The new tea beverage industry continues to witness a surge in market entries, as evidenced by the recent submission of an IPO prospectus by Shanghai's Hu Shang A Yi (Shanghai) Industrial Co., LtdThis company, known colloquially as Hu Shang A Yi, is making headlines as it prepares for a public offering in Hong Kong.

As per the submitted prospectus, Hu Shang A Yi boasted an impressive total of 8,437 retail outlets as of June 30, 2024. Over the first half of 2024, the company reported revenue of 1.658 billion RMB, marking a modest year-on-year growth of 6%. In a strategic move to deepen market penetration, the company is launching a multi-brand strategy, adding two sub-brands, Hu Ka and the lighter version ‘Qing Xiang Ban,’ to its main brand.

However, the tea beverage industry is experiencing heightened competition these days, particularly as numerous brands vie for dominance in the often-overlooked lower-tier markets

The prospectus reveals that Hu Shang A Yi has over half of its outlets situated in third-tier cities and belowThe challenge for the company now lies in enhancing its competitive edge and ensuring a successful IPO amidst a tumultuous market landscape.

Regarding future development strategies, the company remains tight-lipped, stating that all such details can be found within the prospectus.

The first update to the prospectus was initiated on February 14, 2024, marking the company’s initial application for listing on the Hong Kong main boardMore than ten months later, Hu Shang A Yi has submitted the updated prospectus, which includes revised business and financial figures from 2023 and the first half of 2024, with CITIC Securities, Haitong International, and Dongfang Securities (International) as joint sponsors.

The updated figures disclose that Hu Shang A Yi's revenue for 2021 was 1.64 billion RMB, which rose to 2.199 billion RMB in 2022, and further increased to 3.348 billion RMB in 2023. The profit reflected for these years showed significant growth: 83.39 million RMB in 2021, 149 million RMB in 2022, and 388 million RMB in 2023, while the first half of 2024 showed a revenue of 1.658 billion RMB, up 6% from the previous year.

In parallel, the company's gross margin has demonstrated a consistent upward trend, increasing each year: from 21.8% in 2021 to 31.2% in the first half of 2024. This improvement is attributed to the company's enhanced purchasing power owing to higher procurement volumes, negotiations for favorable pricing with suppliers, and optimized production processes and supply chain management, bolstering the profitability of its franchise operations.

Nonetheless, as competition intensifies within the tea beverage sector, brands aiming to boost profits must engage in cost control while also expanding their market reach

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The path to growth now necessitates a strong financial investment in various aspects like product innovation, supply chain development, branding efforts, and price competitionFor instance, Hu Shang A Yi has successfully completed multiple rounds of financing, including Series A in 2020, Series A+ in 2021, and Series B and C in 2023 and 2024, respectively.

However, compared to previous years, securing financing for new tea brands has become more challengingData indicates a reduction in investment activity across the industry in 2024. In this context, many new tea brands are accelerating their IPO plans.

Shen Meng, a director at Xiang Song Capital, noted that the current economic environment presents challenges for consumer demand in the tea beverage sector in the short termThis stagnation is likely to foster fiercer competition among brandsNew tea brands that have undergone multiple rounds of financing and delay their IPO plans risk leaving investors with losses

Therefore, it is essential for companies to continue their listing efforts, regardless of market conditions or valuation, presenting investors with a decision: pursue a potentially undervalued IPO or risk total investment loss.

So far, only two newcomers, Nai Xue's Tea and Cha Bai Dao, have successfully launched their IPOs, with a three-year gap between their market entriesThis cautious reception by the capital markets indicates that IPO approvals for new tea brands have become increasingly waryAlongside Hu Shang A Yi, other brands like Gu Ming and Mi Xue Bing Cheng are in the process of submitting updated prospectuses, while reports have emerged about brands such as Ba Wang Tea Ji and Cha Yan Yue Se preparing for potential listings in the United StatesThe recent surge in new tea IPO applications raises questions about whether the capital market's outlook on this sector is changing.

In response, Shen Meng suggests that there is skepticism regarding the perception of new tea beverage brands as low-risk, low-cost, high-growth, and high-return investment opportunities

Comparatively to other assets, new tea brands remain among the few investment options associated with consumption themesAs food and beverage companies are backed by essential demographic demand, present conditions might represent a window for these companies to secure listingsMissing this opportunity could lead to a position of obsolescence.

In terms of expanding their market reach, the franchise model has consistently played a crucial role within the new tea beverage industry, and Hu Shang A Yi follows suitAccording to the prospectus, as of June 30, 2024, a shocking 99.7% (approximately 8,409) of its stores are operated by franchisees, with the majority of its income deriving from franchise sales and services.

Specifically, out of Hu Shang A Yi's 4,930 franchisees, 32.0% (or 1,579 franchisees) operate multiple outletsWithin the first half of 2024, 53.9% (or 638) of newly opened franchise stores were initiated by existing franchisees.

This franchise-driven model allows the company to expand its market efficiently and at a lower cost, thereby enhancing revenues

Yet, intensifying competition in the tea beverage space has placed greater focus on securing prime locations and high-caliber franchise partners, leading to an increase in reported conflicts between franchisees and corporate entities.

Consequently, the rush to dominate the market has raised ongoing concernsThe booming number of outlets, often leading to “milk tea streets” in cities, generates significant similarities across the industry, exacerbating profitability challengesExecutives from several tea beverage brands have commented that the emphasis going forward will not be only on speed but also on refined operations and improving franchisee profitabilityFor instance, a certain brand has been building its logistics system since 2014, subsequently implementing a nationwide policy of zero logistics fees for its franchisees.

In a bid to attract more franchisees, numerous enterprises are also reducing the costs and barriers to entry

For example, in 2024, Nai Xue’s Tea revised its single-store investment budget to 580,000 RMB, which reflects a substantial cut in franchise fees from previous ratesSimilarly, Gu Ming has devised a new rule to eliminate franchise fees for the first year, allowing franchisees to spread a total fee of 98,800 RMB across the three-year contract.

Zhan Junhao, founder of Fujian Huace Brand Positioning Consulting, emphasizes that firms utilizing a franchise model must enhance communication and collaboration with their franchiseesEnsuring alignment of interests is paramountBy offering training and support, companies can uplift franchise operating capabilities and service quality while establishing effective supervisory and public relations mechanisms to safeguard brand reputation and consumer satisfactionFurthermore, firms should share market intelligence and resources with franchisees to collectively navigate market upheavals.

Besides focusing on franchisees, the diversification of product offerings remains crucial

Observably, Hu Shang A Yi notable has positioned more than half of its outlets in third-tier cities and below, making its strategy to focus on lower-tier markets pivotalIn 2023, the company initiated two sub-brand concepts: Hu Ka and Qing Xiang Ban, with the latter now rebranded as Tea WaterfallCompared to the main brand, the average price of drinks under the light edition is around 9 RMB, making it more accessible.

A growing trend has emerged where many mid-to-high-end tea brands, including the likes of Xi Tea, have introduced sub-brands to penetrate the lower-price segmentsConcurrently, brands from both tea and coffee markets are darting across sectors; for instance, Mi Xue Bing Cheng launched a coffee brand, and coffee chains such as Luckin Coffee and Starbucks have also started offering tea beverages.

Zhan Junhao asserts that Hu Shang A Yi’s multi-brand strategy, particularly aimed at lower-tier markets, is feasible