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Bubbling Success: The Rise of China's Beverage Giants! 🇨🇳 🧋
China's $230B non-alcoholic beverage market, from coffee to Chinese tea, thrives on strong consumption. Lessons for India and SEA- what's there to come!
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Three years and ten months in the making, I finally had the opportunity to visit China. Over the course of several days, I journeyed through Beijing, Shanghai, and Guangzhou, reconnecting with old friends and immersing myself in the transformations that have unfolded in recent years. There are several takeaways from my trip which I would like to cover in the next few write ups. These insights extend beyond the borders of China and may hold relevance for India and other Southeast Asian markets as consumers evolve and enjoy greater discretionary income.
First up, I discuss about the several large beverage retail chains I came across the country.
Beverage in China - A $230B Market! 🥤
China’s non-alcoholic beverage market can be categorized into tea, bottled water, protein beverage, juice, carbonated beverage, energy and sports beverage, coffee, and others. China’s non-alcoholic beverage market, by retail consumption value, has increased from CN¥900B ($130B) in 2015 to CN¥1,233B ($175B) in 2020. Driven by higher disposable income and continuous product innovation, China’s non-alcoholic beverage market is expected to increase to CN¥1,946B ($278B) by 2025, representing a CAGR of 9.6%.
Here are some of the brands which I had come across during my China trip, and together these companies would have more than 60,000 stores!
Luckin Coffee (瑞幸咖啡) ☕
Luckin Coffee, the largest coffee chain in China, was founded in 2017 and offers coffee at reasonable prices through grab-and-go stores and a tech-enabled experience. Since the stores are relatively small, rent is lower, which results in lower prices and attractive discounts. Once per week, customers can enjoy a cup of coffee for CN¥9.9 ($1.3); otherwise, coffee typically costs CN¥12-15, which is significantly cheaper than Starbucks. Luckin has primarily opened company-owned and company-operated stores, but has recently expanded into the franchise business.
Number of Stores: 11K+
Estimated Annual Revenue: $3.4B
Funding Raised: $550M+
I tried the Coconut Latte and Moutai Latte, and both were really good! The Moutai Latte is a collaboration between Luckin and Kweichow Moutai, one of the biggest alcobev companies in China. It infuses Moutai Baijiu into the coffee, giving it a unique flavor profile. I was also impressed by how many Luckin Coffee stores there were; there was one in every neighborhood we visited, or there was one opening soon.
Cotti Coffee (库迪咖啡) ☕
Started in 2022, Cotti Coffee is one of the fastest growing coffee retail chains in the world. Within a year of launching, they have opened more than 5,000 stores. It has been founded by the founders of Luckin Coffee who had to quit due to the financial fraud for inflating revenues at Luckin. Cotti Coffee is even cheaper than Luckin with products ranging from CN¥9-10 ($1.2/ INR 100).
Number of Stores: 5K+
Estimated Annual Revenue: $500-600M
Cotti Coffee is making itself attractive to franchise partners by eliminating franchise fees, which enables quicker capital recovery. While it has opened stores in major business districts and sponsored city marathon events, Cotti's ultra-low prices are what have truly made the brand famous.
Chagee (霸王茶姬) 🥛
Chagee, a milk tea retail chain founded in 2017 in Yunnan, China, blends traditional products with modern experiences. Its products mainly focus on original leaf fresh milk tea, covering pure tea, fresh fruit tea and related products. Its stores have a modern outlook and its packaging is reminiscent of Christian Dior, appealing to a young audience. Most of Chagee's stores are take-out only. A typical 500ml cup of Chagee milk tea costs CN¥20 ($2.75/INR 230).
Number of stores: 2500+
Chagee has opened stores in other SEA markets like Singapore, Malaysia, etc.
Estimated Annual Revenue: $300M+
Funding Raised: $50M+
The tea-making process at Chagee is tech-enabled and divided among colleagues. As you can see above, large quantities of tea are prepared in kegs with dispensers on top. This ensures standardization and faster delivery. It felt like ordering tea from a mini factory. I ordered the oolong milk tea, which was blissful. It was the first time I had finished a 500ml cup of tea!
Ningji Lemon Tea (柠季手打柠檬茶) 🍹
NingJi Lemon Tea, a chain of lemon tea stores founded in 2021, focuses on fresh lemon-based tea drinks. The stores mostly offer takeout, and the overall capex investment is relatively low, enabling quicker payback. NingJi offers flavored lemon tea for around CN¥20 ($2.75).
Number of Stores: 2000+
Estimated Revenue: $200M (Estimated)
Funding Raised: $15-20M
The NingJi Lemon Tea was tasty but unexceptional for the price. It was also a relatively simple product, but the packaging was top-notch and convenient. The beverage-making process was also simplified, with containers filled with the tea.
Mixue Bing Cheng（蜜雪冰城)🧋🍦
MIXUE, an ice cream and tea retail chain founded in 1997, has expanded to over 25,000 stores in China and 3,000 stores overseas. It operates only 47 stores directly, with the rest owned and operated by franchisees. Mixue's indulgent products, such as Boba Sundae, Milk Tea, and Cheese Fruit Tea, are priced at CN¥5-10 ($0.7-1.4).
Number of Stores: 25,000
Estimated Revenue: $4-5B (GMV)
Net Profit: $280M
Most Mixue stores are take-out and offer extremely competitive prices. As a franchise business, the company sold $1.4B worth of raw materials and made $280M in profits in 2021. To achieve quality and taste at such a massive scale, Mixue has highly standardized production processes.
Cha Bai Dao (茶百道) 🥤
Cha Bai Dao, a Chinese tea brand founded in 2008, is one of the largest in the country, serving combinations of tea and fresh fruits. Its products are priced at CN¥15-20 ($2-$2.75). With over 7,000 stores operating largely through franchise partners, Cha Bai Dao generated $2B in revenue (GMV) in 2021, selling $570M in raw materials and making $140M in profits.
Number of Stores: 7000+
Funding: $150M (2020)
Valuation: $2.5B (2020)
Revenue: $2B (GMV)
In 2022, Cha Bai Dao sold 794 million cups of milk tea, generating an average net profit of CN¥1.2 per cup. Despite the competitive market, Cha Bai Dao has been able to build a large and profitable business, largely through its franchise model.
Hey Tea (喜茶) 🥤
Founded in 2012, Hey Tea is a celebrated Chinese milk tea brand known for its freshly brewed milk tea, fruit and cheese tea with boba. With aesthetically pleasing stores, Hey Tea is extremely popular with the younger generation, often resulting in long wait times. A drink at Hey Tea costs between CN¥18-28 ($2.5-$3.9).
Number of Stores: 2800+
Estimated Revenue: $1B+
Valuation: $9B (2021)
Funding Raised: $600M
We ordered a mango tea and grape tea (see images below) - both tasted really refreshing, although we forgot to customize the added sugar so it was on the sweeter side. Given the long order queue, it took over 10 minutes for us to get the order. The packaging was Instagram-worthy, making HeyTea very popular on social media channels!
Good Me (古茗)🥛
Established in 2010, GuMing is a Chinese tea retail chain that combines China's tea culture with fresh seasonal fruit. It is one of the largest chains in China, with over 8,000 stores. Products are priced from CN¥8-18 ($1.10-$2.50). Some of the top sellers include Soy Milk Tea and Taro Pure Milk Tea.
Number of Stores: 8000+
Estimated Revenue: $2B (GMV)
Guming has raised capital from funds like Sequoia, Coatue and is planning an IPO, just like several other milk tea brands in China.
Naixue (奈雪的茶) 🍇🍵
Started in 2015, Naixue is a modern teahouse chain serving freshly made tea drinks with fruits. Formerly known as Nayuki, the company rebranded to Naixue as Japanese branding lost appeal in China. Naixue is popular for its grab-and-go and dine-in stores, as well as its fresh bakery.
Naixue's tea drinks include fresh fruit teas, milk teas, and pure teas, along with fresh baked goods to complement the tea drink.
Number of Stores: 1360+
Valuation: $850M (Listed)
The pricing of Naixue products range between CN¥10-25 ($1.4-$3.4) due to intense competition from brands like Hey Tea. The first time I tried Naixue (Nayuki) was in 2018 and I really liked the strawberry tea that I became a regular customer during my time in Beijing. If you are in China, highly recommend the strawberry tea.
Naixue recently announced the launch of Naixue Tea Garden, a premium teahouse experience. The pricing will also be premium, reflecting the experiential nature of the offering.
Some insights which would be relevant for similar businesses in India and SEA, as we see the consumption boom happening.
China's well-developed roads and infrastructure support a grab-and-go culture, which enables beverage companies to operate grab-and-go chains. Customers are accustomed to purchasing drinks and walking while drinking, which is convenient. This also helps to reduce the cost of the product, as the capex and opex per store are lower, and the savings can be passed on to the customer.
The above-mentioned brands have 60,000 to 70,000 stores in China, and we're not even counting brands with a few hundred stores. To scale to this level and maintain consistency, brands must standardize production centrally and at the store level, so that customers have the same experience regardless of staff skill level.
Companies cannot open thousands of stores with equity capital alone, so franchise and franchise investor models are essential. Standardization is key to scaling franchise businesses while maintaining quality. Since the business also relies on the franchise partner's abilities, it is crucial to select the right partners who are committed to active growth and have industry experience
The Chinese domestic market has become extremely competitive, leading to a price war, as evidenced by the price ranges. It is difficult to differentiate on taste and build unique IP around the product. There is also stiff competition from beverage brands outside the direct category, such as Luckin, which competes with Chagee and vice versa. To sustain, brands need to constantly innovate in product and marketing. Additionally, local brands are diversifying by opening stores in SEA.
If you are keen to exchange learnings in F&B or QSR, drop me a line: firstname.lastname@example.org. Look forward to connecting!