Luckin Coffee Failed but Cheese-Flavored Bubble Teas Are Coming

Bubble Tea. (Photographer: Michael Gross/Bloomberg News)

Luckin Coffee Failed but Cheese-Flavored Bubble Teas Are Coming


Luckin Coffee Inc. was the last Chinese consumer brand that took U.S. stock markets by storm. The coffee chain unicorn — not even two years old at the time — went public in New York in May 2019, raising $645 million. It reaped another $778 million from a share and convertible bond sale months later. Luckin’s pitch was seductive. Imagine, a morning cup much cheaper than offered by Starbucks Corp., served to millions of young Chinese on the verge of switching to coffee from the national beverage of tea. Well, that all ended miserably, with Luckin collapsing after admitting to accounting fraud. 

But that failure hasn’t stopped businesses from trying to capture the tea drinkers of China. After all, the country does have about 250 million members of Generation Z, on top of another 300 million millennials. With enough venture capital money and marketing, the shopping and consumption habits of young people can be influenced and molded — with the effort turning into great profit, eventually. 

So here come the new-age shops, specializing in tea-based milkshakes often served with chewy tapioca pearls. 

Nayuki Holdings Ltd. is still in the red, with only 3.1 billion yuan ($479 million) in sales last year. But it just raised HK$5.09 billion ($655 million) in a Hong Kong public listing. Investors loved it: Its share sale attracted five cornerstone institutional buyers and was over 400 times oversubscribed at the retail tranche. The unicorn was valued at $4.4 billion at the IPO, more than doubling the valuation from its December funding round. Back in March 2020, HeyTea, a competitor backed by Hillhouse Capital Group, already boasted a  $2.2 billion valuation and, in a June 2021 Chinese news report, was valued at roughly 60 billion yuan ($9.3 billion) at its latest funding round. It might seek an IPO by year-end

Nayuki’s IPO shares are not cheap, even by Luckin’s standards. At its January 2020 peak, Luckin was valued at around 17.5 times 2019 sales. Nayuki is priced at about 10 times 2020 revenue. Back then, Luckin reported that sales growth more than doubled. Revenue at the tea bubble chain, on the other hand, grew only 22.5% last year, in part due to Covid-19. 

Bubble teas are originally from Taiwan and were introduced to mainland China in the 1990s. So what kind of magic are these unicorns promising now? 

HeyTea and Nayuki have radically altered the tea powders and creamers used in street-corner bubble tea stalls. They’ve been replaced with high-grade tea leaves, fresh milk and often have whipped cheese or cream toppings added to the brew along with fresh fruits, such as strawberries, mangoes or grapes. One of Nayuki’s signature drinks is a bright-colored strawberries and jasmine tea blend, topped with a layer of whipped “imported” cheese. It’s inspired by strawberry cheesecake, according to the company website. 

Last year, the average order at Nayuki came to a respectable 43 yuan. In other words, it’s no Luckin, which sold cheap coffee at about 10 yuan per cup. As a result, Nayuki was profitable at the store level. Even with Covid-19 and less foot traffic, operating profit margin at its flagship brand  came in at 12.2% last year, versus 2018 and 2019’s 18.9% and 16.3%.

The profit potential has got investors excited — and they are happy about the youthful clientele, too. According to a recent CLSA survey of consumers, 94% of those aged between 20 and 29 bought bubble tea in the last three months, and they even prefer the cheese-topped tea to the traditional Chinese concoction or coffee. Sipping bubble tea in an upscale shopping mall, or hanging out at a fashionable tea shop with co-workers seems a trendy thing to do for the young generation that prefers “touching fish” — slang for goofing off — to working “996 hours” — more slang, this time for 9 a.m. to 9 p.m. six days a week. 

There is one similarity to Luckin, however. These chains are also cash burns. 

Nayuki opened its first bubble tea shop in late 2015. Since 2017, it has gone through five financing rounds to fund its  store openings. Including proceeds from its IPO, Nayuki has raised about $850 million, data compiled by Bloomberg Opinion shows. By comparison, in the last three years, the bubble tea chain took in only $172 million in operating cash. In other words, Nayuki has not been able to generate enough cash flow to sustain its own expansion. 

As of 2020 year-end, the company had 491 Nayuki teahouses. It plans to open 300 this year and 350 next, although about 70% will be smaller and less capital-intensive. Still, the question remains: When will Nayuki become self-sufficient? Will it take Luckin’s route and try to raise more cash via convertible bond sales? 

Complicating the matter is competition. Luckin was practically unrivalled among Chinese coffee brands and was largely competing with Starbucks. Nayuki and HeyTea have to fight it out. In the premium bubble teahouse space, HeyTea has 27.7% market share, followed by Nayuki’s 18.9%. Both are well-funded and even if one ends up the winner, the results may not be pretty. 

When Guangdong-based HeyTea first opened in Shanghai in 2017, customers had to wait in line for hours to buy a cup. That impression of scarcity may have played a part in fomenting desire among the young and impressionable. The craze could prove to be transient. As the bubble tea unicorns race to raise millions and populate big cities with shops, the lines are growing shorter. Will Gen-Z prove to be loyal customers? Or will they line up for the next unicorn trend that comes along?

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

©2021 Bloomberg L.P.

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