Starbucks To Regain its Mojo in China with Eight Tea Drinks?
COVID-19 and China
Starbucks' Shenzhen Coastal Store. PHOTO: Credit to Starbucks' China website

Starbucks will launch eight tea drinks that use organic ingredients, a similar tactic used by Chinese start-up, HeyTea, according to 36Kr. Ironically, HeyTea recently expanded into the coffee market.

Starbucks had a rough last quarter in 2018. In America, its operating margin decreased from 24.4% to 21.5%. Its China market suffered even more as its operating margin fell from 26.6% to 19.0%. However, it made a comeback in Q4: global comp store sales increased 3% in the United States and China’s comp store sales increased 1%, improving from its -2% reported in Q3.

According to Stock-Analysis, Starbucks’ gross profit margin was 58.84% at the end of Sept 2018. While HeyTea is not a publicly listed company, its gross profit margin is believed to be under 50%.

HeyTea’s prices are also significantly lower than Starbucks, ranging from CNY 25-50. It’s also reported that each shop sells approximately 1,000 to 2,000 daily cups which brings its monthly revenue to more than CNY 1 million.

Tiantu Capital’s (天图投资) investment partner, PAN Pan (潘攀) believed that a start-up in the tea sector is likely to become the next Starbucks in an interview with the media.

In addition, as regional differences and attitudes in taste become increasingly prominent in China, regional companies “are likely to dominate locally,” according to McKinsey’s report on predicting China’s 2020 consumer. Jiguang’s research also shows how a beverage start-up is likely to monopolize traffic in the local market.

While it isn’t the first time Starbucks ventured into the tea market, they are arguably branding themselves to appeal to China’s young consumer market as their consumption power increases. According to the 2019 China Beverage Industry Report issued by the US Mission Review, there were 410,000 tea stores nationwide, an 74% YOY increase. Tea’s net profit is also as high as 60%.

To combat Starbucks’ workspace atmosphere, HeyTea introduced a tea room to transform traditional viewpoints of tea. However, while Starbucks creates a business atmosphere, HeyTea aims to create a stylish and trendy space likely to cater to students and white-collared workers.

Starbucks’ psychological position as a high-end coffee brand while HeyTea is naturally known for its innovative and seasonal teas. As HeyTea is also priced significantly lower than Starbucks, consumers may flock toward whichever is more convenient due to Chinese consumers placing more importance on quality products and are willing to pay a premium. As for profitability, it may also depend on which company is more efficient at saving costs to reduce their losses as much as possible.

As Starbucks expands its product range, it may try to shift its product focus to teas in China as the market is growing faster than its demand for coffee. Additionally, whether Starbucks’ serious tea venture will impact China’s tea market may strongly depend upon its product innovation.

Other notable Chinese tea start-ups include Nayuki and Lele Tea (乐乐茶).

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