Source: Wall Street News

Following Cha Baidao's official listing application to the Hong Kong Stock Exchange in August last year, Michelle Ice City and Gu Ming also submitted IPO applications to the Hong Kong Stock Exchange at the beginning of this year.

If Baicha Baidao, Michelle Ice City, and Gu Ming successfully go public, plus Nai Xue's tea, the “first stock of high-end milk tea,” three new tea brands with different positions will be brought together on the Hong Kong Stock Exchange. The new tea brands chose to go public on the Hong Kong stock market at this time, which is inseparable from the increasingly heated competition in the industry.

In 2023, the high-end representatives of new-style tea drinks, Hi Cha and Nai Xue lowered their prices and opened up to join, leading to the fiercest competition and worsened the mid-tier market with the largest number of milk tea brands.

The industry has gradually been divided into two groups: on the one hand, brands such as Cha Baidao and Gu Ming already have a certain scale and market influence. These brands are trying to consolidate and expand their scale through capital support, with the goal of becoming the next “ten thousand stores” brand after Ice City; on the other side, there are brands that once flourished, such as 1DDK and COCO, which are now facing a widening gap with competitors and falling into the dilemma of closing and declining stores.

In 2024, the new tea industry will enter a successive listing stage. Brands that have successfully taken the “ride” of capital will once again surpass their competitors in terms of financial strength, market share, and brand influence, and each brand will usher in a completely different fate.

They all want to be the next “Snow Ice City”

Although new teas and coffee have been regarded as one of the most promising tracks for capital in the consumer sector in recent years, investors also tend to be cautious about new teas as competition in the industry becomes more internal.

According to the “China Catering Investment and Financing Report 2023", the new tea industry's 2023 financing events were reduced by nearly half compared to the peak period in 2021, and the amount of disclosed financing also fell sharply. From January to August, Chabaidao's financing alone exceeded 100 million yuan.

After the primary market was hot, exit pressure loomed over these new tea brands. Since 2023, as many as 8 companies, including Chabaidao, Michelle Ice City, and Gu Ming, have been hit by news that they have gone public.

At the same time, these new tea brands, which are also being forced by the internal scramble of the industry, urgently need to rely on capital from the secondary market to consolidate their scale and compete for greater market share.

“Sprint to Ten Thousand Stores” has become the primary target for new tea players.

The 10,000 store scale is generally regarded as an important milestone. It not only brings significant scale effects in terms of sales, but also brings higher brand awareness to the front-end. Michelle Ice City is a typical example. As of September 30, 2023, the number of stores in Michelle Ice City has exceeded 36,000. It is the only company in the domestic beverage industry that has reached 30,000 stores. The scale exceeds the total number of stores ranked 2-5 in the industry. According to the latest prospectus, the procurement scale effect of high-density store layout has led to the procurement scale effect of the high-density store layout, and the procurement costs of milk powder and lemon in Michelle Ice City are more than 10% and 20% lower than the industry average, respectively.

After Ice City, Guming and Tea Baidao are the two new tea brands with the closest 10,000 stores, yet they have shown very different strategies in terms of expansion strategies.

The most intuitive difference is that Chabaidao is similar to Michelle Ice City, expanding the distribution range of stores more widely; Guming, on the other hand, is more inclined to cultivate the sinking market in specific regions.

This has to do with the two different product positions. Gu Ming mainly drinks fresh fruit tea. Its fruit tea drinks account for 51% of the total cup volume, and fresh fruit tea has a higher demand for fruit and cold chain transportation. According to the prospectus, Guming is the only company in GMV's top ten tea brands that can frequently distribute perishable fresh fruit and fresh milk to low-tier cities. The average distribution cost of its stores accounts for only 0.9% of retail sales, which is lower than the industry average of 2%. Adequate store density is the key to supporting the efficiency of its cold chain distribution of fresh fruit tea.

However, Cha Baidao's best-selling products are poplar, soy milk, jade giraffe, and signature taro milk tea. These raw materials put less pressure on the supply chain and logistics, so Chabaidao is more likely to be fully expanded. Its store coverage is already comparable to that of Michelle Ice City, spread across 31 provinces and cities. In particular, the proportion of stores in Tier 1 and 2 cities is higher, reaching nearly 40%.

However, even though Gu Ming has entered only 15 provinces and regions, the number of stores has surpassed that of Chabaidao, which covers 31 provinces. This shows that Gu Ming has a higher density of stores and deeper penetration into the sinking market. The distribution of second-tier stores and below accounts for nearly 70%, far higher than Chabaidao.

Furthermore, up to now, there are still 19 provinces where Gu Ming has not set foot in China. It is foreseeable that after receiving capital support, Gu Ming will rapidly expand into these untapped markets. In particular, Beijing and Shanghai, which have never set up stores and are extremely popular, will become the main development positions for Gu Ming. However, in these key regions, which have been pioneered by rivals, as the latecomer Gu Ming, there will only be more or less competitive pressure.

Mainstream prices are already crowded with rivals

In 2023, the “volume” between new tea brands is reflected not only in competition for scale expansion, but also in terms of price.

Under the pressure of weak consumer demand and slowing down the growth momentum of new tea drinks, leading companies such as Hi Cha and Nai Xue cut prices one after another, liberalizing second- and third-tier cities to join, and the power of the franchise model was once again reflected in these three prospectuses.

In 2022, Michelle Ice City, Gu Ming, and Chabaidao achieved revenue of 13.576 billion yuan, 5.599 billion yuan, and 4.232 billion yuan respectively. Net profit for the same period was 1,997 million yuan, 788 million yuan, and 965 million yuan respectively. Despite differences in scale, the main source of revenue for these three tea companies is the sale of store materials and equipment to franchisees, accounting for more than 80% of revenue. Among them, Michelle Ice City is the most prominent, accounting for 98%.

With the price cuts of Hi Cha and Nai Xue, competition in the mid-tier market, which originally carried the most milk tea brands and the largest price range of 15-20 yuan, also became extremely intense, and everyone's days were obviously not as good as before. According to a conference call circulating in the market, Gu Ming considered the high cost of raw materials for fresh fruit tea and the increase in takeout allowances, and the franchisee's gross profit declined. He originally planned to raise the price, but the price adjustment and franchise strategy of Hi Tea directly killed this plan in the cradle.

In an environment of intense price competition and narrow profit margins, new tea companies invariably mentioned the importance of building their own supply chains in their prospectus to reduce costs to the extreme. For example, in recent years, Michelle Ice City has continued to build its own production base to increase the self-production ratio of important ingredients. As the proportion of self-produced ingredients increased, its share of food trade procurement in operating costs continued to decline, falling to 41% in the first quarter of '22.

Compared to Aunt Nai Xue and Shangshang in Shanghai to improve bargaining power by participating in upstream supply companies, Gu Ming and Chabaidao chose to build their own base similar to Michelle Ice City, focusing on a “if you can save, then save.” For example, Gu Ming planted peaches, mangoes, grapes, and lemons in advance to ensure that these commonly used fruits come from its own orchards or tea plantations. Tea Baidao's intelligent raw material production and processing base with an annual output value of 500 to 1 billion yuan was also put into operation in June '23.

However, unlike Michelle Ice City, the raw materials of Gu Ming and Tea Baidao have not completely escaped the third-party supply chain. In particular, Gu Ming has not yet started business in 19 provinces, and capital support is urgently needed to expand the scope of operations and adjust the coverage of the supply chain. Guming's IPO fund-raising is also mainly focused on supply chain construction.

Predictably, brands that have successfully received capital support will once again lead their competitors in terms of financial strength, supply chain construction, market share, and brand influence, while small regional brands and traditional established brands that have not been favored by capital and have no competitive advantage in scale will usher in a moment of accelerated elimination.

In fact, the split has already begun. According to data from the CICC Research Institute, from the second half of 2022 to the first half of 2023, the Shanghai Aunt, Gu Ming, and Tea Baidaotuo stores were still relatively fast, and the up-and-coming brands Chaji and Lemon Ji were also rapidly expanding; while Zeng Hongji was 1 point and COCO began to fall behind, the closing rate was also at the top.

In the second half of the new tea drink, each brand will usher in a completely different direction of fate. There is no solution to the supply chain problem, and the tea princess, who is stranded all over the country with capital, has broken through a thousand stores within a year. The story of newcomers winning over the old will continue to unfold.

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