Nayuki Brews Comeback With Slimmed-Down Shops, Automation

Premium tea chain sank into the red in second half of last year, but is hoping to turn things around with its new chain of smaller-format stores

Key takeaways:

• Nayuki reported a $22.9 million adjusted loss last year, reversing a profitable 2020, hit by stiff competition and pandemic-related disruptions
• The company announced price cuts in mid-March in a brewing price war sparked by larger archrival Heytea

By Fai Pui

The weather is warming up, which means cravings for icy drinks are just around the corner. But the coming high season for premium tea sellers isn’t cheering the country’s major brands, which have been busy slashing prices these days. The cheapest drink being served by Nayuki Holdings Ltd. (2150.HK) now costs just 9 yuan ($1.40), and its biggest competitor Heytea has said that it will not unveil any new drinks priced over 29 yuan. Why do the top two brands, which up until now have outpriced most of their peers, suddenly feel a need to slash prices? Nayuki’s latest financials might offer some clues.

The company’s latest report shows it added a net 326 stores last year, helping to boost its revenue by 40.5% to 4.3 billion yuan. But its loss also soared more than twentyfold to 4.5 billion yuan. Much of that was due to a 4.33 billion yuan loss from fair-value depreciation of its convertible and redeemable preferred shares. But even after discounting for that, it still reported an adjusted loss of 145 million yuan ($22.9 million), reversing its adjusted 166 million yuan profit in 2020.

Subtracting out its 48.2 million yuan in adjusted profit in the first half of last year shows Nayuki’s loss in the latter half was nearly 200 million yuan ($31.5 million), in a worrisome trend for the company. Its stock rose by 3.2% after the report was released last Tuesday, but gave back the gains the next day. At its current levels the stock is hovering near all-time lows since its IPO last June, indicating investors are worried that China’s recent premium tea bubble could be close to bursting.

Like many companies from the hospitality industry, Chinese premium tea chains were hit hard by the pandemic last year. At the same time, consumer sentiment towards the group was also changing, Nayuki Chairman Zhao Lin revealed in his company’s latest results. He said that starting in the latter half of last year the company sensed that consumers were becoming less generous and more cautious with their spending on travel and other consumption. As that happened, the company began to worry after the larger Heytea lowered its prices, feeling it had to follow suit or risk losing market share.

Zhao got the idea for Nayuki from his wife and co-founder Peng Xin, who dreamed of running a tea house and treating customers to lazy afternoons with hot drinks and fresh pastries. The couple opened their first store in 2015. Stores in their first few years were around 180 to 350 square meters (1,900 to 3,800 square feet), providing ample area to prepare freshly brewed tea and for on-site baking. But they had to price their goods high due to expensive rents at some of the most coveted spots in shopping malls. For a time, they were selling the most expensive teas in China.

The company rapidly expanded its footprint across China over the years, even as the competition was also intensifying. That ultimately put the company in hot water. Take the major city of Shenzhen, for example, where its average single-store sales fell steadily from 26,800 in 2018 to 21,600 yuan in 2020, before rebounding somewhat to 24,100 yuan last year. In the central China city of Wuhan its average single-store sales plummeted from 35,500 yuan in 2018 to just 19,800 last year. As same-store sales fell, growing competition caused the company’s operating margin to fall from 18.9% in 2018 to 12.2% in 2020, before rebounding a bit last year to 14.5%.

Going downmarket

With the competition growing, the couple realized they needed to not only bring in more revenue through new store openings, but also trim costs. They hope that combination will improve profit margins and take them back into the black this year.

The company reduced the count of its standard stores to 446 last year from 485. But it did the exact opposite for its new smaller-format Nayuki PRO stores, whose count jumped from just six to 371 last year, most of those opened in the latter half of the year. Average investment in those smaller stores, mostly in residential compounds and office buildings, was just 1 million yuan, with each needing around just 10 employees. Drinks are still prepared inside the stores, but only pre-made pastries are sold instead of freshly baked ones. Such moves have helped to bring down costs compared with standard stores, while also bringing up revenues.

Nayuki is also trying to lower labor costs by investing in automated tea-making equipment. The company said such equipment was already piloted in some stores late last year and would be operational in all its stores across China by the end of this year’s third quarter.

The reality is that after several years of breakneck growth, China’s premium tea market is cooling markedly. According to the an industry report on the development of Chinese food and beverage brands in 2021, the country’s premium tea market was growing at 26.1% two years ago. But it will slow to an estimated 19% this year, and is expected to further lose steam to grow just 10% to 15% in the next two to three years. In that kind of environment, companies have had little choice but to cut prices to keep customers.

Around 60% of Heytea’s drinks are priced between 15 yuan and 25 yuan, and it has promised not to raise prices on its existing drinks. Nayuki has followed suit by launching a series of drinks between 9 yuan and 19 yuan, with an added promise to introduce new drinks priced below 20 yuan every month. Another leading premium tea chain Lelecha has also brought its prices below 20 yuan.

The cuts by the three priciest brands are spreading down the food chain, making life rough for second-tier brands like Gumicha, CoCo Tea, Chibaidao and Sexy Tea, which price their teas between 10 yuan and 25 yuan. That group was previously raising prices driven by rising costs. But with the giants now slashing prices, the market expects them to be further squeezed, threatening their development and even their survival.

Nayuki has lost 75% of its market value from its IPO price of HK$19.80 at the end of last June, closing at HK$4.90 on March 31. Its latest reported price-to-sales (P/S) ratio was 1.5 times, lower than the 2.1 times for Xiangpiaopiao (603711.SH), another local milk tea brand. U.S. coffee giant Starbucks (SBUX.US), which counts China as its second-largest market, had an even higher P/S ratio of 3.6 times.

Nayuki’s recent financials have added further fuel to investors’ concerns, but could the company turn things around with its leaner, lower-cost stores and automation technologies? We’ll just have to sit back and sip our tea to wait and see what it all boils down to.

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