This is an English adaptation of a FoodBud historical article originally published on October 10, 2021.
The next growth question for beverage chains is not simply whether coffee brands can add tea-style drinks, or tea brands can add coffee. The harder question is whether these moves create incremental demand, or only redistribute sales within the same store-made beverage market.
In China, many investors were already questioning how much opportunity remained in premium fresh tea. Nayuki had listed, Heytea's latest financing reportedly pushed its valuation to RMB 60 billion, and Lelecha, then the third-ranked high-end tea player, was left in a difficult position. Some projects were still asking for very high valuations, including one brand reportedly seeking RMB 10-20 billion. A return to more rational pricing looked increasingly likely.
Coffee still appeared to have more room to grow, but whether the incremental market was truly large enough remained unproven.
Fresh tea innovation has largely been built on brewed tea plus fruit, cheese foam, milk caps, and other add-ons. Ingredient quality determines price positioning, but the model has a limit: there are only so many fruits to discover. Even niche fruits such as yougan, or emblic leafflower fruit, were turned into seasonal hits.
The problem is supply. Once yougan became a hit, sweet yougan supply proved limited, raw material prices rose sharply, stores ran out of stock, and the question became whether consumers would still remember or repurchase the product once the hype passed.
For operators, the lesson is clear: new product R&D now has to account for supply-chain capacity from the start. New launches are useful for customer engagement and for discovering the next hero SKU, but repeat purchasing still concentrates around core bestsellers. Consumers may enjoy occasional novelty, but they usually value predictable service and product quality more.
Luckin Coffee's move toward milk-tea-style coffee was comparatively strong, partly because it had already tried the Luckin Tea sub-brand. The author argues that the Luckin Tea products themselves were weak, and that shrinking those stores and converting them back into Luckin Coffee locations was the right decision.
After that learning curve, Luckin appeared to improve its coffee-tea crossover capabilities. Its coconut latte became a breakout product in 2021 and helped support a strong share-price recovery on the pink-sheet market.
But when tea brands make coffee, and coffee brands make milk-tea-style beverages, they may simply be taking demand from each other. The overall market for store-made beverages may not expand much unless the products create new occasions or new users.
According to Nayuki's prospectus, China's freshly made coffee market was RMB 50.7 billion in 2020, while freshly made tea drinks reached RMB 113.6 billion.
Within coffee, Starbucks China generated annual revenue of roughly RMB 20-26 billion, while Luckin Coffee generated RMB 4 billion the previous year. Starbucks held roughly half the market, while Luckin's share was only about 8%.
At the time, Starbucks' market capitalization was US$131.1 billion. If Starbucks China alone were assumed to represent 25% of that value, it would be worth about US$32.8 billion. Luckin Coffee's market capitalization was only US$3.3 billion, which the author viewed as a much more rational price.
Manner, by comparison, had more than 200 stores and a valuation of US$2.8 billion. Its Shanghai model depended on dense street-side store expansion. The author questioned whether the same store model would work in Beijing and other tier-one cities, and how long it would take to build national expansion capability.
That said, when capital markets are favorable, raising as much money as possible can be strategically useful. More cash extends endurance.
Cross-category fusion had already begun, but execution quality mattered.
Tea brands were adding coffee. Coffee brands were adding sparkling water and other beverage formats. Some products, however, were difficult to accept on taste.
The author cites Heytea's coconut latte as an example of a weak product, especially compared with Luckin's version, and asks whether Heytea's investment in Seesaw had not yet translated into better creative coffee know-how.
Nowwa Coffee's fruit-flavored sparkling coffee co-developed with Hankou No. 2 Factory was also described as too light in coffee flavor. Franchisees reportedly said stronger coffee would increase costs. The author argues that brands could instead offer multiple versions, as Luckin did with different coconut latte options.
The operating risk is positioning. If a product has moved so far away from coffee that consumers no longer perceive it as coffee, it may be better to remove the coffee positioning. Otherwise, the gap between expectation and experience damages trust. For tea brands serious about coffee, building or acquiring a dedicated coffee brand may be cleaner than stretching the core brand too far.
Heytea had moved further into ready-to-drink beverages. It began preparing a bottled beverage business in 2019, chose sparkling water as the first category, and launched three sparkling water products in July 2020. By the time of the article, those products had been upgraded at least three times.
Based on that experience, Heytea also entered bottled fruit tea in mid-2020 and launched its first bottled fruit tea products on June 18, 2021.
More recently, Heytea launched bottled lemon tea in two versions: Qing Bao Ning, made with lemon and green tea, and Nong Bao Ning, made with lemon and Cantonese-style black tea. The products were positioned as low-sugar, lightly astringent, and refreshing. They were sold in 7-Eleven and FamilyMart stores in key markets including Guangzhou and Shenzhen at RMB 6.8 per bottle.
The author had also heard that one lemon-tea chain wanted to strengthen its new retail business and eventually make packaged retail products 70% of revenue, with stores contributing 30%. Its extensions ranged from lemon tea drinks to ready-to-drink beverages and lemon jelly. But this is a difficult shift for companies built around offline store operations.
Online consumer goods channels, convenience stores, and supermarkets operate very differently from opening stores one by one. Incumbent beverage giants such as Tingyi and Uni-President would not easily allow new entrants to squeeze their market share. The pressure on Genki Forest that year was cited as an example.
Tingyi's financial data showed why the market was attractive. In the first half of that year, Tingyi's beverage business generated RMB 22.276 billion in revenue, up 26.45% year on year, and net profit of RMB 1.554 billion, up 39.80%. Tea beverages grew 23.32% to RMB 8.929 billion in revenue, while juice grew 33.97% to RMB 2.852 billion.
For fresh tea brands, even taking a small share from the giants would be meaningful.
Seesaw's exploration of a day-coffee, night-alcohol store model, and data from U.S. coffee chain Dutch Bros, both raised another question: can beverage chains expand into more functional occasions?
Coffee plus alcohol may have room to grow. Helen's showed the mass-market possibility of beverage-style alcoholic drinks, with RMB 400 million in revenue from that category in the first half of the year. A consumer may drink coffee for energy during the day, then visit an evening store format for a light alcohol occasion.
Tea drinks have turned fruit, milk caps, and high sugar into a dessert-like cup format. Coffee's core job, by contrast, remains stimulation and alertness. In listed beverage companies, Dongpeng Beverage stood out with functional drinks. Vita Coco, which was preparing to list at the time, offered not only coconut water but also post-workout energy replenishment drinks.
The question for operators is how much room remains to upgrade different beverage occasions into cup-based formats. Dutch Bros' Blue Rebel functional beverage line ranked second in sales contribution at 24%, and about 82% of its products sold the previous year were cold drinks. The author also asks whether the Red Bull and Dongpeng drinks commonly kept by ride-hailing and truck drivers need an upgrade.
Other possible R&D directions included weight management, qi and blood replenishment, sleep improvement, dampness reduction, hyaluronic-acid hydration, and anti-hair-loss concepts.
Dongpeng Beverage expanded its business scope. On October 8, Dongpeng Beverage Group added a new investee, Shenzhen Dongpeng Vitamin Beverage Co., Ltd. According to Leju Finance, the company was established on September 30, 2021, with registered capital of RMB 100 million and Liu Meili as legal representative. Its business scope included food sales, alcoholic product production, and beer manufacturing. It was 100% owned by Dongpeng Beverage.
Bloomberg reported that Anheuser-Busch InBev NV was studying a sale of some German beer brands as it focused on other business priorities beyond producing global beer products. People familiar with the matter said the regional brands could be worth about EUR 1 billion, or US$1.2 billion, and that AB InBev was working with an adviser to explore options. Discussions were still ongoing, and there was no certainty that the company would proceed with a sale.
Note: valuation, IPO, revenue, target-mix, and asset-sale figures in this article are historical figures from 2021.