Modern China Tea Shop fights the flow with traditional flavors, directly operated stores

The seller of more traditional premium teas is reportedly planning a Hong Kong IPO, which would make it the latest on a growing list of rivals seeking such listings

Key Takeaways:

• Modern China Tea Shop is carving out a niche among premium tea sellers by focusing on drinks that combine ancient Chinese methods with modern milk teas
• The company is sticking to its model of directly owned and operated stores, even as its main rivals aggressively use a franchise model to tap China’s smaller cities

By Emily Chan

Watch out, sugary milk bubble teas loaded with calorie-heavy tapioca bubbles. A small group of premium beverage shops are fighting for a different place at the Chinese tea table, drawing on consumer thirst for both tradition and healthier choices.

A leader in that group is Modern China Tea Shop, which was rumored last week to be seeking a Hong Kong listing. The chain, based in the Southern China city of Changsha, responded by saying it has no such plans. But many believe it has indeed approached investment banks about a listing, and is keeping mum because the plan is still in the preliminary stages.

Founded in 2014, Modern China Tea Shop is showing its “modern” stripes with its rise as one of China’s most popular emerging online brands in the premium drink market. The chain is famous for incorporating classical Chinese styles into its logo, drink names, packaging, and store decorations, helping it capture the hearts of young consumers looking for a more traditional experience.

The company is squarely in the middle of the premium tea market, typically charging 20 yuan or less ($2.70) per cup. It’s also on the conservative side, preferring to own and operate its own stores rather than expanding quickly through franchising. It remained in its home province of Hunan for its first six years before branching out to other areas in 2020. Such a conservative approach means it only had about 500 stores in its network at the end of last year.

That pales compared to more aggressive rivals like Mixue Bingcheng with more than 25,000 stores, GoodMe with more than 8,400, and more than 7,000 for both Auntea Jenny and Chabaidao, which mostly offer up more modern bubble teas. But that difference has also won Modern China Tea Shop a loyal fan base often willing to queue up for hours for each new store opening.

Bubbling well of new tea listings

Modern China Tea Shop’s IPO plan is just the latest in a steady string of reports for similar new premium tea listings in Hong Kong these past six months. In June and July, the popular fruity tea chain Auntea Jenny and the Xinshiqi chain were both rumored to be planning Hong Kong IPOs. Chagee, a Yunnan milk tea brand that has expanded overseas, was also reportedly eyeing a New York listing.

In mid-August, Sichuan-based fresh fruit tea and milk tea brand Chabaidao took the plunge and submitted its listing application to the Hong Kong Stock Exchange. In early October, reports emerged that Mixue Bingcheng, a milk tea brand that has taken smaller third- and fourth-tier cities by storm, was also reportedly eyeing a $1 billion Hong Kong IPO next year after abandoning an earlier listing attempt in Shenzhen. 

The rush to list could be bubbling up now as demand recovers after three years of Covid depression. China’s food and beverage revenue rose 21.4% year-on-year in the first half of this year to 2.43 trillion yuan ($333 billion), representing the fastest growth among consumer goods categories during the period, according to China’s National Bureau of Statistics. 

New tea drinks are one of the catering industry’s hottest areas. During the recent weeklong National Day holiday, Nayuki (2150.HK), one of the few listed premium tea sellers, disclosed that it sold over 10 million cups of its drinks over the holiday, as sales for many of its stores grew by more than 500% from pre-holiday levels. Modern China Tea Shop, which like many of its peers had to temporarily close shops last year during the pandemic, also reported a 71% year-on-year sales increase during the period, with the average number of cups sold at individual stores up 52%.

As domestic demand recovers, major tea drink brands are stepping up their expansion again, which requires more funds. That, combined with recent strong sales and new store openings, means many may feel now is a good time to go public. 

But we should also note that the China Chain Store & Franchise Association believes the domestic new tea drinks market entered a new mature phase as early as last year. With penetration for target groups now at more than 40% and slowdowns in both total store growth and new openings, it said that markets in China’s smaller third- and fourth-tier cities are becoming the industry’s main new battleground.

Franchise fiends

Current market leaders like Nayuki and HeyTea, which target high-end consumers in first-tier cities, all began as direct owners and operators of their store networks. But after being overtaken by more aggressive names like Mixue Bingcheng, which relies almost exclusively on a franchising model and lower-cost drinks, many are adopting similar franchising models. Both Nayuki and HeyTea adopted such a model last year to tap into the third- and fourth-tier cities where Minxue Bingcheng is king.

Its use of the franchising model has made Mixue Bingcheng the biggest player in China’s new tea drinks market with retail sales of 20.2 billion yuan in 2022, far head of the second-largest player GoodMe at 13.9 billion yuan and Chabaidao not far behind at 13.3 billion yuan, according to third-party data in Chabaidao’s IPO prospectus. 

Mixue Bingcheng’s own IPO prospectus filed to the Shenzhen Stock Exchange a year ago shows it raked in nearly 3 billion yuan in profits in the three years from 2019 to 2021 alone.

The entry by HeyTea and Nayuki into the franchising business is expected to set off a new round of competition. HeyTea has opened more than 1,000 franchised stores since adopting the model last November, averaging about 125 per month. Nayuki has been slower, opening just four franchised stores so far. 

Despite the franchising rage, Modern China Tea Shop seems content to buck the trend not only with its more traditional style and format, but also in sticking to the self-operated store model. But it could only be a matter of time before it abandons that approach and also embraces franchising if it wants to keep its place at the China tea table.

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