Industry Insights | The 'Duet' of Cost Reduction and Efficiency Improvement, IP Collaboration + Tea Culture Reshaping: How Does the New Tea Beverage Market Seek New Growth?

From 1990 to 1995, the Chinese tea market was flooded with street-side shops that filled their beverages with milk powder and water. During this period, the prices of tea products were usually below 10 yuan and there was no concept of brands, but the concept of traditional milk tea products began to quietly sprout.

The main active period of traditional chain tea drinks was from 1996 to 2015. At this time, practitioners began using tea leaves or tea residue to make tea bases, and with the blending of milk powder, a large amount of tea drinks were produced. Chain stores were concentrated in areas between 15 and 20 square meters, and they usually started operating after simple standardized renovations indoors. The product prices in the tea drink market during this stage were typically between 10 and 20 yuan, and the concept of brand chains began to become popular within the industry, with an emphasis on product research and development itself.

2016 was the inaugural year of the new tea drink boom, with industry-leading brands starting to use fresh fruits or fresh milk as natural ingredients for seasoning, and extracting tea base from high-quality tea leaves to make tea drinks. High-end specialty shops emphasizing personalization and modernity began to appear on the market. High-priced tea drinks priced over 20 yuan dominated the industry's development, leading the new tea drink market to be based on high-quality products, centered around brand culture construction, and focusing on the creation of exclusive brand culture and IPs.

In 2017, the market scale of new tea drinks in China was 422 billion yuan, and it has achieved rapid growth in the following years, exceeding a 20% annual growth rate to break through the 1000 billion yuan market scale in 2021. After the negative impact of the pandemic from 2021 to 2022, the market scale slightly increased to 104 billion yuan, but the growth rate is expected to rebound in a V-shape in 2023 and 2024. By then, the market scale of new tea drinks in China will reach 1450 billion yuan and 1740 billion yuan respectively.

Market scale of new tea drinks in China (in billion yuan),2017-2024E

Drawing on the hot elements of the coffee trend, innovative breakthrough points have been explored for new tea beverages.

In March 2021, Luckin Coffee launched coconut latte, which used the refreshing sweetness of coconut milk to counteract the sour and bitter taste of coffee itself. By catering to the long-standing Chinese consumer preference for 'sweet tea drinks', it achieved a turnaround. In response to the trend of 'milk tea-like' coffee beverages, Luckin further introduced a series of products such as thick milk and cheese, all of which have achieved historic sales breakthroughs.

For the already skilled new tea drink industry, which has long utilized various dairy ingredients paired with tea bases, there is also a huge growth potential here. As a result, major brands have begun to draw on coffee's dairy products in their beverage research and development, and have successively launched their own raw coconut series of teas. They have further innovated by pairing upgraded dairy products such as thick milk and cheese. The new tea drink industry has taken this opportunity to continuously expand its product categories.

The focus of current new tea drink formula innovation and upgrading lies in the integration of dairy product upgrades and high-quality tea varieties.

In the dairy sector, the first phase of innovation in new tea drinks has been an upgrade from blending milk powder with other ingredients to full use of pure milk, which also signifies a shift in consumers' demand for healthier tea drinks. The second phase involves cream cheese and fruit tea working together to capture consumers' minds, quickly gaining popularity through a richer and more flavorful taste experience. The current third phase sees new tea drink companies adopting more refined operations in dairy use, with prominent examples being the integration of more delicate dairy products like buffalo milk and ice cream into freshly brewed tea drinks.

New tea drinks have evolved from using milk powder to fresh milk, then to the use of cheese and cream, as well as more diverse dairy products such as ice lattes and buffalo milk. By employing different brewing methods and formulas, they have successfully customized new tea drinks with various tastes.

In the selection of tea bases, it has become a key focus for new tea beverage brands to create product differentiation. Tea Bai Dao launched 'Tanyang Gongfu Tea', featuring an intangible cultural heritage technique passed down for a hundred years combined with the natural freshness and mellow aroma nurtured by the favorable environment of the tea-producing areas at the junction of Zhejiang and Fujian; the well-known hand-made lemon tea brand Wang Ning focuses on 'Shili Fragrance' and 'Camellia', emphasizing the difference in use compared to regular hand-made lemon teas; another specialty tea beverage brand, Ruo Cha, has made a breakthrough by selecting 'Yan tea', 'Old White Tea', and 'Organic Rainforest Tea - Jasmilla' to bring out more enchanting aroma and taste levels; the Guofeng new tea beverage brand originating from Yunnan Province, China's famous tea-producing province, Bawang Cha Ji, has taken the refined operation of original leaf tea bases to the extreme, offering various tea bases under its new tea beverage products including 'Zhengshan Xiangzhong', 'Jasmine Snow Bud', 'Chenxiang Pu'er', 'Dahongpao', ' Tieguanyin', and 'Camellia Oolong'.

From tea powder to traditional black, green, and jasmine teas, the brand has upgraded to offering more refined, high-quality original leaf teas. New tea drink brands are vying to innovate in tea base offerings, bringing consumers refreshing and non-greasy original leaf teas with tea fragrance, providing more nuanced consumer choices and a better drinking experience.

According to incomplete statistics, in 2020, 20 new tea beverage brands introduced a total of 575 new products, and in 2021, they introduced 930 new products, a year-on-year increase of 61.7%. As of the third quarter of 2022, 50 new tea beverage brands have introduced over 1,677 new products.

The surge in the number of new products reflects the anxiety of new tea drink brands about the increasing difficulty in retaining consumers and the internal competition for existing market share amidst slowing industry growth. Against this backdrop, breakthrough applications of various raw materials have become a magic weapon for new tea drink research and development. For example, seasonal fruit introductions such as durian, pomegranate, and persimmon, as well as the widespread use of traditional Chinese ingredients like taro paste, sweet potato, and mung bean, have led to the emergence of 'new ingredient + new technology' blends like 'water chestnut poppy seeds.' New tea drink brands are going all out for product innovation to cater to the rapidly changing needs of consumers.

In the past few years, affected by the pandemic, new tea drink brands have been under double pressure from declining social consumption and rising costs of rent, labor, and raw materials.

At the beginning of 2022, leading high-end tea brands took the initiative to adjust their product prices, attempting to reduce prices through 'cup size reduction + ingredient customization', aiming to capture the cost-effective price range and relieve pressure on performance growth. After exploration, Xicha even dropped the prices of some milk tea and pure tea products to around 10 yuan, aggressively targeting consumers in the mid- to low-end price range.

In contrast, since 2021, several tea brands including Yipian Diao, Coco all sustainable, Yihetang, Cha Bai Dao, and Tea Yan Yue Se have successively raised their product prices.

Leading brands are 'downward', while mid-sized and small brands are 'upward'. The two are engaged in a fierce battle, and the mid-range tea market is inevitably facing a tit-for-tat war. The scramble for the mid-range market by the new tea beverage industry has reached an intense stage. For a time, 'Milk Tea Says Goodbye to the 30 Yuan Era' has topped search queries, becoming a public hot topic, which also proves that the new tea beverage track has entered a deep-water area of product cost-effectiveness development.

In November 2022, new tea drink brands joined forces to enter a new era of 'cost reduction'. Through promotional activities such as '50 off 1 yuan, 70 off 1 yuan' on food delivery platforms, they reduced marketing costs on third-party platforms. They also increased the repeat purchase rate of regular customers by offering coupons/food delivery vouchers on their own mini-programs. This move not only reduced the dependence of new tea drink brands on third-party public domain traffic but also improved the conversion of customer acquisition and repeat purchase rates on their private domain platforms, achieving more refined digital operations.

Data shows that in 2021, 91% of consumers purchased new tea drinks at least once a week, an increase of 5% compared to 2020. Tea drinks have a significant addictive nature, and consumption habits have been fully formed. Coupled with 83% of consumers having extremely high loyalty to brands, tea drink consumption is expected to further increase in the future.

In the context of the overall slowdown in growth of the new tea drink industry, finding new incremental revenue is the primary goal for brands to alleviate performance pressure, and IP collaboration has become a potent remedy for gaining traffic. From the popular dramas 'Dream of the Red Chamber' and 'Canglan vote' in 2022 to 'National Palace Drama' and 'Empresses in the Palace', leading new tea drink brands have expanded their focus on IPs to the film and television sector. The collaboration between Xicha and 'Dream of the Red Chamber' is the first time a new tea drink brand has partnered with a popular drama, and the sales performance of customized IP drinks directly determines the success of the collaboration. According to previously released data, Xicha's special collaboration product sold nearly 300,000 cups on its first day of launch, with a single store reaching a maximum sales volume of nearly 1,000 cups, which can be considered a success.

Meanwhile, the silent emergence of new Chinese-style tea houses has also allowed tea culture to sprout new branches in the third space. 'Kaiji Tea House' and the sudden internet craze for 'cooking tea around the stove' in winter can be seen as a wonderful attempt at 'reshaping tea culture.' Through modern design and digital management, exquisite craftsmanship and market-style tea houses are bringing tea culture back to cities in a younger guise, exploring a new balance between the bustling market atmosphere and the modern urban feel.