The online tea business set up by six Chinese college friends has forged hundreds of thousands of small tea farmers into a supply chain.
By Joseph Catanzaro
On the outskirts of Hangzhou city in the south-eastern Chinese province of Zhejiang, the tea plantations roll across valleys and terraced foothills. Men and women with weathered faces and wicker hats walk the cultivated rows of crops carrying woven baskets on their hips, much as they have since the age of emperors.
While the look of the fields has changed little, the business behind them is evolving fast – thanks to a start-up that read the potential for great fortune in the region’s tea leaves and the nation’s booming e-commerce market.
Hangzhou Efuton Tea was founded in 2008 by a group of six college friends from the provinces of Anhui and Jiangsu. They’d studied traditional Chinese medicine but harboured entrepreneurial ambitions. All they had was 1500 yuan (A$315) and a good idea.
Today, that idea has grown into China’s biggest e-commerce tea retailer, which last year made 205 million yuan (A$43 million) and sold some 2920 tonnes of tea online.
One of the founders, James Zhang, says the idea for the start-up came about as a solution to a problem. The family of one of Efuton’s founders, Xiaojun Li, ran a small stall in Anhui’s renowned tea market, located in the town of Wuhai. But Zhang, 31, says the business wasn’t doing well.
“In this tea market were all different families that for generations had been struggling to survive,” he says. “They couldn’t make it [their business] any bigger. We decided there must be a bigger way to do this business.”
The solution was China’s e-commerce market and the millions of Chinese consumers who had made the great leap online.
“In a country obsessed with tea ... it’s a strategy that’s stirring the cup.”
Using the 1500 yuan they had scraped up between them, the college friends purchased a laptop, paid to make some simple branded packaging and started selling tea on China’s leading online retail platform, Taobao.
“At the beginning, there was no capital, nothing – just 1500 yuan,” says Zhang, Efuton’s deputy general manager. “That was all the money we had. But Taobao requires no big initial investment. The dream was to make something big.”
The family business quickly sold out of tea and the six friends looked to source more. They settled on the renowned tea-growing region of Hangzhou for their new base of operations. Then they set up temporary purchase stations in villages around the province and sourced their tea direct from small-time, subsistence farmers who normally sold their produce in markets or by the side of the road.
The farmers bring their tea to the collection stations in plastic bags. The price they receive depends largely on the quality of their produce, which is assessed on the spot.
Today, Efuton has forged almost one million tea farmers into a supply chain that’s feeding rampant online demand.
Zhang says their business is changing the lives of subsistence tea farmers across Zhejiang. “These tea farmers, they used to sell on the street or they dealt with other purchasers,” he says.
“The farmers had to bargain with those purchasers, and it was not easy to sell at a good price."
Because those purchasers are also at the bottom of the value chain, they try everything they can to pay less to the farmers.
“So we are more welcome by the farmers, because our price is higher and our purchase of their tea is steady. They do not need to worry as long as they make good tea.”
But rattling the cage on the supply side was not the only shake-up Efuton instigated.
Without the overheads of the physical chain stores maintained by the old established tea sellers, Zhang says the company has been able to lower prices for their online customer base, too.
A 250g packet of Efuton’s standard tea sells for 165 yuan on Taobao, a 250g packet of their high-grade tea for 268 yuan. In a country obsessed with tea, where the most highly prized strains can sell for upwards of 200,000 yuan per kilo, it’s a strategy that’s stirring the cup. And it’s a strategy that appears to be working.
Last year, during Taobao’s Singles Day Sale – a 24-hour sale day equivalent to the Boxing Day sales in Australia or Black Friday in the US – Efuton sold a record 13.78 million yuan worth of tea.
Incredibly, Zhang says Efuton has never raised venture capital or borrowed money from a bank. “We did not get any outside investment or borrow funds,” he says.
“We made profit from selling products then invested in our infrastructure to grow. Everything has been accumulated; there was no venture capital.”
He says Efuton’s success largely came from hitching their fortunes to Alibaba, Taobao’s owner. Its online stores have now captured some 80 per cent of China’s online retail market and boast about 300 million customers, almost the equivalent of the entire US population.
With Zhang estimating his company has cornered less than 5 per cent of China’s total tea retail market, he says there’s still room to grow.
Although competitors are starting to appear online, he’s confident Efuton has the brand power to keep them at bay and to keep increasing its leading share of an ever-growing online tea market.
“China’s tea market [online and offline] is worth hundreds of billions of dollars every year,” he says.
“Now young people buy online, and more people will buy online. That’s the trend.”
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