New tea drinks are still a good business, but they are also a difficult one.

Competition in the industry has become increasingly fierce, and involution has spread from the consumer side to the supply chain and marketing links. While each brand is grabbing users at low prices, it also needs to introduce various preferential policies to attract franchisees. The increasingly stringent requirements on both ends have greatly increased the pressure on brand owners to make profits, and the good days of "making money while lying down" are no longer available.

The performance of two leading new tea drinks is facing decline

Nayuki’s Tea (02150.HK)

As a representative of China's high-end tea drinks, Naixue's tea once again turned from profit to loss in the first half of this year. The company is expected to record an adjusted net loss of 420 million yuan to 490 million yuan, with revenue of approximately 2.4 billion yuan to 2.7 billion yuan. Although Nayuki's Tea struggled to turn a profit in 2023, its performance deteriorated again in the first half of this year. As of the end of June this year, Nayuki's number of directly operated tea stores was 1,597, an increase of only 23 from the beginning of the year, while the net increase in the number of directly operated stores in the same period last year was 126.

In a related announcement, Nayuki’s Tea (02150.HK) admitted that consumer demand has not recovered significantly and store income is under pressure. With store-side cost optimization already basically in place, costs such as manpower, depreciation and amortization have limited room for further adjustments in the short term, resulting in greater pressure on the store's operating margins.

ChaPanda (02555.HK)

Cha Baidao is the second stock of New Tea Beverage and was listed on the main board of the Hong Kong Stock Exchange on April 23 this year. Although Chabaidao is known for its profitability, with revenue of 5.704 billion yuan and net profit (adjusted) of 1.26 billion yuan in 2023, the company also faced a decline in performance in the first half of this year. Chabaidao expects adjusted net profit in the first half of this year to be 380 million yuan to 410 million yuan, a year-on-year decrease of no more than 36.45%; net profit is approximately 220 million to 250 million yuan, a year-on-year decrease of no more than 63.03%.

Cha Baidao is the second stock of New Tea Beverage and was listed on the main board of the Hong Kong Stock Exchange on April 23 this year. Unexpectedly, the first interim report card after listing gave investors a head-on blow.

Regarding the sharp decline in performance in the first half of this year, Cha Baidao explained that in order to cope with changes in consumer habits due to changes in the external environment, the company has increased support policies for franchisees and preferential sales of equipment and goods, and at the same time increased overall market investment expenses, thereby impacting company performance.

The battle for franchisees

In the past ten years, China's ready-made tea industry has grown wildly and is the fastest growing subcategory in the catering industry. In 2024, the number of stores nationwide will exceed 400,000. As the market gradually becomes saturated, competition among brands has extended from consumers to franchisees.

●Transformation of Heytea and Nayuki: High-end brands Heytea and Nayuki, which once adhered to the direct operation model, have opened franchise channels in 2022 and 2023. In order to attract franchisees, these brands have lowered the threshold for joining and provided limited-time marketing subsidies, attracting a large number of applications from potential franchisees. In the past, Nai Xue, who has always been obsessed with the tone of "space experience", announced that the investment amount for a single store will be reduced from one million to 580,000 yuan, and at the same time, there will also be a limited-time marketing subsidy. After the threshold was significantly lowered, more potential franchisees were immediately attracted to submit applications.

●ChaPanda’s response measures: While facing a decline in performance, Chabaido has increased its support policies for franchisees, such as providing discounts on equipment and goods, fee reductions and material rebates, to maintain its attractiveness to franchisees. 

In low-tier cities, periodic "zero franchise fee" policies are common, further intensifying the fierce competition in the market. In this environment, only brands that can provide better single store models and more attractive franchise conditions can stand out from the competition.

Market sinks

In China's first-tier cities, the freshly made tea market is close to saturation, and high-quality spots have become scarce. By the end of 2022, the number of ready-made tea stores per million people in first-tier cities will reach 460, while the store density in third-tier cities and below will be 247 stores per million people. Under this market structure, leading tea drink brands have quickly completed their layout in first-tier cities and turned their attention to sinking markets.

The sinking market has become the main battlefield for new tea brands. Data shows that the ready-made tea market in third-tier, fourth-tier and below cities has shown rapid growth in recent years, with the market size increasing from 16.3 billion yuan and 21.4 billion yuan in 2018 to 71.6 billion yuan and 73.5 billion yuan in 2023 yuan, with average annual compound growth rates (CAGR) reaching 34.3% and 28.0% respectively. It is expected that in the next five years, the market growth rate of these low-tier cities will continue to exceed that of first- and second-tier cities.

As brands compete to grab low-tier cities and even towns, this former “blue ocean” has quickly turned into a new “Shura Field.” In order to compete for market share, various brands have to attract franchisees through more intense price wars and more attractive franchise policies. Competition between brands is no longer limited to products and services, but also extends to supply chains, marketing methods, pipeline construction and other aspects.

Overseas expansion strategy

Facing the saturation of the domestic market, China's new tea brands have set their sights on broader overseas markets, trying to recreate a "golden era" through overseas expansion.

●Mixue Bingcheng: Mixue Bingcheng, the first to go overseas, has achieved success in the Vietnamese market and is rapidly expanding in Southeast Asia and other places. As of the end of 2023, its overseas stores will be close to 4,000.

●HiTea and Nayuki: Using Singapore as a springboard, Heytea and Nayuki have successfully entered the Southeast Asian market and established their reputation in the region.

●ChaPanda: Actively enter overseas markets and further expand international market share by attracting local franchisees.

Capital market performance and future prospects

In the past few years, thanks to the strong promotion of capital behind them, leading new tea brands have achieved rapid expansion.

Nayuki's tea and tea hundred courses have been listed one after another, and brands such as Mixue Bingcheng, Gu Ming, and Shanghai Auntie are also lining up in the Hong Kong stock market, waiting for the opportunity to ring the listing bell.If these leading brands can successfully go public in the future, abundant book cash and a new round of fundraising may bring about new expansion models. By then, the industry may start more intense competition in the upstream and downstream of the supply chain or in marketing, and truly enter the "most volume" era.

However, today's capital market is not very enthusiastic about the new tea industry. The market value of Nayuki's tea was close to HK$30 billion when it was first listed, but its current market value has dropped to HK$2.38 billion. Chabaidao was issued in April this year at a price of HK$17.5 per share, but it fell below the issue price on the first day of listing. The stock price fell again by 12.38% on the 12th. However, the stock price recovered yesterday and today, with the latest market value of HK$9.93 billion

In the future, how to balance the consolidation of the domestic market and the development of overseas markets, and how to attract more high-quality franchisees in the fierce market competition, will become the key to the continued growth of major brands. China's new tea beverage industry is in an important transformation period, and brand owners need to find new development opportunities through innovation and strategic adjustment.