Serving as one more example of the growing power of local Chinese foodservice brands, beverage-focused chains such as Da Ka Si, Jack Hut, and Happy Lemon have all seen remarkable growth from 2005 to 2010.
Specialising in iced tea beverages, all of the major Chinese drinks chains have used a combination of affordable prices, an indulgent, high-margin product, and small-footprint, high-traffic outlet formats to grow share at an extraordinary rate, even by Chinese standards. Their success neatly illustrates both the power of beverages in driving traffic and sales, as well as the growing muscle of local chained operators, many of whom have aggressively targeted a broad base of local consumers through a combination of low prices and familiar products. This drive to reach the vast “mass market” in places like China, India, and Brazil will likely define every chain’s global strategy over the next five years, as growing prosperity forces regular adaptation.
Big menus, simple concept
At its core, the concept behind all of China’s major tea chains is extremely simple—tea, coffee, and juice drinks, often served with milk in an iced, blended format. The selection of drinks on offer, however, is often vast, with a dizzying combination of add-ins and flavours. Happy Lemon, for instance, offers around different beverages at any given time, including iced cocoa with chocolate pudding, lemon yogurt with aloe, and green tea with salt and cheese, while Tea Storm offers iced milk teas with ginger, coconut, and toffee flavours, among others, along with more exotic add-ins such as wheat germ or herb jelly. “Bubble tea” is an ubiquitous choice, featuring various combinations of iced tea with milk and small beads of tapioca starch, a Taiwanese invention which can now be found across Asia. Outlets are invariably small kiosks, allowing for low overheads and prices, with most items priced at around US$1. Food options are limited to nonexistent, with the focus squarely on indulgent impulse beverages.
The sheer size of the Chinese market has already allowed a number of chains to flourish. Market leader Jack Hut operated more than 1,300 outlets by the end of 2010, almost ten times the number in operation in 2005, followed by Da Ka Si, Coco, and Tea Storm, with 450, 390, and 388 outlets respectively. Fifth-placed operator Happy Lemon operated just under 80 outlets at the end of 2010, yet has already begun to carve out a niche as the premium leader, with sales per outlet and spend per transaction both well above that of its four competitors—Happy Lemon outlets average around US$320,000 in annual sales, with an average transaction size of US$2, while the other four operators listed average per outlet sales of US$60,000-100,000 annually with an average transaction price of US$1. All together, the five tea chains listed here accounted for US$240million in sales in 2010, a tenfold increase from 2005 and 40% increase compared with 2009, an indication of the kind of explosive growth these operators have seen.
A significant opportunity
With just five chains accounting for close to US$250 million in annual sales, one could conservatively put the current size of the “fast food tea and juice drink” market at around US$500 million, a figure which could easily surpass US$2 billion over the next five years. While this figure is smaller than annual sales through KFC alone, it still represents a significant potential bolt-on opportunity for fast food chains. What’s more, beverages such as bubble tea and others offer a relatively low-cost means of driving impulse traffic and localising menus, all at price points accessible to a large portion of the population. Just as McDonald’s has already done with smoothies and coffee in the US and elsewhere, there is real opportunity for any number of fast food chains currently operating in China to grab a slice of the exploding drinks market, both through full-sized outlets as well as smaller kiosk outlets which can already be found in cities such as Shanghai.