Milk tea couple lose billionaire rank just two months after IPO

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Peng Xin and Zhao Lin, the married couple behind the Chinese bubble tea chain Nayuki, took their business to the fore in Hong Kong in June with great fanfare. But the startup known for making cheese tea seems to have lost its appeal – which caused Peng and Zhao to drop out of the ranks of the world’s billionaires in just two months.

The couple, who each own 28% of the company, now have an individual fortune of $ 624 million. They joined the Tri-Comma Club in June, when Shenzhen-based Nayuki raised HK $ 5.09 billion ($ 656 million) by selling 257.3 million shares at a premium price of 19. , 8 HK dollars each.

The event was billed at the time as the world’s first listing by a milk tea company, and the retail portion of the IPO was oversubscribed 432 times. But Nayuki’s value has since almost halved, as it has faced challenges ranging from food security concerns to uncertain profitability prospects.

The company was summoned by regulators in Guangzhou and suspended operations of two stores in Beijing in early August, after a state media reporter worked undercover and then publicized hygiene concerns, including the sighting cockroaches and using rotten fruit to make tea. The company said in a recent stock exchange filing that it had not been fined or penalized, and that it would use measures, including more frequent disinfection and improving its operating system. in store to better track the use of ingredients. But the government-run People’s Daily called on popular milk tea companies to do more.

“Marketing can maybe help you become popular for a limited period of time,” the newspaper wrote in a recent op-ed. “But you can only win the favor of consumers in the long run by investing more energy and resources in food safety and quality. “

A spokesperson for Nayuki said the company had no further comment. Even before the state media report, Nayki’s share price was plummeting. Brock Silvers, chief investment officer of Hong Kong-based Kaiyuan Capital, said that while regulatory overhang may pass, the company must demonstrate that it can eventually be profitable.

“Nayuki’s operating costs are just too high,” he says. “The main challenge for the company is that it has yet to communicate a compelling path to profitability, and its share price was suffering even before recent regulatory concerns.”

Nayuki, which operated nearly 500 stores in 66 Chinese cities last year, sold $ 473 million worth of desserts and tea-based drinks, a 22% increase from 2019. The net loss was significantly expanded to $ 32 million from $ 6.2 million a year ago, a result attributed to store closures induced by Covid-19 as well as changes in the fair value of its warrants, onshore loans and notes convertibles, according to its prospectus.

A cost hindering profits increases in securing supplies of high-quality fresh fruit and tea, which accounted for nearly 40% of revenue last year, the prospectus says. A Nayuki bestseller is the $ 4 Supreme Cheese Grape Tea, a vivid purple-colored blend blending high-quality Oolong tea with fresh grapes and a topping of whipped cream.

Jason Yu, managing director of Shanghai-based consulting firm Kantar in China, says supply management could be a challenge. “Tea houses are more difficult to operate than coffee chains,” he says. “Blending teas is more complex than brewing a cup of coffee, and keeping fresh fruit has strict requirements. “

In a June interview with Forbes Asia, Peng, 33, said she didn’t see the cost of raw materials going down. She said she intended to cut personnel costs by upgrading management software and introducing more automation – like letting robots wash strawberries or making cheese filling – in the process of tea making. Her husband Zhao, 42, said that a new store format called Nayuki Pro could also contribute to profitability.

While a typical Nayuki tea house measures between 180 and 350 square meters on average and has an on-site bakery for freshly baked bread or cakes, professional stores range from 80 to 200 square meters. He does away with the bakery and instead sources pre-made bread from the company’s central kitchens. Each Nayuki Pro store requires an average investment of $ 193,000, which is more than 30% less than the flagship store’s $ 286,000. About 70% of the 650 new stores planned for this year and next year are in the Pro format, which Zhao saw as crucial for profitability as they can serve more customer groups while operating at lower cost. “Our profitability will gradually improve,” he said in the June interview.

Yet the couple, who met over dinner in 2013, face one more challenge. Competition in the Chinese milk tea market is fierce, and startups from Shanghai-based Lelecha to Shenzhen-based Hey Tea all blend traditional tea with cheese mousse, fresh fruit, or newer ingredients. like tiramisu flavored cream to create drinks for the younger generation. ever-changing palate. Nayuki currently owns 18.9% of this market, which is estimated by Shanghai-based China Insights Consultancy to quadruple to $ 9.6 billion in sales by 2025, just behind a competitor’s 27.7%. anonymous, according to CIC data cited in the prospectus.

“People just switch between brands,” says Yu Wen, a Shanghai-based research analyst at consulting firm Mintel. “Companies need to think about how to make their products better known to consumers in this very crowded market. “

The answer lies in opening more stores, Peng said. She referred to Starbucks’ presence in China, where it has 5,100 cafes in 200 cities, and said consumers like to go there above all because it’s convenient and easy to find. “In some Chinese cities, we only have two or three stores,” she said. “It’s impossible for consumers to get to know us better and become loyal to the brand if we have so few stores.

And the entrepreneur took on a conciliatory tone when asked about the fierce competition, especially with Hey Tea. “The pressure we put on each other is significant,” she said. “A lot of people still consider bubble tea to be low-end and not suitable for occasions like business meetings. Together with our peers, we enable more consumers to understand new products and attract more customers. “

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