How six college friends started a multi-million dollar tea business

Posted on March 29, 2016 by ATB Chartered Accountants

In Hangzhou City, South East China, there are thousands of tea plantations where men and women carrying woven baskets harvest the crops much like they did in ancient times. While the methods may seem much the same historically on the surface, the business behind these tea businesses is evolving rapidly, mainly due to six college friends’ start-up business which has reaped rewards for the region’s tea leaves and e-commerce market.

Hangzhou Efuton Tea was founded by six college friends in 2008 with a collective investment of A$315, a business now worth A$43 million. In the 8 years of the business’ operations, more than 2920 tonnes of tea has been sold online. The friends came up with their business idea by first noticing a problem in their current tea market. It was found that businesses which sold tea were predominantly family run over many generations, and they weren’t performing very well. They were struggling to make their family run businesses bigger, and so, Efuton was born through the utilisation of China’s e-commerce market. Using the $315 they had between them, the founders bought a laptop and paid for some simple branded packaging to begin selling tea on the widest used e-commerce platform in China, Taobao.

When the family businesses ran out of tea, the group moved to Hangzhou, a tea region in Zhejiang where they set up temporary tea stations, and sourced theur tea directly from farmers whom generally supplied to markets. The amount they paid the farmers was based solely of the quality provided which was assessed on the spot. Since their opening, Efuton has developed a supply chain of over 1 million farmers across the region. The main reason the business is so popular with the farmers in the region is that they no longer had to bargain with purchasers for their tea, and so were receiving a much more realistic and profitable price for their produce.

Since there are little-to-no overhead costs for Efuton seeing as they are liaising directly with the farmers, and they don’t have any physical stores, the company are able to keep their prices low for their customers as well. The company sell both standard packets of tea for A$33.65, and higher grade tea for A$54.65 (250 gram packets). Considering that in China, the best tea you can buy is worth approximately A$40,793.50 per kilogram, this low cost business strategy is working extremely well for the company. Last year on Taobao’s sale day equivalent to Black Friday sales in the US, Efuton sold an amazing A$2.81 million worth of tea.

Efuton never had to use external sources of finance for their infrastructure, rather, opting to purchase their assets with the profits earnt from their business. Every asset in their business was accumulated without need for venture capital. The group associate their huge business success to Taobao, a company who holds 80% of the online retail market in China with 300 million customers.

Surprisingly, Efuton only holds an estimated 4-5% of the total tea market in China, so there is plenty more room for the company to grow. Even with increasing competition in the market, the large success the business has had in it’s start-up and operations from 2008 will show that they have enough power to remain competitive in the continually growing market.