Dayao is crafting a new story for the young

The soda brand that has expanded beyond its Inner Mongolia base in recent years is reportedly pursuing a Hong Kong IPO

Key Takeaways:

  • Dayao earned 3.2 billion yuan in revenue in 2022, up 50% year-on-year
  • The soda brand denied reports that it was considering a Hong Kong listing, adding it continues to focus on improving its operations

  

By Lee Shih Ta

Restaurant brands have become the new flavor of the day on the Hong Kong Stock Exchange as China kicks off the Year of the Snake. A close cousin of the group is the beverage sector, whose popular soda maker Inner Mongolia Dayao Beverage Co. Ltd. was also reportedly planning a Hong Kong IPO, even though the company denied the talk.

The source of the fizz was a Bloomberg report saying Dayao was working with advisers on a deal to raise as much as $500 million in Hong Kong as soon as the second half of the year. In its denial, Dayao said it was focusing on its operations and development and that it wasn’t considering a listing.

But the genie was out of the bottle, as the buzz stirred up curiosity about the company and its plans.

Dayao began as the Bayi Beverage Factory in 1983 in the city of Hohhot, capital of North China’s Inner Mongolia Autonomous Region. It was acquired in 1996 and rebranded as Dayao by founder Wang Qingdong, who named the company after the Dayao culture that lived in a preserved heritage site from the Paleolithic Age.

The company quickly expanded from there using a low-price strategy to generate big sales volume and asserted itself as one of the most iconic brands from its Inner Mongolian home. Its popular products over the years have covered a wide range of flavors, many of them fruity, including orange, lychee and pineapple.

Targeting men

Unlike other brands that target a wide range of consumers, Dayao chose a different strategy that focused on men who were more used to drinking liquor. In Inner Mongolia, more than 60% of men are regular drinkers, higher than most parts of China. While Inner Mongolian men frequently consume liquor and other alcoholic drinks at all kinds of gatherings, Wang astutely noticed some men who liked to refrain.

Their abstention owed to different reasons, such as because they had to drive or for health-related reasons. But their situation was often awkward, since holding a Coke when everyone else is toasting with liquor could make them feel self-conscious. This inspired Wang to package his sodas using green glass bottles with volumes and appearance similar to beer. The sodas also look like liquor. To drive home the message, the company came up with the catchy slogan “Don’t drink beer while driving, drink Dayao.”

Since identifying dining and other social occasions as the best watering holes for its products, the company has focused on selling through restaurants and other catering channels. According to official data, 85% of its sales come from the catering industry.

However, restaurants often price beverages quite high compared with online shops and grocery stores. To promote sales, Dayao sold its 520 ml sodas to caterers for less than 2.5 yuan a bottle, even though the suggested retail price was more than double that at 6 yuan. That allowed restaurants to reap a healthy margin without raising their prices too high and putting customers off, revving up Dayao’s sales.

In 2021, the company launched a branding upgrade campaign with the new slogan “Big Soda, Drink Dayao” at subway stations across China. As brand ambassador it also hired Wu Jing, the lead actor from the popular “Wolf Warrior” movie series, known for his tough-guy persona. With his image appearing on every Dayao bottle, consumers could feel they were toasting the tough Wu Jing every time they raised their bottle.

The company’s business has grown steadily in recent years, lifted by the savvy marketing campaigns. Its annual revenue reached 3.2 billion yuan ($445 million) in 2022, up 50% year-on-year, according to media reports. At that level, Dayao’s sales were 10 times that of Ice Peak, a beverage brand from Shaanxi province, and three times Polar Soda, a brand from Beijing.

Moving south

As its business expanded, Dayao began to move beyond its Inner Mongolian home. It now has seven factories in other mostly Northern Chinese provinces including Ningxia, Jilin, Liaoning, Anhui, Shaanxi and Shandong. Seeking to further expand that footprint, the company announced a “southern pivot” plan in late 2023. The next year it unveiled a “Northern Commerce and Southern Support” plan to leverage resources of its northern distributors to gradually expand southward.

But many questions remain around whether the company’s big-bottle soda that mainly plays on its affordability and familiarity can win a bigger piece of China’s soft drink pie. After all, Coca Cola (KO.US) and Pepsi (PEP.US) currently control more than 80% of China’s carbonated beverage market combined, leaving just 20% for Dayao its Chinese rivals.

Moreover, its ability to produce at such low costs owes partly to its use of artificial flavors instead of real juice, which could undermine its prospects as consumers become more health-conscious. As a Northern Chinese brand, Dayao also has to compete with established Southern rivals with better understanding of local tastes like Wong Lo Kat and Coconut Palm.

After meeting demand from its main target group of middle-aged adult men, Dayao is also trying to craft a new story for younger people. During the recent Lunar New Year holiday that’s often characterized by eating and drinking with family and friends, Dayao was displaying its New Year-themed ads on jumbo screens at Beijing’s famous Sanlitun shopping and entertainment district. Lit up with electronic music and bold and dazzling colors, the campaign pitches Dayao’s drinks as “the sparkling soda that feeds your New Year frenzy.”

A Dayao listing would come as another group of Chinese beverage makers from the bubble tea space, such as Mixue, Guming and Auntea Jenny, also head towards the finish line of Hong Kong listings. The only other major bubble tea brand to list so far, Chabaidao (2555.HK), is currently valued at around 14.2 billion yuan with a price-to-earnings (P/E) ratio of 16.8 times. But Chabaidao’s stock is also down nearly 40% since the IPO, suggesting simple popularity among consumers doesn’t always directly translate into popularity with investors. That could be a cautionary lesson for Dayao.

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