Industry Insights | The New Tea Drink Market: A Red Ocean, What Lies Ahead

China's tea drink industry has gone through stages 1.0 and 2.0, and is currently in stage 3.0.

• Stage 1.0 of the Tea Drink Industry (Tea Powder Brewing Era)

There were many small retail stores, with participants lacking brand and operational management awareness, leading to slow market development:1990-1995 was the budding stage of China's tea drink industry. Milk tea was mainly made by blending powder, containing neither tea nor milk, with extremely low nutritional value, and prices generally below 5 yuan.

During this stage, tea drink merchants were mostly small workshops, providing only tea products, with weak awareness of brand, service, franchising, operation, and management.

• Stage 2.0 of the Tea Drink Industry (Traditional Chain Tea Drink Era)

Merchant brand awareness increased, and rapid expansion was achieved through franchising models, leading to rapid market development:From 1996 to 2015, the number of milk tea shops continued to increase, and some brands upgraded their milk tea ingredients, starting to use tea powder or tea residue to make the base and innovating the form of milk tea by covering pure tea products with whipped light cream to create a unique milk-covered tea taste.

Representative brands of this stage include Jiekè, Subway, Happy Lemon, CoCo, etc. Compared to stage 1.0, tea drink enterprises in stage 2.0 have stronger brand awareness. By adopting franchising models, they achieve rapid expansion of store scale, further enhancing the brand's market visibility and influence.

• Stage 3.0 of the Tea Drink Industry (New Tea Drink Era)

Since 2016, the tea drink industry has gradually moved towards high-quality tea drinks, with health-conscious tea products attracting more consumer attention.Merchants continue to focus on improving the quality of tea drinks, such as using fresh milk and imported cream instead of creamer, and high-quality tea leaves instead of tea powder.

Representative brands of this stage include Xicha, NESCAFÉ, and other high-end brands. Compared to stage 2.0, tea drink enterprises in stage 3.0 pay more attention to conveying brand values. Through strategies such as high-value storefront decoration, healthy raw materials, fashionable product packaging, high-quality tea taste, and market differentiation marketing, they endow the brand with distinct characteristics, attracting a large number of young consumers and gaining market recognition.

• Product 'newness'

Firstly, it is reflected in fresher ingredients, more novel flavors, and more innovative packaging design. New tea drinks use fresher natural raw materials, extracted from high-quality tea leaves, and added with fresh fruits and fresh milk for seasoning, bringing a fresher and healthier tea experience than traditional milk tea.

Secondly, the product innovation capabilities of new tea drink brands have greatly increased, and the product iteration speed is very fast. For example, Lele Tea launched nearly 600 products in just 18 to 20 years, and Xicha also develops new products at a rate of 1-2 weeks per time, bringing more novel flavors to consumers.

Additionally, new tea drink brands pay more attention to product visual communication to establish a more innovative brand image. For example, Seven Points Tasty focuses on mango products, highlighting bright mango yellow from product blending and packaging, logo design, storefront design, material design, etc., with very high recognition.

• Operation 'newness'

Compared to traditional tea shops mainly located on the street, new tea drink brands have expanded into new store operation models. Firstly, they choose high-quality business districts with large-area stores for store location and carry out personalized decoration to create a 'third space'. This is new offline stores. The 'newness' of operations also includes the 'newness' of online operations for new tea drinks. New tea drinks have fully entered the era of precision marketing. How to operate private domain traffic well has become the key for new tea drink brands to grasp consumers. They not only need good products but also understand consumers.

• Culture 'newness'

New tea drink brands are more committed to shaping and conveying new brand culture. For example, the rise of Tea Face Color is closely related to its sufficiently differentiated 'Chinese style' positioning. Another example is that Xicha has launched stores in different styles such as Black Gold Store, Pink Store, DP Store, ancient style theme store, and environmental protection theme store, and decorated them according to the characteristics of different cities.

How to combine local characteristics well and effectively convey the brand's own image is also something that new tea drink enterprises need to learn. Among the main consumer group born in the 95s and 00s, being willing to queue up for check-ins and share on social media makes full use of these new consumption behaviors one of the key points for new tea drink brands to achieve fission growth.

The new tea drink industry, with natural high-quality raw material supply, shaping and conveying new brand culture, and creating all online and offline consumption scenarios and differentiated consumption experiences, has become an attractive track in the 'new consumption' field.

The Chinese new tea drink market has developed rapidly in recent years. By accurately grasping the trend of consumption upgrading, the Chinese new tea drink market has entered stage 3.0 of the industry and has now grown into a track worth hundreds of billions. The revenue scale of Chinese new tea drink brands has rapidly climbed from about 70 billion yuan in 2019 to nearly 110 billion yuan in 2021, with an annual compound growth rate of nearly 40%.

• Supply Chain

Like all modern catering, to win the battle of new tea drinks, the supply chain is key. For new tea drink brands, if a certain product wins the love of a large number of consumers, but the brand's supply chain capacity is insufficient, resulting in shortages or quality declines, it will significantly shorten the life cycle of popular products. Therefore, brands also need a stable supply chain to maintain the life of a popular product. For example, Xicha promoted the niche fruit of yellow peel across the country, demonstrating its strong supply chain capacity and R&D strength. The sudden breakthrough of niche fruits can bring great pressure to the raw material side in a short period. For example, the coconut series promoted by Luckin Coffee caused a long-term shortage due to supply not keeping up.

When launching the yellow peel series, Xicha adopted a base co-construction method, intervening early and interfering with the planting of the fruit's origin, and through large-scale procurement, stabilizing supply prices while ensuring raw material supply. In terms of transportation, a full-process cold chain with branch transportation is used to prevent moisture loss, greatly ensuring the freshness of yellow peel. At the same time, after full storage and transportation tests, Xicha controlled the process from picking to store use of yellow peel within 72 hours, and it must be used within 24 hours after arrival at the store. Xicha also went to great lengths in the R&D process. On the tea base, through comparative tests of various tea varieties, Xicha selected Green Yan and Amber Lan that can blend better with yellow peel juice and obtained the best mixing ratio through testing.

Generally speaking, product homogenization will bring certain impacts to brands, but strong supply chain capacity and R&D strength can give brands a longer lifespan.

• Product standardization, membership system, diversified product matrix

Many new tea drink brands and new consumer enterprises are benchmarking against Starbucks. Starbucks has also gone through many detours and crises, and its experience can bring many development inspirations. From 2000 to 2008, founder Schultz left. During this stage, Starbucks blindly expanded, resulting in a decline in store service levels and operational efficiency, and neglecting franchise management and product innovation, causing year-on-year decline in store growth. Later, Schultz returned and mainly did three things:

1) Standardization. In order to ensure high-quality coffee, the company completely standardized the coffee-making process and made it into CDs and distributed them to 7,100 stores across the United States, strictly controlling the product-making process;

2) Membership system. Starbucks launched a membership incentive plan (My Starbucks Rewards). Under the influence of this plan, membership stickiness has been continuously improved, driving a significant increase in average transaction value per customer and rapid growth in company performance;

3) Product diversification. In addition to coffee, Starbucks has also actively launched other categories of products, such as cakes, sandwiches, city cups, bagged coffee, and products suitable for different time periods (lunch, afternoon tea, cocktails, etc.) to enrich its product matrix. In addition, Starbucks also sells its coffee beans, instant coffee, ready-to-drink canned coffee, tea bags through retail channels, continuously expanding its business scope and increasing consumer consumption frequency and average transaction value per customer.

In fact, each new tea drink brand is also making efforts in these aspects. For example, both Xicha and NESCAFÉ have launched various products such as European-style bags, cakes, bagged tea, bottled beverages, etc. It can be said that the new retail path is the breakthrough way for many new tea drink brands.

• Digitalization

Against the backdrop of the big data era, the full digitalization of the new tea drink industry will also open up new space for industry growth. The digitalization of the new tea drink industry includes the digitalization of the supply chain, warehousing and logistics, consumption scenarios, etc.

At present, the digitalization of consumption scenarios has been relatively complete. Consumers do not need to go to stores to place orders when buying new tea drink products; they can place online orders and queue up, helping new tea drink stores save on personnel costs for handling offline orders.

However, there is still much room for digitalization of the supply chain and warehousing and logistics. Digital management of raw material warehousing and transportation is conducive to helping downstream enterprises make procurement decisions, improve operational efficiency, control costs, and bring broader imagination to business.