The Online Nut Brands Have Taken Off. What Do They Do Next?

Having grown from Taobao shops into brands, snack e-commerce companies have moved from cultivating consumers to fighting over them.

"Make it different, so people think of nuts the moment they see it." Three years ago, when Zhang Liaoyuan, founder and CEO of the nut e-commerce company Three Squirrels, was having the brand's logo designed, that was his only requirement.

The logo today is three squirrels with their mouths wide open, and it has worked well in the market.

On this year's Double 11, Three Squirrels' Tmall store alone sold more than 250 million yuan worth of goods, ranking first among food sellers on Tmall and 11th across all categories, with sales up 129% year on year. In the first half of this year its sales reached 1.2 billion yuan, more than in all of 2014. Before that, from 2013 to 2014, its sales grew more than 200% year on year. This year Three Squirrels expects sales of more than 2 billion yuan.

That makes it look very much like a hit product: in a nut market nobody was watching, Three Squirrels quickly made itself into a well-known online nut brand.

Asked why the brand took off, Zhang Liaoyuan answered: "Three Squirrels succeeded because every step it took matched the pace of the internet's development. Forget 1.5 million yuan (the size of Three Squirrels' angel round). Even if you gave me 100 million yuan and asked me to build another Three Squirrels on Tmall today, there would be no chance, because the door to the Taobao dividend has closed."

The "Taobao dividend" refers to the perks Tmall offered merchants in its early days. Three or four years ago, when Three Squirrels was founded, Tmall had far fewer merchants and categories than it does now. Search for nuts on Tmall, for example, and only a handful of sellers came up, so Three Squirrels could easily land near the top of the results.

Two snack chains that had started offline, Be&Cheery and Bestore, also rode this wave, moving into e-commerce in 2010 and 2012 respectively.

In its first year of selling online, Be&Cheery's sales reached 26 million yuan. "That would have been unimaginable through traditional offline channels," founder and CEO Cai Hongliang told QDaily. Over the past four years, he said, Be&Cheery's online sales have grown 43.7-fold. Before the move into e-commerce, Be&Cheery was only a retailer of other people's goods; now it makes its own products and ranks second by market share among online nut and snack brands.

Bestore ranks third. On Double 11 in each of the past two years its sales held third place, but it grew the fastest of the three. On last year's Double 11, Bestore's e-commerce sales across all channels came to 42 million yuan, a 10-fold increase. This year the figure was 123 million yuan, a 3-fold increase. Its rapid growth, of course, also owes something to its relatively small base.

Look closely at how the three snack e-commerce companies operate and you will find their paths to success strikingly similar. On the objective side, nuts keep for a long time and travel well, which gave them a head start in online shopping. On the subjective side, all three brands timed their move well and all aimed at the same consumers: young people born in the 1980s and 1990s. To win these consumers over, they took great pains with packaging and design.

Three Squirrels' most recognizable asset, for example, is its logo. The smiling squirrel appears not only on the packaging but in every corner of the brand's online flagship store. Bestore went for a playful comic-book style, with each package themed around the product inside. Be&Cheery relies on illustration and a realistic, object-like look.

The images above come from the brands' Tmall flagship stores. From top: Three Squirrels, Bestore, Be&Cheery.

"Three Squirrels sells cuteness; Be&Cheery sells fun," says Wang Jingyao, Be&Cheery's brand director. When you face young consumers online, he argues, being cute and being fun are both a kind of service.

These brands have one more thing in common: together they have brought nut prices down. Pan Daowei, assistant director to the CEO at Three Squirrels, gave us the example of hickory nuts.

"When Three Squirrels started selling online in 2012, we bought hickory nuts from farmers at 25 yuan a jin (500 grams) and processed them into 400-gram packs. A supermarket would sell a pack for 60 yuan. Our price at the time was 45 to 50 yuan," he said.

The benefit of lower prices is that consumers are more willing to try nuts they rarely bought before. A friendlier price, together with young people's growing interest in health, has gradually made nuts a fashionable thing for the young to buy.

Along the way, snack e-commerce moved from cultivating consumers to fighting over them. That raises a new question. A shopper standing in front of a supermarket shelf used to hesitate between Pepsi and Coca-Cola. Now these nut e-commerce brands are the ones being chosen between.

In other words, now that Three Squirrels, Be&Cheery and Bestore have grown from ordinary Taobao shops into brands, they face a wider and more demanding market. How do they stay competitive in it, so that consumers keep choosing them rather than their rivals?

Marketing is the first answer they reached for, and you can already see it at work. Be&Cheery paid 20 million yuan to sign the actor Yang Yang as its spokesman and used his fans to start the Weibo topic "Yang Yang has a date with Be&Cheery," which drew more than 50 million views and 390,000 posts. Bestore signed Huang Xiaoming. Besides staging social-media campaigns such as "Feed Your Love on Qixi," it handed out red envelopes on WeChat, steering the traffic straight to its WeChat store and online flagship store. Three Squirrels spent 5 million yuan on a 15-second ad that aired four times during Tmall's Double 11 gala, putting its cute squirrel in front of consumers once again.

Three Squirrels, though, says it "doesn't spend that much on marketing." Pan Daowei says marketing alone cannot get consumers to open their wallets. The point of Three Squirrels' marketing, he says, is to give its customers a sense of "pride," so that they come to feel loyalty to and trust in the brand.

"We advertise so that consumers can feel our brand growing. It's like a Xiaomi user seeing a Xiaomi ad: there's pride and a sense of belonging," said Pan, adding that Three Squirrels now has 20 million customers.

Bestore hopes event marketing will "form a closed loop of promotion, onboarding and traffic generation," moving consumers straight from a marketing campaign to a place where they can buy. With marketing as the engine, Bestore CEO Yang Yinfen expects the company's e-commerce sales in 2016 to "reach 2 billion yuan and turn a profit."

Be&Cheery, which besides hiring Yang Yang often sponsors music festivals and places its brand in films and TV shows, plans to use marketing to raise its profile among young people and talk to them directly.

According to Be&Cheery, sales from Double 11 to the end of the year make up 50% of the brand's annual e-commerce sales, which is not a healthy pattern. When we asked how marketing would change its traffic, average order value and purchase frequency, Be&Cheery declined to answer. But its founder and CEO Cai Hongliang conceded to us: "It's true that 50% is a bit high, but that comes from the way people in this country think about spending. To change it, you'd have to change the whole nation's consumption habits."

The "way people think about spending" that Cai refers to has partly to do with the relatively high price of nuts (even after e-commerce has brought prices down), and partly with how people eat them. Nut buying used to be highly seasonal, concentrated in the holidays around the New Year.

That pattern has already broken: nuts are becoming an increasingly popular snack in offices and homes. For the nut e-commerce companies, this is good news, but not yet cause for celebration.

In 2014, China's market for nuts and roasted seeds was worth 55.6 billion yuan, of which e-commerce accounted for 4 billion yuan, less than 10% of the total. But according to a forecast from an official at the China National Food Industry Association, online sales will reach 8 to 10 billion yuan this year, at least doubling. What is certain is that fiercer competition is coming to this industry.

Their shared view on this is that "the fiercer the competition in the industry, the bigger the market everyone can open up."

Pan Daowei's ideal moment for real competition to begin is when the industry has "a company with more than 10 billion yuan in sales, and several with more than 3 billion." Three Squirrels has raised four rounds of funding so far, the latest worth 300 million yuan. Its early investor, Capital Today, has also invested in its rival Bestore.

The next question is this: as competition intensifies, what can these brands do beyond working on price, packaging and marketing? Keep in mind that it is not especially hard for a traditional nut brand to start selling online.

Expanding into more product categories is the idea they have all landed on. Be&Cheery's goal for 2018 is to become a "10-billion-yuan giant of snack foods." Notice that? The market it wants is "snack foods," not just nuts or candied fruit. Three Squirrels has set its brand goal as "when people talk about snacks, they think of Three Squirrels." Bestore wants to "become synonymous with snacks, so that when consumers want a snack, they think of Bestore." According to figures Bestore gave QDaily, its best-selling categories online right now are not nuts but biscuits and pastries, and dried and preserved fruit.

Three Squirrels doubled its range this year, from 150 products last year to 300. Be&Cheery now also sells more than 300 products, and Bestore has grown from just over 60 products eight years ago to nearly 1,000.

More categories will directly lift sales and company size, and will also put more demands on supply chains, production and logistics.

In 2014, Be&Cheery spent 400 million yuan building a fully automated complex of about 100,000 square meters in Hangzhou, which now houses its product development, production, warehousing and logistics, and brand creative work. Compared with factories scattered around the country, the complex's biggest advantage is that once development, production and sales sit together, the brand can respond faster to competition and to changes in consumer habits.

Bestore has assembled a 100-person R&D team devoted to working out what consumers like to eat. "Take chili: people in Hunan like it fresh and hot, people in Jiangxi like it sour and hot, people in Sichuan prefer it numbing and hot, and people in Anhui like it salty and hot. From province to province, you have to adjust products to local tastes," a Bestore executive told us. The R&D team also sets exacting standards, such as "every 50 grams of pine nuts must contain no more than 160 kernels, and 10 pine nuts laid end to end must measure 8.5 to 10 centimeters."

Three Squirrels, which built its business on pecans, keeps adding new categories, such as tea, which its rivals have yet to touch. According to Pan Daowei, Three Squirrels' ultimate goal is to become synonymous with snacks; for now it is at the stage of "snacks built around nuts."

On how fast to add categories, Pan says, "That's up to consumers, not us. Consumers won't pay for just anything we put out."

This caution is well founded. When a brand that started with nuts tries to remake itself as a "snack" brand, it exposes itself to a much larger market, where it faces snack giants many times stronger: Danone and Kraft in biscuits, Mars in chocolate and candy (Dove, Snickers and others), and PepsiCo in chips and drinks.

Whatever happens, until that stage of competition (possibly) arrives, Three Squirrels will not take today's online competition lightly. Compared with Be&Cheery and Bestore, each of which has more than a thousand physical stores, it is a purer internet brand. As for the O2O (online-to-offline) plans its rivals are pushing, Three Squirrels says it is in no hurry to open stores.

"For now, we won't do O2O just because everyone else is," Pan Daowei said. "This model would hurt us, because it means products sit longer on shelves and adds costs for middlemen and stores, so prices would go up."

What can be predicted is that the online snack market will grow, competition will intensify, and the brands will keep working on marketing, packaging, product range and more. But nuts and snacks in general are standard supermarket categories, and in the end the competition between brands is the same old playbook in a new channel.

Don't believe it? Look: offline price-cut promotions have become the "Double 11" and "Double 12" sales online; newspaper ads have given way to video and HTML5 ads on new media; the celebrity spokespeople are still being hired; supermarket slotting fees have become Tmall's listing fees, and fees for end-of-aisle displays have become fees for Tmall's "Zhitongche" search ads...

In a sense, the rise of online snack shopping repeats what happened earlier with clothing. The difference is that in clothing the fight was between department stores and Taobao, whereas in snacks it is, in the end, just a continuation of the supermarket contest.

Graphics: Xu Bingqing

Cover image from Hellorf