China Consumer

Bubble tea

Problems percolating for Heytea as growth slows

Heytea-w

The place to drink cheese tea: Heytea has 865 outlets in China

In 2017, a food blogger asked the burning question that many consumers – who’d spent hours queuing in line at Heytea – wanted an answer to: is Heytea really that good or were people getting hyped up over nothing?

The tea chain, of course, popularised cheese tea (a fruit-based tea topped with cream cheese foam) and has managed to convince a lot of investors that it’s not just a fad. The company executed a total of five funding rounds in five years and completed its latest round of $500 million last July, backed by marquee names like Tencent, Sequoia China, Hillhouse Capital and Temasek. Its valuation reportedly reached Rmb60 billion ($9.46 billion), setting a new record for a Chinese unicorn in the tea segment (in our most recently quarterly update of China’s Top 50 Unicorns Heytea ranked 15th – for more see http://www.weekinchina.com/unicorns/).

But has the firm’s growth finally hit a ceiling? Last week, Sina Finance reported that the Shenzhen-based tea chain quietly laid off 30% of its headcount. Heytea quickly denied that those rumours were accurate, adding that the job reductions were normal personnel adjustments and optimisation efforts based on year-end assessments.

Heytea has 865 outlets around the country and was profitable last year. However, industry insiders reckon that its growth has tapered off and the reported layoffs were a quick means to juice profitability in anticipation of its future listing. “To prepare for future IPO, it wants to make its financial report look as attractive as possible, which is why they have laid off so many people,” TMT Post added.

“The truth is, Heytea is trapped: in the age of rapid development, the cost increases along with the expansion of offline stores. But the current traffic has not ushered in the same proportion of growth. Heytea has been blindly expanding to sustain growth and now the overexpansion is causing a big headache,” TMT Post further commented. “Worse, its biggest rival Nayuki has left a rocky path to IPO for the rest of the tea drinks industry. Even though it was listed first, the company’s shares went below IPO price the first day of trading and its market cap is now hovering at a fraction of its listing valuation.”

Indeed, Nayuki’s weak financial performance won’t inspire much confidence among investors. The beverage chain announced last week that its revenue is expected to reach Rmb4.3 billion but that its net loss was around Rmb135 million to Rmb165 million during 2021.

It also marks the fourth consecutive year the bubble tea chain has reported a net loss. Its market valuation has also dropped from $4.4 billion at IPO to just $1.6 billion this week.

Nayuki’s largest losses occurred mainly as a consequence of the heavy initial investment needed to promote the rapid development of its retail stores. The average investment cost of a retail store is as high as Rmb1.8 million. In addition to that initial investment, its daily operating costs, materials, staffing and rental expenditures are all high.

Heytea also struggles with a similar problem. According to domestic brokerage Xinye Securities, raw materials account for the highest proportion of Heytea’s cost structure at 35%, followed by salaries and rent, which account for 25.6% and 12% respectively. By comparison raw materials account for just 7.3% of Starbucks’s total cost.

“Heytea has always positioned itself in the high-end of the tea drink market. That is also the reason it has invested heavily on brand marketing, store design, raw materials and labour to uphold that high-end image. But now that becomes a huge cost burden on the company,” reckons Daxiongfan, a financial commentator. In an effort to expand its revenue base, Heytea has diversified its businesses. During the second half of last year it invested in boutique coffee brand Seesaw, mixed drink WAT and peach milk tea brand Heqitaotao.

It has also extended its brand into tea-based products for consumers at home. Heytea now hosts daily livestreaming sessions on Douyin and Taobao Live selling its own branded tea bags, bottled juices and milk tea. According to data from Grey Dolphin, the number of viewers who tuned in across the two livestreams reached around 30,000, while about Rmb131,000 of Heytea products get sold in an average four hour livestream.

Heytea has also quietly lowered prices. Last month the company cut the price for some of its products by as much as Rmb5. Most of its tea drinks now cost between Rmb19-29. Nayuki, too, has also released a new range of coffee drinks that start at just Rmb9 a cup.

As competition intensifies, stores are closing. Changsha-based tea chain Modern Chinese Tea House has shuttered 87 stores since last November. Nayuki also shut 10 stores in 2021.

“Only when the tide goes out will we know who has been swimming naked the whole time,” muses Daxiongfan. “In any rapid development, all the industries that have been given enormous capital will likely see a bubble. When the air dissipates and the bubbles bursts, that’s when danger surfaces.”


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