The money in the new tea beverage industry is getting harder to earn.

Zebra Consumer Chen Xiaojing

The new tea beverage industry remains a good business, but also a challenging one.

The internal competition in the industry has extended from the consumer side upwards. While brands compete for users with low prices, they also have to introduce various preferential policies to attract more franchisees.

As the demands from both the B and C sides become increasingly stringent, the golden days of easy profits for brands are over.

In the first half of this year, the only two listed companies in the industry, Nayuki and Chabaidao, saw Nayuki turn from profit to loss and Chabaidao's performance decline sharply, reflecting the true state of the industry.

Performance Declines Across the Board

Within a week, the only two listed companies in the new tea beverage industry, Nayuki and Chabaidao, successively issued profit warnings, revealing that this once-hot sector has taken a downturn.

Chabaidao (02555.HK) expects that in the first half of this year, its adjusted net profit will be between 380 million and 410 million yuan, down no more than 36.45% from 598 million yuan in the same period last year. Net profit is expected to be between 220 million and 250 million yuan, a sharp decline of no more than 63.03% year-on-year.

The situation is even more dire for Nayuki, the representative of China's premium tea beverages and the first stock in the industry.

In the past, Nayuki suffered continuous losses but finally managed to turn a profit in 2023. However, in the first half of this year, the company fell back into losses, with an expected adjusted net loss of 420 million to 490 million yuan. Revenue for the period is estimated at 2.4 billion to 2.7 billion yuan, showing little growth compared to 2.594 billion yuan in the same period last year.

In its announcement, Nayuki (02150.HK) admitted that consumer demand has not significantly recovered, putting pressure on store revenue. With store-side cost optimization largely complete, there is limited room for further adjustments in labor, depreciation, and amortization costs in the short term, leading to significant pressure on store operating margins.

At the same time, the company plans to close some underperforming stores, which will result in asset impairment provisions.

Directly operated stores are Nayuki's core source of income. As of the end of June, the company had 1,597 directly operated stores, an increase of only 23 from the beginning of the year. In the same period last year, the net increase in directly operated stores was 126.

Chabaidao, the second stock in the new tea beverage industry, was listed on the Hong Kong Stock Exchange on April 23 this year. In the new tea beverage sector, Chabaidao stands out for its profitability, with revenue of 5.704 billion yuan and adjusted net profit of 1.26 billion yuan in 2023.

Unexpectedly, its first interim report after listing delivered a heavy blow to investors.

Chabaidao explained the sharp decline in performance in the first half of the year by stating that it increased support policies for franchisees and offered discounts on equipment and goods, while also raising overall market investment expenses. Management believes these adjustments were necessary to address the impact of changing consumer habits due to external environmental shifts.

Competing for Franchisees

Over the past decade, China's freshly made tea beverage industry has ridden the wave of rapid growth, becoming the fastest-growing segment in the catering sector, with over 400,000 stores nationwide.

During this period, the industry has undergone several iterations, leading to intense competition.

Mixue Bingcheng dominates the low-end market, while brands like Nayuki and Heytea, once positioned as premium, have adjusted prices to compete in the mass market, creating a chaotic battleground. Brands compete over tea, fruit, milk, toppings, and even collaborations.

With the return of rational consumption, end-users increasingly seek value for money, making price the most powerful weapon in the war among brands.

Zheshang Securities' "Monthly Catering Report" tracks changes in core indicators of the catering sector. According to its latest report, in June this year, 10 out of 16 mainstream new tea beverage brands saw a year-on-year decline in average customer spending, two remained flat, and only four saw an increase. Among the declining brands, Heytea, Lelecha, Nayuki, and Heilongtang saw drops of over 10%.

After years of price wars, we now see that over the past three years, the proportion of tea beverage purchases under 10 yuan has risen from 7% to 30%, while purchases over 20 yuan have fallen from 33% to 4%.

With product homogenization worsening and the era of blockbuster products gone, the room for single-store growth is extremely limited. Brands are shifting their focus from competing for users to competing for franchisees. Only by increasing store density to reduce costs through brand momentum can they attract more franchisees and create a "flywheel effect."

After Heytea and Nayuki, which previously insisted on direct operations, opened up to franchising in 2022 and 2023, the new tea beverage sector has largely become fully franchised.

With more brands to choose from, franchisees now have more options. They will vote with their wallets based on which brand offers a better single-store model and more favorable terms.

In January this year, Heytea was the first to announce multiple preferential policies for franchisees, including limited-time fee waivers and subsidies for opening multiple stores.

In February, Chabaidao followed suit with fee reductions and rebates on materials.

Nayuki, which once clung to its "space experience" ethos, had to compromise with reality, lowering the investment threshold for a single store from 1 million yuan to 580,000 yuan and offering limited-time marketing subsidies. The lower threshold immediately attracted more potential franchisees to apply.

This year, competition in the mass tea beverage market has become even fiercer, with zero-franchise-fee policies becoming common.

Collectively Seeking New Paths

In major Chinese cities, it's common to see tea beverage brands competing head-to-head in crowded streets and shopping malls. Prime locations are becoming scarce, and the market is nearing saturation.

At the end of 2022, there were 460 freshly made tea beverage stores per million people in first-tier cities, compared to 247 per million in third-tier and lower cities. By then, leading tea beverage brands had largely completed their penetration of first-tier cities, making lower-tier markets the new battleground.

According to institutional data, in recent years, third-tier, fourth-tier, and lower cities have seen rapid growth in freshly made tea beverages, with market sizes 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, with compound annual growth rates (CAGR) of 34.3% and 28.0%, respectively. Growth rates in these markets are expected to outpace those in first- and second-tier cities over the next five years.

As brands rush to compete in lower-tier cities and even towns, these markets are quickly becoming another "battlefield."

The growth rate of China's freshly made tea beverage market has slowed significantly, and the shift from incremental to stock market trends is unstoppable.

What's the solution? Industry players are turning their attention overseas, hoping to recreate a "golden era."

Mixue Bingcheng was the first to take this step, opening its first store in Hanoi, Vietnam, in 2018, followed by rapid overseas expansion.

Around the same time, Heytea and Nayuki chose Singapore as their gateway to overseas markets. In August of the following year, Chagee opened its first store in Malaysia.

In 2023, the trend of Chinese freshly made tea beverage brands going overseas reached its peak, with Chabaidao, 7 分甜， Auntie Shanghai, and Tianlala entering foreign markets. A battle among Chinese tea beverage brands overseas is imminent.

After five years of cultivation, Mixue Bingcheng has become the vanguard of Chinese tea beverage brands overseas, with about 4,000 stores by the end of 2023.

In the past few years, the rapid expansion of leading new tea beverage brands was fueled by strong backing from capital. Now, it's time for investors to cash out.

After Nayuki and Chabaidao, Mixue Bingcheng, Gu Ming, and Auntie Shanghai are still queuing up for listings on the Hong Kong Stock Exchange.

If leading brands successfully go public, their ample cash reserves and new fundraising could lead to new growth models. Will they compete upstream in the supply chain or downstream in marketing? That will be the most competitive era for new tea beverages.

However, the capital market has not shown much enthusiasm for new tea beverages. At its peak after listing, Nayuki's market cap approached 30 billion HKD but has since fallen to just 2.569 billion HKD.

In April this year, Chabaidao was listed at 17.5 HKD per share but fell below its IPO price on the first day. Yesterday, its stock price dropped 12.38% to close at 6.30 HKD per share, with a current market cap of 9.309 billion HKD.