How Are Upstream Water Suppliers Doing After the Tea and Coffee Industry’s “Cooling Down”?
— An In-Depth Analysis of the Tea and Coffee Supply Chain’s Struggle to Increase Revenue Without Increasing Profits and the Need for Transformation
Hello everyone, I’m your financial journalist friend. Recently, you might have noticed that the number of new tea and coffee shops on the streets isn’t as high as it was a few years ago, and some brands are even closing down quietly. This change isn’t just limited to the stores; it’s affecting the entire supply chain, impacting those who provide ingredients like fruit juices, plant-based creamers, and paper cup straws.
In the past, as tea and coffee brands expanded rapidly, upstream suppliers benefited greatly. But now, the situation has changed. Today, we’ll break down this news story in simple terms to understand the logic behind these challenges and explore potential solutions.
Industry Overview: From Rapid Growth to Steady Progress
Over the past few years, China’s ready-to-drink tea market has been a booming sector, attracting a lot of capital and leading to the opening of numerous stores. However, the growth rate has slowed down significantly:
- Growth Rate Decline: The industry’s growth rate peaked at 24.9% in 2021 and is now expected to drop to 7.3% by 2026.
- Store Opening and Closure Ratio: While in the past, for every 10 new stores opened, 1 closed; now, for every 1.6 new stores opened, 1 closes. Additionally, 62% of brands are seeing a reduction in store size or stagnation.
In simple terms: It’s like a car that was speeding on the highway suddenly having to slow down in a congested urban area. For upstream suppliers, it means they can no longer rely on steady sales just by producing goods; they now have to compete with lower prices and face changing customer demands. The era of easy profit growth is over, and now it’s about surviving in a competitive market.
Financial Reality: Increased Revenue, but Not Profits
The news highlights two companies as examples: Weike Xian, which is preparing for an IPO, and Tianye Shares, which is already listed. Their financial reports reveal a stark reality:
- Weike Xian (supplier of HPP fruit juice concentrates): Revenue increased by 25.23% in the first half of the year, but net profit decreased by 22.77%, with a gross margin of only 20.33%.
*Reasons:* To secure orders from major customers like Mishi Ice City and Luckin Coffee, they had to lower prices. Meanwhile, increased fixed costs (equipment, factories) and lower selling prices squeezed their profit margins.
- Tianye Shares (supplier of raw fruit juices and frozen fruits and vegetables): Revenue dropped by 6.75%, and net profit plummeted by 94.16%.
*Reasons:* The downturn in the downstream industry led to increased competition, forcing them to engage in price wars and even incurring losses on some products.
In simple terms: Restaurants might see more customers, but they need to offer discounts to retain them, and their costs (rent, labor) are rising, resulting in less profit. The key issue is that upstream suppliers have little bargaining power against large customers.
Survival Crisis: Double Pressure from Giants and Price Wars
Another challenge is that downstream brands are becoming more self-sufficient, reducing their reliance on external suppliers:
- Self-Sufficiency: Brands like Mishi Ice City and Luckin Coffee are buying their own fruits, coffee beans, and even building factories to produce essential ingredients.
*Consequences:* This reduces the market space for external suppliers and makes it harder for them to pass on price increases.
In simple terms: It’s like a supplier who used to supply a restaurant chain; now the chain grows its own crops and processes its own ingredients, leaving the supplier with fewer opportunities.
Breaking the Cycle: Transforming from Suppliers to Solution Providers
To survive, upstream suppliers need to shift their focus:
- Product Upgrading: From selling basic ingredients to offering “healthy, functional, and uniquely flavored” solutions.
*Trends:* Consumers are seeking products that promote gut health, weight loss, and low sugar content.
*Examples:** Using plant-based alternatives to creamers, adding health-boosting ingredients, and employing advanced technologies like HPP (High-Pressure Processing) to preserve nutrients.
- Channel Diversification: Selling products directly to consumers (C-end) in addition to traditional B-end (brand stores).
*Weike Xian’s success:** By producing ready-to-drink cold-brewed tea and fruit juices, it’s gained a higher profit margin (25.29%) from the C-end, despite overall revenue decline.
In simple terms: Suppliers need to differentiate their products and target more premium markets to avoid price wars and gain more control over their profits.
Future Outlook: Structural Differentiation
The industry will see a clear division between strong and weak players. Those that can innovate and diversify their products and channels will thrive. Opportunities lie in niche markets with high technical barriers and higher margins.
For Investors and Entrepreneurs:
- Investors: Don’t just rely on companies with a “tea and coffee” theme; look for those with unique technologies, diverse customers, and profitable C-end or high-margin B-end businesses.
- Entrepreneurs: Focus on innovation and differentiation; technology (e.g., advanced processing methods) or building strong brands will be key to success in a competitive supply chain.
In conclusion: The golden age of the tea and coffee industry has passed, but the era of specialized supply chain services is just beginning. Those who can adapt and innovate will thrive in the new market landscape.