Financial Services Association, Feb. 21 (Reporter Wu Weiling) Following Michelle Ice City and Gu Ming, Shanghai's aunt recently submitted a listing application to the Hong Kong Stock Exchange. Earlier, Chabaidao impacted the Hong Kong stock listing in August 2023, and there are already 4 companies sprinting to the “second share of tea drinks.”

The Financial Services Association reporter looked through the company's prospectus and found that at a time when first-tier and new-tier cities are facing challenges, the sinking market has become the focus of many ready-made tea brands. Supply chains and brand awareness are important links in developing the sinking market, and multiple brands plan to invest their capital in this in the future. In the process of the development of ready-made tea to the “bottom”, an internal revolution around the supply chain and brand marketing may already be on the way.

Break through to the “bottom”

“The current tea shop market in China's third-tier cities and below is the largest and expected fastest growing segment between 2022 and 2027, with huge potential for future growth.” Aunt Shanghai said this in her prospectus.

The potential for ready-to-drink tea to sink in the market can be seen in the Spring Festival in the Year of the Dragon. According to relevant data, the top ten cities with sales growth at Hi Cha stores during the Spring Festival are all non-first-tier cities. Among them, sales at Hi Cha stores in cities such as Anyang, Huanggang, Fuzhou, Huainan, Guang'an, Handan, Nanping, and Lianyungang all increased by more than 200% month-on-month compared to before the holiday season.

People returning home are only part of a sinking market. An investor in the catering industry told the Financial Federation reporter that going overseas and sinking is currently the direction of various food and beverage brands looking for market growth, but the main players in the sinking market are not people returning home. “It's like being an overseas market. It's not just an overseas Chinese business, but a foreign business; otherwise, it would be too narrow.”

According to Michelle Bingcheng, the continued urbanization of third-tier cities and below will strongly promote population agglomeration like towns, thereby expanding the consumer base and density of ready-to-drink beverages.

At the same time, the first-tier and new-tier markets are becoming saturated. “The first tier and the new tier are mature markets for tea. Frankly speaking, this market is relatively saturated, and competition is naturally very intense.” Zhang Yi, CEO and chief analyst of Ai Media Consulting, told CFA reporters that in addition, the cost pressure brought about by store rents and labor costs, as well as consumers' high quality requirements, have all become challenges facing current tea drinking in first-tier and new-tier cities.

Currently, the sinking market is gradually becoming an important battleground for various brands. By the end of the third quarter of 2023, the share of stores in the third-tier markets of Michelle and Shanghai Auntie had reached 56.9% and 49%, respectively. Aunt Shanghai mentioned that the plan is to increase the density of store networks in second- and third-tier cities within the next five years. “The ability to enter third-tier cities and below is the key to the long-term development of existing tea shop brands.”

Looking ahead to the future market, Michelle Bingcheng said that currently in third-tier cities and below, consumer demand for ready-made drinks is not fully satisfied. The prospectus quoted Insight Consulting data as saying that as of December 31, 2022, the density of current tea stores in third-tier cities and below was 247 stores per million people, far lower than 460 stores per million people in first-tier cities. In terms of terminal retail sales, the market size of ready-to-drink tea shops in third-tier cities and below is expected to grow at a CAGR of 24.6% from RMB 73.2 billion in 2022 to RMB 273.9 billion in 2028, the fastest growth rate among all city levels, and is expected to account for 51.5% of the total market size of the existing tea shop market in China in 2028.

“Volume” marketing to supply chains and brands

The sinking market is vast, yet crowded. A CFA reporter noticed that in a prefecture-level city in Hunan, in a 400-meter shopping street, two ancient tea houses, as well as many ready-made tea shops, such as Cha Baidao and Cha Yue Yue Shine, have gathered.

How to expand in a sinking market? Judging from the planned capital investment, supply chain building, brand building, and marketing all appeared in each company's prospectus.

Zhang Yi told the Financial Federation reporter that in the process of sinking the market, current tea brands need to ensure smooth supply of raw materials, product production, and logistics distribution; otherwise, it is difficult to operate stably. From this perspective, a perfect supply chain system plays a decisive role in improving the stability of products and services for existing tea brands.

“Our ability to deliver goods and equipment to stores in a timely manner depends largely on the smooth operation of our processing plants, warehouses and freight vehicles.” Gu Ming said that in order to support the expansion of the store network and ensure fresh and stable distribution of high-quality raw materials to stores, it is planned to operate new refrigerated/frozen warehouses in provinces with intensive store networks in the next three to five years to expand storage infrastructure, while also improving logistics infrastructure by adding and upgrading freight vehicles.

In terms of production capacity, as of the end of the third quarter of 2023, Guming was operating three factories dedicated to juice and tea processing, and is building another processing plant in Zhuji, Zhejiang. It is expected to be put into use this year, thereby further improving raw material processing capacity.

Michelle Ice City also claims that it “has formulated a capacity expansion plan that requires significant investment,” such as building a new facility specializing in the production of frozen fruit, coffee, syrups, and small ingredients at the Hainan production base. Construction began in 2023 and is expected to be completed in 2025.

In terms of brand marketing, Michelle Ice City, which owns the “Snow King” IP, said that it will expand the “Snow King” content matrix, continue to develop joint IP cooperation with various brands, expand brand influence, and use part of the funds for omni-channel promotion; Shanghai Aunt plans to increase brand exposure, launch cross-border cooperation activities, create popular discussion topics among consumers, and use various other marketing and marketing methods to further enhance brand awareness.