• Investment is predicated on rising demand for non-alcoholic drinks in restaurants
• Founding family retains minority stake, pursues other beverage brand interests
• L Catterton is taking a long view on China consumer, despite recent weak sentiment

Growing health awareness among Chinese consumers is opening up new segments in food and beverage: low-sugar, low-calorie, herbal-infused, plant-based, and zero additives have become part of the zeitgeist. L Catterton and co-investor HarbourVest Partners aim to tap this nascent demand by acquiring Viee, a local plant-based drink brand.

“The increased propensity for consumers to dine out and order takeout or delivery led us to source for investments in beverage businesses that benefit from the trend. A second major trend is consumers’ increasing preference for non-alcoholic drinks,” said Scott Chen, an Asia-based managing partner at L Catterton.

“While spicy hot pot has historically been often consumed with beer, its association with beer is declining relative to its association with Viee.”

L Catterton’s research found that Viee and hotpot is one of the stickiest associations in a Chinese beverage-consumed-alongside-food market expected to be worth USD 60bn by 2028. The company’s products are mainly distributed through restaurants, where the peanut and walnut-dominated recipes are seen as effective in neutralising spice and grease.

The brand is more than 30 years old – though its name changed from Tianxiaxiu to Viee in 2001 – and enjoys a strong following in China’s southwest. Customer feedback included references to “childhood memories of Sichuanese food” and “a must-have with spicy hotpot.” It is said to be profitable, with earnings hitting a record high in 2023.

The size of the investment was not disclosed. L Catterton is deploying its third Asian fund, which has a corpus of USD 1.45bn and mainly writes cheques of USD 25m to USD 150m. It is also currently raising Fund IV, which has a target of USD 800m, not including sidecars for India and Japan. This investment will be split between both funds, according to a source close to the situation. L Catterton declined to comment on fundraising.

A sword unsheathed

The firm spent three years getting to know Viee before negotiating a proprietary deal that involved the founding family retaining a minority stake. At the time, management was in transition. Yawen Guo, daughter of company founder Yimin Guo, had joined the Viee board and replaced her father as chair of Blue Sword Beverage Group, a holding company for various family-owned assets.

Established in 1985, Blue Sword was the biggest brewer in Southwest China. In 2001, it agreed to pool its breweries in Sichuan province with those of China Resources Enterprise, owner of the Snow brand, as part of an industry consolidation push. China Resources held 60% to Blue Sword’s 40%, and it took full ownership six years later, buying out its partner for CNY 2.5bn (USD 348m) in cash.

Blue Sword retained the non-brewery assets, which now comprise a series of health drinks, winemaking operations, a farming business, and various food and trading interests. Viee sat in a portfolio alongside Soyog, another plant-based beverage brand, and Ice Age, a mineral water brand.

“We are actually a lucky enterprise. When we started transforming the business to plant-based drinks and mineral waters, who would have known it would become a consumer trend?” Yawen Guo told local media last year.

Ice Age and Soyog were created in 2002 and 2021, respectively. According to Soyog’s marketing materials, it is a sister brand of Viee and they share R&D and manufacturing resources. Yawen Guo said last year that she hoped Soyog – which is aimed at Generation Z consumers who want zero additive and low or no-sugar products – could achieve annual revenue of CNY 100m.

On agreeing to the sale of Viee to L Catterton, Yawen Guo said she was impressed by the private equity firm’s value creation plans. These include product line extensions and distribution channel diversification, while geographic expansion initiatives will focus on solidifying the brand’s lead in Sichuan and Chongqing as well as entering adjacent provinces.

“We are supplementing the existing management team with resources that we have within our firm and industry network. It’s a win-win arrangement, and the founders get to enjoy a new leg of growth leveraging the resources we bring in while still being pretty actively involved in managing the company,” Chen added.

Keen on consumer

The investment comes as China continues to demonstrate relative economic weakness, with consumer sentiment near all-time lows. L Catterton has tracked increasing buyout opportunities as corporates and family owners become more open to selling, yet the firm still believes in the long-term fundamentals that underpin the country’s consumer growth story.

“We think about the consumer trends that are set to persist, identify the categories which best benefit from those trends, and source deals with companies that are the best positioned to win in those categories,” said Chen. “Sometimes it leads to earlier stage deals with more disruptive companies; sometimes it leads to control deals with long-established companies.”

L Catterton has taken minority stakes in the likes of children-oriented personal care brand Hi!Papa, beverage brand Genki Forest (now called Chi Forest), and pet food brands Pure & Natural and Partner Pet. Control transactions include fitness club operator Will’s Group. It claims to have deployed USD 200m across eight China deals in the past 18 months.

The firm contends that macro data tend to oversimplify China’s consumer dynamics. In areas like health and wellbeing – and categories such as food and beverage, fitness, and outdoor activities – it still sees robust growth. Exit scenarios are mapped out on the way in and likely buyers are identified. Even in challenging markets, L Catterton knows what is likely to sell.

“While IPOs are an option, they are market-dependent, and today’s market isn’t very conducive for them,” said Chen. “Trade sales are another option and because we focus on businesses with strong brands, distribution networks, and supply chains, as well as other competitive moats, our portfolio companies tend to be unique assets with scarcity value that interest strategic.”