Relying on "tail docking" for profit, is Naixue betraying itself by joining the sinking market?

After a year and a half of accumulation, Naixue's Tea finally crossed the breakeven point and achieved the long-awaited profit. However, as time goes by, the expectations of the capital market have quietly evolved.

Looking closely at the present, the tea industry is surging. Emerging brands such as Migu Xuebingcheng, Chabaida, and Guming have submitted or successfully listed their applications, showcasing their impressive performance and continuously attracting the attention of investors.

In this context, investors' expectations for Naixue's Tea are no longer limited to the shift from loss to profit, but rather hope that it can demonstrate a stronger profit-making ability and continue to release greater profit value.

Faced with such a competitive landscape and market expectations, how should Naixue's Tea, while adhering to its core brand strengths, accurately strategize and effectively broaden its growth path to boost the confidence of the capital market?

Can "quantity and price decline" be overcome?

April 30th was the last day of operation for the "Tai Gai" milk tea brand's Maoye store in Huaqiangbei, Shenzhen, and this store is also the last Tai Gai store in Shenzhen.

As a sub-brand launched by Naixue Tea in 2015, Tai Gai was initially introduced as a supplement to the main Naixue brand, targeting the affordable tea drink market, with the goal of attracting price-sensitive consumers such as students and young office workers. The prices were more affordable, with an average customer spending of around 16 yuan, and it was once a "hot cake" under Naixue's umbrella. However, as Tai Gai did not generate substantial profits for the company, Naixue Tea planned to gradually close Tai Gai stores and focus its business on the main brand, Naixue Tea.

By strengthening cost control and strategic focus, Naixue Tea delivered a solid performance in 2023.

Recently, Naixue Tea's 2023 annual financial report showed a total operating income of 5.164 billion yuan, a year-on-year increase of 20.3%, demonstrating strong brand influence and market competitiveness. Particularly noteworthy is the company's achievement of turning losses into profits, with a net profit attributable to the parent company of 13 million yuan and an adjusted net profit of 21 million yuan, marking a significant breakthrough in Naixue Tea's profit model.

However, beneath this impressive financial performance, some operating indicators showed a downward trend. Data showed that the average order consumption amount per direct-operated store of Naixue Tea in 2023 was 29.6 yuan, a decrease of 13.7% from the previous year, and the average daily order volume per tea drink store also slightly decreased by 1.1% to 344 orders.

Faced with the dynamic changes in the consumption environment, Naixue Tea adopted a "price for quantity" strategy, actively lowering product prices to attract a wider range of consumers. While this measure may help expand market share, it inevitably led to a decrease in the value of individual orders. At the same time, the slight decline in the average daily order volume reflects that the sales growth did not meet expectations under the price reduction strategy, presenting a situation of "quantity and price decline."

Nevertheless, it is worth acknowledging that Naixue Tea's efforts to reduce costs and improve efficiency have begun to yield results. The financial report data showed that the operating profit margin of direct-operated stores increased from 11.9% in 2022 to 17.7% in 2023. Although there is still room for improvement to reach the set target of 20%, it reflects the substantial progress the company has made in refined operations, cost control, and efficiency improvement. The optimization of the profitability of individual store models means that Naixue Tea can ensure the quality of individual store profits while expanding its scale.

In terms of cost structure, the labor cost ratio was controlled at 20.3%, and the actual rental cost ratio remained at 14.5%, basically meeting Naixue Tea's cost control targets of within 20% and 15%, demonstrating the company's precise efforts in cost control and efficiency improvement.

So, faced with the challenge of "quantity and price decline," can Naixue Tea successfully break through? How much room is there for cost reduction and efficiency improvement?

Firstly, the long-term effects of the "price for quantity" strategy still need to be continuously observed. With the continuous increase in consumer demand for high-quality tea drinks and the further enhancement of Naixue Tea's brand influence, moderate price adjustments may attract more price-sensitive consumers, thereby driving continuous sales growth. At the same time, the company also needs to closely monitor market feedback, adjust product combinations and pricing strategies in a timely manner, to ensure the dynamic balance between attracting new customer groups and maintaining brand loyalty among existing customers, achieving a balance between average customer spending and order volume.

Secondly, there is still significant potential to be explored in cost reduction and efficiency improvement. On the one hand, Naixue Tea can improve production efficiency and reduce labor costs by deepening the application of digital technology and intelligent equipment, thereby reducing reliance on manual labor. For example, optimizing the operational processes of ordering, production, and delivery can improve service speed and accuracy, enhancing customer experience while effectively reducing costs. On the other hand, by optimizing site selection, lease negotiations, and diversifying store formats (such as small store models, quick pick-up stores, etc.), Naixue Tea can continuously optimize the cost structure of rental expenses. In addition, strengthening supply chain management and improving the efficiency and bargaining power of raw material procurement are also important ways to reduce costs and improve efficiency.

Leveraging franchisees to enter the lower-tier market

In 2023, Naixue Tea's main brand expanded vigorously, opening approximately 544 new stores, achieving a net increase of 506 stores. Although slightly lower than the initial target of opening 600 stores, its expansion pace remained steady.

Faced with signs of slowing market demand in the second half of last year, Naixue Tea decisively launched the franchise model in July of the same year, aiming to accelerate market penetration through extensive social capital. By the end of 2023, a total of 81 franchise stores had successfully opened, demonstrating the market potential of the franchise model.

Initially, to ensure dual control of brand standards and store quality, Naixue Tea adopted relatively strict standards in formulating franchise policies, setting higher entry thresholds compared to the industry average.

However, in the face of rapid changes in the market environment and competitive landscape, Naixue Tea made significant adjustments and optimizations to its franchise policy in February 2024. Among them, the investment budget was significantly reduced from nearly a million to 580,000 yuan, greatly alleviating the financial pressure on franchisees; the store area requirement was relaxed from the original 90 square meters to 40 square meters, broadening the range of available properties, allowing Naixue Tea to enter more city business districts and communities, reaching a wider consumer base.

The adjustment had an immediate effect, as of March 31 this year, Naixue Tea operated a total of 1,597 direct-operated stores and 205 franchise stores, and the franchise business showed a strong growth momentum.

At the recent performance briefing, the management of Naixue Tea clearly stated that they plan to open 2,000 to 3,000 franchise stores in the next two to three years.

This not only signifies Naixue Tea's high expectations for the franchise model, but also demonstrates their determination to deeply tap into the potential of the lower-tier market.

Currently, the competition in the tea beverage market is becoming increasingly fierce, and the open franchise model and pursuit of large-scale expansion have become the new norm for all brands. Faced with the situation of the "battle of ten thousand stores," tea beverage brands are accelerating their expansion and no one is willing to slack off on the path of expansion. Naixue Tea chooses to leverage the power of franchisees to expedite the store opening process, attempting to exchange for a stronger profit momentum through economies of scale.

However, opening up the franchise and lowering the threshold for franchisees is a double-edged sword for Naixue Tea. While accelerating the layout of the lower-tier market and enhancing brand influence and profitability, it also brings about various challenges such as brand control, supply chain management, profit distribution, and intensified internal competition.

In terms of positive effects, firstly, by attracting social capital to invest in store openings, Naixue Tea can achieve rapid growth in the number of stores while maintaining stable internal funds, improving capital utilization efficiency, and reducing the financial pressure of corporate expansion, especially in third- and fourth-tier cities and broader lower-tier markets, effectively filling in the brand's blank areas and seizing market share.

Secondly, a large number of new franchise stores act as brand "tentacles," penetrating into the living circles of consumers in various regions, consolidating and enhancing Naixue Tea's brand awareness and influence through high-frequency and wide-ranging brand exposure.

Furthermore, a large-scale franchise store network is expected to achieve supply chain optimization through centralized procurement, unified distribution, and cost reduction. The standardized operating model can also improve management efficiency, laying the foundation for overall profit improvement.

It is worth mentioning that compared to a fully direct-operated model, the franchise model can effectively diversify the company's operational risks, with franchisees bearing some of the operating costs, while the company focuses on core areas such as product development, brand promotion, and supply chain management.

In terms of the potential negative impacts of lowering the franchise threshold, on one hand, relaxing the franchise conditions may lead to varying qualities among franchisees, increasing the difficulty of brand management in product quality control and service standard execution. If individual franchise stores fail to strictly adhere to brand standards, it will damage the brand image and consumer experience.

On the other hand, large-scale expansion may lead to a surge in raw material demand, placing higher demands on supply chain management. How to ensure the quality of raw materials, stable supply, and efficient logistics distribution is an urgent issue that Naixue Tea needs to address.

Additionally, the lower franchise threshold may compress the profit margins of individual stores, and sharing profits with franchisees. Balancing the reasonable returns for franchisees while ensuring the overall profit level of the company is not affected will be a challenge that Naixue Tea needs to confront.

The risk of market saturation should not be overlooked. With a large number of franchise stores entering the market, it may lead to overly dense stores in certain areas, triggering internal competition within the same brand and intense competition with other tea beverage brands, and even sparking price wars, affecting overall profitability. Therefore, helping franchisees stand out in the competition and avoiding "internal consumption" is also a challenge that Naixue Tea needs to face.

Overall, after achieving a breakthrough in profitability, Naixue Tea is standing at a new starting point. Faced with higher expectations from the capital market and the fierce competition in the industry, its future development path will test the management's strategic decision-making and refined operational capabilities in an environment where opportunities and challenges coexist.