Starbucks Corporation (NASDAQ:SBUX) – HeyTea heats up the premium tea market with contrarian price cuts

Key points to remember:

  • HeyTea, the first new-style premium tea maker, has launched a recent series of price cuts, even as many rivals grapple with rising costs, fierce competition and Covid disruptions
  • China’s high-end tea makers raised $2.2 billion from investors last year, nearly half of that at HeyTea, which last valuated at nearly $10 billion.

By Jose Qian

New-style tea beverage makers have sprung up across China in recent years, thriving on a powerful brew of low barriers to entry, high profit margins, rapid returns and a growing middle class. grower who isn’t afraid to spend a few bucks. a trendy cup of tea. But as the market quickly becomes saturated, they enter a new phase of overheating characterized by similar products and fierce competition.

The Covid-related closures add to recent growing pains, confronting these high-end tearooms with a dwindling clientele even as rents and labor costs remain high. At the same time, inflation at levels not seen in decades has also driven up raw material costs.

The increasing pinch drove smaller strings like Xiangpiaopiao (603711.SH) and hot tea increase in prices since the beginning of the year. But high-end market leader Hey Tea recently bucked the trend by lowering the prices of some products from around 1 yuan to 5 yuan, including a drop that saw the trendy chain drop the price of its “Pure Green Tea” to an unthinkable level at a figure of 9 yuan.

The move has market watchers scrambling to determine whether HeyTea’s cuts represent an attempt to steal market share, or perhaps a signal that the growth of premium tea drinks has come to an end.

China’s new-style tea beverage industry saw 32 fundraising events last year, raising more than 14 billion yuan ($2.2 billion). These included two rounds of funding from HeyTea, raising a total of $1 billion and taking its valuation to 60 billion yuan. Market leader investors include big names such as Hillhouse Capital, Sequoia Capital, BA Capital and Tencent(0700.HK).

However, maintaining such buoyant valuations is no easy task. Take Nayuki (2150.HK), the market’s No. 2 and closest rival to HeyTea, for example. The high-end tea competitor was listed in Hong Kong last June and has seen its shares lose 60% of their value as investors grow impatient for the company to turn a profit.

The top of the market isn’t alone in its heated state. Most mid-range Chabaïdao announced that its number of domestic stores exceeded 5,500 last year, amid rumors that it was considering a $500 million Hong Kong IPO. The low end Mixuebingcheng claims to have more than 20,000 stores in China and received 2 billion yuan in investments early last year, led by Hillhouse Capital and Meituan(3690.HK)-affiliated with Longzhu Capital, giving it a market value of 20 billion yuan. Shuyi Tealicious (603939.SH), another low-end player, also had 7,000 stores in 2021.

By comparison, HeyTea saw some of its slowest growth in 2021, at least in terms of store count. After increasing its number by 139% and 78% in 2019 and 2020, respectively, HeyTea’s store growth rate fell to just 26.3% last year, bringing its total to 878, according to Canyan Data, a data service provider in the restaurant industry.

Founded in 2012 in Jiangmen City, Guangdong Province, HeyTea is considered a pioneer in premium tea, a kind of tea equivalent of Starbucks (NASDAQ:SBUX). He creates his sense of superior value by adding products like fresh fruit and cheese mousse to his teas. It sells those from high-end stores in traditional business districts, with people sometimes lining up to pay the equivalent of $4 and $5 for its high-end drinks.

lifestyle product

As with Starbucks, HeyTea’s drinks are as much a lifestyle product as they are actual drinks, catering to young upwardly mobile white-collar workers who don’t mind spending relatively large amounts on products they might find much less. expensive elsewhere.

But some believe that HeyTea may have pushed the prices as high as possible. The HeyTea drink costs an average of 29 yuan, according to Haitong Securities, and consumers willing to pay such high prices are still a minority. A survey conducted by Sina in 2020 showed that 61.8% of consumers would reject a tea drink priced above 30 yuan, while 31.4% said they would “drink less” for such prices.

Data from consultancy iResearch shows that premium products, defined as those costing 20 yuan or more, accounted for just 14.7 percent of China’s new-style tea drink market last year. The rest – more than 85% – was dominated by cheaper products costing less than 20 yuan.

HeyTea hopes to retain its customer by lowering prices in its competitive industry, and even attract new ones by stealing business from popular low- and mid-range brands. He also most likely thinks the move won’t hurt his high-end image, as the cuts are relatively moderate, not exceeding the 20-30% range.

HeyTea’s confidence to launch a price war in such a difficult climate may come from its higher margins due to the high premiums it charges for its high-end image. Guosen titles (002736.SH) estimates its gross profit margin to be 65%-70%, well above the industry average of around 53%, giving HeyTea more room for price reduction than most peers.

HeyTea can also feel confident to make such cuts because its “base camp” at the high end of the market is very stable, judging by its current market share. According to Haitong Securities, HeyTea leads the market with a share of 27.7%.

Third, HeyTea has better control over the quality and cost of its raw materials through its self-built supply chain system. For example, by building organic tea plantations in Guizhou province and signing purchasing agreements with tea producers, the company guarantees low prices and stable supplies. It has similar supply chains enabling it to secure a regular supply of off-season fruits, which gives it an additional advantage over its competitors.

HeyTea has also reduced operational costs with its “HeyTea GO” applet, which had 520,000 daily active users as of April 2021, second among new tea brands, according to iResearch. All of these advantages give HeyTea a powerful arsenal of weapons to lower its prices, taking advantage of the current market turmoil to drive consolidation by making strategic investments and acquisitions.

Since last July, the company has invested in six brands, including coffee brand Seesaw, lemon tea brand Winning, fruit tea brand Hechi, oat milk brand YePlant and premixed alcohol brand WAT. He has taken stakes in these companies ranging from 5% to 60%, as he seeks to expand his reach in the drinks sector.

The next big step could be an IPO, although HeyTea has been tight-lipped about it. But with its market share likely to climb and its leadership position likely to solidify with the latest price drops, an IPO in the not-too-distant future could be a strong possibility to grab its latest momentum.

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