Vol. 3 What you need to know about bubble tea shops in China, and global fintech funding

1st edition on beverage

When bubble tea (or "boba") arrived in mainland China from Taiwan over a decade ago, few could have foreseen the milky tea with chewy tapioca balls becoming a hundred billion yuan market. Today, the tea beverage in China has diversified significantly in terms of flavors, ingredients, packaging and pricing. For some consumers, a daily tea drink is a necessity, not a choice. In this context, it's worth taking a look at the tea beverage market by consolidating public data, industry reports, and our own index.

We hope you're enjoying a warm boba as you read this edition.

China’s tea beverage landscape

To begin with, the definition of tea beverages is broad. The China Chain Store & Franchise Association has published a report on the terminology and classification of tea beverages, which includes tea, traditional milk tea, milk tea, flavored tea beverages, new tea and others. Broadly speaking, tea drinks are those that are made on site and served directly for consumption.

Based on publicly available data, including company registrations and trademarks, the number of tea beverage stores in China has steadily increased to around 350,000 this year (see footnote1). Although the pandemic has undoubtedly taken a heavy toll on these businesses, resulting in a decline in store growth from 2020 to 2022, many tea shops have expanded this year. This trend is particularly evident in the reversal of the net store growth from 2022 to 2023.

Guangdong, Jiangsu, Guangxi, Sichuan and Hunan are the top 5 provinces with the most tea shops. This is not unexpected as the majority of these provinces are located in the south and have a culture of drinking tea, in contrast to consuming alcohol in the northern regions. This may explain why Beijing, Tibet and Qinhai have the least number of stores. Many top tea beverage brands are also from southern China, such as Heytea (喜茶, Guangdong), Nayuki (奈雪的茶, Guangdong), Chayanyuese (茶颜悦色, Hunan).

For the food and beverage industry, table turnover is a key metric for predicting business performance. The faster tables are turned, the more customers are served and the more revenue is generated. At Micro Connect, we have ranked all food and beverage categories according to their table turnover rates. Tea drinks have the highest rate of all drinks.

If you look at the Micro Connect Daily Cash Index ( See footnote2 for details of MDCI index) over the past 15 months, you will find that the business has a seasonal pattern. Naturally, summer is the busiest time of the year, and winter is a relatively slow season, although many stores do serve hot drinks. Typically, March sees a spike in business, as many brands start to introduce new flavors of the year.

Another notable aspect of the tea beverage industry is its significant proportion of online and mobile orders. We have evaluated all food and drink categories in our portfolio based on their takeout order percentages. Tea drinks are only outranked by burgers and fried foods.

Like many Chinese brands seeking to increase their profit margins amid heightened competition in top-tier cities, several tea beverage companies are rapidly expanding into lower-tier cities and opening up franchise opportunities.

According to Meituan, one of China's largest food delivery service providers, orders for tea beverages in Tier 5 cities and below grew at almost the same rate as those in Tier-1 cities in the first half of 2023, indicating significant untapped business potential.

Industry insight (curated charts, data, etc.)

𝐅𝐢𝐧𝐭𝐞𝐜𝐡 𝐟𝐮𝐧𝐝𝐢𝐧𝐠 𝐭𝐫𝐞𝐧𝐝𝐬 in Q3:

According to CB Insights, global fintech funding slowed to USD30.5 billion in the first 9 months of 2023, down 61% from the 2022 full-year number. In Q2 and Q3, the number of deals declined steadily by a fifth respectively.

In Q3, digital lending attracted USD1.7 billion, with insurtech and payments as distant seconds (each with USD1.1 billion). The rest were split between capital markets tech, banking, and wealth tech.

🦄Unicorns: In Q3, there were 2 new names joining the club in the US ( BitGo and Kin Insurance), 1 in Asia (Micro Connect), and zeros elsewhere.

Story of a tea shop

Quchashan (去茶山) is a tea beverage brand that began operating 23 years ago in Guizhou province in southern China. It is impressive that they continue to develop new flavors and enhance the quality of their signature drinks in a cutthroat industry where brands and stores are constantly opening and closing. Unlike many popular tea beverage brands that rapidly expand throughout China, Quchashan has remained in the southern and southwestern regions of the country for many years, preserving the local culture, people, and taste. Read their story here.

Footnote:

1. This number is only for reference, as it may be different from other estimates due to the source of data.
2. Micro Connect invests in individual small stores through a daily revenue sharing model, meaning that an invested store shares an agreed upon percentage of its daily cash flows with us throughout the investment period. Thanks to China’s digitized economy, we can automatically capture shared revenues every day.Based on our investment pool of more than 10,000 stores, Micro Connect Daily Cash Index (MDCI) tracks how much return we receive every day per one thousand RMB investment (e.g. if the index is 1.5 today, it means we receive RMB 1.5 in return for every RMB 1,000 investment). This gives us a glimpse into how these small shops are performing on a daily basis. In a word, we follow the money.