2019 China’s New Tea-Based Drinks

Investment Report

Contents
I. Why Choose This Topic And Market Analysis
II. Key Success Factors for New Tea-based Drinks Sector
III. Challenges & Development Trends of the Sector

iResearch Consulting Group

Strategy & Investment Research @ Shanghai
May 2019
New Tea-based Drinks

Why Choose This Topic And Market Analysis

Why Choose This Topic

 It is said that HEYTEA has completed a new round of financing invested by Tencent and Sequoia Capital. With a valuation as high as 8 billion
Yuan, it replaced Naixuecha as the brand with the highest valuation in the sector. At the same time, Starbucks is trying the tea-based drink
market by launching 8 new products. This biweekly focuses on the domestic new tea-based drink brands (mainly milk cover tea and fresh
fruit tea) that are cultivated in a new round of consumption upgrading in China.
 China has over 500 million consumers of tea-based drinks. In the context of consumption upgrading, the consumers are not only buying the
new tea-based drinks, but also enjoying a balanced life. The social and leisure value of the products is in line with the young consumers’
pursuit of lifestyle and identity. It is also a simple of fashionable life. New tea-based drinks are embracing industrial upgrading and increased
consumer demand. In the future, the scale some of the brands may become comparable to that of Starbucks in China.
Upgrade of New Tea-based Drinks and Vast Market Potential
 High quality is the foundation of innovation of new tea-based drinks,
in two aspects: 1) Healthy: Creamer and caffeine are replaced by Market Size Forecast
fresh milk and high-quality tea, with fruits, cream, etc.; 2) Mature Method 1: Replacing the existing
SOP (standard operation process) for stable and consistent products + increased demand
taste. Replacing the existing products Increased 40-50 billion Yuan
demand
 The tea-based drinks has undergone three stages: the “powder
stage” containing no tea or milk at all, the “street stage” with tea
powder and tea leaf as base tea and with fresh milk, and now the
“new tea-based drinks stage” healthier and with leisure and social Replace Replace
features. traditional Replace Sales of Sales of Sales of
prepared
milk tea bottled prepared coffee & traditional milk
hot drinks
shops, juice and hot drinks other drink tea and other
teahouss (e.g. instant
carbonated stores beverage
and cafes coffee)
beverages stores

Powder stage Street stage New Tea-based

Drinks stage
Method 2: A top-down approach
A Store of Some Top Tea-based Drink Company
Daily Orders 1,600 Monthly sales 1.60-1.80
per store million Yuan
Population Urbanization Target age group
Per customer 45-55 Area efficiency 8,000- in China rate
transaction Yuan 10,000 Yuan
40-50 billion Yuan
Peak times on 2,500 Payback 6-8 months
weekends period of the Cups bought Price/cup
store annually

Financing Activities in the New Tea-based Drinks Sector

Number of Financing Financing Latest

Company Revenue Time Investor
Stores Round Amount Valuation

HEYTEA 163 C 2019 Unknown 8 billion Yuan Tencent, Sequoia Capital

Monthly turnover
LELECHA of top tea-based ~35 Pre-A 2018 200 million Yuan / Vertex Ventures
drink brands is
over 1 million
Naixuecha 178 A+ 2018 100 million Yuan 6 billion Yuan Tiantu Capital
Yuan per store
Tens of millions
Guantea That of some / A 2018 / Shunwei, Meridian Capital
of Yuan
stores is even
as high as 2-3 Nearly 100 V Star Capital, Oriental
Teasoon million Yuan / Pre-A 2018 8 million Yuan
million Yuan Fortune Capital

INWE / / 2016 500 million Yuan / Richard Liu

 Top new tea-based drink brands are receiving pre-A/A round of financing. New tea-based drinks are increasingly popular among the
capitals and young consumers. Many brands are emerging. With “New Tea-based Drinks” as their slogan, they are going viral thanks to the
personalization, brand and experience. They are attracting the attention of the capitals.
 Though belonging to the catering business, tea-based drinks are more like products which feature light assets, quick turnover, high gross profit
and high brand effect. Therefore, it has overcome the inherent drawbacks of traditional catering service industry and is attracting equity investment.
 The new tea-based drink brands are popular among the capitals because besides good taste and beautiful package, more importantly, they also
offer some special feelings. In addition, when buying the drinks, the consumers may be satisfied both materially and spiritually. For example, the
brand name “Naixuecha” will arouse a scene when the consumers see the logo: The snow flakes are falling slowly, a graceful girl is making tea at the
table. Both the nice-looking design and the refined details are attractive to the younger generation of consumers with demand for entry lux and little
2
happiness, and arouse the interest of the female consumers who like selfie and sharing.

Source: JINGDATA and publicly available materials

New Tea-based Drinks

Summary of Latest Views on New Media

Key Success Factors for New Tea-based Drinks Sector

Innovation of New Tea-based Drink Products, Supply Chain Management and Store Layout

Category Description
 Innovation in two aspects: horizontal category innovation, e.g. fruit tea, western-style bread, etc.; and vertical
product upgrade, e.g. the evolution from milk tea with creamers, to cheese milk cap and milk tea with fresh milk.
Product
 In 2018, on average, HEYTEA released 2 new products per month. Recently, HEYTEA started the stable supply
Innovation: of several types of bread and ice cream, and started to offer coffee products which are addictive and frequently
bought by the consumers.
Keep The Brands  Naixue keeps launching 1 new product per month. And it also started to offer coffee, yogurt and products, and the
Fresh stores also have claw machines, lipstick claw machines and other gaming devices.
Improve  LELECHA focuses on dirty chocolate croissants, dirty tea and other popular products. There are about 20
repurchase rate western-style bread and fresh fruit cheese tea SKUs. Two new products are launched monthly, at least one
popular product quarterly and at least one phenomenal product annually (accounting for over 50% of the total
sales of the store).

Supply Chain  Good innovative ideas should be applied in the supply chains to ensure mass production. “Others may copy our
Management: drinks, but the production cost is to high to launch them on the market.” The important competitive barrier of the
top tea-based drink brands is the partnership with the tea and fruit suppliers in the upstream chain, ensuring the
Product supply of high-quality raw materials at a reasonable cost.
competitiveness lies  Taking Naixue as an example, it has tea gardens in Ruili Village, Ali Mountain, Taiwan. The tea from there
in the capacity to features thick leaves and lasting aroma. Naixue R&D team learn the tea processing process from Qiu Wencong,
integrate upstream a tea making master from Taiwan, and developed a product, Ali Mountain Trutea.
supply chain  Naixue has planned and built the central factory with a high investment and has built a strong supply chain barrier.

Store Layout
 Site selection is
essential
 Environment helps
retain customers
 After the layout in key shopping centers in 1st-tier cities, the top tea-based drink brands start layout of diverse
stores.
 HEYTEA used to have large stores covering more than 100 m2 to match with the shopping centers. However, in
last June, HEYTEA started to launch “HEYTEA GO”, a type of small store covering 20+ m 2, to open more stores
in a short time. Large stores are to promote its brand awareness and small stores are to expand and cover
more consumers. “We open stores close to office buildings to sell afternoon tea to white-collar workers.”
 According to the founding team of LELECHA, in the catering sector, the functional demands are upgrading to
demand is upgrading to “comprehensive demand” integrating food & beverage, social, entertainment and
experience. Therefore, LELECHA is not only trying different store models, but also trying different decoration
style, with products and spaces of special tones and designs. However, focusing on space does not mean
creating the third place. In the store planning, LELECHA is restrained in the number of seats.

Marketing Approaches of New Tea-based Drinks

Main Approaches Description

 For example, HEYTEA has evolved from Royaltea to the Cantonese HEEKCAA and then to HEYTEA. The brand
LOGO has acquired a more popular image. The brand is simple and cross-regional.
1 Promoting Brand  The players are developing mini programs and the new tea-based drinks are penetrating our daily life. In the
Concept
future, they will provide convenient services like home delivery and picking up in the store, promoting the
brand concept of “Tea Culture Upgrade in China”.

Attention to Offline
2 Space
 Both the illustrations on the WeChat public platforms and the product packaging are in line with the simple and
beautiful brand image. Use the e3xpressions popular among the young people and offer products of originality.
 Besides launching new product styles, the most effective approach crossover cooperation, adding more
elements to the brands and combining the visual effects with the products. For example, see the offline spaces
as the carrier and starting point of brand culture, paying attention to offline spaces and work with the
designers to build stores attractive to young people.

 Focusing on the most attractive elements of the products to be launched, prepare advertorials on public
accounts and we-media, etc. based on their own advantages. For example, use personified approaches and
Online We-media tell product stories, to promote the products in a more acceptable form and highlight product elements and
3 Marketing brand features.
 Interact with the consumers on various social platforms, feed back and make modifications according to the
opinions from the consumers

 Consumers who spent a long time queuing ——to以上观点由艾瑞根据HEYTEACMO肖淑琴在2018年新商业公开课上的分享要提炼总结

buy products will share pictures and they will have something to
4 Reverse Marketing brag if they do not have to queue. Such reverse marketing on new media are also free ads of the new tea-based
drinks, attracting more potential customers and allowing effective interactions.

Conclusion
——
 Tea-based drinks are easy to copy, so the constant innovations in raw materials and formula and development of derivatives are essential to
offer different and fashionable products. The quality of the tea-based drinks lies in the base tea and tea is the biggest cost for the new tea-based
drinks. Control of the upstream tea supply chain is a necessary condition for the large new tea-based drink chain stores to build their own core
competitiveness. 3
 New media is an important approach to connect the new tea-based drinks and the target young consumers. Relying on new media marketing
and pictures shared by the fans to promote reverse marketing and effective interaction is an important way to promote new tea-based drinks.
New Tea-based Drinks

Summary of Latest Views on New Media

Challenges & Development Trends of the Sector

Development Trends of New Tea-based Drinks: Membership Services And Social Tool

HEYTEA LELECHA Naixuecha

Membership HEYTEAGO members get one points for Free registration with mobile phone Register by logging in the WeChat mini
Card each Yuan they spend. Silver member number, and members get one point and program. Members get 1 tea coin for
(0-500 points) is the lowest and black experience value. The lowest level is each offline consumption and can
diamond (>11,001) the highest Leyuan member (1-49 experience value) change peripheral products at Naixue fair

Recent On May 20th, members may change On their birthday, the members may get During the dragon boat festival, the
Activities preserved rose and other gifts on the buy-one-get-one-free coupons and don’t members get 30 Yuan discount when
points mall have to queue. Such coupons are buying gift packages of sweet and salty
available for newly registered members zongzi

 Membership cards help improve the interaction and shopping funs for the users, as well as the user stickiness. HEYTEA and
Naixuecha updated their membership system this year. The leading tea-based drink brands may offer more member benefits
to attract more customers, as an important factor in their business model.
 However, membership may lead to fraudulent conducts and damage to the brand image. The sellers need to prevent such
fraudulent conducts when designing the systems to ensure “one person one account”.

Challenges And Coping Strategy of New Tea-based Drinks

Challenges Contents

Keep Freshness  The Chinese consumers are fickle in affection. According to the data from Meituan, the life of the catering
stores in China is 508 days, and each year, 2.80 million stores are closed done. How to be innovative and
Coping Strategy: improve the repurchase rate is the eternal topic in the industry.
 Product Innovation
 Promoting Brand  Nie Yunchen, founder of HEYTEA, tell the media that HEYTEA hopes to improve the scarcity of the brands
Concepts and enhance the convenience. How to balance these two points is a test for the managers.

 To some extent, the number of shopping centers put a ceiling on the growth of new tea-based drinks. The
slowing down growth of commercial real estate in the past two years has some impact on the customer
acquisition, production and sales of the stores.
Break Through The
Ceiling  To have a higher ceiling, it is necessary to go online. For example, HEYTEA works with Meituan and
receives the investment from Longzhu Capital, Meituan. It also launches a mini program “HEYTEAGO”.
Coping Strategy: According to HEYTEA, in half a year, HEYTEAGO has 6 million users and a monthly repurchase rate of 36%.
 Buying Via Mini Over 35% of the orders are placed via the mini program, indicating that the consumers are getting used to
Programs buy via the mini program.
 Big Data Analysis
 The online sales allows HEYTEA to directly collect user data. By analyzing such data, it can learn about the
preference of the users and guide product R&D; and it can also know and predict sales and control the
purchase costs. The data accumulated may also help select site for new stores.

 The competition in the tea-based drink sector is increasingly fierce. In the first three quarters in 2018, there
were 410,000 made-on-site tea-based drink stores in China, an increase of 74% YoY. HEYTEA, Naixuecha
and others are not only engaged in expansion in China, but also have to compete with regional players.
 A typical case is Modern China Tea Shop, founded in 2014. Relying on its unique Chinese style and good
Regional Competition reputation, the brand expanded rapidly in Changsha. It has opened 2018 100 stores in 2018 and will open
another 100 stores in the local area in 2019. According to data from Tiantu Capital, in Changsha a city with 8
Coping Strategy: million population, the people buy two cups of Modern China Tea Shop annually, indicating that the local
 Differentiation market is almost monopolized by the brand.
Competition
 Modern China Tea Shop now only operates in Changsha. According to Lv Wei, its CEO, now they are still
improving their fundamental capacities in services, management, operation, etc. “Without solid fundamental
capacities, our word of mouth may be diluted if we open stores in other regions. It took us much efforts to
acquire word of mouth in a 2nd-tier city.” The leading players in the tea-based drink sector may compete with
their regional counterparts by adopting different product R&D and pricing strategies and different store layout.

——The contents above are summarized by iResearch based on Critical Time for HEYTEAs, an article from Huxiu

Conclusion
——
 “If the appearance, taste, cost performance and environment of the products exceeded the expectations of the users, the products
will be irresistibly attractive.”

 After the rapid expansion, the companies are focusing on their own development. To win the long-term competition, they need to
have competitive edges in products, refinement management, operation, etc.

 Starbucks has made drinking coffee a significant part of our daily life. Its brand and core competitiveness rest on its strong capacity
in products, supply chains, stores and operation. The players in the new tea-based drinks sector in China need to grab market on the
one hand and need to improve their own capacities on the other hand. We hope that in the future, just like the western fast food 4
market dominated by KFC, Mcdonald's and Burger King, the new tea-based drinks market in China will be dominated by at least two
giants with their own distinctive capacities.
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