As the majority of consumers become more price-conscious amid economic headwinds, budget shopping options are gaining popularity, even for bubble tea.
Given this, the Chinese low-priced bubble tea chain brand, Mixue Bingcheng, filed for an IPO in Shanghai on Sept. 22, with the intention of raising 6.49 billion yuan ($901.33 million).
According to the company's prospectus, proceeds from the IPO will be utilized to improve production lines and logistics infrastructure, as well as increase liquidity.
“There are 1 billion individuals in China who have never traveled by airplane, and many school students spend less than 10 yuan ($1.39) on every meal,“ a spokesperson of Mixue once told the press. "However, this population also enjoys drinking freshly crafted beverages."
Having a wide variety of drinks at affordable prices, such as lemonade for 5 yuan, bubble tea for 7 yuan, lattes for 7 yuan, and grape tea for 9 yuan, allowed the business to acquire a significant number of loyal consumers.
According to market intelligence firm Qianzhan, the budget bubble tea chain dominates the market with an 11.52% share, while premium bubble tea brand Nayuki has a much smaller 2.73% stake.
Shenzhen-based Nayuki went public in Hong Kong in July for HK$19.8 per share, capitalizing on the market's infatuation for "new consumer brands." Nevertheless, its stock price plunged as the market returned to "rationality" and macroeconomic uncertainties increased. As of this writing, it was HK$5.68 per share, equivalent to a market value of HK$9.74 billion.
Mixue has been profitable for three consecutive years, with a net profit of 1.912 billion yuan in 2021, in contrast to Nayuki, which is still in the red. The premium tea chain has lost 3 quarters of its market value from its IPO price of HK$19.80, and their net losses were a total of over 300 million yuan in the last three years,
Why can't the cash flow of the high-priced tea brand be positive while the low-priced brands can?
This is likely due to Mixue's unconventional strategy -- most of its revenue comes from supplying ingredients, packaging, and utensils to its franchisees, as opposed to franchising fees.
According to the prospectus, from January to March, sales of ingredients to franchisees accounted for 72% of the company's total income, totaling 1.75 billion yuan.
To effectively control the supply chain and costs, Mixue established an R&D center and a manufacturing hub in Henan, where its headquarters is located, as early as 2012. In 2014, its warehousing and logistics system was built to accommodate its nationwide expansion.
As of the end of the first quarter, Mixue had a total of 22,229 franchise stores and 47 directly-operated stores, making it the tea chain brand with the most locations in China.
It is important to note, however, that Mixue's gross profit margin is among the lowest in the industry, at approximately 30%, compared to Nayuki's 67.4% and Luckin Coffee's 59.84%. As a result, franchisees have to put in extra effort to boost sales and obtain a decent income.
This affordable bubble tea brand has long identified Southeast Asia as a market for its low-priced beverages, where the economy is developing and the purchasing power of a sizable younger generation is growing.
As of March 31, 2022, a total of 249 Mixue outlets in Vietnam were in operation, generating 9.2904 million yuan ($1.29 million) in revenue and a quarterly loss of 322,000 yuan. In Indonesia, it has 317 stores, with a revenue of 25.4108 million yuan and a net profit of 2.2355 million yuan.
Future efforts to further penetrate the Southeast Asian market will be aided by the company's food processing facilities in Ding'an County, Hainan.
However, some of its foreign franchisees have labeled the Chinese company's expansion "chaotic." After Mixue Indonesia posted a promotion targeting new franchisees on Instagram, many already-on-board franchisees have voiced concerns about the company's poor management -- primarily because it lacked clear rules to keep new stores at a distance from existing stores.
"At least make a rule to limit the distance between each Mixue branch... Do you care about the old franchisee?" "A new store is allowed to open only 1 block from mine; it is really messed up and unhealthy..." Similar complaints mounted below the post.
The startup has also encountered difficulties in Vietnam. According to the prospectus, the company's business license in Vietnam is at risk of being revoked because its Vietnamese subsidiary and local franchisees signed contracts that did not comply with the country's regulations.
According to Mixue, international markets will present the business with more opportunities, and it is reasonably confident in its ability to do so due to its considerable experience in R&D, supply chain management, quality control, etc.
Mixue believes that the international market will bring the company more prospects, despite the fact that the firm's unfettered expansion has revealed many of its weaknesses.
Photo by Jason Leung on Unsplash