Nesher's tea lost 145 million yuan last year, and the PRO store with high hopes performed poorly

Reporter | Lu Yibei

Edit | Xu Yue

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Nesher's first annual report after its launch was not very good.

On March 29, Nesher's Tea released its 2021 annual results, as of December 31, 2021, The total revenue of Nesher's tea in 2021 was 4.296 billion yuan, up 40.5% from last year; the adjusted net loss amounted to 145 million yuan, compared with a profit of 16.6 million yuan in the same period of 2020, from profit to loss.

In the past year, Nesher's tea stores have expanded rapidly - as of the end of 2021, the company has 817 stores nationwide, all of which are self-operated, with a net new number of 326 stores, and mainly concentrated in first-tier, new first-tier and key second-tier cities. The expansion of the store network has also become an important driving force for the growth of Neixue's tea revenue.

However, the high cost of Nesher's tea has greatly dragged down the final profit under the rapid expansion of stores.

According to the financial report, the cost of materials, including ingredients, packaging, etc., accounted for 32.6% of the total revenue, labor costs accounted for 33.2% of the total, while the expenses including long-term rent depreciation, short-term rent and property decoration could account for a total of 19.5%, and only the above project expenditures could already account for 85.3% of the company's total revenue.

Although the loss is serious, Naixue's tea will continue to open a store. Naiser's tea said in the financial report that a large number of expanded stores is conducive to cultivating and consolidating consumers' consumption habits for high-end ready-made tea in the future, and will continue to implement the "encryption strategy", and it is expected to open 350 new stores according to the prospectus plan in 2022.

Zhao Lin, co-founder, chairman and CEO of Nesher's Tea, said at the results meeting that the market environment has allowed many commercial brands to reduce store expansion, which makes Nesher's tea more affordable to negotiate rents. By signing a pure deduction model with commercial entities, for example, some fixed costs can be turned into some dynamic costs, "which is also an opportunity for us."

But the question is whether Nesher's existing store model can really support it to improve profitability on the basis of continuous store expansion.

Since the end of 2019, Naixue's tea has launched a PRO store type that is different from the original standard store, which has been given high hopes and is the key to the market's belief that Naixue's tea has embarked on a profitable road.

PRO store area, personnel allocation can be more flexible, the cancellation of on-site baking kitchen also allows this store type to not need special smoke exhaust pipes, so it can enter high-end office buildings, residential communities and other points that are difficult to enter in standard stores, in order to greatly save manpower, rental costs, and improve operational efficiency. Among the 326 new stores added by Nesher's tea in 2021, most of them are PRO stores. According to the type of store, Nesher's tea classifies the PRO tea shops located in the higher-level chain shopping malls as the first type of PRO tea shops, while the PRO tea shops located in other locations (high-end office buildings, etc.) are classified as the second type of PRO tea shops.

According to the original plan of Naixue's tea, the PRO store should have a more prominent performance than the standard store in terms of store operating profit margin.

However, this is not the case.

As of December 31, 2021, the average daily sales of Naixue's tea standard store, first-class PRO store and second-class PRO store were 20,300, 14,200 and 11,000 respectively, and the operating profit margin of the store was 17.5%, 9.8% and 6.2%, respectively. As far as the operating data released at present, the profitability of PRO stores is even far less than that of the original standard store.

Naixue's tea said at the performance meeting that the company's store opening was concentrated in the second half of the year, and the external environment changed rapidly in the second half of last year, and the business circle inevitably declined in the flow of people, resulting in a more obvious impact on the newly opened stores. It also plans to restore and improve the profitability of various stores through cost control and automation.

Nesher's tea is also struggling to find an effective way to reduce costs and increase efficiency through digitalization. According to the financial report, its self-developed automated tea making equipment has begun to select manufacturers and trial production at the end of the fourth quarter of 2021, and has been piloted in some stores, and is expected to be officially applied in stores nationwide before the third quarter of 2022. The company believes that the application of automated tea making equipment will be of great significance to reduce the labor cost of stores.

In addition, in terms of business, Nesher's tea is also looking for ways to increase revenue sources. Since the third quarter of 2021, Nesher's tea has entered the retail business through bottled fruit tea, sparkling water, pure tea and other products, and has recently added a Chinese dim sum product line. For now, these retail operations are still far from being the backbone of performance. According to the financial report, the revenue of its freshly made tea, bakery products and other products accounted for 74.2%, 21.9% and 3.9% respectively during the period.

In order to further broaden the consumer group, Naixue's tea also announced a sharp price reduction in March, launched a new tea product line of less than 20 yuan to relax the series, and promised to put on the new "1 word" products every month, but also lowered the price of a variety of products, the maximum drop of 10 yuan, there is no more than 30 yuan of products, the main price band as a whole moved down.

Zhao Lin said at the performance meeting that if the customer atmosphere A, B and C are three categories according to the consumption power, the difference between Nesher in the past mainly covers the A category with relatively high consumption power, but with the increase of stores, it is necessary to attract B and C customers. And a price cut or easy series can help companies broaden their price bands.

This is also a common measure of Xi tea and Lele tea, which were considered to be priced in the range of 30 yuan in the past. Since February, these brands have successively announced price cuts. A problem that is gradually emerging is that the target customer base of Heytea, Neixue and LeleCha – that is, young people in tier 1 and 2 cities – has a growth ceiling, and brands that have been saddled with the impression of expensive milk tea in the past have difficulty attracting broader- and price-sensitive consumers. At a time when the overall growth rate of the new tea industry is slowing down, the homogenization of products and the intensification of competition are becoming more and more significant, how to compete for stock is a problem that every brand is thinking about.

On the other hand, Nesher's first annual report may affect the capital market's value judgment on the entire new tea drinking track. On June 30, 2021, Nai Xue's tea was officially listed on the Hong Kong Stock Exchange as the "first share of new tea drinks", but after the first day of the listing, it repeatedly reached a new low, and its total market value of HK$32 billion at the time of the bell has fallen to HK$8.644 billion at the close of March 30, and the stock price once bottomed out to 3.650 yuan not long ago. Behind this performance, the market has doubts about the profitability and growth of Nesher's tea.

At present, there may be a number of new tea companies waiting in line for the opportunity point of listing, such as Xicha, which completed the D round of financing in 2021 and is valued at 60 billion yuan, and Mixue Ice City and Gu Ming, which have been rumored to be listed but denied.

But can today's new tea industry still be as hot as it used to be?