Chinese milk tea firms face bubble amid over competition, fast-changing consumer preferences
- Amid an increase in new players, only 18.8 per cent of milk tea firms survived for more than a year in 2019
- Hot money is causing a bubble and firms need to improve products and services, iiMedia Research says
Zhong Jinglin, an entrepreneur in his twenties, was surprised to find that a milk tea shop that he had opened with his friends in China’s southern Guangdong province was suddenly surrounded by 20 other, similar tea-houses.
“There should be room for growth for the milk tea industry, but it’s important to choose the right location. And you need to keep up with heavy competition these days,” he said.
Zhong and his friends had to close their business a year later, after revenue plummeted sharply, from about 6,000 yuan (US$925) on their first day to about 1,000 yuan a day, followed by losses.
Zhong’s experience represents a snapshot of the industry, which features both a fast growth in the number of businesses, as well as an increasing number of firms shutting down. Between 2014 and 2018, milk tea companies grew at an annual compound growth rate of 23 per cent, according to company information and data provider Tianyancha. But about 26,000 tea-houses collapsed in 2019, with only 18.8 per cent of the total number surviving for more than a year, data from iiMedia Research shows. The coronavirus pandemic wiped out more than 130,000 such firms, or 43 per cent of the total market, as of the end of November last year.
Nonetheless, hot money continues to flow into the industry. Investment into tea drink makers hit a 10-year peak in the first six months of this year, with more than 5.3 billion yuan flowing in, according to Chinese Venture magazine. Investment last year amounted to just 170 million yuan, in comparison.
The industry is at a crossroads where it must contend with over competition and an investment frenzy.
