5Y View | Xiaoxiao Zhou, 5Y Capital: The Underlying Logic of Business Is Supply and Demand

Recently, Zhou Xiao, Vice President at 5Y Capital, sat down with Ebrun for an interview. "The underlying logic of business is supply and demand. Whoever can close or reshape that relationship most completely will have the strongest competitive advantage." During the conversation, "supply and demand" was the phrase Zhou returned to most often — 39 times in total.

Take a head of cabbage: planted and harvested, then pushed through wholesalers, wet markets, and street vendors before finally reaching the consumer's table. That supply-demand relationship remains open. The grower doesn't know what consumers actually want; production precedes sales. At every layer, supply and demand must be matched, and every match carries a cost. Worse, if the cabbage picked today doesn't reach a dinner table within two or three days, it risks spoiling.

But if you start from consumer demand — order first, plant second — the supply-demand relationship becomes closed. Fewer matches, higher transaction efficiency, lower transaction costs. Zhou believes companies that truly achieve this closure typically possess three capabilities simultaneously: defining demand, connecting demand, and organizing supply. They can get the flywheel spinning.

"Companies that can genuinely close the supply-demand loop are world-changing companies. But they're rare," Zhou said.

Below is the full interview transcript. We hope you find it illuminating :）

01

The greatest value of transaction platforms lies in balancing supply and demand

Ebrun: You cover retail, food, home furnishings, and other sectors. What's the common thread?

Zhou Xiao: I've always focused on industry chains. Whether it's fresh produce, building materials, or anything else, the logic is the same. From Alibaba and Tencent down to a roadside stall, the essence of business is satisfying a supply-demand relationship. What 5Y has always sought are companies that can change or reshape supply-demand relationships most dramatically.

Why is Meituan worth $200 billion today, DiDi $80 billion? They're not just transaction matchmakers. Their crucial additional attribute is balancing supply and demand. That relationship varies enormously across time, space, and customer segments. These platforms' greatest value lies in digitizing demand that was previously fragmented and offline, then using algorithms to optimize overall transaction matching. That's the biggest variable algorithms have introduced to these industries.

Supply-demand dynamics shift even within the same space across different times. Take hailing a ride in Sanlitun: at 10 a.m., you might wait one minute; at 10 p.m., half an hour.

The same intersection can see rents five times higher on the northeast corner than the northwest — meaning the office workers in each building are entirely different people. So ordering delivery from the northeast corner might average 100 yuan per order, while the northwest corner comes in under 20. Yet when you open a delivery app, your location can't distinguish whether you're on the southeast or northwest side of that intersection. Precisely identifying these two user types and matching them with appropriate supply is extraordinarily difficult.

Ride-hailing only needs to match position and direction. Food delivery must also match user segments. Higher complexity. That's why transaction-matching platforms can have such different values and barrier heights. The more complex the supply-demand relationship, the greater the platform's value.

Ebrun: How should efficient supply-demand balance be achieved?

Zhou Xiao: For many early-stage startups today, whether to build supply or demand first is a strategic choice. Getting this right tests a founder's strategic thinking.

I distinguish business model innovations as push or pull supply chains. If a model merely digitizes within a push supply chain, it's made partial corrections — an information-based improvement. If it's a pull supply chain, it could be genuinely disruptive. Community group buying, for instance, transformed what was originally a push supply chain with products pushed through distributor layers into a pull supply chain.

Ebrun: How do you understand pull supply chains?

Zhou Xiao: Take a bottle of water. From origin to consumer, it passes through provincial, municipal, county, and village distributors before finally reaching hands. This is the push supply chain traditional consumer goods use. The supply-demand relationship isn't closed because producers don't know what consumers want; they can only rely on distributors pushing layer by layer.

Each layer generates three costs: warehousing, logistics, and capital. Payment terms between upstream and downstream create capital costs. Goods arrive and go into warehouses — warehousing costs. Warehouse to consumer — logistics costs. The result: consumers in fourth- and fifth-tier cities pay the same prices for inferior products compared to first- and second-tier cities, because the supply chain reaching them is longer and costlier.

The greatest value of community group buying is reducing match counts and improving transaction efficiency, bringing fulfillment cost models for consumers in smaller cities in line with those in major metros.

Companies like Xingsheng Youxuan and Duoduo Maicai use pull supply chains: demand first, supply second, sales-driven procurement, no inventory, no spoilage. Because they know precisely where orders originate, they can pre-plan delivery routes, so truck load rates stay high.

Another typical pull supply chain example is SHEIN in apparel. It collects user demand first, then mobilizes upstream and downstream supply chains to meet it. Sales-driven production, no inventory, no spoilage. Knowing exactly where orders come from, it pre-arranges production — achieving closed-loop supply and demand.

02

Food service is moving from industrialization to standardization

Ebrun: In 2019, you wrote that you were bullish on the restaurant ingredient supply chain track. A year on, has the industry evolved as you expected?

Zhou Xiao: The changes haven't been as dramatic as sectors driven by policy or technology variables, but key shifts are underway. It's a track worth long-term attention.

All B2B enterprises progress through six stages: labor-intensive, industrialization, standardization, digitization, algorithmization, and intelligence. Today's automotive industry, for example, is industrialized but not standardized — German cars follow German standards, American cars American standards, Japanese cars Japanese standards. This makes auto parts entrepreneurship difficult: SKUs are too fragmented, creating massive inventory and very low operational leverage.

Today, only advertising distribution has truly reached the intelligence stage. Advertising is purely online; slap on a tag and distribute. E-commerce may be next — it has not only online tags matching user segments but also physical locations: Jiangsu-Zhejiang-Shanghai versus Qinghai, Tibet, Xinjiang, directly affecting delivery timelines and costs. Physical retail may follow.

Convenience Bee, for instance, is essentially doing this now. With nearly 4,000 convenience stores nationwide, each location operates on an individual model, and every model's operations can be algorithmized. These 4,000-plus models form a massive algorithmic network, optimizing away all procurement, logistics, and store operations that previously required human judgment.

From an investment logic perspective, industries currently entering industrialization and standardization harbor enormous opportunity. The essence of food service is retail. It's facing a progression from industrialization to standardization, then onward to digitization and algorithmization.

First, we'll see food processing companies like Anjoy and Sanquan, and compound seasoning companies like Yihai. Their high PE and PS ratios already reflect capital's optimism and recognition of this market.

Second, China will develop its own restaurant chain brands. Companies like Hehegu and Yonghe King will multiply; a Chinese "Yum! Brands" will emerge. And Yum! is a brand matrix — it owns KFC, Pizza Hut, Taco Bell, and dozens more. Today China mostly has single-brand restaurant chains, corresponding to single supply chain organizations and store operation capabilities. Yum!'s U.S. development rode two major waves: food industrialization driving backend supply chain standardization, and computer technology driving enterprise resource management and operational informatization. Mapped to China today, we have rapidly evolving food industrialization infrastructure and globally leading algorithm technology.

Yum! spent nearly 30 years building an informatized operation model. But with China's advanced algorithm and computing infrastructure today, an algorithm-driven Yum! could emerge in perhaps 10 years.

We've invested in a restaurant brand management company called Zansi, which manages brands like Mr. Soup and Dazhuang Beef Offal, plus its own compound seasoning supply chain. What most impressed me about founder Chen Huabin was that in five years of observing this space, he was the first entrepreneur to tell me he wanted to apply algorithmization to store management.

Ebrun: How has this year's community group buying boom affected the restaurant ingredient supply chain?

Zhou Xiao: Community group buying has accelerated cold-chain urban distribution infrastructure. Previously, this was handled entirely by distributors. China's trunk line cold chain has been mature for years, and today China also has the world's most developed last-mile delivery system. Community group buying essentially bridges the gap in between — cold-chain urban distribution — and the commercial value here is enormous.

Take low-temperature milk: gross margins exceed 70%, but shelf life is only seven days. Because cold-chain urban distribution was immature, few distributors had cold-chain consolidation capabilities; most handled only ambient-temperature distribution. So even at companies like Mengniu and Yili Group, low-temp milk accounted for only 3-4% of sales. Most milk people drank was pasteurized ambient-temperature milk. But with cold-chain urban distribution built out, when consumers can access seven-day-fresh milk, they'll certainly prefer it.

Another advantage of community group buying: it's closer to consumers. Here China and the U.S. differ greatly. The U.S. has high urbanization with concentrated population distribution, mainly on the east and west coasts. So U.S. agriculture is highly concentrated. But over 80% of China's population is distributed relatively evenly east of the "Hu Huanyong Line" (the Heihe-Tengchong line). This means Chinese agriculture is local-to-local, fundamentally different from the U.S.

Ebrun: So could companies like Xingsheng Youxua eventually supply B-end customers too?

Zhou Xiao: Whether B2B or B2C, for service providers these are simply logistics fulfillment nodes. The underlying layer is a logistics service system.

Urban distribution doesn't distinguish B from C; it's just a delivery node. The difference lies in service requirements. B-end service requirements are clearly lower — whole-case shipping, whole-case unloading. C-end may require splitting orders. That's why robots are widely deployed in e-commerce warehouses but much less so in B2B warehouses.

03

Food industrialization is the next generation of production methods

Ebrun: What's driving industrialization?

Zhou Xiao: The driving force behind food industrialization is urbanization. The U.S. went through food industrialization in the 1970s; companies like Yum! and McDonald's were born in this period. Rolling back U.S. society in the 1980s and applying it to China today, we find the logic holds — urbanization development. Urbanization drives population influx and rising labor and rent costs.

The underlying logic of food industrialization in China today is that the restaurant industry is undergoing a cost-profit structure transformation. According to the China Hotel Association, over the past two to three years, restaurant industry revenue growth has been roughly 17%, while rent growth hit 23% and labor cost growth 27%. Revenue growth can't outpace cost increases, so profit margins keep compressing. For a restaurant to improve efficiency, it must chain-ify.

In other words, food industrialization fundamentally changes the restaurant industry's cost-profit model. Previously, a restaurant might staff one chef plus four or five kitchen workers. But today at companies like Yoshinoya and Hehegu, there are no chefs, only kitchen workers — because their output is already standardized; workers merely reheat products in-store.

Their kitchen areas have also shrunk dramatically, expanding dining space for higher table turnover. More significantly, output standardization pushes serving speed to the limit. Previously, one chef could produce perhaps a hundred meals per lunch rush. Today, fast food reheated in industrial microwaves can turn out 30 portions in 15 seconds.

Food industrialization is the next generation of production methods. And as urbanization advances, population aging intensifies, and labor and rent costs keep rising, restaurants will be continuously pushed toward chain-ification. That's why companies like Haidilao and Jiumaojiu command such high PE and PS ratios.

From the broader secondary market perspective, restaurant enterprises with standardized supply chains also command significant premiums, because investors believe China will certainly produce its own Yum! Brands.

Ebrun: What technological underpinnings support food industrialization?

Zhou Xiao: Upstream, liquid nitrogen technology is a key enabler. Previously, if you put crayfish in a freezer or cold storage, it froze slowly; upon reheating, oil and water would seep out, severely affecting texture. Liquid nitrogen reaches over minus 100 degrees instantly, flash-freezing; upon reheating, texture can be restored.

Another factor is maturing cold-chain infrastructure. In 2018, over 200,000 new cold storage facilities were added nationwide. This infrastructure improvement drove circulation of frozen and quick-frozen foods. So after 2018, companies like Qian Damai and Dingdong Maicai emerged — the maturation of cold-chain infrastructure was the ballast stone for this wave of fresh produce opportunity.

Mature cold-chain infrastructure reduces spoilage while improving truck load rates through multiple consolidation points, dramatically lowering circulation costs.

Ebrun: Why does food service standardization and food industrialization seem to have been discussed for years, yet progress has been so slow?

Zhou Xiao: Because this industry's barriers are relatively low, it's easy to make (small) money, but it lacks long-term-oriented, ambitious stalwarts. A truly good investor needs to filter out noise, discover companies with long-term value, and believe in those crazy enough to try.

Jeff Bezos once said: Too many people ask me what will change in the next 10 years. What I want to say is, what will stay the same in the next 10 years is the more important question — because you must build your company's long-term strategy on what is constant.

Author: Yang Li

Source: Ebrun

5Y Capital (formerly Morningside Venture Capital) currently manages approximately $3 billion across USD and RMB dual-currency funds. We believe that if the crazy you that others see begins to be believed in, the world becomes a better place.

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