The married couples Peng Xin and Zhao Lin behind the Chinese bubble milk tea chain Nayuki went public in Hong Kong in June to great fanfare. However, the startup known for making cheesy milk tea appears to have lost its appeal, causing Peng and Zhao to withdraw from the ranks of the world’s billionaires in just two months.
The couple each own 28% of the company and now each has a fortune of $ 624 million. They joined the Three Comma Club in June when Shenzhen-based Nayuki raised HK $ 5.09 billion (US $ 656 million) by selling 257.3 million shares at the highest price of HK $ 19.8 per share.
At the time, the event was known as the world’s first milk tea company listing, and the retail portion of the IPO was oversubscribed 432 times. But Nayuki has nearly halved since then because it faces problems ranging from food security issues to uncertain earnings prospects.
The company was subpoenaed by Guangzhou regulators and suspended the operation of two stores in Beijing in early August. Prior to this, an official media journalist did undercover work and then publicly revealed hygiene issues, including the discovery of cockroaches and the use of rotten fruit. To make you. The company stated in a recent stock exchange document that it has not been fined or sanctioned and that it will take measures including more frequent disinfection and strengthening of its operating system in the store to better track the use of raw materials. But the government-run People’s Daily called on popular milk tea companies to do more.
“Marketing can help you become popular in a limited time,” the newspaper wrote in a recent editorial. “But only by investing more energy and resources on food safety and quality can we win the favor of consumers in the long term.”
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A Nayuki said the company has no other comment. Even before the official media reported, Nayki’s stock price had been in free fall. Brock Silvers, the chief investment officer of Hong Kong-based Kaiyuan Capital, said that although over-regulation may pass, the company must show that it can eventually make a profit.
“Nayuki’s operating costs are too high,” he said. “The main challenge for the company is that it has not yet communicated a convincing profit path, and its share price has been affected even before the recent regulatory concerns.”
Nayuki operated nearly 500 stores in 66 cities in China last year. Sales of tea-based desserts and beverages valued at US$473 million, an increase of 22% over 2019. According to its prospectus, the net loss has increased significantly from US $ 6.2 million a year ago to US $ 32 million due to store closures caused by Covid19 and changes in the fair value of warrants, home loans and convertible notes. Prospectus
shows that access to a supply of high-quality fresh fruit and tea is a barrier to profit growth, accounting for nearly 40% of last year’s revenue. Nayuki’s best-selling product is the $ 4 Supreme Cheese Grape Tea, a bright purple blend that combines premium oolong tea with fresh grapes and topped with whipped cream. Jason Yu, general manager of Shanghai consultancy Kantar (Kantar) China,
said managing supply can be challenging. “Tea shops are more difficult to operate than coffee chains,” he said. “Blended tea is more complicated than making a cup of coffee, and there are strict requirements for storing fresh fruit.” In an interview with Forbes Asia in June
, the 33-year-old Peng said he had not seen a drop in the raw material. costs. He said he intends to reduce personnel costs by updating management software and introducing more automation to the tea-making process (for example, allowing robots to wash strawberries or prepare ingredients for cheese). Her husband Zhao, 42, said that a new type of store called Nayuki Pro also helps increase profitability.
A typical Nayuki tea house has an average area of between 180 and 350 square meters, and has an on-site bakery offering freshly baked bread or pastries, while specialty shops range from 80 to 200 square meters. He eliminated the bakery and instead bought pre-made bread from the company’s central kitchen. Each Nayuki Pro store requires an average investment of US$193,000, which is more than 30% less than the flagship store’s US$286,000.
Approximately 70% of the 650 new stores planned to open this year and next year will be in Pro mode. Zhao believes that this is critical to profitability because they can operate at a lower cost while serving a larger customer base. “Our profitability will gradually improve,” he said in an interview in June. However, this poses another challenge for the couple who met at dinner in 2013. The Chinese milk tea market is highly competitive.
From Lele tea in Shanghai to Hey tea in Shenzhen, start-up companies combine traditional tea with new ingredients such as cheese foam, fresh fruit or tiramis-flavored cream to create drinks for the rapidly changing people. The taste of a generation. According to CIC data cited in the prospectus, Nayuki currently holds 18.9% of the market. According to estimates by Shanghai-based China Insights Consultancy, by 2025, sales in this market will quadruple to $ 9.6 billion, the second only 27.7% of anonymous figures. competitors.
“People just switch between different brands,” said Yu Wen, a research analyst at Mintel Consulting in Shanghai. “Businesses must consider how to make consumers better understand their products in this saturated market.”
The answer lies in opening more stores, Peng said. He mentioned the presence of Starbucks in China, which has 5,100 coffee shops in 200 cities, and said consumers like to go first because it is convenient and easy to find. “In some Chinese cities, we only have two or three stores,” he said. “If we did, consumers will not be able to understand us better and remain loyal to the brand.