The tea beverage industry is becoming increasingly "cutthroat".

The previous internet-driven strategies are gradually losing effectiveness, and the capital market is valuing tea beverage brands more rationally. However, for tea beverage brands, competition has already reached a fever pitch, with expanding scale and increasing revenue becoming the ultimate goals for many.

Over the past year, both tea and coffee brands have experienced a year of "breakneck growth". Unfortunately, the market's evaluation of tea beverage brands has begun shifting from scale to profitability.

This also signals that the era of "scale is king" is becoming history.

Recently, Nayuki Tea, the "first listed tea beverage company", released its 2023 financial report. The report showed that the company's revenue in 2023 was 5.164 billion yuan, a year-on-year increase of 20.3%; net profit attributable to the parent company was 13 million yuan, and adjusted net profit was 21 million yuan, turning from a loss to a profit year-on-year.

However, the market did not respond positively to this first profitable financial report.

The day after the report was released, Nayuki Tea's stock price plummeted by 12.79%.

Notably, the company's stock price has continued to decline, and its market capitalization has now dropped to just 4.099 billion HKD, hitting a new historical low.

From its peak, Nayuki's stock price has fallen by over 85%, with its market capitalization evaporating by more than 28.4 billion HKD, equivalent to approximately 26.2 billion yuan.

So, why is the market not buying into this turnaround financial report?

Is the blind expansion strategy of tea beverage brands the right approach?

How can companies ensure profitability amid rapid scaling?

The "Bubble" Created by Capital

Four years ago, with the support of internet-driven models, new tea beverages and new consumption became the hottest sectors. Pop Mart's market capitalization exceeded 100 billion HKD on its first day of listing; Perfect Diary's market capitalization surpassed 12.2 billion USD on its debut; and even Genki Forest's valuation approached 30 billion yuan at the time.

Data shows that in 2020 alone, tea beverage brands secured 18 rounds of financing, with a total disclosed amount of 1.743 billion yuan, a year-on-year increase of approximately 700%.

Amid the frenzy, tea beverage brands expanded at breakneck speed, with burning cash for traffic becoming the norm. At the time, brands like Nayuki Tea, Heytea, Mixue Bingcheng, and Chayan Yuese were all rumored to be planning IPOs.

In late June 2021, Nayuki Tea took the lead by listing on the Hong Kong Stock Exchange, becoming the "first listed tea beverage company", marking a new phase of expansion for the industry. In July of the same year, Heytea completed a $500 million financing round, valuing the company at nearly 60 billion yuan, setting a new record for China's new tea beverage sector. Meanwhile, Mixue Bingcheng's store count surpassed 20,000, and it secured a 2 billion yuan strategic investment. Mid-tier brands like Yidiandian, Chabaidao, and Shuyi Shaoxiancao each had over 5,000 stores...

According to incomplete statistics, in 2021, China's tea beverage industry completed 59 financing rounds, involving over 15 billion yuan, with participation from top-tier institutions like Temasek, Sequoia China, UBS, and Hillhouse Capital.

The increasingly rapid pace and intensifying competition led to soaring prices for tea beverage products.

Nayuki's IPO prospectus revealed that in the first three quarters of 2020, the average order value for Nayuki Tea was 43.3 yuan, compared to the industry average of about 35 yuan, earning it the nickname "the Moutai of milk tea" among netizens.

Unfortunately, this price surge during the boom did not last long.

Declining same-store sales and order volumes quickly forced tea beverage brands to face reality. Following the price cuts by Heytea and Nayuki, product prices in the industry continued to drop, with some items even halving in price.

In the capital market, Nayuki, the "first listed tea beverage company", suffered. On its first day of listing, Nayuki's stock price fell below its IPO price. Since then, its stock has continued to decline.

In early 2022, winter quietly arrived for the tea beverage industry, with store closures and layoffs becoming commonplace. Heytea even made headlines on Weibo for rumors of "laying off 30% of its workforce".

Although Heytea later denied the rumors, the slowdown in expansion became an undeniable fact. Clearly, after Nayuki's bubble burst in Hong Kong, many investors began reducing or exiting their investments. Tea beverage brands, under pressure to expand, had no choice but to rush into the capital market despite unfavorable conditions.

Notably, the tea beverage industry has already become a "red ocean".

No End to Price Wars

From the current state of the tea beverage market, opening franchises and competing on quantity and scale have become the new rules of the game.

Amid scaling, tea beverage brands are becoming increasingly cutthroat, yet none dare to stop expanding.

According to Chabaidao's IPO prospectus, as of the end of 2023, the brand had opened 7,801 stores, and its management stated that it aims to reach 10,000 stores in 2024.

Amid scaling, profitability is becoming increasingly important, yet companies seem unaware of the negative consequences of diminishing marginal returns.

Data from iiMedia Research shows that in 2023, China's new tea beverage market was valued at 333.38 billion yuan, a year-on-year increase of 13.5%, with growth expected to slow to single digits in the coming years.

In other words, as scale ceases to be king, the current business models of tea beverage companies will face further challenges, signaling that price wars are almost inevitable.

For Nayuki Tea, following the industry's lead is a must amid this intensifying competition. Thus, starting in late July 2023, Nayuki began opening franchises, expanding into third- and fourth-tier markets. According to its financial report, Nayuki opened only 81 franchise stores last year, but by February this year, the number had reached 200.

During Nayuki's earnings call, management stated that the company plans to open 2,000 to 3,000 franchise stores in the next two to three years. However, the market did not respond positively to this aggressive expansion plan.

Instead, the stock continued to decline. So, what exactly is the market worried about?

A closer look at the financial report reveals that Nayuki's turnaround in 2023 was largely due to cost-cutting and efficiency improvements, while its operational data still shows declining volume and prices.

The report shows that last year, Nayuki's average order value dropped from 34.3 yuan in 2022 to 29.6 yuan in 2023, a year-on-year decrease of 13.7%; daily orders per store fell from 348.2 in 2022 to 344.3 in 2023.

Zhu Danpeng, a food industry analyst in China, noted that Nayuki's escape from losses last year might be a temporary result. As market competition intensifies and other new tea beverage brands accelerate their IPO processes, Nayuki will face even greater pressure in the future.

Kan Jian Finance believes that the deeper challenge for new tea beverage brands like Nayuki, Heytea, and Chayan Yuese is that operating costs rise rapidly with offline store expansion, while offline traffic fails to grow proportionally. Moreover, as brands like Chabaidao and Mixue Bingcheng go public, industry competition will intensify further, making price wars almost unavoidable. If tea beverage companies' profitability remains low, the likelihood of being 淘汰出局 will increase significantly.