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HeyTea - On Creating Tea Culture 2.0 (1/2)

A study of HeyTea's innovation to bring inspiration to the beverage market 2.0 in China.

· retailing

{{{Caroline (Yunjie) Lai}}}

More than eight years have passed since HeyTea's first physical store opened in 2012. HeyTea has gone from an initial small-scale startup to the household name for which young people are willing to line up for 2 hours. What has HeyTea done right to create Tea Beverage 2.0 in China? How could HeyTea's growth story inspire other beverage producers for Gen Z's appetite?

Source: Sina News

Due to the epidemic's impact, people's consumption habits and consumer demand have undergone considerable changes. New opportunities, new markets, and new models in the retailing industry have emerged. With mature technology, China has also entered a new stage of deep integration of the internet, big data, artificial intelligence, and the offline economy. The ecosystem of commerce is quietly reconstructing, and new formats and models drive economic recovery and consumption growth.
 

Among all the emerging brands, HeyTea has become a phenomenal name in China and East Asia. The popularity and rapid expansion from a single store to beverage franchises made HeyTea interesting to study as the new retailing model. In the two parts series, we will look into HeyTea's history, consumer basis, and digitalization approach to get a deeper understanding of what HeyTea has revolutionized China's current retailing industry.

HeyTea's History in 3 Steps

• 2012-2016: Ace product and full-cycle R&D

HeyTea's development has experienced three stages. From 2012 to 2016, before HeyTea secured its first venture capital to accelerate its expansion, HeyTea focused primarily on product R&D to bring an 'innovative' flavor to customers.

Source: 36Kr

8 years ago, in 2012, a new tea shop named Royal Tea opened on Jiuzhong Street, Jiangmen, Guangdong province. The owner was a 21-year-old young man Nie Yunchen. In Guangdong, tea is the most popular commodity that people drink in all seasons. Milk tea is also everywhere on the street, so Nie's Royal Tea was not much different from others initially, but Nie kept his vision of tea to this 30-meter square store. He cherished China's profound tea history instead of the powder-made fake tea, and he found that the tea market in China had not emerged as a mature market compared to coffee or another soft beverage market. The traditional Chinese tea was regarded as an old-fashioned lifestyle, which almost lost its attraction to young people who are the major consumption force in China. Many would even prefer Japanese green tea instead of the Chinese green tea flavor. Moreover, people will go to Starbucks for a cup of Latte, but they struggle to find a well-known tea shop that sells popular Chinese tea. Nie wanted to revolutionize the tea market in China.

 

Making a decent cup of tea sets the high benchmark for raw materials. While China is famous for tea production, none of the existing raw materials on the market met Nie's standard because they all contained artificial powders or sweeteners. To create his original taste, Nie went all the way to the upstream supply chain, improved the tea leaf baking process and blending methods, and made its raw material supply chain that met his requirement.

 

Substantial product development led to an ace product quality. Half a year later, Nie originated his tea - cheese cap tea. Unlike other milk tea using cheap milk powder or Chinese tea requiring sophisticated making, Nie put a 2 cm cheese cap layer on top of fresh brewed traditional Chinese tea. The dense flavor of cheese mixing with Chinese tea such as Oolong and Longjing brought the fresh taste to young customers. Abandoning the artificial sweetness from milk powder and pearls, Nie created the exclusive brand of "Royal Tea," surpassing other cheaper brands with 10 RMB milk tea and 20 RMB premium products. At the end of 2012, "Cheese Cap Tea's" reputation spread across Guangdong, and there were long queues in front of his little "Royal Tea" store every day.

• 2016-2017: Market recognition & brand development

HeyTea entered the second stage of development from 2016 to 2017 by expanding cross regions and setting its symbolic impact across the internet. In 2016, after completing store expansion in Jiangmen, Foshan, Zhongshan, and Shenzhen, Nie received a 100 million RMB venture capital investment from IDG. Unlike other brands who rushed to open up franchises, Nie carefully selected store locations and seized market share after getting the investment. With venture capital's injection, HeyTea upgraded its service, decoration, and product supply chain to expand beyond Guangdong province.

In the same year, Nie upgraded the brand name to "Heekcaa" by adding "inspiration," "zen," and "cool" elements to the brand. By carefully monitoring the product quality, interior decoration, and strict employee training, HeyTea emerged as the top tea shop in the competitive milk tea market. HeyTea didn't stop carrying out new product lines. It introduced fruit cheese cap tea in which it mixed seasonal fruit, tea, and cheese cap on the top.

Source: Sohunews

In 2017, HeyTea opened its first store outside of Guangdong in Shanghai's city center. As the landmark for a fashionable lifestyle and young-spirited taste, Shanghai gave HeyTea opportunities to thrive. With the solid product line and fresh taste, HeyTea's store in Shanghai's Raffles City attracted hundreds of people when it opened. Curious customers lined up in 6 rows for hours, and scalpers gathered around HeyTea stores to sell cups at 100 RMB per cup to customers who didn't want to wait in line. HeyTea began to gain a reputation across China. By 2017, if you hadn't heard or tasted HeyTea, you would be considered "outdated." People from other provinces started calling for new store openings in Beijing, Chengdu, etc. Crazy fans even ordered cross-province delivery services at 500 RMB extra per cup only to take a sip of HeyTea.

During the short expansion period, HeyTea also introduced WeChat mini-apps and a WeChat public account to attract traffic and increase its fan base over the internet. The internet ripple effect allowed customers to engage in the HeyTea culture even though they didn't have a chance to taste HeyTea themselves.

Source: YiMagazine

HeyTea developed its app HeyTea Go where customers can order online to avoid waiting in lines. More importantly, HeyTea saved invaluable data from its customers to better understand their shopping behaviors. HeyTea turned away from the traditional offline milk tea franchise to a data-driven internet company.

• 2018- 2020: Secure the crown and break barriers

Securing its market-leading position, HeyTea entered its current and third stage of expansion to regional first-tier cities in China and expanding overseas. Since 2018, HeyTea's name frequently appeared on the top newsfeeds in VC industries. In 2018, HeyTea received 400 million RMB Series B financing from Black Ant Capital and Meituan's industrial fund Longzhu Capital. In 2019, HeyTea was co-invested by Tencent and Sequoia Capital China, driving its post-investment valuation to 9 billion RMB.

At the end of 2019, HeyTea owned 390 stores in 43 cities across China, with a 139% annual increase rate from 2018. Among the 390 stores, 80% located in first-tier or new first-tier cities, fewer in second-tier cities, with only 3 stores situated in third-tier cities. Meanwhile, HeyTea is expanding overseas and has established 10 stores in Hong Kong and Singapore. Additionally, the "HeyTea Go" app attracted 15.82 million users throughout 2019, bringing the total number of users to 21.5 million. Even during the covid-19 epidemic, HeyTea secured another round of investment jointly led by Hillhouse Capital and Coatue Capital, pushing HeyTea's valuation to 16 billion RMB, only 8 months after its last game with a 9 billion RMB valuation. HeyTea became the highest evaluation tea brand in China.

Chinese Tea Market: Tea Culture as the Rich Soil for HeyTea to Thrive

HeyTea's growth story is not the only result of its product R&D but also the result of history and increasing demand. China enjoys a three-thousand-year history of drinking tea with Chinese people growing, processing, manufacturing, and applying tea to every aspect of life. However, the traditional tea market was declining, with only a 5.62% average growth rate. According to the Chinese Academy of Agricultural Science's data, there are 470 million tea consumers in China, approximately 31% of the total population. There are around 70,000 tea stores in China but with limited size and low brand recognition. The top franchise, such as Zhong Cha, Tian Fu's annual income were around 1 billion RMB. Therefore, it was very fragmented when HeyTea entered the tea market.

Source: China Statistics Bureau

Technology innovation also played a crucial role in promoting the tea market in China. Tea extraction, high-temperature and high-pressure steam technology, cold chain, and aseptic and sugar-free methodology collectively made new taste possible. According to 36Kr's survey in 2019, the demand for tea beverages reached 400 billion RMB, almost 2 times the coffee market in China, giving HeyTea the potential to grow even more significant.

Meanwhile, Chinese customers have developed a sophisticated taste for tea-affiliated products such as milk tea and fruit tea since the 1990s. In 1998, Bifengtang(避风塘) built its Shanghai headquarter to serve grass jelly milk tea (烧仙草奶茶). The same year, the Taiwan milk tea brand Coco was established. In 2005, Xiangpiaopiao (香飘飘)brought the innovative powder milk tea to the Chinese market. In 2007, Japanese beverage company Kirin Enterprise penetrated China with Afternoon Black Tea (午后红茶). In 2010, the lower-class milk tea brand YiDianDian (一点点)opened its first store in Shanghai. Chinese customers' appetite was familiar with milk tea, but at the same time, tired of similar taste brought by cheap and artificial sweeteners.

At the same time, Chinese, especially young people, intend to spend more on physical stores and enjoy the environment and shopping experience created by store decoration while they socialize with friends. McKinsey's newest report on Chinese customers indicates that even with the booming e-commerce in China, customers also made a noticeable shift back to shopping in physical stores, and young consumers in tier 1 and 2 cities are leading the trend. Meanwhile, consumers continue to blur the boundaries between online and physical channels: 88 percent of shoppers now engage with online and offline touchpoints in 2019, rising from 83 percent in 2017. HeyTea's approach to combining the offline shopping experience with online gamification HeyTea Go met young customers' yearning.

Source: McKinsey 2019 Chinese Customer Report

Market Demand: Understand HeyTea's Customers

In its beginnings, HeyTea's price limited its target customers to first-tier cities such as Beijing, Guangzhou, Shanghai, and Shenzhen. HeyTea's average price remains from 25 to 36 RMB, which is 30% more expensive than other popular milk tea brands such as Yidiandian and Coco.

Source: 36Kr

According to 36Kr's survey in 2019, 46% of HeyTea's customers come from the 18-to-28-year-old range, followed by 42% of the 29-40 age range. Not surprisingly, women take up a majority of the customer base. Among them, 39% of customers live in first-tier cities, and 28% live in emerging first-tier cities such as Chongqing, Chengdu, and Wuhan. The second tier and third tier combined share only make up around 33% of total customers. It's somewhat surprising for the annual income division to find 47% of them have a monthly income ranging from 5000 to 9999 RMB, and the second-largest customer base has an even higher gain, ranging from 10000 to 14999 RMB per month. More interesting, 92% of HeyTea's customers hold a university, graduate school, or junior college degree.

Source: 36Kr

There are also heavy internet users largely influenced by trendy products and inclined to get information from the internet. 70% of HeyTea's consumers get information from the internet, and 53% of the source information from a short-video platform. The connected social circle further implements the ripple effect with 57% recommendation from friends.

Source: 36Kr

The obvious user demographics such as first-tier city residence, high-educated, high-income, and heavily affected by social media and social networks indicate the shared user demand such as healthy, low-fat, low-sugar, and higher quality drinks.
 

In the product development process, brands need to clarify the most important for establishing a long-term and stable brand reputation. Otherwise, the faster expansion will only bring more significant problems that can ruin brand reputation due to bad taste. Once customers are disappointed, they walk away. A long-term stable brand reputation requires more standardized supply chain management and store management ability. Although these are the foundation, scientific management can provide more precautions for future food safety and other essential matters. A survey conducted by 36Kr reveals that the highest-ranking feature given by customers is "tasteful for both food and drink," highlighting that taste characteristics contribute to consumers' willingness to pay loyalty to one brand.

Source: 36Kr

With the mature tea leaf processing logistics, historical tea drinking culture and fun-seeking Gen Z, the Chinese tea market has been waiting for too long to embrace an innovative trend to revive the tea market and tea culture. HeyTea has undoubtably led the 2.0 tea market, and the next level of competition will be how to realize and implement the differentiation, diversification, innovation and upgrading among new tea beverage brands such as Nayuki and LeleCha. In our part 2 of HeyTea, we will introduce the digitalization and marketing approach adopted by HeyTea to differentiate itself from other followers.

All opinions expressed in this essay represent our personal views only.

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