Luckin Coffee’s fraud scandal brought back onlookers’ attention to the Chinese coffee chain that grew at a dazzling speed in recent years. The company was regarded as a challenger for Starbucks’ market share and was even often referred to as the “Starbucks of China.”
This narrative seems very logical. Luckin’s sleek design, vast number of stores and similar product lines all allude to Starbucks. However, anyone who has lived in China long enough would know that Luckin and Starbucks are incomparable. With its highly subsidized cheap products and the pick-up station catering model, Luckin mainly attracted price-sensitive customers who lacked brand loyalty thus putting it in the same league with convenience stores, rather than real coffee shops.
Indeed, Starbucks’ success has still non been replicated in China. However, there are many players trying to reimagine Starbucks’ business model and fit it to Chinese realities. So, if Luckin is not the “Starbucks of China”, the question arises as to who is or has the potential to be? Given coffee is still far from a universally popular product in China, the rising upscale milk tea industry may be the closest answer.
When it comes to tea chains, you might think of the ubiquitous Taiwan-style bubble tea shops with poor packaging and low prices. However, China’s milk tea market has grown extremely sophisticated and competitive in recent years.
According to a report published by 36Kr and China’s leading upscale tea brand Nayuki’s Tea, China’s tea market was expected to exceed 400 billion yuan at the end of 2019, twice the size of the Chinese coffee market. Though most of the market is still occupied by traditional lower-end milk tea brands, upscale tea industry, that hinges on polished brands, innovative high-quality drinks and cozy spaces has grown significantly in the past three years. According to the report, people born in the 1990s have become the main consumers of upscale tea drinks, accounting for 50% of the total number of consumers.
The Chinese milk tea market is ushering in a new round of rapid growth, and the high-end innovative tea shops are getting more mainstream than ever. The upscale tea industry in China is comparable to Starbucks in three aspects: the operations model, the price level, and the social function of their offline stores. Learning from Starbucks’ experience but giving it a more localized spin, tea is becoming the new coffee in China.
No discussion about upscale tea and the lifestyle of China’s young generation is complete without HeyTea. Arguably one of the most innovative brands both in products and digital marketing, HeyTea one after another creates social media crazes. The recent collaboration between HeyTea and Rihanna’s cosmetics brand Fenty Beauty was a clear demonstration of the tea chain’s global ambitions.
Before becoming the HeyTea it is today, the company was a local tea chain based in south China called Royal Tea. Since the trademark could not be registered, the company changed its name to HeyTea and started expanding to China’s first-tier cities. According to HeyTea, the company opened 390 stores in 43 cities in 2019, compared with 163 in 2018. At the same time, the HeyTea app gained 15.82 million users throughout the year, with the total number of users reaching 21.5 million.
HeyTea is also known as the creator of cheese tea, a creative combination of tea, seasonal fruit, and cream cheese that became hugely popular across the country. In addition to fruit teas, milk teas, cheese teas and ice cream, HeyTea also constantly introduces seasonal “it” items to attract the public’s attention, such a a salty egg custard smoothie, Chinese tradition inspired soy milk smoothie and black sesame milk tea, as well as drinks that contain alcohol in collaboration with Bailey’s.
Nayuki’s tea had more than 420 offline stores by the end of 2019. Since 2017, the chain completed three rounds of financing, all of which were from Tiantu capital. After round A+, its valuation reached about 6 billion yuan.
Being HeyTea’s biggest rival, its product line is quite similar to its competitor’s. The only major difference is probably that Nayuki’s Tea looks more like a bakery than just a tea shop. Inventor of the “euro-style bakery with tea” model, Nayuki’s Tea sells fine-looking pastry with fruit, cheese or taro fillings.
In terms of store decoration, compared with the minimalist style of HeyTea, Nayuki’s tea has a softer and more leisurely style, making teir spaces a better fit for casual business conversations and friend meetups.
Although not as influential on social media as HeyTea, Nayuki’s Tea is also actively participating in growing e-commerce trends. At Luo Yonghao’s (Chinese internet celebrity and founder of Smartisan) first ever TikTok e-commerce live-streaming session Nayuki’s Tea was the first beverage brand to be introduced. 45,000 Nayuki’s Tea gift cards worth 100 yuan each sold out in just one second. By midnight that day, Nayuki’s Tea had sold nearly 100,000 items, with sales reaching about 9 million yuan. On April 1, Nayuki’s Tea’s Tmall flagship store had 1.31 million visitors and over 7.7 million page views.
LeLeCha, which literally stands for “Happy Tea”, is an emerging competitor that is similar bot to HeyTea and Nayuki’s in its business model. In April 2019, LeLeCha announced the completion of a 200 million yuan Pre-A round of financing led by Vertex Holdings, Jiaxing Drop Asset, Pusi Capital, Z&H Investment, Hina Group and Ruchuan Capital.
Just by looking at the modern design and bright colors of its stores, you might conclude that LeLeCha is merely a HeyTea copycat. However, if you take a closer look, you will see the similarity to Nayuki’s Tea at its giant bread counter. LeLeCha definitely learned from Nayuki’s Tea’s “Euro-style bakery +Tea” model and brought it to another level. LeLeCha’s pastries are more in line with the demands of young people than HeyTea’s or Nayuki’s Tea’s. With their exaggerated shapes and bright colors, LeLeCha’s bakery cannot be more Instagram or Weibo-ready.
At the same time, LeLeCha products are on average four to five yuan cheaper than those of HeyTea, giving them a considerable advantage.
After securing a 500 million yuan investment from Liu Qiangdong, founder of JD.com, InWe quickly became a popular brand in China’s new-style tea game. Miu Qin, the founder of InWe was the youngest Chinese VP of McDonald’s before starting the company, and has rich experience in offline store management.
The biggest feature of InWe’s offline stores is their large spaces. The stores are not only well lit, but have good wifi and charging plugs everywhere, which make them very suitable for studying and working.
Teasure was founded by Liu Fang, Starbucks’ ex-president in central China. The company has raised tens of millions of yuan in a Pre-A round of funding from Fortune VC investment.
Founded in 2015 with a clear vision to become “China’s Starbucks”, Teasure’s first store was completed in early 2017 after two years of preparation. Teasure now has 5 stores, 4 of which are in Beijing and 1 in Xi’an. The storefront of Teasure is designed by the Japanese master Kenya Hara.
Compared with other brands, Teasure chose to stay on the more traditional side of tea brewing. Learning from the standardized operation process of Starbucks, Teasure presents customers with high-quality brewed Chinese tea and delicate tea-inspired desserts.