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Can't win, can't let go

Author: Liu Shuhan

Cover source: Nayuki's Tea official website

The trend of 9.9 yuan has blown to the milk tea industry without any hesitation. Nayuki's Tea (hereinafter referred to as Nayuki), which has always been known for its "white, rich and beautiful" image, has been hit hard.

Walking into a Naixue store, you will see colorful co-branded tea cups that keep up with the trend, exquisite breads and cakes neatly arranged, bottled drinks of various flavors displayed on the side, and white tables and chairs in the dining area that are pleasing to the eye. However, it is rare to see a lively scene like the one at Ba Wang Cha Ji with long queues.

A cup of fruit tea costs about 20 yuan, and a large cup costs 4 yuan more, and cheese costs another 5 yuan. On social platforms, many netizens complained that Nayuki has "changed" after the price cut, with less fruit pulp in the drinks and even the bread becoming mini versions.

In comparison, the 4 yuan per cup of Mixue Bingcheng lemonade, the 10 yuan per bucket of Tianlala fruit tea, and the 9.9 yuan special offer of Shanghai Auntie's Bobo milk tea and Watermelon Coconut Tea seem simple but affordable.

For young people who have become pragmatic, milk tea is no longer a fashionable item that symbolizes a high-end lifestyle, but just a simple comfort in a tired life. What is important is that they don’t have to worry about being "backstabbed" by the expensive price.

Behind the frustration of the impoverished daughter is the shattered dream of the entire industry to "reach new heights".

Overtaken by Grassroots

In the past two years, "almost all well-known milk tea brands" have flocked to this small town in Wang Yuxin's (pseudonym) hometown in Guangdong.

On the main road of the town, which is jokingly called "Milk Tea Street", coffee giant Starbucks and the popular Bawang Tea Princess are on both sides of the road, and affordable milk tea Gu Ming and Shuyi Shaoxiancao are facing each other. Along the road, from Yi Dian Dian, Mixue Bingcheng, Shanghai Auntie, Cha Baidao to Heytea, familiar names and signs are everywhere.

The only thing missing is Nayuki’s Tea.

Wang Yuxin told Snow Leopard Finance that when she first came to work in Shenzhen in 2018, her colleagues' afternoon tea was mainly Nayuki and Heytea, and girls preferred the fresh-looking Nayuki. But six years later, she can't even remember the last time she drank Nayuki.

In the core business districts of first- and second-tier cities, Nayuki is gradually giving way to the likes of Bawang Tea Princess.

Du Bin, secretary-general of the Shanghai Shopping Center Association, once said that the first choice of shopping malls nowadays are emerging brands such as Cha Yan Yue Se and Ba Wang Cha Ji. The average monthly sales of these "new top-tier" tea stores can reach more than one million yuan, and many stores can pay back within three months.

In comparison, Naixue, who has always presented herself as a "white, rich and beautiful" girl, is no longer able to fight.

In the second quarter of this year, Nayuki added 48 directly-operated stores and closed 48 stores, with a net increase of zero. One year after opening for franchising, the number of Nayuki's newly opened franchise stores was less than 300.

As of June 30, the total number of Nayuki's directly operated and franchised stores added up to only 1,894. In the first half of this year, Nayuki added 320 new stores, an average of 53 stores per month. In 2023, when new tea drinks were advancing rapidly and grabbing land, Nayuki only added 506 stores in the whole year.

At the same time, the up-and-coming brand Bawang Chaji has opened 4,500 stores worldwide, with an average of 6 new stores opened every day in 2023. Heytea, which opened franchises a year earlier than Nayuki, opened more than 2,300 franchise stores in 2023. Mixue Bingcheng expanded its store count from 10,000 to 36,000 in three years (2021-2023), becoming the king of the sinking market together with Tianlala. Chabaidao, Guming and Shanghai Auntie are also sprinting towards 10,000 stores.

In the vigorous wave of expansion, the former "No. 1" in the new tea beverage industry fell behind and fell into the dilemma of being a penniless woman.

On August 2, Nayuki released a forecast for its first half performance this year, predicting a loss of 420 million to 490 million yuan, close to the full-year loss level of 2022 (a loss of 475 million yuan). On August 5, Nayuki's stock price fell 15.91% to HK$1.48, with a total market value of HK$2.5 billion, less than 1/10 of the highest value.

With stagnant store growth, drastic decline in performance, and erosion of market share, why has Naixue fallen behind?

"Bai Fu Mei" slipped

Since the opening of its first store in a high-end commercial center in Shenzhen in 2015, Nayuki has been a well-known "white, rich and beautiful" in the tea industry.

All stores are directly operated, and most of them are located in prime locations of large shopping malls in first- and second-tier cities. They are brightly lit and stylishly decorated. The products are mainly fruit tea, which is popular at the time, and they offer zero-calorie sugar options. The packaging is also the fresh and simple style favored by young middle-class women in cities. In 2019, the average store area of ​​Nayuki was 280 square meters, and there was usually a transparent glass window for selling baked products.

In order to attract female users aged 20 to 35, Naixue took great pains to pay attention to details: in order to prevent lipstick from sticking to the cup, Naixue spent three months to determine the design of the cup mouth; in order to make it more comfortable for women to hold, the cup size was adjusted 18 times.

At that time, the tea industry was dominated by relatively affordable brands such as Gongcha, CoCo, and Yidiandian. They were often opened near schools, subway stations, and in inconspicuous corners of shopping malls. The stores were small, often with only one counter, and their products and prices were very down-to-earth.

In this context, the goal of Peng Xin, the founder of Nayuki, is to create a high-quality brand like Starbucks that white-collar workers and fashionable people are willing to consume, and to create a third space for afternoon tea. Compared with raw materials, price, and taste, culture, tone, and style are more like Nayuki's labels.

In Peng Xin's view, Nayuki is the true pioneer in the high-end tea beverage market.

Image source: Nayuki's Tea Weibo

Naixue, which broke out on the eve of consumption upgrading, quickly became a popular check-in spot relying on social media, and embarked on the road of expansion with its dual product line model of "tea + soft European bread". In 2020, Naixue, which was established five years ago, has 422 stores worldwide, covering 61 cities in China. In April 2020, Naixue announced a price increase of 2 yuan for some products.

Such a cup of milk tea, which has been endowed with additional meanings such as "high-end, beautiful, and romantic", has received a generous high valuation from capital, and has also brought the ambition of the entire industry into the "30 yuan era".

In June 2021, Nayuki went public as the "first stock of new tea drinks" with a market value of about 30 billion yuan. Some investors judged: "In 2021, the new tea drink listing wave is about to hit."

However, the reality deviated from expectations. The listing boom did not come, but instead a large number of new affordable brands rushed to the front of consumers, competing fiercely all the way.

Cha Baidao, Mixue Bingcheng, Shuyi Shaoxiancao, and Guming all have mainstream product price ranges below 20 yuan, and their scale and sales volume have quickly surpassed Nayuki. In 2022, affected by fierce market competition, Nayuki announced for the first time that the price of all products would be reduced to less than 29 yuan, and struck while the iron was hot and launched a series of relaxing tea drinks with a price range of 9 to 19 yuan.

According to Red Can Big Data, from 2020 to 2023, the proportion of new tea brands priced below 10 yuan increased from 7.1% to 29.6%, while the proportion of those priced above 20 yuan dropped from 32.7% to 3.6%. The once controversial "30 yuan era of milk tea" has completely become a thing of the past, replaced by multiple brands competing fiercely in the "10 yuan price range".

The average sales per order presented by Naixue in its financial report also dropped from 34.3 yuan in 2022 to 29.6 yuan in 2023. According to the latest data from Zhaimen Canyan, this figure has dropped to 20.34 yuan.

However, after the price cut, Naixue is still not competitive enough among a number of affordable brands.

Financial report data shows that after the price cut, the average daily order volume of each Naixue tea shop dropped from 348.2 orders in 2022 to 344.3 orders in 2023, a year-on-year decrease of 1.12%. In the first quarter of this year, Naixue's average same-store sales were only about 70% of the same period last year.

It's hard to turn things around

Regarding the reasons for the loss in the first half of the year, Naixue’s explanation in the financial report was: consumer demand has not recovered significantly, store revenue is under pressure, and store cost optimization has basically been in place. There is limited room for optimization of costs such as labor, depreciation and amortization in the short term, resulting in greater pressure on store operating profit margins.

In other words, if the product doesn’t sell well, the cost cannot be reduced.

A consumer investor told Snow Leopard Finance that unlike the relatively mature baking markets of Japan, Europe and the United States, Chinese consumers purchase baking products less frequently and do not have the habit of having afternoon tea in stores. The baking product line and third space that Nayuki has invested heavily in will become two major factors that drag down costs.

According to the financial report data, in 2023, Nayuki's operating income from the sale of baked products and other income was 1.12 billion yuan, a year-on-year decline of 3.11%, and its revenue contribution accounted for 21.7%. At the same time, in the revenue structure of Nayuki's directly-operated stores, store orders accounted for only 14.5%, while self-pickup and takeaway orders accounted for 43.6% and 41.9% respectively. In other words, among Nayuki's consumers, 80% chose non-dine-in.

More importantly, the high-end tone that Naixue tried to stick to slowed down its pace of expansion.

In 2023, in order to "reach the market that direct sales cannot temporarily cover", Naixue lowered its profile and embraced franchising in the sinking market, planning to open 2,000 to 3,000 franchise stores within 2 to 3 years.

At the beginning, the investment amount for a single Naixue franchise store was as high as 1 million yuan, and the store area requirement was clearly limited to 90 to 170 square meters, which meant higher daily operating costs. Even though the franchise threshold was later lowered, the investment amount for a single store still required 580,000 yuan, and the store area had to be around 40 square meters, which was higher than other brands.

The unique label of "white, rich and beautiful" has become a heavy burden on Nayuki. One year later, the average number of new franchise stores added by Nayuki per month is less than 25, far below expectations.

At the beginning of 2024, the war escalated again. Many tea brands tried to win the favor of franchisees by "giving out benefits" and accelerating the land grab. Cha Baidao and Shuyi Shaoxiancao announced a "0 franchise fee" plan. Gu Ming, which has always been strict in selecting franchisees, also lowered the standards: starting from March 29, 2024, there will be no franchise fee in the first year of signing the contract, the franchise fee will be deferred for the first payment, and it will be supported to be amortized for three years.

Many brands such as Heytea and Bawang Chaji have been rapidly expanding their stores since last year, salvaging a new round of high-quality franchisees and locations. In addition, brands such as Mixue Bingcheng have been entrenched in the sinking market for many years, so there are not many high-quality resources left for Nayuki.

Next, Nayuki plans to close some stores that are not performing as expected and make provisions for asset impairment. Can Nayuki, which is always a step behind and has a particularly twisted turn, still reverse its decline?