Is new tea beverage a good business?

Compared with traditional tea drinks, new tea drinks spend more effort on brand building and brand operation. In the process of development, new tea drinks are also trying to create more invisible assets and enhance their own brand value. However, with increasingly fierce competition, is the new tea drink a good business? The author of this article explains his understanding and views on new tea drinks. Let's take a look.

New tea drinks are not a good business.

I have written many articles about the ready-made beverage industry before, including Mixue Bingcheng, the competition between coffee and milk tea, and the internet-famous fruits that are most closely related to the tea industry.

But I have never written an issue that fully discusses how new tea brands have gone from the limelight to mediocrity in the past seven or eight years.

At the end of last year, Nayuki's Tea announced that it would acquire 43.64% of Lelecha's equity interest for RMB 525 million, becoming Lelecha's largest shareholder. As we know, in this so-called "hot industry", mergers and acquisitions often mean that the industry is returning to rationality, and also mean that an era has come to an end.

So this may be a good time to share with you my understanding of new tea drinks.

01

Let me first state the conclusion. Although new tea drinks are “new”, they have not fundamentally changed the way people drink tea. It is precisely because there is no fundamental change that new tea drinks have always been difficult to emerge as a leader with obvious advantages, and therefore have fallen into involutionary competition.

To explain clearly what new tea drinks are, we must first explain clearly what "old" tea drinks are.

The so-called old-fashioned tea milk tea shops actually mainly serve pearl milk tea from Taiwan.

There are two theories about the birth of bubble milk tea.

The first theory is that bubble tea originated from Chun Shui Tang in Taichung City. During an internal competition for new drinks, a store manager put tapioca balls, a snack made from tapioca flour, into bubble tea. The owner, Liu Hanjie, liked the idea so much that he renamed the tapioca balls "pearls" to mean "big and small pearls falling on a jade plate ." Thus bubble tea was born.

Another theory is that Mr. Tu Zonghe of Hanlin Tea House in Tainan City invented pearls. The old man saw white tapioca pearls for sale at Yamuliao Market, so he tried adding them to milk tea, which was originally called "Emerald Green Pearls". Later, the tea base was changed from green tea to black tea, and the tapioca pearls were changed to black, forming the current pearl milk tea.

Regardless of which version is true, bubble milk tea created a whirlwind in Taiwan in the 1980s.

Pearl milk tea opened up the way of drinking milk tea with "small ingredients", which is undoubtedly groundbreaking from a commercial perspective. It turned milk tea from a single product into a diverse category.

In the 1990s, Taiwanese milk tea began to be introduced to the mainland market.

The development of milk tea in the mainland market can be divided into three stages. The first stage was from 1990 to 1995.

During this period, milk tea was mainly made from tea powder, and the price was usually RMB 3-5 per cup, targeting students and young consumers. In the 1990s, businesses generally lacked brand awareness, and during this period, there were basically no big brands worth mentioning today.

We call it the era of tea powder preparation.

The second stage was longer, starting from the mid-1990s and lasting until 2015. During this period, the raw materials for milk tea began to be upgraded to tea dregs + creamer. The price also increased, and milk tea priced at more than 10 yuan began to appear.

Older Shanghainese may still remember that in the early years there was a kind of "black tea shop" in Shanghai that sold Taiwanese bubble tea and pearl milk tea.

The price was not cheap. When the average wage was less than 1,000 yuan, the milk tea in the Red Tea House cost more than 10 yuan. You could order one cup, but you could get refills. Many people would order a drink and play mahjong in the store all day.

In addition, milk tea is no longer limited to pearl milk tea and iced black tea. More types of toppings, different tea bases, and different flavors have given milk tea more or less the attributes of a consumer upgrade.

Many common brands today originated from that period, such as Mixue Bingcheng and CoCo. All of the above types can be called old tea drinks.

02

So what about the new tea drinks?

Starting from 2015, a wave of new brands appeared in the tea beverage market. In 2015, Nayuki and Chayanyuese were established. In 2016, Nie Yunchen changed the name of his brand "Imperial Tea" to Heytea. In the same year, the first Lelecha was established in Shanghai. In 2017, Luckin Coffee entered the mainland from Taiwan.

The common feature of this wave of new brands is that they use better ingredients, usually real milk, real tea and fresh fruit, and combine and blend various ingredients in a diversified way. Due to the diverse ingredients, new tea drinks often update their menus and launch new products at a high frequency.

In addition, the leading brands of new tea drinks, such as Heytea and Nayuki, have all chosen Starbucks as their benchmark. Therefore, they will emphasize the third space, that is, to allow customers to sit here, so the area will be between 100 and 200 square meters. Of course, the price is also benchmarked against Starbucks.

The most important thing is that new tea drinks attach much more importance to brand building than in the past.

Traditional tea beverage brands often adopt a franchise model, which makes it difficult to achieve standardization in all aspects, which is quite unfavorable for brand operations.

Many new tea drinks adopt direct sales methods, which can create a unified user experience. In addition, social media operations and frequent launch of new topical products can help users pay for the high prices through brand building.

Behind this is the general trend of consumption upgrading in the past decade. Cost-effectiveness is no longer the first consideration for consumers. Consumer experience, brand value and social attributes are gradually being valued.

At this time, new tea drinks with far superior ingredient quality, service level and product price enter the market, and it is natural that they are sought after.

Moreover, driven by new tea drinks, old tea drinks have also begun to transform, starting to use better tea leaves and fresh milk and focusing on building brand image.

Over the past few years, everyone has been talking about the "involution" of new tea drinks, and there are a wide variety of new products, but it can be seen that every brand has not left the scope of "tea + milk + condiments". At most, it has been enriched a little, becoming a combination of freshly brewed tea + sugar + milk cap + fresh-cut fruit + condiments.

To be frank, new tea drinks are still based on old tea drinks and have not brought any fundamental changes to the way people drink milk tea.

03

Some time ago, I saw a very harsh statement: Today's new tea drink players are more like fruit slices rather than milk tea brands.

The words are a bit harsh, but the logic is correct.

There are two characteristics of selling fruit slices. One is that the rigid costs are too high. The price of fruit is very transparent, and the costs are rigid. The labor for peeling and cutting the fruit is also fixed, and the rent is also difficult to compress. The rigid costs are too high, which means that the more profit you make, the more costs you have. If the profit structure is not good, it will be difficult to do business.

Second, there is no threshold. Your competitors can use the same fruit as you. If you launch a new seasonal product, your competitors can also do the same. Therefore, the profit of such a business is bound to be low.

The combination of the two means that this industry is destined to be a hard-earned business.

The tea beverage industry is similar.

From the report data of Zheshang Securities and iResearch Consulting Group, we can find that in the milk tea industry as a whole, raw materials, employee salaries and rent are the three largest costs, which are the rigid costs we mentioned earlier.

For new tea drinks, the situation will be more difficult than the milk tea industry as a whole, because they focus on brand building, so the proportion of marketing costs will be greater. In addition, for brands that pay attention to the construction of the "third space", the proportion of store rent will also be greater than that of stalls such as Mixue Bingcheng Cha Baidao.

Therefore, if new tea brands want to make profits, they need a more relaxed competitive environment. Only when there is profit margin can there be opportunities to make money.

But the fact is that competition in the new tea drinks market has been extremely fierce from the very beginning.

Even the top two brands, Heytea and Nayuki, are similar in size, positioning and brand value, and no one can claim to be a sure winner. So what can we do? Just keep competing and see who will be the last one to win.

To see how unprofitable new tea drinks are, you can look at the situation of listed company Nayuki.

From Naixue's prospectus, we can see that from 2018 to 2020, Naixue's net losses were 66 million yuan, 39 million yuan, and 202 million yuan, respectively, with a cumulative loss of 300 million yuan in three years. The loss was reduced slightly in 2021, to 145 million yuan. In the first half of 2022, the loss expanded again to 249 million yuan, and the loss in half a year was more than the loss in the past year.

The huge losses last year were definitely affected by the epidemic, but what cannot be ignored is that the price of new tea drinks has basically reached the ceiling that the market can accept, but it is still not profitable.

As for Heytea, I think it will be better. As the industry leader, its brand value is slightly higher than Nayuki, and it has opened slightly more small stores, so it is definitely not losing as much as Nayuki. But I don’t think it will be much better.

04

I have repeatedly mentioned before that there are three types of businesses that are worth investing in: good business, fast business and big business.

Obviously, new tea drinks are not a good business.

But in the past many years, the development direction of new tea drinks has been to turn themselves into a good business, that is, to create more invisible assets by enhancing brand value.

This is why new tea drinks have to benchmark Starbucks from the beginning, because Starbucks is a master at monetizing invisible assets. Relying on brand potential, Starbucks can often get much lower rent prices and long rent-free periods than other brands.

Once you understand this, you can understand many phenomena of new tea brands.

First of all, many people don’t understand why there are still people queuing up for Heytea and Nayuki three years after its establishment, why some people have to fly just to drink Cha Yan Yue Se, and why in 2022 there are still newly opened tea brands that require waiting three to five hours to buy.

Think about it carefully. Is it true that Heytea has become the top brand among new tea drinks because it claims to insist on using 100℃ hot water, 60 seconds of high pressure extraction, and only using each tea bag once? Of course not. It is because the production of fresh fruit tea is complicated and the serving time is slow, which easily leads to queues. And queues are a manifestation of scarcity.

Why is Cha Yan Yue Se so popular? Is it really because of its Chinese style elements?

Of course not, because it is highly tied to Changsha's urban culture and has only opened stores in a few cities, making it scarce enough.

When a commodity is scarce, being able to buy it becomes something worth showing off. Scarcity is the printing press of social currency.

Secondly, many people don’t understand why new tea drinks are so expensive.

In addition to the rigid cost issue, another reason is that expensiveness itself is a kind of brand value.

In fact, both extreme cheapness and extreme expensiveness can become brand labels. Since Mixue Bingcheng has occupied the niche of extreme cheapness, it can only move towards the niche of expensiveness.

Let me cue Starbucks here again. In fact, a large part of Starbucks' brand value comes from its high price. If it is expensive, can't it show off?

In addition, many people do not understand why the new tea beverage industry is so competitive, with new products being released every week and every month.

The answer is still for the brand.

In most industries, launching new products is an important marketing node that can bring in a wave of sales and increase presence.

The special thing about new tea drinks is that their products are all "micro-innovations" and are integrated with supply chain solutions, with no barriers to entry. If you launch a new product, I can change the name and follow up with the same product next week, which does not give the first movers enough innovation benefits.

Without product barriers, there will not be a long enough period of innovation protection, and the input-output ratio of developing new products will be very low. In order to maintain the brand's fashionable and avant-garde image, the frequency of new product development must be increased. As a result, there is a highly saturated competition in new tea drinks.

But everyone knows the result. The long competition did not produce any results. Coupled with the impact of the epidemic, the top players also began to show signs of fatigue.

05

In 2021, Cha Yan Yue Se began to close stores and lay off employees on a large scale. Hey Tea was also reported to have laid off employees and cut salaries. Lelecha completely withdrew from the South China market and retreated to its base in East China. As for Nayuki, although it was successfully listed, it also broke the issue price on the same day, which was very ugly.

Last year, Lelecha was again caught up in rumors of being acquired, and Heytea boss Nie Yunchen also criticized the company in a post on his WeChat Moments, saying that he had completely, utterly and resolutely given up after learning about the internal situation.

When Naixue finally took over, the valuation had dropped from 4 billion to 1.2 billion.

Under the hammer of reality, new tea brands began to change their thinking.

Since this is not a good business, then find a way to make it a big business and a fast business.

Since I don’t have the ability to make money, can I try to expand the scale first?

This is why Nayuki wants to acquire Lelecha, a brand with the same positioning, product structure and brand scale as Nayuki, which can be called a mini version of Nayuki. It’s simple, it’s all about scale.

The same is true for Heytea. Just last November, Heytea, which has always been proud of its direct sales model, suddenly opened up for franchising. Although the threshold is high, it can be seen that the company is eager for cash flow. It needs the funds of franchisees to help the brand grow rapidly.

In addition, at the beginning of last year, all major new tea beverage companies launched a wave of price cuts, not only reducing prices to below 30 yuan, but also starting to try 10-15 yuan, or even lower. The purpose of price cuts is naturally to promote sales growth and scale expansion.

Whether it is forming alliances or lowering prices, the purpose is the same: to optimize the profit structure and change the capital market's pessimistic attitude towards new tea drinks.

In the 1980s, Michael Porter, the "father of competitive strategy", proposed the classic "Five Forces Model".

This model points out that a company has to deal with five competitive forces, including upstream suppliers, downstream buyers, potential new players, substitutes from other industries, and competitors in the same industry.

The most difficult thing for new tea beverage companies is that they do not have a good ability to deal with these five competitive forces. Therefore, although they can grow bigger, they are not strong and it is difficult for them to make profits.

A few years ago, everyone vowed that all consumer products were worth redoing. So, under the wave of new consumption, all consumer products were roughly prefixed with the word "new", and the same is true for new tea drinks.

But now it seems that no matter how new the tea drink is, the final consideration is still the old thing of making money.

References:

• "Has Heytea cut its prices out of necessity?" Kaibo Finance
• "Can the acquisition of Lelecha solve all of Nayuki's troubles?" Huxiu
• "Nayuki acquired 43.64% of Lelecha's equity, but it seems to be of little use"
• "The valuation cannot be sustained, and Heytea is in disarray" Jinduan
• "Have New-Style Tea Drinks Gone to an End?" Yaya Hong Kong Stock Circle
• "The Midfield Battle of New Tea Drinks" Narrow Broadcast
• "Nayuki's Tea, Skim off the Foam Before Drinking" Jinduan
• The truth behind the "ferocity" of milk tea - China Business Strategy
• "Nayuki's Tea lost 145 million yuan in 2021, and the internal competition of new tea drinks intensified" Caijing Eleven

Original title: Who forced Heytea to lower its prices?

Author: IC Lab; Official Account: IC Lab (ID: InsightPlusClub), looking at business from the perspective of brand.