Wanda Milk Tea, Li Ning Coffee: The 'Dangerous Temptation' in the Aroma of Milk and Coffee

Naixue$NAYUKI (02150.HK)$While Nayuki and Heytea are still struggling in the quagmire of losses and layoffs, a group of 'elephants' have once again barged into the 'china shop' of the new tea drink industry.

These are giants from traditional enterprises. According to the Qichacha app, on May 5th, the sports brand Li Ning$LI NING (02331.HK)$applied for the trademark registration of 'NING COFFEE', planning to sell coffee in its offline stores.

Last month, Wanda Group also applied for the registration of the trademark 'Wan Cha' in multiple categories including beverages. Leopard Finance learned that Wan Cha is Wanda's self-owned cinema beverage project launched at the end of 2019, with milk tea shops located within or near Wanda Cinemas.

Also in April, China Railway launched its tea beverage brand 'Ban Dao Cha'. Previously, the Guangzhou Railway Group had introduced a freshly made 'High-Speed Rail Milk Tea'. Additionally, there's 'Post Office Coffee' by China Post, 'Good Host Coffee' and 'Easy Joy Coffee' under 'The Two Oil Giants' (PetroChina$PetroChina (601857.SH)$, Sinopec$China Petroleum & Chemical Corporation (600028.SH)$) known as 'Petroleum Coffees'. Tong Ren Tang$Beijing Tongrentang (600085.SH)$has also opened a coffee shop called 'Zhi Ma Health', selling traditional Chinese medicine-infused coffee.

New tea drinks have become a competitive arena for a host of giants.

However, can these elephants who have barged into the already densely competitive milk coffee market start running?

Milk coffee craze

On Valentine's Day, February 14 this year, 'Post Office Coffee' opened in Xiamen, promoting the idea of 'drink a cup of coffee and write a letter to your loved one'. In addition to combining postal services with coffee drinks, it also offers postal cultural and creative services such as selling stationery, aromatherapy oils, blind boxes, and other trendy items.

From Weibo to Dianping, and then to Xiaohongshu, 'Post Office Coffee' has attracted significant curiosity among young people. In fact, before selling coffee, in June 2021, China Post opened 'You Yang's Tea' in Fuzhou, which also saw a wave of check-in enthusiasm.

However, China Post stated that 'You Oxygen Tea' is a new business launched by the Fujian branch of China Post in partnership with Zhongyou Hengtai Pharmaceutical, and it is unrelated to postal services.

However, China Post's venture into the milk coffee business does indeed seem like a well-prepared strategic move. Leopard Finance discovered that in April this year, China Post had already applied to register multiple 'Post Coffee POSTCOFFEE' trademarks, with international classifications including advertising sales, alcohol, and convenience foods. According to media reports, Post Coffee plans to open specialty coffee shops in Beijing, Shanghai, Guangzhou, and Shenzhen throughout 2022.

Before China Post entered the coffee sector, the deep-pocketed 'two oil giants' had already ventured in, jokingly referred to by netizens as 'petroleum coffee'.

In 2018, CNPC launched 'Good Guest Coffee', selling freshly ground coffee at its Kunlun Good Guest convenience stores. By 2021, Good Guest Coffee had opened more than 120 stores across 20 provinces and cities, with total coffee product sales exceeding 100 million yuan in 2021.

Sinopec also followed suit. In 2019, Sinopec established the 'Easyjoy Coffee' brand in partnership with Luckin Coffee. In December 2020, Easyjoy Coffee opened its first store at the Yuquan gas station in Beijing, marking the beginning of its 'gas station + coffee' journey. In June 2021, Easyjoy Coffee entered the bottled beverage market, available not only at Easyjoy convenience stores but also through online channels such as WeChat mini-programs and Tmall.

Among these, the 'one-click delivery to car' service introduced on the Easyjoy Coffee mini-program reflects the typical gas station service style. Car owners can choose from several delivery options: home delivery, pick-up at the gas station, or entering their license plate number when placing an order so that the station staff can deliver the coffee directly to them while they refuel.

In the coffee sector, Luckin$Luckin Coffee (LKNCY.US)$, Starbucks$Starbucks (SBUX.US)$These old and new giants both offer grab-and-go services. Clearly, as a newcomer, Sinopec has learned from its predecessors, allowing drivers who need a caffeine boost to experience 'coffee delivered to your car'.

The furthest-reaching player is Wanda. In addition to expanding its stores, Wanda has already made moves upstream by planting raw materials. According to public reports, in 2018, Wanda established a tea plantation covering about 1,000 mu in Guizhou, accumulating resources for its tea beverage development.

Traditional giants are entering the new tea beverage industry, some seem to be doing it casually, while others are methodical and steady.

It is absolutely not just a 'small goal'.

Why have a group of players seemingly unrelated to the milk tea business entered this sector in recent years?

Take Wanda as an example. The film industry has been deeply affected by the pandemic, leading to 'poor box office results, but milk tea comes to the rescue.' In fact, in Wanda's film business revenue, non-box office businesses such as merchandise and food and beverage have always contributed higher gross margins (over 60%) compared to ticket sales. Last year, one of Wanda Film’s campaign slogans was to strive to increase non-box office business income and create a new profit growth point.

The 'popcorn economy' has always been considered a standard feature of cinema operations. Wanda selling milk tea is an upgraded version of the 'popcorn economy,' with the aim of creating a high-margin new tea beverage business.

Moreover, 'Wan Cha' is by no means just a small goal for Wang Jianlin.

According to Snow Leopard Finance, 'Wan Cha' initially focused on integrated stores in collaboration with COSTA, began testing standalone stores in 2019, and broke through 70 stores in 2020. The stores offer multiple series of beverages including milk tea, fruit tea, and cheese tea; prices mostly range around 20 yuan, with the cheapest option at 9.9 yuan, directly competing with Mixue Ice City. Besides opening stores, Wanda has also expanded upstream into raw material cultivation, operating a thousand-mu tea plantation in Guizhou for four years.

From integrated stores to standalone ones, and then to raw material accumulation, Wanda is now applying to register the 'Wan Cha' trademark across various fields. Essentially, Wanda’s milk tea business aims to cultivate high-margin products and build a one-stop service system for dining and entertainment by integrating upstream and downstream resources of the movie ecosystem.

Zhu Danpeng, a Chinese food industry analyst, told Snow Leopard Finance, 'Wanda has its own location, resources, traffic, and fan base. Entering the milk tea business is顺势而为 (a natural progression), and aligns with its demand for profitability, fitting into its overall future business layout.'

The clustering entry of traditional giants indirectly reflects the vitality of the new tea beverage track.

According to the '2021 New Tea Drink Research Report' by the China Chain Store Association, the growth rate of China's new tea drink industry from 2021 to 2023 is approximately 19%-20%. From 2017 to 2020, the revenue scale of China's new tea drink market increased from 42.2 billion yuan to 83.1 billion yuan, and it is expected to reach 142.8 billion yuan by 2023.

There were once voices questioning whether it was a deviation from their main business for China Post and China National Petroleum Corporation to sell coffee. However, Shell's retail business president, Cai Yifan, told the media that Shell convenience stores sell about 250 million cups of coffee every year, and the profit margin of the coffee business 'is much higher than that of oil'.

However, compared with Wanda, when China Post and China Railway ventured into the milk coffee sector, although they did not have an urgent pursuit of profit, like Li Ning, traditional enterprises also need to create youthful new products to attract the new generation of consumers.

The report by the China Chain Store Association shows that new tea drinks attract the 'new generation,' with young consumers who grew up drinking milk and eating fruits being the main customer group. The collision with new tea drinks 'helps cultivate the Gen Z consumer market and promotes future sustainable growth'.

For China Post, China Railway, and the 'two major oil companies,' using their extensive and dense network of outlets and customer base across the country, selling a cup of milk coffee as an additional service not only enriches the store’s service scenarios and business formats but also fosters a sense of identity among young customers. Why not?

Traditional giants crossing over into milk coffee are not limited to the new tea drink business itself. 'What these giants value more is how cross-border operations can upgrade their own service systems, enhance user stickiness, and increase new profit points.' Zhu Danpeng analyzed for Snow Leopard Finance Society.

Inside and outside the besieged city

However, the new tea drink industry is truly a 'china shop,' even leading brands face tough times.

In 2021, Nayuki's Tea went public under the halo of being the 'first new tea drink stock,' but soon recorded the largest loss since 2018 (see Snow Leopard Finance Society’s 'Nayuki, Not Resistant to Loss'). Another leading brand in the new tea drink sector, Heytea, faced reports this year of delayed year-end bonuses and layoffs.

The challenges faced by Nayuki and Heytea are similarly immense for Luckin Coffee, despite claims of an impending turnaround. In 2021, Luckin Coffee reported a loss of 539.1 million yuan, which was merely a significant reduction from previous years' losses.

In this seemingly glamorous 'china shop,' the bonus period for new tea drinks has passed. Nowadays, new tea beverages can hardly be considered a profitable business.

According to a survey by China Merchants Securities, a leading milk tea shop needs to sell 800 cups per day just to break even. A milk tea shop with annual revenue of 10 million yuan would ultimately only make around 1 million yuan in profit. Additionally, the new tea beverage sector faces challenges such as shallow industry moats and continuously rising raw material costs.

Compared to professional players like Heytea, Nayuki, and Luckin Coffee, the cross-sector ventures of 'Wan Tea' are still in the small-scale trial phase.

In Zhu Danpeng's view, giants also face difficulties in brand positioning. In the world of branding, 'even giants cannot compete with specialized players.' The likelihood of elephants getting pricked in a china shop far outweighs the chances of them dancing gracefully.

Breaking out from core businesses into side ventures presents not only the alluring aroma of milk coffee but also hidden dangers lurking behind the fragrance.

(Author | Julie Editor | Li Jing)

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