On January 2, 2024, the listing applications of two freshly-made beverage chain enterprises, Mixue and Guming, simultaneously appeared on the Hong Kong Stock Exchange website.
Freshly-made beverages refer to drinks that are prepared on-site and can be consumed immediately. According to data, the average annual consumption of freshly-made beverages per person in China was about 18 cups in 2022, while in Western countries, the average was 200 to 300 cups per person.
It is worth noting that in Western countries, the high consumption of freshly-made beverages is predominantly in coffee. Whether milk tea and fruit drinks can become popular, similar to coffee, remains uncertain.
As a result, pioneers in the Chinese freshly-made beverage industry divided their focus into two paths: one targeting coffee, such as Luckin (PINK: LKNCY), and the other focusing on tea and fruit drinks, such as Mixue, Guming, and Nayuki’s Tea (HK:2150).
It is expected that in 2024, these four companies will converge in the capital market.
01. Nayuki’s Tea loses growth momentum
According to financial reports, as of September 30, 2023, Nayuki’s Tea operated a total of 1360 directly operated stores (with only 4 franchised stores).
In 2019, Nayuki’s Tea’s revenue exceeded 2.5 billion, with a year-on-year growth of 130%;
In 2020 and 2021, revenue growth rates were 22% and 41%, respectively;
The revenue growth rate in 2022 was zero.
In H1 2023, the revenue was 25.9 billion, with a year-on-year growth of 27%.
In comparison, Mixue and Guming adopted a franchise model. As of September 30, 2023, the number of stores in China was 32,000 and 9,000, respectively.
While there are significant differences in store size, location, and operations among various brands, comparing the number of stores vertically still reveals the brand’s expansion strength.
In terms of the franchise model, Mixue has a faster store growth rate and a leading revenue scale:
In 2022, Mixue’s revenue was 13.6 billion, with a year-on-year growth of 31%;
In the first three quarters of 2023, Mixue’s revenue was 15.4 billion, with a year-on-year growth of 46%;
In 2022, Guming’s revenue was 5.56 billion, with a year-on-year growth of 27%;
In the first three quarters of 2023, Guming’s revenue was 5.57 billion, with a year-on-year growth of 34%.
The data shows that Mixue has a larger base and higher growth rate, gradually expanding its leading advantage. In terms of the speed of store expansion, the franchise model has a natural advantage, while Nayuki’s Tea can only accept being in a weaker position.
02. Nayuki’s Tea’s three major costs
Looking at the proportion of revenue, Nayuki’s Tea’s three major costs are material costs, labor costs, and store costs.
Material Costs
Accounting for about one-third of revenue, with a slight decrease in recent years:
In 2020, material costs were 1.16 billion, accounting for 38% of revenue;
In 2021, material costs were 1.4 billion, accounting for 33% of revenue;
In the first three quarters of 2023, material costs were 830 million, accounting for 32% of revenue.
Labor Costs
Similar to material costs in terms of proportion of revenue:
In 2020, labor costs were 920 million, accounting for 30% of revenue, 8 percentage points lower than material costs;
In 2021, labor costs were 1.42 billion, accounting for 33% of revenue;
In the first three quarters of 2023, labor costs were 690 million, accounting for 26% of revenue, 6 percentage points lower than material costs;
Store Costs
Including rent, equipment depreciation, amortization of usage rights assets, water and electricity, etc.:
In 2020, store costs were 680 million, accounting for 22% of revenue;
In 2022, store costs exceeded 1 billion, accounting for 24% of revenue;
In the first three quarters of 2023, store costs were 570 million, accounting for 22% of revenue.
Despite efforts to compress costs, Nayuki’s Tea’s store-related costs still account for over 20% of revenue. Compared to the franchise model adopted by Meixue and Guming, Nayuki’s Tea faces a significant cost disadvantage.
03. Dramatic changes in consumption scenes weaken store value
Nayuki’s Tea categorizes user consumption scenarios into three types: in-store ordering—placing orders on-site and paying immediately; self-pickup orders—using WeChat/Alipay mini-programs or Nayuki’s app (including on-site use); delivery orders—orders requiring delivery services.
In 2018, in-store cashiering accounted for as much as 93%, with delivery accounting for 7%, and self-pickup at zero;
In 2019, in-store cashiering dropped to 69%, with delivery increasing to 17%, and self-pickup at 14%;
In 2020, in-store cashiering plummeted to below 30%, with self-pickup accounting for 40% and delivery exceeding 30%.
By H1 2023, in-store cashiering further dropped to 15%, with delivery accounting for 44% and self-pickup at 41%.
The combined cost of store-related expenses and labor costs is close to 50% of revenue. For example, in H1 2023, store and labor costs totaled 1.26 billion, accounting for 48.5% of revenue.
Now, delivery and self-pickup have become mainstream, with the former provided by third parties, reducing the dependence on stores and significantly lowering labor costs. In H1 2023, the expenditure on stores, equivalent to 1.26 billion, was only generating revenue of 350 million in the “in-store cashiering” model.
04. Turning losses into profits before “frenemies” go public
Excluding several fair value changes that significantly impact net profit, Nayuki’s Tea disclosed “adjusted net loss/profit” (non-IFRS) in its annual report.
In 2020, adjusted net profit was 16.64 million;
In 2021, a net loss of 145 million, with a loss rate of 3.4%;
In 2022, a net loss of 461 million, with a loss rate of 10.7%;
In H1 2023, the proportion of the three major costs in total revenue dropped from 90% to 80%, where material costs remained the same, labor costs decreased by 7 percentage points, and store costs decreased by 3 percentage points. Excluding a fair value loss of 8.52 million, the after-tax net profit was about 73 million (H1 2022 adjusted loss of approximately 240 million). It is expected
to achieve full-year profitability in 2023.
In H1 2023, Nayuki’s Tea turned losses into profits, with a key factor being the reduction of the three major costs as a percentage of total revenue from 90% to 80%.
In addition, it is expected that Mixue and Guming will go public in 2024. This means that for investors interested in the Chinese freshly-made beverage market, the choices increase to four companies. Nayuki’s Tea, by reducing costs and improving efficiency (mainly through compressing labor costs), timely turned losses into profits.
05. Comparing the “quality” of Mixue and Guming
1) Gross Profit
Mixue and Guming both have a gross profit margin of around 30%.
In 2021, Mixue’s gross profit was 3.2 billion, with a gross profit margin of 31%; in 2022, the gross profit was 3.8 billion, with a gross profit margin of 28%; in the first three quarters of 2022, the gross profit was 4.6 billion, with a year-on-year growth of 54%, and a gross profit margin of 30%.
In 2021, Guming’s gross profit was 1.3 billion, with a gross profit margin of 30%; in 2022, the gross profit was 1.6 billion, with a gross profit margin of 28%; in the first three quarters of 2022, the gross profit was 1.7 billion, with a year-on-year growth of 48.5%, and a gross profit margin of 31%.
Comparing the data, Mixue, due to its scale advantage, has a better profit-making ability.
2) Expense Ratio
The blue line represents the gross profit margin, and the colorful stacked bars represent the expense ratio. Only when the blue color overwhelms the colorful bars can a profit be recorded.
In the figure below, the “blue” of Mixue and Guming is significantly higher than the “colorful”:
Mixue:
In 2021, the gross profit margin was 31.3%, with market expense ratio of 3.9%, administrative expense ratio of 3.6%, and R&D expense ratio of only 0.16%, with a total expense ratio of 7.7%;
In 2022, the gross profit margin fell to 28.3%, with market and administrative expense ratios increasing to 5.7% and 3.7%, respectively, and a total expense ratio rising to 9.6%;
In the first three quarters of 2023, the gross profit margin was 29.7%, with a total expense ratio of 9.6%.
Guming:
In 2021, the gross profit margin was 30%, with a market expense ratio of 4.2%, administrative expense ratio of 2.8%, and R&D expense ratio of 1.5%, with a total expense ratio of 8.6%;
In 2022, the gross profit margin was 28.1%, with market and administrative expense ratios increasing to 4.8% and 3.4%, respectively, and an R&D expense ratio of 2.1%, with a total expense ratio surpassing 10.3%;
In the first three quarters of 2023, the gross profit margin was 31%, with a total expense ratio of 9.9%.
In H1 2023, Nayuki’s Tea turned losses into profits, with a key factor being the reduction of the three major costs as a percentage of total revenue from 90% to 80%.
3) Net Profit
Mixue’s net profit is steadily rising: In 2021, a net profit of 1.9 billion, with a profit margin of 18%; in 2022, a net profit of 2.7 billion, with a year-on-year growth of 39%, and a profit margin increasing to 20%; in the first three quarters of 2023, a net profit of 2.5 billion, with a year-on-year growth of 51%, but a profit margin falling to 16%.
Guming achieved profitable scale in 2023, with a net profit of 1 billion and a profit margin of 18% in the first three quarters. Whether it can continue and whether there will be changes after going public are yet to be observed.
In summary, in terms of store count, revenue scale, and profitability, Mixue is a better investment target.
06. “Franchise/Self-operated” Hybrid Model
Those familiar with the coffee industry probably know that Starbucks does not have franchise stores in China; all are self-operated, which is not its usual practice.
As of October 1, 2023 (the fiscal year-end), Starbucks had 38,000 stores globally, with franchise stores accounting for 48%. Over the past four fiscal years, this ratio has remained relatively stable.
By the end of the 2023 fiscal year, there were 17,800 stores in North America, with a self-operated to franchise store ratio of 6:4. In the 20,200 stores outside North America, franchise stores accounted for 56%.
North America (the United States and Canada) is Starbucks’ “headquarters,” where everything aligns perfectly. Therefore, the 6:4 ratio of self-operated to franchise stores is the ideal state for Starbucks to feel secure, as the profit margin for franchise operations is five times that of self-operated operations. (Note: The profit margin for self-operated business is about 15%, while the profit margin for franchise business is about 75%).
Starbucks’ entry into new markets can be summarized as a “three-step” process:
The first step is to test the waters with franchise stores;
The second step is to switch to a self-operated model if confident in the target market, even moving towards self-operation for all stores;
The third step is to transition to the ideal state of a 6:4 ratio between self-operated and franchise, at an opportune time.
Starbucks entered China in 1999, and in 2017, after 18 years in the market, all Starbucks stores in China were changed to self-operated, marking the completion of the second step in China. Starbucks Japan is also at this stage.
In October 2017, Luckin Coffee opened its first self-operated store. At this time, Starbucks, which had been in the Chinese market for 18 years, had nearly 3,000 stores in China, equally split between self-operated and franchise.
In 2019, Luckin Coffee launched the “Retail Partner” model, providing site selection, store design, logistics, and raw materials (such as coffee beans, milk, etc.) to retail partners, without charging franchise fees but adopting a profit-sharing model. In exchange for sharing some of the gross profit, Luckin Coffee gained the funds and local resources of retail partners while saving store rent/equipment depreciation costs.
As of the end of September 2023, Luckin Coffee had 13,300 stores, with 8,807 self-operated and 4,466 franchise.
In summary, Starbucks and Luckin Coffee’s “self-operated/franchise” hybrid model is positioned at the top of the pyramid. Mixue and Guming, with their traditional franchise models, occupy the middle tier. On the other hand, Nayuki, operating solely through direct management, lacks a competitive edge in terms of growth and profitability, placing it at the bottom of the pyramid.