Milk tea price war hurts franchise stores

The price war in the milk tea industry is intensifying. While consumers are enjoying the convenience of low-priced milk tea, franchisees are facing serious profit compression and operational difficulties.

Milk tea has entered the 10 yuan era, which makes consumers happy but worries franchisees.

Even in the peak season of tea sales during the summer vacation, the employees of Dachuan Milk Tea Shop in Jiaxing, Zhejiang Province shake their cups every day until their hands shake, but the store is just able to break even. "The price cut brought in customers, but did not bring in an increase in actual revenue."

"In the past, we relied on peak season revenue to offset the losses in the winter off-season. Now I know that we will definitely lose money this year." Faced with the brand's behavior of engaging in price wars and raising material prices at the same time, Dachuan, who started to join a well-known new tea brand in 2022, has recently considered withdrawing.

Wang Yang, a franchisee of another well-known new tea brand, has already taken action. After two years of opening the store, Wang Yang not only did not make any money, but lost more and more money in the recent price war. He finally decided to sell at a loss and leave because he could not stand it any longer.

But after going through the brand transfer process, "I spent 500,000 yuan on franchise decoration, and after evaluation, the store was only worth 200,000 yuan." Even though the brand regulations prohibit private transfers, Wang Yang posted the news of the milk tea shop transfer on social media in early August. However, he has not yet found a "buyer".

In worse cases, some brands have not been able to gain more customers even after cutting prices. Muzi, a Shandong girl born in the 1990s, joined a well-known new tea brand after leaving her job last year.

In April this year, the tea brand began to lower its product prices. But after the price cut, she did not feel much change in store traffic, and the small profit did not bring more sales. "The daily sales are still stable at around 2,000 yuan."

Price reduction of new tea drinks is not new. Since 2022, "New tea drinks bid farewell to the 30 yuan era" has once become a hot search, but now, their price range has dropped to 10 yuan, and the profits of tea drink brands have been infinitely squeezed.

The milk tea industry has finally returned to business common sense, shedding the glamorous appearance of new consumption and becoming an ordinary catering company.

"Who is paying for the 10-yuan era of milk tea?" "Who is the biggest victim of the 10,000-store milk tea shop push?" Related posts are emerging one after another on social platforms. The answers almost point to the same group, that is, franchisees.

Price reduction means further compression of profit margins. Continuing to insist on self-operation for scale expansion at this time will most likely lead to an increase in revenue scale and a continued decline in profit margins. This is also one of the main reasons why Nayuki's Tea has been losing money year after year.

As competition in the new tea beverage industry continues to intensify, almost all brands have opened up to franchising and are accelerating their expansion. Even Heytea and Nayuki’s Tea, which originally insisted on direct sales, will open up to franchising in the fourth quarter of 2022 and the third quarter of 2023, respectively.

By 2024, the threshold for joining tea beverage brands has been lowered again and again, and many brands have even announced "0 franchise fee".

Opening up for franchising can not only accelerate the expansion of store scale and seize market share, but also gain more bargaining power upstream and support profitability after price reduction. This has almost become a consensus among all new tea brands.

However, the price of the product has been reduced, but the purchase price of the franchisees has not changed at all. Some brands subsidize one or two yuan per order as a token of appreciation, while many brands do not even provide subsidies. In other words, while the milk tea brands are engaged in a price war, the pressure has been transferred to the franchisees.

The new tea beverage market, which wants both scale, low prices and profits, is "forcing" franchisees to leave. According to data from Zhaimen Canyan, as of June 10, the total number of milk tea shops reached 427,306, with 165,388 new stores opened in the past year, but the net increase was only 45,825. This means that nearly 120,000 stores in the new tea beverage industry have closed in a year.

Once franchisees leave due to frustration, it will directly affect the brand's market expansion, eventually forming a vicious cycle. The business model of new tea brands is undergoing a major test.

01

"We must grab the bargains this time." Recently, when browsing Douyin, Yuanzi, a girl born in the 2000s, was often pushed milk tea coupons, including 6 yuan for a cup of milk tea, 4.9 yuan for a cup of passion fruit tea, and 2.9 yuan for a cup of lemon tea...

Milk tea, which used to cost 20 or 30 yuan, now costs less than 10 yuan after using the coupons. With the mentality of "I can't miss it if I pass by", Yuanzi bought all the coupons, "I'll decide whether to drink it or not, but I'll stock up first."

Most of the initiators of this round of price war are well-known new tea brands. Heytea's "Pure Green Tea Yan" is only 4 yuan per cup after using the coupon, Shuyi's Herbal Grass Jelly Kumquat Lemonade is priced at 6 yuan for a large cup, Shanghai Auntie's Milk Green Tea group purchase price has been around 6 yuan for a long time, and Guming has launched a new 4 yuan lemonade product.

Recently, several brands including Heytea, Shuyi Herbal Jelly, Guming, Cha Baidao, and Mixue Bingcheng have reduced prices by adjusting menus and issuing coupons, and are competing fiercely in the 10 yuan price range.

There are even many consumers who share their strategies on how to get the best deals. Careful consumers have figured out which platform offers the best deals and which platform has the lowest price.

The reason is that there are many drinks on the market that cost less than 10 yuan per cup, but most merchants put coupons on third-party platforms. Users usually cannot buy them directly in offline stores or official mini-programs.

Consumers are happy to see the price reduction of milk tea. On social platforms, many netizens said, "The price of a mass consumer product like milk tea should have been reduced long ago," "The price of a cup of milk tea was really outrageous in the past, which was only 20 or 30 yuan," and "The price of a cup of milk tea is sometimes even higher than that of a fast food meal." However, some netizens found that the volume of milk tea cups became smaller and the taste became bland after the price reduction, and they were worried that the price reduction would reduce the quality.

The price cut brought an immediate increase in customer traffic to some stores, but after doing the math, the merchants found that their profits had actually decreased. Before the price cut, Wang Yang's store sold an average of 200 cups a day, with an average selling price of 15 yuan per cup. Based on a gross profit margin of 50%-60%, the average daily gross profit was about 1,500-1,800 yuan.

After the price reduction, daily sales increased by about 100 cups, but the daily gross profit was even less. The reason was that nearly 80% of customers chose the group purchase discount on the third-party platform with an average order value of 5-6 yuan per cup.

Like Wang Yang, Muzi is also facing increasing operating pressure. Since April this year, the milk tea brands that Muzi has joined have been continuously lowering their product prices. The new fruit tea products are priced at around 10 yuan, which is about 3-5 yuan lower than the previous prices of similar products. "The average price of the product has moved from around 15 yuan to the 10 yuan price range."

"After the price cut, consumers will order whatever products are cheap." But the problem is that although product prices have been lowered, the purchase price has not changed at all. In the end, Muzi's actual monthly revenue has been reduced in disguise.

"The brand I joined has been going downhill in the past two years. After the brand upgrade, its positioning in the minds of consumers has lost its characteristics. Products that once sold well have also been removed from the shelves under the premise of the brand's pursuit of healthy upgrades."

Muzi believes that it is foreseeable that price cuts will not lead to an increase in customer traffic. "It is like treating the symptoms instead of the cause. Brands should study brand positioning and product development more carefully. Participating in price wars will only increase the operating pressure on franchisees."

The brands that Dachuan joined were even more aggressive. While engaging in price wars, the brands also raised material prices. "This is equivalent to transferring all the pressure of price cuts to the franchisees."

In the three years since joining the brand, the cost of a milk tea condiment has increased 20 times, from being brewed by the franchisees themselves to canned products and now frozen products.

The brand recently launched a "buy one get one free" promotion, but the subsidy for franchisees is only 1 yuan per order. "The number of orders has increased by 20%, but the actual revenue has decreased. For some single products, I lose 3.5 yuan per cup." What makes Dachuan even more worried is that the brand recently notified franchisees to upgrade the brand, "The packaging fee is almost doubled."

02

"I am a franchisee of a tea beverage brand, and I will decisively close my store next month." "I can't afford to pay the losses if I close the store." "I have closed three stores, and several more are on the way to bankruptcy"... In August, you can see many new tea beverage franchisees who want to sell or close their stores on social platforms.

Under the price war, franchisees are fleeing at an accelerated pace.

According to Yilan Business, in July this year, the number of new stores opened by the 25 new tea drink chain brands it has been tracking for a long time increased by 24 compared with the previous month, and the total number of new stores increased by 0.47% month-on-month, almost flat. In May this year, the number of existing stores was 114,839, which means that in two months, the new tea drink industry has lost more than 4,000 stores.

Wang Yang, who has run a milk tea shop for two years, has been considering selling the business to stop losses as profits continue to decline. "The franchise fee is 98,800 yuan, the equipment fee is 100,000 yuan, the deposit is 5,000 yuan, the first batch of materials is 40,000 yuan, the opening marketing fee is 8,000 yuan, the decoration is 150,000 yuan, and the rent and labor are 100,000 yuan."

The brand originally estimated that Wang Yang's payback period would be one and a half years, but now two years have passed, and the store has gone from initially making meager profits to only being able to break even now, and fully recovering the principal has become a distant prospect.

Wang Yang recalled that since he joined the brand, the brand has often held promotional activities and forced franchise stores to participate, but there was no subsidy. "From the time I joined until now, I have not seen any form of subsidy, while other brands still have subsidies to some extent."

In addition to price cuts, the main reason why Wang Yang has been unable to make a profit is that the price of materials is far higher than the market price. "Two watermelons cost 150 yuan, while a watermelon in the local vegetable market is only more than 30 yuan."

Wang Yang once secretly removed promotional products with too low profits from the shelves, but supervisors would often check whether the main products were online, and would immediately call the store if they found they were not there.

"Nowadays, opening a store means working like a slave for the brand." In order to save labor costs, Wang Yang dismissed an employee and stayed in the store every day to shake milk tea. "It's like I spent 500,000 yuan and found myself a 996 job with a monthly salary of 6,000 yuan."

In Wang Yang's view, the price war will only get more intense. "We are about to enter the off-season. If we continue to hold on, we will only lose more and more money."

Dachuan opened the milk tea shop with a friend. At the end of last year, they found that they had lost 150,000 yuan. Dachuan's friend decided to quit and advised Dachuan to stop the loss in time, but Dachuan wanted to stick with it for another year. "It takes time and money to maintain a shop. It's only been a year, and it's not yet the payback period."

The more he insisted then, the more embarrassed he is now. "After the brand promotion, the store's daily net income can't even cover the rent." Now, every time he opens his eyes, Dachuan's mind automatically pulls out a row of bills: the store's monthly rent is nearly 20,000 yuan, the labor cost of 3 waiters is 20,000 yuan, and other water, electricity and miscellaneous expenses are 4,000 yuan per month. Recently, Dachuan has also begun to consider closing the store and transferring it.

On one hand, old franchisees are fleeing, while on the other hand, brands are competing for new franchisees.

Since 2024, new tea brands have accelerated their efforts to expand their business, and the competition for franchisees has become increasingly fierce. Many tea brands have lowered the threshold for joining, and Cha Baidao and Shuyi Shaoxiancao have even announced a "0 franchise fee" plan. Small and medium-sized entrepreneurs who have not yet experienced the hardships of being a franchisee are also eager to try.

Faced with such a fierce price war, Li Xiaoyue, who has joined three new tea brands, is not surprised. "For brands that are already in a blood-thirsty frenzy, continuous expansion is inevitable." This means that her experience of "opening three stores nearby within a year" will continue to repeat itself, and the profits of franchisees will be diluted accordingly.

"The secret to getting rich by joining a milk tea shop is to find the right time to enter and exit the business." Li Xiaoyue is good at the game of passing the parcel in the milk tea franchise. By accurately controlling the time of entry and exit, she joined three milk tea brands in a row and made 1.6 million in three years.

But half a year ago, when she closed all her stores and prepared to re-examine a suitable milk tea brand, she found that it was almost impossible to find a "chicken that lays golden eggs".

03

The essence of price war is to grab more customers in the existing market. As the pioneer of the 9.9 yuan freshly brewed beverage, Luckin Coffee Chairman and CEO Guo Jinyi once publicly stated that since the launch of the 9.9 yuan campaign, Luckin Coffee's product sales have continued to increase and the number of consumer users has reached a new high.

As a result, new tea beverage brands are attracting consumers by lowering prices, while also wooing franchisees to accelerate the expansion of store scale in order to gain more bargaining power upstream and support profitability after price cuts.

However, compared with coffee, which has a single raw material and is easy to scale up, it is a little difficult for new tea drinks, which have a wider variety of raw materials, to lower costs. In fact, since the beginning of this year, the fierce competition in the new tea beverage industry has led to a decline in the operating performance of many companies.

On August 9, Cha Baidao issued its first profit warning after its listing. According to preliminary assessment, it is expected that the adjusted net profit in the first half of 2024 will decrease by no more than 36.45% compared with the same period last year; the net profit is expected to be between approximately 220 million yuan and 250 million yuan, a decrease of no more than 63.03% from 595 million yuan in the same period last year.

Nayuki's Tea's latest first-half results are not optimistic. On August 2, Nayuki issued a profit warning. In the first half of this year, the company expects revenue to be about 2.4 billion to 2.7 billion yuan; the adjusted net loss is 420 million to 490 million yuan, and the half-year loss is close to the full-year net loss in 2022. From the perspective of the secondary market, Nayuki's Tea's share price in Hong Kong stocks has fallen by more than 50% since the beginning of this year.

Even Luckin Coffee, the originator of the "9.9 yuan" product, was not spared. The continuous price war brought revenue growth while also eroding its profits. Revenue in the first quarter of 2024 was 6.2781 billion yuan, a year-on-year increase of 41.5%;

Net loss was 83.2 million yuan, down 148.7% year-on-year. Second quarter revenue reached 8.403 billion yuan, up 35.5% year-on-year; net profit was 871 million yuan, down 13% year-on-year.

Even if the new tea brands at that time failed to package themselves as "Internet technology companies", they would eventually move closer to "Internet consumer companies". They shouted the slogan of becoming the "Chinese version of Starbucks" and told the story of "promoting Chinese tea culture".

The injection of capital has driven the rapid expansion of the domestic new tea beverage industry. Milk tea has transformed into a "social currency" for expressing emotions and has been quietly labeled as "young" and "trendy". It has even caused the "spectacle" of long queues offline. The new tea drinks priced at 30 yuan per person are being accepted by more and more young consumers.

But in the end, no new tea brand became the next Starbucks, and the business model is still that of traditional catering companies that make money by selling cup after cup of milk tea.

Saying goodbye to the era of blind rush, the price of milk tea has eliminated various premium factors such as user novelty and capital support, and returned to business common sense. Naturally, profits have returned to the state of thin profits or even losses for catering companies.

When the story is no longer sexy, the capital market becomes increasingly indifferent to new tea brands. Today, when growth is no longer the main theme of the industry, adapting to the new identity of "mass consumer goods" is the focus of the new tea industry.

At the same time, blind price wars can bring traffic but also backfire. It is easy to reduce prices but difficult to raise them. Long-term price competition will make consumers form the psychological expectation that "the product is only worth this price". McDonald's poor meal price increase was threatened by some "McGate" fans to "rebel", and Luckin Coffee's 9.9 yuan coffee promotion was reduced, causing dissatisfaction among consumers.

"Any industry must maintain reasonable profits to survive in the long run. Even if the brand passes the pressure on to the franchisees, the franchisees will either cut corners or choose to withdraw for the sake of profit, and the brand will ultimately bear the consequences."

Li Xiaoyue, who has joined three new tea brands, has now returned to the workplace and started working as an operator in a live broadcast company.

Editor: Tan Xiaohan Writer: Zhang Lin This article is written by the author of Operation Party [Alphabet List], WeChat public account: [Alphabet List], original/authorized publication on Operation Party, any reproduction without permission is prohibited.

The title image is from Unsplash, based on the CC0 protocol.