New tea brands are entering Northeast counties

This article deeply analyzes the phenomenon of new tea brands collectively entering the county towns in Northeast China, explores how capital stirs up the industry ecology, and the business logic and market potential behind this strategy. From Heytea's sinking market strategy to Mixue Bingcheng's cost-effectiveness advantage, the article provides a comprehensive perspective for understanding the competitive landscape and future trends of the new tea industry.

Capital has become a "catfish", stirring up the industry ecology.

Hao Xudong opened a Heytea store in Hegang.

A small northeastern city that is declining due to the depletion of coal resources and a "high-end new tea brand" highly sought after by capital have intersected because of the preferences of young people.

Hegang has a population of less than 800,000, and the aging process is accelerating, but there are all kinds of milk tea shops everywhere. According to incomplete statistics from Dianping.com, there are nearly 100 stores selling freshly brewed tea in Hegang City. Luobei County and Suibin County, which are close to the China-Russia border, have at least 38 and 16 milk tea-related stores respectively.

Among them are many common chain brands, including 20 Mixue Bingcheng stores, 10 Shanghai Auntie stores, 10 Big Cup Tea stores, 8 Tianlala stores, 3 Cha Baidao stores, 1 Mo Yogurt store, 1 Bawang Cha Ji store, and the Heytea store which opened in Buyute Times Square in Hegang City in June last year.

Hegang, the "holy land for lying down", once became an internet celebrity city thanks to its low housing prices. Like Hegang, many cities in Northeast China have low prices and a slow pace, but from another perspective, this also means enough opportunities and growth.

In April 2023, Hao Xudong's first HEYTEA store opened in Jiamusi Wanda Plaza. Half a month later, he welcomed a joint event between HEYTEA and FENDI. For a while, young people carrying "little yellow bags" could be seen everywhere in Jiamusi.

After the successful trial, Hao Xudong and his team turned their attention to Hegang, which borders Jiamusi. Later, he co-founded a company with his friends and opened several HEYTEA stores in other cities such as Fujin and Daqing.

The "self-reducing of prices" by high-end tea brands will shift the focus of competition to the sinking market with completely different business logic, reflecting the industry's collective anxiety and compromise.

Market competition continues to intensify, and “sinking northward” is a tacit understanding among new tea beverage companies. However, this wave of milk tea brand chain development, fueled by capital, is extremely surging.

01. When sinking becomes a tacit understanding

There are 293 prefecture-level cities and 388 county-level cities in China.

As long as it is a city with administrative districts, it has a certain number of educated people, which can support the development of several commercial complexes. Milk tea brands, especially high-end new tea brands, are basically opened on streets with dense traffic and in commercial complexes.

"For practitioners, the threshold for opening a milk tea shop is lower than that for catering." Wen Zhihong, general manager of Hehong Consulting, believes that in low-tier cities, the drinking habit of milk tea does not need to be educated like coffee. "Everyone has a cup of milk tea" has long become a common lifestyle habit for young people.

In a period of economic downturn, non-essential milk tea products with low customer unit price provide people with higher emotional value. Similar to the "lipstick economy", new tea consumption has also created a sales miracle in the catering industry.

According to data from China Insights Consulting, from 2017 to 2022, the compound annual growth rate of the market in third-tier and lower cities will reach 30.2%, expanding from 19.6 billion yuan in 2017 to 73.2 billion yuan in 2022. In 2023, the market growth rate of third-tier and lower cities is expected to reach 31.4%, and the growth rate will remain above 20% in the next two years.

Image △ Image source: Screenshot from Guojin Securities Research Institute

As a former resource-based city, Hegang is not without commercial genes. Two national chain brands have emerged from here - Xijiade Dumplings, which are sold all over the country, and Biyoute, the leading supermarket brand in the three northeastern provinces.

Hao Xudong’s HEYTEA store is located on the first floor of Buyote Times Square. The store covers an area of ​​about 80 square meters and has a good location in the entire shopping mall.

According to him, this Heytea store was popular among local young people on the opening day. During the daily peak sales season, the store can sell 1,700 to 1,800 cups of drinks every day, which is 3 to 4 times the sales volume in the off-season. "Once winter comes in the Northeast, the customer flow will drop significantly, and it will be even more terrible when there is a snowstorm." But even so, in Hao Xudong's opinion, low-tier cities represented by Hegang and Jiamusi have more opportunities to open new stores, and the market is less affected by consumption downgrades.

"Young people here have more free time and are more willing to spend. After trying good products, they are unwilling to reduce the quality of their consumption even if it means reducing the frequency of consumption."

Hao Xudong is a typical Northeasterner who lives a "migratory bird" life. He usually does business in Heilongjiang and migrates to Hainan with his family in winter.

An interesting phenomenon is that new and cutting-edge tea beverage brands always open stores in Northeast China and Hainan one after another.

In 2022, Tianlala established branch warehouses in Harbin and Haikou. As of now, the number of Tianlala stores in Hainan Province has reached 180. From the perspective of volume, if new tea brands want to quickly open stores in the national market, the Northeast region is the most indispensable link.

Xu Zhou, general manager of Tianlala, said that in Anhui, the brand's base, the northern part of Anhui is mainly plains, while the southern part of Anhui is mostly mountainous and hilly. "The population in the plains is relatively concentrated, and the stores cover a wider population, so the taste difference will not be very big, and the market can form a scale effect faster."

Therefore, the North China market has become the first place for Tianlala to "go north". This business logic is also applicable to the Northeast Plain. As of now, Tianlala has nearly 800 stores in the three northeastern provinces.

Xu Zhou mentioned that the initial price of Tianlala's products was around 5 yuan. "Such a price is more suitable for expansion in northern counties. The price in the southern market is generally higher."

The new tea beverage market in the south is currently saturated, and major tea beverage brands have entered the "small town social" segment in mature regions.

Meng Fanwei, a brand marketing expert who has been deeply involved in the tea beverage industry for more than ten years, believes that after several rounds of reshuffles, mature markets represented by Henan and Zhejiang have formed an oligopoly situation, and the market share ranking of major brands is stable. However, in some areas north of the Yangtze River, brand penetration is insufficient and there are still opportunities. Among the many regional markets, Jiangsu is more intense.

A typical example is another high-end new tea brand - Nayuki Tea.

In July 2023, after Heytea and Lelecha opened up for franchising, Nayuki introduced the "highest" franchising threshold in history. At that time, Nayuki required the franchise store area to be between 90 square meters and 170 square meters, and the initial investment for joining a Nayuki store was 980,000 yuan (now reduced to 580,000 yuan), which was significantly higher than Heytea's 500,000 yuan and Lelecha's 120,000 yuan.

Picture △ The cost of joining the high-end beverage franchise; Picture source: 36Kr

Naixue's opening to franchisees received positive feedback from the capital market, with its stock price rising by more than 12% on the same day. The first batch of franchise stores that Naixue announced were all in Jiangsu Province.

A person in charge of franchise operations at Nayuki’s Tea said that because of the focus on the third space large store strategy, Nayuki’s franchise stores are mostly located in the best locations in the top business districts. “But this type of store requires schedule adjustment, which is why the outside world initially believed that Nayuki’s franchise speed was slow.”

According to the above-mentioned person, Jiangsu's tea market has both local brands that have been deeply rooted and national chain brands that have entered. Nayuki has increased its market share through franchising based on its original directly-operated stores.

Today, Naixue’s stores have “occupied” all cities at the county level and above in Jiangsu. While fully understanding the Jiangsu market, it has also expanded into surrounding provinces.

The key to the problem is: Is there really such a huge demand for new tea drinks in the sinking market?

02. Close combat with the "Snow King"

Going down means lowering prices, which means competing with Mixue Bingcheng for market share.

Judging from the current average customer spending, the price of milk tea products in county and town markets is mostly around 10 yuan or even 5 yuan.

At the beginning of 2022, the topic of "HEYTEA bids farewell to 30 yuan" became a hot search; in the recent 12th anniversary celebration, HEYTEA once again launched a limited-time buy-one-get-one-free event.

According to a previous report by "Shijie", the "Zhizhi Jinfeng Tea King" with an original price of 15 yuan is equivalent to 7.5 yuan per cup after the coupon, while the "Pure Green Tea Yanhou" with an original price of 8 yuan is even lower after the coupon.

"This means that during the brand promotion period, consumers can drink products from the leading tea brands in first-tier cities at the original Cha Baidao price. This will definitely support the development of high-end tea brands in the sinking market," said Wang Hongtao, vice president and secretary general of the China Chain Store Association.

In the sinking market, the title of "Snow King" alone is enough to demonstrate the status of Mixue Bingcheng.

Different from the “new tea drinks” such as Heytea and Nayuki that focus on fresh fruits, fresh milk and fresh tea, Mixue Ice City started out with ice cream and focuses on “cost-effective” products.

In 2014, Mixue Bingcheng officially entered the tea beverage industry. With Zhengzhou, a second-tier provincial capital, as its center, it continued to penetrate into 83 county towns and 39 prefecture-level cities in Henan, and quickly developed into other provinces and cities in accordance with the strategy of "surrounding the cities from the countryside."

According to Mixue Ice City's prospectus, by September 2023, its total number of stores will reach 36,000. Among them, there are 18,000 stores in third-tier and lower cities, accounting for 56.9% of the national total. In comparison, the number of stores of Shanghai Auntie accounted for 49% during the same period, and the proportion of Cha Baidao was even lower.

Image△Distribution of stores of various brands in different cities; Image source: 36Kr

Meng Fanwei believes that behind Mixue Bingcheng’s rapid expansion is the release of the consumption power dividend of the Chinese market, especially the third, fourth and fifth-tier markets.

Earlier, Mixue Ice City replaced the demand for bottled drinks in the vast lower-tier markets with its lemonade, which was sold at 4 yuan a cup. Because Mixue Ice City's products are mostly made of powdery raw materials, it was able to quickly form a supply chain scale and replace the low-quality mom-and-pop stores and "quick-fix" chain brands in the lower-tier markets.

Wang Hongtao said that there are two important assessment criteria within the chain industry: one is the survival rate of stores, the number of stores opened must exceed the number of stores closed; the other is the franchise repurchase rate, that is, the same franchisee can join multiple stores.

If old franchisees continue to open new stores, it will not only prove the return on investment of the first store from the side, but the communication costs of the brand will also be greatly reduced.

The high-end new tea beverage brand, which has lowered its profile and stood on the same starting line as "Snow King" again, has basically delivered a satisfactory answer.

All the Heytea stores owned by Hao Xudong can break even on their initial investment in about eight months. Based on his prediction of future revenue, he plans to open a second Heytea store in Hegang.

In Longyan City, Fujian Province, an old revolutionary base more than 3,400 kilometers away from Hegang, Li Jiaming is also planning his second Naixue store.

Li Jiaming was one of Naixue’s early “large-store” franchisees. His store officially opened in October last year, with an initial investment of about 1.2 million yuan.

Among them, the initial investment costs for brand cooperation, comprehensive services, training, etc. totaled 130,000 yuan, and the deposit was 30,000 yuan; the drawings for store decoration were provided by Naixue's headquarters, and the total decoration cost was about 300,000 yuan. From site selection, design drawings, decoration to opening, the time cost was more than 2 months. During this period, Li Jiaming also went to Naixue's Shanghai headquarters for 26 days of training, including 15 days of store operation courses.

Longyan City is located in western Fujian Province. It is home to Hakka Tulou and has rich tourism resources. In 2023, Longyan City's GDP was nearly 10 times that of Hegang City. The travelers and the city's economic strength also injected vitality into Li Jiaming's Naixue store.

Li Jiaming revealed that the first month's turnover of the Naixue Longyan store reached 700,000 yuan. He estimated that if the store can maintain this level of turnover, it can recover its investment in one to one and a half years.

Judging from the industry average, if a franchise store can break even within 18 months, it is considered a healthy return on investment. Despite this, the store turnover rate in the tea industry within two years can still reach 30%, or even more than 40%.

Meng Fanwei said that what is worth paying attention to in the future is the overall profitability of high-end tea brands such as Heytea and Nayuki, the quality stability of franchise stores, and the upper limit of the number of stores a brand can have in the domestic market. This also depends on whether the franchise management of each brand can truly "sink".

03. 2024 will be a watershed for the industry

“If Cha Baidao can open three stores in Hegang, Heytea can also open a second one.” This is a sentence that Hao Xudong often said before.

There are many franchisees who share the same idea as him. In November 2022, the development speed of Heytea after opening up to franchisees clearly exceeded the industry's expectations.

A widely circulated saying is that within 24 hours after the franchise entrance of Heytea was opened, the headquarters received tens of thousands of partner applications. The "2023 Annual Report" released by Heytea shows that by the end of 2023, the number of its stores has exceeded 3,200, of which more than 2,300 are business partnership stores, and the store scale has increased by 280% year-on-year.

However, what Hao Xudong needs to face now is the diversion from Ba Wang Cha Ji.

In early April, Bawang Cha Ji, a brand specializing in whole-leaf milk tea with a refreshing taste, opened its first store in Buyute Plaza in Hegang, and ranked first on the Hegang Dianping food list.

It is not just Bawang Chaji. Under the wave of homogenization, the competition among tea brands has fallen into a melee. While most tea brands have reduced their prices and moved down the market, Mo Yogurt has gone against the trend with its high pricing and taken over some of the high-end markets that Heytea and Nayuki have withdrawn from.

As the supply chain is not difficult to build, the operation is simple, and the stores are easier to replicate, the "Snow King"'s impressive performance has spread to overseas. The prospectus shows that the number of Mixue Ice City's stores overseas is close to one-tenth of the total number of stores, with more concentrated in Southeast Asia.

If things continue like this, the Chinese tea industry will inevitably experience a "big fish eat small fish" process. An industry insider said, "Everyone has a very consistent expectation of the industry. They all believe that in the next two years, some tea brands will definitely die."

Wang Hongtao’s judgment is: 2024 will be a watershed year for the entire new tea beverage industry.

He estimated that the industry's "blood-throwing" phenomenon will gradually emerge in the second half of 2024, with some brands withdrawing and others rising. After the competition and cooperation resume, the profitability of the entire track will decline to a certain extent, and then stabilize.

Wang Hongtao believes that in the short term, China's tea beverage industry may still have a certain amount of new growth. After two to three years, or at most five years, the entire industry will see a decline in profitability and expansion speed. "This is similar to chain restaurant brands. When too many players enter the market and supply exceeds demand, store revenue will decrease."

In the future, supply chain capabilities are likely to become a trump card that determines success or failure. In the process of large-scale expansion, the tea beverage industry must ensure strong supply chain distribution. If the supply chain is not mature enough, the more scattered the stores are, the more difficult it will be to control.

In the product structure of high-end new tea drinks represented by Heytea and Nayuki, more than half are fresh fruit tea drinks. In order to ensure the taste and food safety, the store must have a higher delivery frequency.

In Meng Fanwei's experience, to achieve a chain tea brand with 10,000 stores, a county must have at least 10 to 20 stores to ensure the economic benefits of logistics routes and special vehicle delivery mainly in prefecture-level cities. "You can't run a car and only deliver to two or three stores. If there is no special vehicle delivery, the quality of fresh fruit cannot be guaranteed."

It is said that "investment does not go beyond Shanhaiguan". In addition to the consumption off-season caused by the cold weather, the brand chain operations in the three northeastern provinces are also constrained by the objective conditions of "vast land and sparse population".

In order to solve the problems of supply chain efficiency and logistics distribution in such regions, Wang Hongtao suggested that brands can open up procurement rights in the local area. "For example, adopt a regional franchise and large franchisee cooperation model, and then use a high degree of product standardization to allow local partners to purchase by themselves. Or directly set up branch warehouses and independent regional companies for unified planning and management."

Regardless of the form, the brand is required to achieve a certain store density locally.

According to the author’s incomplete statistics, as of now, Heytea has more than 40 stores in Heilongjiang Province.

According to Hao Xudong, when planning to open a store in Jiamusi, Heytea asked franchisees about their own logistics and distribution capabilities and considered borrowing their logistics and distribution capabilities. But a few months later, the logistics in Heilongjiang Province were quickly opened up, "the store was delivered every two days at first, but now it is delivered every day."

In addition, both Heytea and Nayuki have adopted a digital store ordering system, which can calculate the purchase quantity of different products based on the store's past customer flow to avoid waste caused by unsold products.

04. The end of involution is slowing down

Capital is like a "catfish", and consciously engaging in market competition has become a law of survival.

For current tea beverage companies, whoever has the right to speak can become the rule maker in the next stage, so they are rushing to go public and enter the capital market.

On April 23, the well-known new tea brand Chabaidao was successfully listed, becoming the second new tea company to be listed on the Hong Kong stock market after Nayuki's Tea. As of the close of the listing day, Chabaidao's share price was HK$12.8, down 26.86% from the issue price.

The general view is that Cha Baidao's market performance is not as good as expected, mainly because investors are cautious about the profit model of franchise stores and the growth potential of the new tea beverage track.

Some investors also revealed that the reason for Chabaidao's IPO price drop was that it did not introduce cornerstone investors. This may be due to the company's top management's optimism about the market, and the Hong Kong stock market's financing capacity has not yet recovered to its best state.

The old story of the stock price falling below the IPO price had also happened to Naixue.

The experiences of Chabaidao and Nayuki have poured cold water on many tea brands that are queuing up for listing and preparing to "take off" in the capital market.

According to the author's incomplete statistics, as of the time of publication, nine leading companies including Mixue Bingcheng, Guming, and Bawang Chaji have submitted prospectuses to the capital market or have been rumored to have plans to go public.

Image △ Image source: 36Kr

Judging from the current profit level, "mid- and low-end" tea brands represented by Shanghai Auntie, Gu Ming, and Cha Baidao have stronger hematopoietic capabilities.

For the sake of brand image and consumer experience, Heytea and Nayuki have also paid huge costs. Nayuki, which dreams of becoming the "Starbucks of the tea industry", only achieved profitability after reducing costs and increasing efficiency in the first half of 2023, and its net profit margin was only 2.5%.

In comparison, in 2022, the net profit margins of Shanghai Auntie, Mixue Bingcheng, and Guming were 6.8%, 14.8%, and 14.2%, respectively, while the net profit margin of Cha Baidao reached 22.8%.

Image △ Image source: 36Kr

"If a milk tea brand said it wanted to go public ten years ago, investors would probably think it was a question mark, or at least a distant dream," said Lin Qihua, managing partner of KPMG China's consumer retail industry. At present, the growth potential of tea beverage companies is already quite good. Although Chabaidao's listing encountered great challenges, it is still a milestone for the tea beverage track - the capital market has ushered in fresh blood, and Chabaidao has also become the largest IPO event on the Hong Kong Stock Exchange in 2024.

Affected by some current objective factors, it is reasonable that tea beverage companies are blocked from listing and their market value has fallen. In his observation, some tea beverage brands are still on the sidelines of the A-share market, hoping that the main board market will be open to chain enterprises in the future.

Lin Qihua also emphasized that financial compliance, especially tax issues, are key in the process of tea beverage companies seeking to go public. "The milk tea industry is unique in that in the early stages of a company's operation, it is usually based on single-store operations and direct operations by individual shareholders. Therefore, many franchisees have the problem of equity holding by proxy, and there are even many franchise stores where employees hold shares internally. For brands, equity structure adjustments also involve higher taxes and operating costs."

Shortly after Chabaidao announced that it had passed the hearing of the Hong Kong Stock Exchange, it was also reported that Bawang Chaji would be listed in the United States as early as this year. It is interesting to note that this high-end tea brand comparable to Heytea and Nayuki has a vested interest in Chabaidao, which is positioned at a relatively low end. In November 2023, Bawang Chaji and Chabaidao jointly established a new material company.

Some people believe that for new tea brands, packaging such as straws and plastic cups is a considerable expense, so it is inevitable for brands to work together to build an upstream supply chain. Compared with brands, the capital market has a higher degree of recognition for suppliers.

In 2021, Jiahe Food, a leading supplier of non-dairy creamer, was listed on the Shanghai Stock Exchange Main Board. Later, Tianye Shares, a juice supplier for Mixue Ice City, was listed on the Beijing Stock Exchange.

However, as new tea beverage brands open up to franchising, the entire industry will inevitably be swept upstream, and small supply companies will also exit the stage.

Meng Fanwei believes that the original tea beverage brands, which have not reached a scale of more than 3,000 stores, will not have a deep layout of the supply chain, and will only rely on the socialized supply chain to customize raw material products, and rely on the wholesale price difference of franchise stores or directly-operated stores to make profits.

As Heytea and Nayuki embarked on the path of franchising, the identity of their headquarters also changed - from focusing on C-end store business to becoming a B-end operator that provides raw materials and equipment to franchisees.

The mid- and low-end brands represented by Mixue Bingcheng, Tianlala, and Guming, which are already focusing on franchising, will pay more attention to the production cost control and quality stability of the main raw materials, while maintaining a high proportion of self-processing products. In terms of logistics supply chain, many brands have gradually controlled the entire process from warehousing to stores.

In Meng Fanwei's view, the two major supply chains of upstream raw materials and logistics are the core competitiveness of brands with more than 5,000 stores. In the future, China's tea market will have at least five brands with 10,000 stores and five brands with more than 5,000 stores. "These 10 brands will basically account for 35% to 45% of the stores in the entire industry."

This also means that in a stage where consumption upgrading and downgrading coexist, new tea beverage brands can still achieve breakthroughs in segmented and lower-tier markets through differentiated operations, cost control, and quality improvement.

The first step for a brand to be strict in management is to select franchisees.

Hao Xudong recalled that his 15 years of experience in the catering industry and the store kitchen environment that he highlighted to the interviewer were the keys to his successful passing of the re-examination.

Hao Xudong still clearly remembers that he waited in line for a long time in Sanya in 2018 to drink Heytea for the first time. It was a brand new taste experience. Today, he has joined several Heytea stores, but the current market environment and consumption atmosphere are very different from those at the beginning.

"Queueing frenzy" is no longer a hallmark of new tea drinks. The milk tea industry is in a state of "up and downturn". When adjectives such as "accelerated reshuffle, imminent fight, and bloodshed" begin to be frequently used to describe an industry, it is time to be vigilant.