Frost & Sullivan releases the 'White Paper on the New Tea Beverage Supply Chain in China, 2022'

Sipping a cup of freshly brewed tea has become one of the most natural self-indulgent pleasures for people in their leisure time.

Today, young people living in Guangzhou and Shenzhen, as well as those in Changdu, Tibet, can all enjoy a moment of pleasure by ordering a cup of the same-flavored matcha. Being accessible and trendy is key for new tea drinks to break through geographical and dietary barriers and spread across the country. According to statistics, the number of new tea drink stores in China has now exceeded 500,000, scattered across first- and second-tier cities and the lower-income markets.

But a decade ago, when we talked about milk tea, it was still difficult to reach such a consensus. At that time, milk teas represented by pearl milk tea were mostly brewed with crushed tea powder and condensed milk, sold at dimly lit franchise stores, and associated with trendy consumer concepts.

The changes began when someone added fresh milk and fresh fruits to the tea base extracted from high-quality tea leaves. These new tea beverages precisely catered to the demands of consumers who are undergoing consumption upgrades and have a growing awareness of health. Since then, the entire tea beverage industry has begun an evolutionary upgrade, with the emergence of leading brands that have cultivated young consumers' habits of consuming tea, thereby attracting capital attention and developing into a trendy business.

When we look at the industries behind tea through a teacup, we see a broader picture.

Looking at today's new tea beverage industry chain, you will find that among its upstream participants, there are both the primary industries represented by agricultural and sideline products such as tea leaves, fruits, and dairy products, as well as the secondary industries represented by manufacturing such as equipment supply and packaging. At the same time, as a typical representative of modern service industries and digital economy, new-style tea beverages also provide a large number of job opportunities for practitioners in the tertiary industries such as bartenders and food delivery workers. Currently, the two most popular ready-to-drink beverages in China are new tea beverages and coffee. Among them, the scale of new tea beverages is broader—tea beverage stores account for more than 60% of all domestic stores. They are more widespread in lower-income markets, can cover a wider variety of consumer groups, and bring employment opportunities to more cities.

According to Frost & Sullivan statistics, in the upstream of the industrial chain, new tea drinks are expected to directly drive employment for over 1.6 million people and indirectly support employment for more than 80 million people. In the midstream, they can provide employment opportunities exceeding 1.3 million for headquarters and regional office staff of new tea drink brands, as well as store employees. In the downstream of the industrial chain, the distribution needs of new tea drinks indirectly drive employment for over 7 million people.

"According to our calculations, the consumer market size of new tea drinks in China exceeded 100 billion yuan for the first time in 2021, reaching nearly 110 billion yuan. At the same time, we expect that by 2025, the scale of this industry will double again," said Jia Pang, Managing Director of Frost & Sullivan.

The rapid development of the entire industry will also continuously feed back into the upstream. For example, the demand for agricultural products has expanded. New tea drink stores are widely distributed, and the demand for fruits, tea, dairy products, and other agricultural products is constantly increasing. Taking fruits as an example, according to incomplete statistics, in 2020, the total consumption of fruits in China's new tea drink industry exceeded 1 million tons.

At the same time, the high demands of new tea drink brands for product launch rates and quality have also influenced the planting methods of agricultural products. The new tea drink industry has promoted the industrialization and standardization of agriculture by strengthening collaboration with upstream enterprises.

In 2021, the country formulated strategic goals for common prosperity. To some extent, the currently burgeoning new tea beverage industry, as a representative of the new economy that integrates traditional agriculture, manufacturing, and modern services, will undoubtedly directly or indirectly promote rural revitalization towards common prosperity.

When we joyfully order ourselves a cup of milk tea, tens of millions of workers along the entire industrial chain come into operation because of this small demand.

When we talk about new tea drinks, we often first think of popular brands and hit products. In the early stages of industry development, these eye-catching topics brought explosive growth to new tea drinks. However, from the perspective of the development laws of the food and beverage catering industry, whether a supply chain and quality control can keep up during a period of rapid growth determines how far the industry can develop in the future.

Hidden food safety risks, short product life cycles, and easy imitation are issues that even leading new tea beverage brands frequently face. Behind these problems is actually a certain issue with quality standards and management systems.

If we view the new tea beverage industry from a long-term perspective, it has undoubtedly entered a stage that requires improvement and enhancement of the supply chain for further development and advancement.

Recently, Frost & Sullivan released its first industry report focusing on the new tea beverage supply chain, titled 'White Paper on China's New Tea Beverage Supply Chain, 2022'. The report analyzes the development patterns, growth trends, and immense future growth potential of various sectors within the Chinese new tea beverage supply chain.

The white paper points out that the current upstream competition landscape in the new tea beverage industry chain is relatively fragmented, which is not conducive to the overall quality control management of new tea beverages. With the closer integration of the upstream and downstream of the new tea beverage industry chain, it will optimize the food and agricultural product supply chains and make up for issues such as unstable and non-standard raw materials. The vigorous development of the industry will be beneficial for standardizing the quality and standards of the food supply chain.

A new tea drink can instantly bring a pleasant experience, but to achieve this pleasure, it is the result of the collective efforts of multiple supply links. To help the industry and investment community better understand the current state of the supply chain for different segments of the new tea drink industry, Frost & Sullivan's 'White Paper on the Supply Chain of New Tea Drinks in China, 2022' starts from the key elements of making a cup of new tea drink and defines the new tea drink supply chain for the first time into eight categories: packaging materials, water, sugar, fruit, tea, taste granules, dairy products, and equipment, with in-depth discussions presented separately in the white paper.

The average cost of tea in a cup of new tea drinks accounts for 20% to 26% of the total raw materials, which is a relatively high proportion.

As one of the most important raw materials for new tea beverages, the tea supply chain market has a low concentration and processing characteristics near tea-producing areas. Most suppliers are OEM+.ODMParallelism. In recent years, we have seen many leading brands actively participating in the construction of the upstream tea supply chain through self-establishment and cooperation to ensure stable supply and custom unique flavors. Brands' layout upstream of the supply chain is not only conducive to standardizing the quality and standards of the industrial chain but also brings new vitality to the industry. The popularity of new flavor teas such as peach oolong and jasmine green tea among young people in recent years is precisely due to this influence.

The white paper mentions that maintaining stable supply and erecting unique barriers for products are two major issues that tea supply enterprises urgently need to solve. For those enterprises hoping to go further, they also need to operate professional teams to meet customized customer needs, using a variety of products to satisfy consumers' pursuit of health, convenience, and a diverse product experience.

Some mainstream suppliers have made impressive innovations in their layouts. For instance, they have positioned themselves in high-quality origins, obtained quality system certifications, and established mature production lines and standardized operating models to ensure stable quality and meet the brand's demand for standardized product taste; in terms of craftsmanship, retail outlets prefer instant cold brew products to cater to the fast-paced lifestyle of young people. In addition to collaborating with new tea drink brands, some suppliers bypass intermediaries by leveraging e-commerce platforms and live streaming trends to attract consumers and capture new growth points.

Adding fruit to tea enriches the taste and enhances quality, which is an important distinction between new tea drinks and the previous generation of milk tea. According to Frost & Sullivan statistics, in new tea drink products, the cost of fruits accounts for 20% to 25% of the total raw material costs. Consumers' health-conscious needs have made fruit tea very popular, and the use of fresher and healthier raw materials such as fresh fruits, frozen fruits, and NFC may continue to increase.

However, for new tea beverage companies, many fruits pose greater challenges. It is reported that currently, only a few leading brands in the new tea beverage industry have established stable fresh fruit supply chains, which requires substantial financial support.

The reasons for this phenomenon need to be traced back to the fruit industry itself. On one hand, fruits are prone to rotting, have a short procurement radius, and are greatly affected by seasons. On the other hand, the variety of fruits is more diverse, with a lower market concentration and scattered enterprises. To ensure an annual supply of high-quality fruits, some brands have begun to choose to cooperate with local orchards or build their own orchards.

The white paper believes that the extension of brand owners to the upstream of the fruit product industry chain is an inevitable path towards standardization and scaling. How to ensure the stable supply and storage of fresh fruits has become the key to the development of this supply chain system.

Passion fruit, lemon, mango, grape, strawberry - these are the five most commonly consumed fruits by current consumers. However, last year's surge in yellow-skinned oranges and oil tangerines also made the industry realize that the rapid emergence of new tea drinks has continuously raised higher demands for product innovation by fruit brands. Breaking through the niche market with small-batch fruits has become a new trend for creating hit products in the new tea drink industry. The white paper suggests that fruit companies need to follow industry trends, continuously diversify their supply varieties, and thus gain new growth points.

Milk tea, milk foam, and cream are the key factors in consumers' evaluation of the taste profile of a new tea drink. Typically, dairy products account for 17% to 21% of the cost of a new tea drink, contributing the largest portion of raw material costs along with the tea.

Dairy products are a category with clear giants and a high concentration of market supply chains. High school students have different preferences for brand choices of affordable drinks.

For new tea drinks, the mature operational system of dairy products has helped stabilize supply and ensure quality. However, on the other hand, two factors—transparent pure milk prices and increased costs due to cold chain transportation—are posing certain challenges to the profit margins of supply enterprises. Therefore, establishing a nationwide cold chain transportation network to reduce transportation costs is the key to success for supply enterprises.

Consumers have shown a clear trend towards healthier dairy preferences for new tea drinks. The top three most popular choices are pure cow's milk, fermented milk, and plant-based milk, with the preference rate for pure cow's milk reaching 72%. However, under this apparent demand, supply enterprises clearly need to offer more natural, low-fat options for consumers. With consumers' diverse taste needs, the market also hopes that dairy products will have richer and more nuanced flavors such as mellow, silky, and dense ones, enriching the taste profile of a cup of tea.

Due to the high requirements for cold chain logistics in dairy products, sales of milk-containing beverages began to fluctuate after the COVID-19 pandemic. New tea beverage brands have taken advantage of this situation to develop more ready-made drinks without milk to balance risks and have somewhat affected the demand for dairy products.

However, the rapid expansion and penetration of new tea drink brands into various stores can somewhat compensate for this issue. The premise is whether the brands can keep up with the pace and initiate a supply chain distribution strategy at the grassroots level.

Sugar is an essential key factor in enhancing the flavor of a new tea drink. The types of sugar used in new tea drinks are diverse. Data from the white paper shows that fructose currently accounts for the largest proportion, reaching 46%, followed by sucrose at 22% and rock sugar at 20%. In recent years, low-calorie sugars have only accounted for 6%.

Sugar is a highly industrialized product, and new tea beverage brands usually choose to cooperate with suppliers on a long-term basis or make regular bulk purchases to meet their raw material supply needs, which is relatively stable.

However, as consumers' taste preferences become more diverse and their demand for health continues to rise, sugar manufacturers also need to undergo transformation. This transformation includes shifting from producing a single product to deploying a variety of sugar matrices to meet diverse market demands, as well as developing new products with low sugar and low calories to satisfy new consumption trends.

Frost & Sullivan expects that in the future, the consumption of rock sugar in the new tea beverage industry will increase, and consumers will also be attracted to various forms of sugar such as black sugar. The increasing emphasis on health by consumers will also lead to the emergence and use of low-calorie sugars such as stevia.

The term 'taste granules' refers to the small additives commonly recognized by consumers as being added to tea beverages. The most representative examples are pearls in milk tea and crispy waves in fruit tea.

In a cup of freshly brewed tea, the cost of taste particles ranges from 11% to 12%, which is not high but can be a key factor in attracting consumers to place orders. Data from the white paper shows that currently, fruit granules, jelly balls, starches, taros, cereal porridge, and nuts are the six types of granules that consumers love to add.

The variety of taste particles is extensive, and a new tea drink shop usually collaborates with multiple suppliers to seek suitable products based on the new product's tone. However, it is also common for suppliers to drive innovation and develop new products based on unique taste particles in reverse order. Currently, the supply of taste particles has formed some scale concentration effects, with suppliers having a strong Taiwanese background and factories mostly located in Jiangsu. They all possess the capability to provide customers with a variety of cross-category taste particle products.

For the granule supply industry, the biggest pain point from the consumer side is the taste loss and food safety issues caused by improper storage of granules after opening.

Due to the multi-pair cooperation model adopted by most tea drink brands and taste granule suppliers in the new tea beverage industry, as well as the need for suppliers to serve different customers separately, they must also organize a large and powerful R&D team capable of meeting the customized needs of different customers simultaneously, endowing tea drinks with new value. Driven by the demand for healthy diets, taste granule manufacturers can also focus on more natural, healthy ingredients rich in dietary fiber when developing new products, such as natural ingredients like taro paste and purple rice that are rich in dietary fiber, low-calorie and satiating jelly balls, and nuts rich in amino acids.

Driven by the demand for pleasant consumption, the packaging form of new tea drinks is increasingly becoming a major driving force behind people's consumption. Changes in shape such as round bottoms, bagged products, large barrels, and mini-cups can stimulate consumers' new desire to purchase.

Currently, packaging costs account for 10% to 12% of the price of a new cup of tea. New tea packaging materials include paper, plastic, glass, and other materials, with varying consumer preferences. According to Frost & Sullivan's statistics, cup lid packaging, plastic cups, and biodegradable materials are the types of packaging that consumers generally prefer.

Packaging material supply enterprises are more obviously manufacturing-oriented companies with mature and complete production and supply systems. For this industry, new opportunities and challenges arise in the areas of policy and culture. As environmental protection policies become increasingly strict, higher requirements are placed on the packaging material production industry. Packaging material manufacturers need to use more environmentally friendly materials while controlling costs and ensuring quality, achieving green sustainability. Therefore, how to meet the needs of the new tea drink industry while ensuring product green environmental protection has become a top priority for packaging material manufacturers. Moreover, as various new tea drink brands continuously inject cultural connotations into their products, how to timely refresh and innovate new tea drink packaging to attract consumers' attention and achieve 'breaking the circle' in tea drinks will also be a major challenge for packaging suppliers.

As one of the important raw materials for new tea drinks, water safety is of utmost importance. In recent years, most of the food safety issues with new tea drink brands have been related to water quality.

Currently, the common practice in the new tea drink industry is to meet water quality requirements by using various types of water purifiers. In addition to water, consumers' demand for ice continues to be segmented, which has also led to the diversification and functional development of ice machines. As a result, the expansion of new tea drinks has driven rapid growth in the water equipment and ice machine industries. It is estimated that from 2021 to 2024, the market for new tea drink water purifiers will continue to grow at an annual compound rate of about 16%.

The white paper points out that the rapid development of water treatment technology has provided cost reduction and efficiency improvement opportunities for water equipment products. High-quality product quality and after-sales service management are fundamental reasons why customers favor these products in the long term.

The operation of new tea drink stores involves a wide variety of equipment, including ice machines, refrigerators, workbenches, etc. Equipment accounts for about one-third of the startup costs of new tea drink stores. The operational maintenance and replacement of equipment are also significant expenses that cannot be underestimated by new tea drink stores, as they directly determine operational efficiency.

The cost of equipment used by affordable brands in high schools varies greatly. The equipment cost for high-end brand stores is nearly 500,000 yuan, for mid-range brands it is over 800,000 yuan, and for affordable brands it is less than 200,000 yuan. As durable goods, the market scale is greatly affected by industry growth rates. The white paper finds that due to the near saturation of the mid-range market for new tea drinks, the growth rate of store numbers has slowed down. Coupled with the pandemic which has increased the closure rate of mid-range and affordable brands, the growth of the new tea drink equipment market has also slowed down.

New tea drink brands prefer imported equipment, commonly adopting the purchase model where agents purchase and then sell to consumers. However, due to the diverse needs for equipment in new tea shops, most imported equipment is not custom-made for new tea drinks. It has a single function, requires high manual operation skills, and contains many unstable factors during the beverage preparation process, leading to low production efficiency and high labor costs. In addition, the quality of after-sales service provided by agents is inferior to that of original manufacturers, which also becomes a major drag on the operational efficiency of new tea shops.

The white paper points out that the inevitable trend for new tea drink equipment will be towards integrated functionality and intelligence. Terminal stores' demands for operational management, labor and material cost control, cup stability, product pairing analysis, etc., will force equipment suppliers to digitally and intelligently upgrade their products to improve store operational efficiency and stability. The standardization of new tea drink brand chain stores is also forcing equipment system upgrades, making it possible for stores of the same brand to share data. At the same time, as brand stores pay more attention to space marketing, developing a full range of customized product lines may become a new growth point for suppliers.

New tea drinks are constantly introducing innovative flavors to drive consumer purchases, with fruits and taste particles being the main mediums for product innovation. Jia Pang stated that Frost & Sullivan found in their research that 70% of consumers choose fruit-flavored new teas when purchasing them, while 100% of consumers add taste particles to their teas. Therefore, it is believed that these two areas will become the fastest-growing segments in the new tea drink market.

In fact, the future opportunities in these two major areas are not limited to just one beverage. Around 2020, pearl milk tea became popular in Japan, and subsequently we saw pearls as a standalone IP incorporated into more creative desserts. In China's consumer market, the emergence of foods and beverages such as Popo ice cream, yogurt, and sea salt milk cap cheese hot pot made with taste granules has also opened up new market spaces for taste granules.

"There should be very good capital market opportunities in the segment of taste granules, as it has a high connection with the new tea beverage industry and can quickly reap industry dividends. Secondly, since it can enjoy the benefits of this industry well, its growth rate and financial performance are worthy of attention from an investment perspective," said Jia Pang.

Since 2018, the booming new tea beverage market has become a favorite in the capital market. In the first half of the new tea beverage industry's development, with the support of capital, the sector seems to have reached a stage where it is well-developed.

However, Jia Pang believes that the new tea beverage industry is far from reaching a solidified stage. First, the industry has just begun to see milestone events such as IPOs, and in mature consumer industries, more companies should be able to go public. Second, capital markets' attention to this industry remains focused on end brands and stores, with very few large-scale capital market moves seen by supply-side companies in the industry. Many hidden champions within the industry also have the potential to create more stories.

Starting from the end of 2021, some leading brands began to announce price cuts. Among the reasons disclosed externally, cost compression due to supply chain integration and transformation is one of the common main reasons. Leading brands have just completed the basic construction of their supply chains, and for the entire industry, the evolution process of the supply chain has actually just begun.

Especially in terms of digitization. Looking at consumption scenarios such as online ordering and member interactions, new tea drinks may already be sufficiently digitalized. However, looking at the entire industry, there is still significant potential for overall digital management in the mid- to back-end supply chain, warehousing logistics, and quality control management. Jia Pang stated that the current level of digitization in procurement decision-making for new tea drinks is still relatively low, while this digital model has matured in other large-scale high-end manufacturing industries. Building these digital systems requires substantial capital investment and the power of capital to inject new stories into new tea drinks.