t waste your time on you now, stretching yourself too thin”, but at the same time and the way I see it is that this is the advantage we have over our competitors. Because I am a small company, I can go and do those customizable products for you. It’s worth it to me whereas a big tea brand in China; they are inflexible and they will not be able to satisfy your needs, so I’ve used that….
The size of our company as an advantage to be able to provide much more customized products for customers. That’s really where our success has come from. You know, someone has had good tea. You know, a lot of the tea companies have more resources, they have more channels, they have a bigger staff, more power; buying power so how do we win our customer over as opposed to the big brands and that’s because we offer more personalized services. We work with the little guys and you know that’s how we built our business.
MATTHIEU DAVID: I am actually very surprised you are also doing bottled tea. The reason being is that it goes, I guess much more relations because you are mixing the liquid instead of just the leaves in bags. How do you deal with the regulations? Selling food, selling beverages in China and made in China, processed in China; there is more and more heavily regulated… has it been complicated or is it overstated, the complications, if you look at it?
MARTIN PAPP: I mean it’s a very good point. I do not think it is overstated. It’s very complicated and much more different than one may think. It’s very unlike… I can relate to the US market because the US market has a very thriving community and also craft community, so you have a lot of individuals that want to do their own beer, create their own kombucha in China, and they can do that because the legal system to run a small business in the United States is a lot of… they make it accessible whereas in China, to run a drink business as you mentioned comes with a lot of red tapes. You have to have a scale, you have to have an extensive amount of capital, so you know, I have been trying to get kombucha off the ground in China for over two years and I’ve really subsidized the whole project because of my sales of tea.
So, if I just started with kombucha in China, with my this new tea brand in China, I think I’d be in trouble, but because I’ve got a good growth and sales; consistent sales with my TMA have experiments into these other… because I think there’s a huge pay-off for going into RTD’s. If we can get bottled teas in the right channels, you really open yourself up to fast growth, and that’s why you could stay in 10 x multiple growths. You know, with those types of convenience products, but the regulation is tough. You know and to really explain to you how I overcame that is I found partners to work with. So, highly advised, not trying to build a factory yourself until you have significant sales traction. So,
MATTHIEU DAVID: Did you have to build a factory with someone or you’re outsourced it?
MARTIN PAPP: Yeah so I outsourced everything, but that’s not easy with the product like kombucha when it’s not being made in China. So, you have to really spend a lot of effort trying to find a manufacturing partner to customize their supply line to fit your specifications without paying an exorbitant amount of fees or an exorbitant amount of MOQ’s; Minimum Order Quantities and so it was really a long process of visiting probably over 30+ factories not to mention the 100 factories that we contacted over the phone, but to really find factories are willing to work with a start-up, willing to work with you that…
So to answer your question, we outsource our kombucha in China and our bottled tea through 2 processes. One, the factory makes the kombucha for us, and we have another factory that actually bottles it for us. So we were unable even to find a factory that could do the whole thing in one you know, in one go. So we have had to break the production down in steps.
MATTHIEU DAVID: I see; very interesting because I believe that a lot of people when thinking of processing and starting a business think that they should see it as a pure thing. They shouldn’t manage everything. They should consult everything, but already being able to check to ensure the quality is good, to ensure the process is well respected is already a lot of work as in the initial stage. In terms of checking what the processes will do, what was the quality; what has been the most painful?
MARTIN PAPP: What were the pain points when checking quality? Is that your question?
MATTHIEU DAVID: Yeah the quality or the processes; what did you focus on when you checked on… one of the factories you visited; what has been the thing you focused on? I understand that some of them may not take small amounts of production, but some of them you direct them, I guess because of you… processes, quality; what were the factors?
MARTIN PAPP: Yeah well, I mean so the consistency is a huge issue; making sure that the product is the same from one production run to the next is a challenge. It’s really hard to answer. It’s a really hard question to answer because I mean every step of production, you are going to run into problems and it requires… I would say that what to keep in mind is that it’s going to take several iterations to create a product that you are happy with and so I would highly, at least for us you know, we’re on our third generation of kombucha in China now and we’ve had multiple problems you know, from the very first batch that we had so just known that you’re going to run into problems and so, therefore, don’t expose yourself to too much risk too quickly.
You know, I had the opportunity to go into more supermarkets last year, but I actually restricted our growth a little bit just because I wanted to make sure we got our production under control and make sure that every batch to batch was consistent, so it’s a balancing act of you know, you want quick sales. Everything moves fast here, but at the same time, don’t be afraid to kind of plan out a slower roll out so you have the opportunity to make changes as you go because if we launched our first generation kombucha in China in all the channels we have now, it would have been a disaster, but because we started with the first couple of select clients that we had good relationships with and, “Here, we want you to test this out. We know it’s not perfect, but we are going to be making changes.” Having that experimental time is key. Yeah, that something to keep in mind for anybody looking to do any type of physical product is that, don’t put all your eggs in one basket.
Take it to step by step because it’s not going to be perfect the first time and you know, I have met some entrepreneurs that needed it to be perfect from the get-go which is great, but then you know, they’re in development for like 3 years and then you know, China… the opportunity has been lost so it’s really about saying, “Can I get it to 90% of what I want and sell it and then know that I’ll continue to improve that last 120% as we move forward?”
MATTHIEU DAVID: That’s a nice way of working. That’s one thing that has been stressed out by many people and many reports the way of innovating in China is to create product, to try it, to learn from the market and to re-innovate, to re-iterate and and in Europe or in the West, generally speaking to do much more IND and then to run the product without ruining the market which has made some of the failures of the dot economy collapse in the early 2000s. So, I wrote down that you said your competitive advantage was familiarity with the product or familiarity with resourcing the product; where it comes from, speed and to be able to talk to a new generation?
So from what you said, three aspects you are saying? Familiarity I can understand because maybe more difficult for Chinese to be international, to understand resourcing, to fully understand the product, yeah? Speed; okay, you will be faster than the Chinese and faster than a Chinese company. Do you feel that it’s possible? I feel it’s the main barrier for businesses here. They have to be slower.
MARTIN PAPP: Well that ties into a little bit about don’t be obsessed with perfection, and maybe that’s why a lot of western companies move slower than Chinese, but I think we’re kind of like… you know, my team is Chinese, so we do kind of operate with the Chinese kind of work ethic. We work you know, long hours 6 days a week and maybe not as efficiently as a western company would, but we make up for it with the speed in which we make decisions, what would maybe in the west be calculated as very rash decisions without enough data, but you’ve just got to go, you have to move. We have changed products on the fly all the time to keep up with that speed. Having said that, I would love to take it slower. It’s not like I’m driving the company at the speed that our clients are so to give an example, our FNB clients especially some of the nicer or more popular western restaurant chains; because of the speed in which China changes, you always need new products coming in.
So restaurants are changing their menus twice a year at least so every season, every summer, every winter you’ve got to have new products ready. So, you don’t have time to create, you know, your 10 perfect products and go with that for the rest of you know, 10 years. They want to change immediately. So the point in trying to create something so finite and so final when you know that when winter comes, they’re going to want a fully different set of products. So, that’s maybe specific to the tea industry in China, but because it’s very different in the United States. When I go to restaurants here, it’s like the menus stay the same and for the last 5 years, the only thing they do is maybe have it inserted every year with the kind of like a new product.
So, it’s basically you’ve got 90 the same and 10% that changes whereas in China I would say at least 50% of the products on the menu are constantly evolving so you have to be fast. It wasn’t that I needed to be fast. That was the requirement from our clients, and we learned how to deal with that so, we work… the reason that I say this is an advantage is that bigger companies are harder to move faster when you have more bureaucracy in the company, you have more protocol, you know being at a start-up level you are able to make decisions in an afternoon without having to go up 3 levels of command and this… so I would say the smaller the company, the more speed you have at your disposal.
MATTHIEU DAVID: You say you are working 6 days a week? Is it because you have too much during the weekday? Is it everyone in your team has to work either on Saturday or Sunday? Like in 9-9-6 as we know. Is it compulsory or it’s just because it is needed?
MARTIN PAPP: It’s not compulsory. It is a system mentality. You know everybody in our company wants to work hard, and we end up doing things as needed.
MATTHIEU DAVID: You are expected to work on Saturday, right in the company?
MARTIN PAPP: We were for the first three years. We’ve kind of toned it down a little bit just in the last couple years, but yeah we tell people when we hire them that it’s for the first three years, that’s how we operated, yeah.
MATTHIEU DAVID: I see.
MARTIN PAPP: And most people that come to a start-up I think can accept that. I mean you don’t go to a start-up to do the 5 days a week you know, low working hours…
MATTHIEU DAVID: I need to change the rules in my company then. I’m just surprised that it’s a capitalistic business. You have to invest money. At least you have to sustain for some time to find factories, to develop a product and maybe with that much income and you raised money only in 2017 if I wrote correctly in my notes. Can you explain it? This is something I feel I don’t understand here.
MARTIN PAPP: Yeah, yeah maybe I was not completely accurate in what I was saying. I had received funding from myself and my wife. So we started with that we put into the business and then 2017 is when had an official outside investor come in and invest and kind of professionalize the company. Before it was just my wife and I invest in our own capital.
MATTHIEU DAVID: You are co-founders?
MARTIN PAPP: Yes, we are co-founders. Having said that; she’s much more in the background, but very critical the first year having her around to help navigate the administrative side of things, but
MATTHIEU DAVID: She’s Chinese, right?
MARTIN PAPP: Correct. That wasn’t clear, I guess. I highly recommend having Chinese roots if you are going to run a company in China. It helps a lot to have somebody local in your court that’s always going to be on your side. You can do that with Chinese partners too. I am not saying it doesn’t work, but having the family tied together obviously incentivizes your partner to make the decisions in each other’s interest and not just in their personal interest.
MATTHIEU DAVID: Would you give us an idea of the size of funding you got in 2017?
MARTIN PAPP: So, we had $500 000 in 2017, and that was split between a venture capital firm in Shanghai, and it ended on an American investor. They split that… I mean funding wasn’t a small amount either. I had seed amounts of about $300 000.
MATTHIEU DAVID: Okay so a total of let’s said $800 000 so far?
MARTIN PAPP: Yes.
MATTHIEU DAVID: I see. So, I guess for the investors you had a pretty good deal because you only had that bit of experience, so it’s not really a seed anymore. How did you… it could even be a series A.
MARTIN PAPP: I mean, so 2014 is not an accurate date from when the company started if that’s what it says. That’s when I founded the Hong Kong company, but we didn’t actually start selling to our first B2B client until 2016. So, really the company didn’t start in terms of having an office and working I would say until 2015, and it really took about a year for us to kind of get something off the ground and then we had another year of just working on sales so we went about a year and a half to two years before we approached investors for an angel round and at that time we were having sales of around 200 000 RNB a month, so that’s like let’s say $30 000 a month. So, you know we’ve since then we have basically more than doubled that, tripled…
MATTHIEU DAVID: how did you get in touch with the investors and how many did you have to meet before you found a good match?
MARTIN PAPP: Yeah, so I think this is a tough one. I don’t feel fully qualified to answer. I feel like it’s so serendipitous that I found that round of investments because that particular round came really easily because of I just… I met Bits x Bites through a news article about how they are investing in companies just like us so I would say that I really found I think the perfect investor for us and I think that is so critical because after 2017 it was so easy to like I went to them, and they liked it, and then I told them that I was going to raise more and I had a friend. I was like, “Hey, I like Kombucha too” and then we did invest. He is an investor, and I had… I met with about 4 people three or four times, and I got investments to form 2 of them.
Having said that, I then tried to raise another round in 2018, and I met with at least 20+ VC companies and one of them invested and so I kind of put a halt on that round of funding, and I plan on doing a new round at the end of this year. So, I had a large amount of success and luck I thought in 2017, and in 2018, I was completely dry, and at that time I thought I even had a better pitch. I had a better pitch deck, I had better sales, but just nobody really latched on to the concept so I think it’s kind of a hit or miss business and it is really just about perseverance and making sure that you’re not doing the same thing necessarily over and over.
People say it’s a numbers game. I do agree with that, but it should be a numbers game where every time you maybe make a small adjustment according to the feedback that you get so that’s why I kind of stopped continuing to look for investment in 2018 after about 20 people I said, “Maybe I need to re-think about how I am doing this” and now I am focusing on getting more traction with our sales and improving our core team, and that’s why I said I recently had the head of finance from Twinning’s join us, so I am putting the pieces in the place to set myself up for the next round of funding.
MATTHIEU DAVID: I see what do you need this funding for? Is it to create new products; is it to enter new solutions in China or to actually get your B2C brand, right? Then to be less dependent?
MARTIN PAPP: Correct. It would mostly be to do sales and marketing; B2C. That would be a large push for online channels so that would include advertising and promotion and it would also be for offline sales channels which requires quite a lot to enter you know, supermarkets and distributors have the capital and go to trade shows. You have to have the capital to pay for stocks in the supermarkets. So, then you need to have the working capital to you know, withstand getting large orders, so that’s a big problem for a company like ours where we are growing, but the payment terms… you know, we don’t get paid until 60 days after we make a transaction.
MATTHIEU DAVID: Yeah, 60 days. For a start-up, it is tough. In China, some people that are listening to us don’t know, but in China, banks don’t do working capital loans for such small companies. It is only for very big companies, and many companies have the same issues even if they are seen as big, making tens of millions of US.
MARTIN PAPP: Banks; what’s that? I have never been to a bank before in China.
MATTHIEU DAVID: it seems that it has been pretty easy for you to raise this amount of money like 500K US, but weren’t you afraid of the tensions to use it the right way and the right amount of percentage? How did you have the metrics? How did you know how much to value your work and how much you value the capital? How do you work out?
MARTIN PAPP: Yeah, I had to learn as I went. So it required talking to mentors, talking to people in the tea industry in China. You know, if one investor doesn’t invest in you; you turn them into an adviser instead. Some of the best advisors are the people that feel bad that they didn’t invest in your company. So I would say like, “Don’t worry. You didn’t invest, it’s fine, but the deal I’ve got here; what do you think?” Like, what should I be negotiating here? So I think one of the things that an entrepreneur needs to do is to be able to ask for help in many places and to leverage everybody that you know and I do believe in you know, the concept that you have to send out a signal of what you want in order to get it back. It is very about just when I was going through that process; I would just talk to everybody I knew. Like, “Hey.” I didn’t try to keep it to myself and said, “Hey I go this investor that maybe will invest. How much do you think I should give up the company?”
So I got alto of different opinions and then eventually I got a pretty good deal. I did. Basically, we are operating at 20/21 so 2000 RNB a month. That was about so that’s about 240 000 oh sorry; 2 000 400 a year and I valued the company that Angel round at 20 000 000 RMB so it’s about a 10x. Correct so I think I did a good job of negotiating that; offered 15% of the company and so that went pretty smoothly overall; term sheets I think are very important, but I think more importantly you have to find the investors that have the same vision as you. So, I think I’d get very lucky with my 2 investors is that they are very encouraging, they’re enablers, they’re not restricting me in any way; always trying to find ways to help me and I really appreciate that and so you know, I think probably a lot of start-ups run into a lot of issues when they get the wrong investor on board.
MATTHIEU DAVID: How often do you meet with them? You said they are very helpful. Is it something very organized like every month? Is it just when you need you to ask them for some advice? How do you work with them?
MARTIN PAPP: It was quite structured in the first year, and that’s because they are fairly professional angel investor so they were actually running what you know, what you would consider an accelerator program and I would meet with them you know, every week I would have a phone call.
MATTHIEU DAVID: Every week?
MARTIN PAPP: Yeah, but it was from a very – as I said, it was for a very supportive role like what can we do for you? What are your challenges? Who do you need to talk to? I found that very helpful. Having said that, after about 6 months we reduced the amount of contact time to once a month, and after a year, I would say now it basically contacts on a need-to basis. So I would say probably in touch maybe once or twice every couple of months or something like that.
MATTHIEU DAVID: I see. We are talking about your company. We are talking about your product. I would like to talk a little bit more about the market. So the niche, as you mentioned; you define the niche…as far as I understand more like a generation; more as a younger generation, so this is an interesting piece still or Kombucha and also I’d like to add the perspective on 2 products. Could you tell us more about the market? What do you see in the market?
MARTIN PAPP: So specifically for Kombucha in China or for tea in China?
MATTHIEU DAVID: I think both of them I am interested and before we go to Kombucha could you define more of the product? I’m not sure if the people listening to us will be familiar with it.
MARTIN PAPP: Sure. I am talking about Kombucha in China first, and then I will talk about tea in China. So Kombucha in China is a tea that is; a sweet tea that is fermented with yeast in bacteria and callus and what you create is something very similar to a cider or vinegar even. So it’s a very sour, sweet, tangy fizzy tea drink. This has become very popular in the west, specifically the United States.
So, it’s really grown in popularity for its health properties. It’s a low calorie; low sugar drink that contains probiotics, organic acids, great for digestion and it also carries a lot of the benefits of normal tea drinks, so they have lots of polyphenols, antioxidants. We are the first company to launch this product commercially in China or at least an authentic version of it and this is very ironic because Kombucha; the origins of Kombucha actually come from China, so you basically had in traditional Chinese medicine or homes brewing these little what we call Scobie’s; symbiotic of bacteria and yeast in their tea and they would drink them as you know, as a medicinal drink
MATTHIEU DAVID: Sorry to cut you off, but that reminds me of the story of Red bull which is coming from Thailand. Its recipe was coming from Thailand, so it’s a very interesting story.
MARTIN PAPP: this is very similar to our tea as well is that what we do as our company; our company is called PAPP’S TEA is we ended up taking things that are original or traditionally are Chinese and we really just re-invented to show a more kind of western spin on an ancient Chinese product so, and that’s what Kombucha is. I mean it’s taken this ancient Chinese tea elixir that had really kind of died out in popular Chinese culture.
It was quite popular in the 80’s so I had to know a lot of older Chinese people that were familiar with it, but most young Chinese are not and so what we have done is we have taken that traditional Chinese concept and put it into a bottle, carbonated it and served it cold and these are all very American things to do. Drink something cold and carbonated, that’s not the first thing that Chinese usually think to do. So we basically took a Chinese product and westernized it. I did not do this. This was done in the United States. It became popular, and so now we are bringing this to China, and it’s really fascinating because there is a much more sophisticated market here for fermented products. So the United States everybody is like, “Oh cool. Probiotics” and
MATTHIEU DAVID: When you say here… so it’s like you went here because you are now in the United States; are you saying in China?
MARTIN PAPP: No, I mean in China. My physical spirit is in China. So yeah, I see myself as a Chinese person now. Yeah so here, it’s a very sophisticated market for fermented products. Chinese consumers are very familiar with the benefits of fermented products. They get it, you know, it sounds very scientific into western years, and you’re like, “I don’t know what that is.” When you translate it in Chinese, people hear these words all the time. It’s very common.
So, you don’t need to convince anybody about what’s beneficial about a probiotic drink in China. So the challenges though are quite the opposite in that there are so many fermented products in China. How does Kombucha differentiate itself? What makes Kombucha more interesting than say the tea on the shelves in China? There are tons of beverages in China with fermented roots, fermented foods and so the challenge here is trying to create an identity in an already crowded space and that’s very different in the United States where Kombucha in China has been this kind of new trend that really didn’t have an existence so in that senses China is a very interesting market. It’s hard to tell exactly how it is going to go, but our stake in the ground is maintaining the western authenticity of Kombucha so being part of Kombucha Breweries International and making sure that people see that… what they do in America and what Kombucha in China is; we are not just you know, creating a market spin-off, but we’re actually bringing this to China and making authentic you know, craft brewed Kombucha and doing it in the same spirit that western companies are doing it.
MATTHIEU DAVID: to be clear on Kombucha in China; I see on your LinkedIn profile that it’s written out of Asia territory. Does it mean that you are an importer into the Chinese market?
MARTIN PAPP: No, it means that I am providing support for other Kombucha brewers in Asia. So there are Kombucha companies in China, in Taiwan, Hong Kong, South Korea, and Japan, Indonesia, and even India and so we are creating a coalition of basically sharing resources; talking about the best practices of brewing Kombucha, so KBI is really an organization about educating other brewers on brewing Kombucha in China or Asia properly.
MATTHIEU DAVID: I see.
MARTIN PAPP: Association to grow the category together.
MATTHIEU DAVID: Before we move on; on Kombucha in China, could you tell us why you say that you are creating the market? If I go on Google, I found a Chinese name for Kombucha I find nothing. If I go to the shop, I find nothing. Does it mean that or does it mean that there is a specific segment you are talking about in this market that we don’t find?
MARTIN PAPP: It is changing quickly so last year if you went online to these platforms and typed in Kombucha you wouldn’t find anything except us. However, now in the last 12 months, you start to have some tea brands in China creating somewhat I think very non-authentic gimmicky products so now you do start to see them online and one of the reasons that it took… that it hasn’t really become a thing in China is because the challenges of manufacturing a fermented tea drink and importing that into China is not easy for American companies. So, to this point in time, there is no – I am aware of that has imported Kombucha into China.
MATTHIEU DAVID: I see. About the market; who is the typical consumer of Kombucha in China do you think and what would be the larger segment; the current segment and the future segment? How would you define it?
MARTIN PAPP: So, a current segment is a white collar, 25-35 years old, generally has exposure to western culture that has heard about Kombucha from friends or when they studied abroad or when they worked abroad or the community that’s looking for Kombucha in China. That’s the immediate group, and now the future of what we intend to see is a much broader expansion of Kombucha to consumers that are health oriented looking for low calorie, no sugar drinks and have the purchasing power to try craft products you know because the Kombucha price point is not cheap. We sell retail 28 UN per bottle. So that is… 280ml in a bottle.
MATTHIEU DAVID: I see, yeah, it’s not cheap.
MARTIN PAPP: Comparatively people can buy a juice for 8 Kuai; 7 Kuai. So, we are you know, at least quadruple that. So it’s definitely a premium product, but having said that you know, the consumption upgrade and people are looking for higher quality products, higher quality drinks that are going to bring more health benefits, more functionality, so we see a lot of growth potential in a few channels. One would be the athletic community, people looking for functional beverages in China, so that’s like I said in the gymnasiums, the gyms, the marathons, and thee kinds of places. You want to have Kombucha and then you also have the non-alcoholic craft scene is also quite large in growing the bars. We have actually found that our Kombucha in China sells the highest volume of sales from one particular location and it actually comes from a barn in Shanghai, and that is because people are looking for non-alcoholic options, but still, want the craft brewing.
Then you also have the supermarket channels and online channels. You know the T-malls, the Ging and that would be expanded via e-commerce, so working with independent leaders to give Kombucha to their followers and make sure that their health is foremost. I mean it’s a health functional beverage in China, and that is appealing and is a growing market so there is no reason that this shouldn’t expand. It just needs to be executed properly.
MATTHIEU DAVID: I see. So about tea now; you were saying that there was a generous show challenge for tea brands in China to target the younger generation. I understand that. The first question is so if the younger generation doesn’t drink tea in China what is more trendy for them to drink and second thing; how do you position yourself towards the younger generation? I see the logo is very; your logo perhaps is already looking much younger than most of the older traditional tea brands in China, which were very established. I already had a feeling of that, but you could you elaborate more on this?
MARTIN PAPP: Sure and to be clear, I think young people still drink a lot of tea in China. China is still a tea drinking country. I did some market research in 2014 when I was planning on starting this company and actually went physically to multiple Starbuck stores in Beijing, Tandu, and Chamen and I basically came to people sitting in Starbucks with a survey and I told them I was doing research on the consumer habits of coffee drinking and tea drinking and I have Starbucks customers fill out a form saying, “Do they prefer drinking tea or coffee?” Generally speaking, what occasion do you drink coffee? What occasion do you drink tea and so I asked them a lot of consumer questions and found that it’s about 50% of the Starbuck customers, so we are just talking about people in a cafe prefer tea over coffee.
So the notion that young Chinese people are not drinking tea I think is not correct. You can definitely say that coffee consumption is growing; that’s undeniable, and so it was interesting. It’s not that young Chinese don’t want to drink tea. It’s going to Starbucks because they can’t find a location that really that is a tea location that fits their lifestyle, so they don’t want to go to a traditional Chinese tea house. They want to be more modern, more cool, more fashionable.
Now, about the tea industry in China and terms of these tea brands in China; why didn’t they see this and act on it earlier and they are changing, by the way.
There has been rapid development in Chinese tea innovation and tea houses in the last couple of years, but around about 4ers ago there really wasn’t much, and I think that was because there is such a strong culture of Chinese tea and history behind it and they are very proud of the Chinese tea that they became very insular. It was very always about being this kind of high-end kind of Chinese ceremonial experience and they honestly just got old and rigid and didn’t realise that there was huge opportunity to re-invent themselves into something more westernised or a little bit more trendy and I really wanted to take it and one of the things that US companies have done a good job with is making tea fun and blending teas from all over the world you know, in China it is such a purest tea culture where the idea of even drinking an ice tea or adding sugar to tea was kind of you to know, taboo for
MATTHIEU DAVID: The world is changing. You’re right. It seems that they are turning it again and it’s a very interesting topic you raised is the fact that sometimes some companies are stick with their own identity, they are stuck with their own origins, and the new player can reinvent it so this is leaving some space to new players. I think it is very interesting. So far you say so, younger Chinese tea, but they don’t find the tea which is good enough causes them to share with their friends, to be cool enough to have a less official gathering. That’s what you are saying, right?
MARTIN PAPP: Yeah, essentially. People want to drink things that are unique to their age group that is unique to their friends and not necessarily the same tea their grandfather drinks or their father drinks. You know so people are looking to be different and there is really not a lot of tea companies taking advantage of that, and so we are definitely riding that space and saying, “We want to bring you good tea. We are going to do it in a more creative and more fun way.” That’s worked out well for us. Having said that, the competition is growing so we were a very early mover you know; 4 years ago when we started, but already I mean you know, it’s there is tons of innovation now in tea and there are tons of new tea houses opening, so the gap that I am talking about is being filled very quickly.
MATTHIEU DAVID: Martin, I think we have a lot of little topics to talk about, including the music you had. I would have liked to go into it, but it’s very late for you. You are in California. So it’s already one setting, I think. So I think we have to end now. I thank you very much in collaboration for everything you have done to be presenting 350 locations between 85 B2B clients for a beverage in China; in the tea industry in China, it is not easy as a start-up. I am not sure if this is how hard it could have been. I can imagine. I mean I have been in China for 20 years so I can imagine how hard it can be. So congratulations for what you did and thank you very much for having participated in our China marketing podcast.
MARTIN PAPP: thank you. I had a good time talking with you in this episode of China Paradigm. Thank you.
China paradigm is a China business podcast sponsored by Daxue Consulting where we interview successful entrepreneurs about their businesses in China. You can access all available episodes from the China paradigm Youtube page.
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