Nayuki Files IPO: With Only 0.2% Net Profit Margin, Does it Have What it Takes?
After several years of rapid growth, it looks like this will be the year of Chinese new beverage company IPOs. Nayuki went first, filing its Hong Kong IPO on February 11th.
This has been a crazy couple of years for China’s “new tea” industry, with top players such as Hey Tea and Nayuki becoming household names. But do these brands have what it takes to achieve long term growth and profitability?
Let’s take a look.
A Romantic Story behind Nayuki
Nayuki was founded by a couple, Peng Xin (彭心) the wife and husband Zhao Lin (赵林).
After graduating from college, Peng had a job at an IT company and gradually became a brand director. Yet she wasn’t happy. Like many other girls, Peng always had a dream of owning a bakery. Eventually, she quit her job and started finding business partners for her bakery store.
In March, 2013, Peng was connected to Zhao by a common friend. At that time, Zhao had been in the restaurant industry for many years. When they met, Peng began enthusiastically briefing Zhao on her business plan, not knowing that Zhao was, in fact, coming for a blind date.
After only three months, (and with a nearly 10-year age gap) the couple got married and a little while later, in 2015, they launched their first Nayuki store in Shenzhen. In the following month, they opened two other stores. At that time, they didn’t have enough funds for the business and they had to pledge their houses as collateral to the bank to secure a loan.
It turns out that Peng and Zhao made the right decision. Nayuki grew quickly and as of December 2020, it had 500 stores across 70 cities in China. According to Bloomberg, Nayuki was valued at nearly 2 billion dollars in 2020.
While it is currently known for its tea drinks and bakery items, Nayuki is also developing coffee products, aiming to capture some of Starbucks’ market share in China.
Not All Sunshine and Roses
Yet while Nayuki has achieved incredible growth over the past few years, there is some skepticism about its future. Namely that at 0.2%, its net profit margin is far too low. The main reason the net profit margin is so low is that operating costs of its stores remain too high.
What’s more, both the daily sales and average order amounts have been declining. This is partially because as Nayuki opens more stores, there are more stores in a single area therefore foot traffic is split between the stores. But we have to take 2020 numbers with a grain of salt and take into consideration the effects of COVID 19 on offline businesses throughout the first half of 2020.
Nayuki’s Plan for the Future
In an interview with 36Kr, Peng explained that Nayuki’s growth has mainly come from two reasons:
- It created a new consumer group. People who purchase Nayuki teas are not the same people that used to purchase milk tea and other drinks 5 years ago. They upleveled the product and branding so now the main consumer group is white collar workers and business people.
- The new tea industry can be divided into three price points. The middle and high price point markets are growing, while the market for low price point 5-10 RMB teas is declining. No matter whether in 1st tier cities or lower tier cities, consumers increasingly value quality.
Nayuki’s IPO prospectus summarized the brand’s growth strategy into 5 points:
- Consolidate the leading position in existing markets and expand the business scope into new markets
- Further digitize overall operations to improve efficiency
- Strengthen supply chain capabilities
- Increase customer engagement to increase retention and loyalty
- Launch innovative new products and expand product categories and sales channels to unleash the brand potential of Nayuki’s tea
We can see this already happening with its Nayuki Pro shops. Nayuki Pro is a new type of store that Nayuki launched in November last year that has more products categories, including coffee, tea, baked goods, and snacks.
According to Nayuki, unlike previous Nayuki stores, which are mostly located in high-end shopping districts, Nayuki Pro will focus on business districts and residential areas.
Nayuki plans to open about 300-350 Nayuki shops in 2021 and 2022 in first-tier cities and new first-tier cities, of which about 70% will be Nayuki Pro shops.
In some ways this appears to be going against the general industry trend. Other beverage brands are focusing less on creating ‘third places’ and more on getting consumers in and out fast – Hey Tea started opening “Little Hey Tea”, Luckin has self-pickup stores, and even Starbucks is pushing order online and pickup in store.
Nayuki’s Key Competitors
Strongest Competitor: Hey Tea
Nayuki Tea and Hey Tea are often mentioned in the same sentence. They are the first two brands people think of when they think of the new beverage industry. The founder of Hey Tea, Nie Yunchen (聂云宸) is a post-90s. After his graduation in 2010, he opened a mobile store in Guangzhou, but it didn’t go well. In 2012, he opened a milk tea store called Huang Cha (皇茶) and in 2016, Nie officially changed the name to Hey Tea, and got 100M RMB financing.
There are voices saying Hey Tea will file an IPO in Hong Kong before the end of 2021. In fact, Hey Tea received a lot of investments in 2020. It received funds from Hillhouse Capital Group (高瓴资本) and Coatue Management, totalling 16 billion RMB. There are reports saying Hey Tea is planning to do more rounds of investing before filing the IPO.
Chayan Yuese or Sexy Tea (茶颜悦色)
Compared with Nayuki and Hey Tea, Chayan is more low-key. For the past 7 years it has only had stores located in Changsha and it was only in the end of 2020 that it opened its first store in a different city – Wuhan.
This is very different from Nayuki and Hey Tea which have stores all across the country. But by focusing on one city, Chayan Yuese has dominated the market in that one city, and now many tourists say that having a Chayan Yuese drink is a must-do when visiting Changsha.
With this “slow” marketing strategy, we are not sure if the brand will join the IPO battle.
Honey Snow City (蜜雪冰城)
The brand is famous for its ice cream bubble tea. Compared with the other three giants, Honey Snow’s prices are way lower, with the average of 6-9 RMB. It targets the Xiachen market. In 2019, it achieved over 6 billion RMB sales, with 800M retained profits.
Read more:
