This is an English adaptation of a FoodBud historical article originally published on March 30, 2022.
On March 29, 2022, Nayuki released its 2021 full-year results. Revenue rose 40.5% year on year, store-level operating profit reached RMB 590 million, and adjusted net loss was RMB 145 million.
In 2021, Nayuki added 326 net new stores and said it expected to open another 350 stores in 2022. While Heytea had already slowed its expansion pace, Nayuki was still pushing ahead. By the end of 2021, its store count had reached 817, making a 1,000-store scale in 2022 appear achievable.
The key question for operators: why keep expanding while COVID disruptions were still recurring?
Competition in freshly made tea drinks had become more intense. As store density increased, new-store openings no longer produced the same launch effect seen two or three years earlier, when a brand's first few stores in a city could peak immediately after opening.
Under repeated COVID disruptions, Nayuki had been betting on its PRO store format since 2021. The company categorized PRO tea stores in higher-tier chain shopping centers as Type 1 PRO stores, while PRO stores in other locations, such as premium office buildings, were classified as Type 2 PRO stores.
Nayuki was converting standard stores into PRO stores while also concentrating new openings in the PRO format. In 2021, more than 40 standard stores were converted. According to the company, after conversion at the same location, revenue did not decline and in some cases increased, while profit margins rose substantially.
Compared with standard stores, PRO stores are smaller and require less labor. A standard Nayuki store typically needs 25-30 employees, while a PRO store is expected to require 10-15 full-time staff. The PRO format also makes it easier to deploy automated equipment and improve operating efficiency.
Nayuki said expiring standard stores would gradually be converted into PRO stores. Around 10% of older stores could renegotiate rent structures, though most would remain under their original rent terms.
For new openings, Nayuki planned to focus primarily on PRO stores, especially Type 1 PRO stores, with an approximate Type 1 to Type 2 ratio of 3:1. Type 2 PRO stores were positioned more as strategic infill in mature markets. At the time, only Shenzhen, with 120 stores, was considered relatively mature; other cities still had lower store density.
Nayuki expected its Shenzhen store count to reach 130-150 in 2022. Shenzhen is Nayuki's home market and was becoming its first mature market. Once a city reaches a certain density, store growth enters a more stable phase, and Shenzhen was already in that state.
The next markets approaching Shenzhen's pattern were likely Guangzhou and Shanghai. Nayuki had nearly 50 stores in Guangzhou, where store performance was already becoming stable. Shanghai had 65 stores and was expected to stabilize at 80-100 stores.
Nayuki had previously said it would deploy automated tea-making machines across stores at scale in the third quarter of 2022. Beyond equipment, it also planned to shift rent, labor, and procurement from fixed costs toward more dynamic cost structures.
COVID disruptions had a major impact on tea-drink store operations. Stores repeatedly opened and closed, and during lockdowns employees could be stuck at home. Over time, this affected both revenue and staff proficiency, creating major operational challenges.
According to Nayuki's 2021 financial report:
Nayuki said it would not heavily cut raw material costs because doing so would affect product quality. It expected procurement cost to remain around 35%. There might be limited room to bring raw material cost down to 32%-33%, but the core cost-control opportunity was store operating efficiency and fixed labor cost.
The company's goal was to make front-end stores lighter through three operating changes: automated scheduling, automated tea production, and automated ordering and logistics.
Automated scheduling began rolling out to some stores in March 2022, and stores using it reportedly saw significant labor-cost reductions. Nayuki also planned to gradually shift store employee pay toward hourly wages.
In stores testing automated tea-making machines, efficiency had already improved. Nayuki expected labor costs to fall substantially after all stores adopted the machines nationally in the third quarter. The company hoped that, with reasonable use of automation, stores could avoid losses even during severe COVID disruption.
The hardware cost for the automated equipment was relatively low, at just over RMB 10,000 per unit. The harder part was software. Nayuki had a 200-person digital team, and technology-team investment exceeded RMB 100 million in 2021. The goal was to embed store SOPs into the system so that, once a customer placed an order, the order would flow directly to the store and trigger production of the relevant item.
Once automation is widely deployed, stores need fewer highly experienced staff, reducing training pressure. During COVID disruptions, stores can reduce staffing through automated scheduling.
That lets labor allocation move with revenue: a store might use 10 employees when sales are high and 3 when sales are low. By linking hours to sales and dynamically adjusting full-time and part-time staffing, Nayuki expected the number of full-time employees to at least halve. It also wanted to make raw material use more dynamic by tying ordering plans directly to sales conditions.
Nayuki aimed in 2022 to keep single-store labor cost below 20% and companywide labor cost around 25%.
The final piece was rent. Traditional store rent included a base rent plus a percentage of sales. Because COVID conditions were dynamic, Nayuki wanted to negotiate rent as a pure percentage of sales, such as 10% of revenue, so that rent would move with business conditions and store profit could remain controlled during disruptions.
This was the core logic behind opening stores against the cycle: make labor, rent, and raw materials more dynamic, use technology to improve operating efficiency across multiple links, and lower operating cost so store-level returns can be managed even through repeated disruptions.
In 2022, as Heytea drove price reductions in premium freshly made tea drinks, Nayuki followed with its RMB 9-19 "Easy Series" products.
On its results call, Nayuki said the new series was part of its long-term strategy. As it entered more cities, the company wanted to broaden its consumer base by bringing in users with lower spending power.
The Easy Series was designed mainly to pursue incremental demand. Nayuki divided customers into A, B, and C segments. A customers were those comfortable buying products priced above RMB 20 per item.
As Nayuki's store count grew, it needed to expand into B and C customer groups. The Easy Series was intended to attract B customers, defined as those spending below RMB 20 per item, and gradually convert them into A customers.
Because the series launched in March 2022 amid serious COVID disruption, it was still too early to judge how much it lifted store sales. Based on first-quarter sales, orders for products above RMB 25 remained stable, so Nayuki believed the lower-priced products were not cannibalizing its original A customers.
From Nayuki's external communication, Easy Series sales in Chengdu were performing well. Whether price reductions and a broader price band could clearly attract consumers spending below RMB 20 per item still required more time to observe. Another open question was whether those incremental customers could be converted into A customers.
Nayuki created a separate business unit for retail products. Its head was formerly the general manager of Vita China, where he worked for 13 years and was mainly responsible for Vita Lemon Tea. Nayuki also brought in external talent from the cola system, mainly for sales.
Nayuki saw its advantage in ready-to-drink products as product understanding: knowing user tastes and being able to produce higher-quality products for those users.
The current ready-to-drink product mix combined new and old elements. Tea leaves came from Nayuki's proprietary tea gardens. Fruit tea products had juice content above 40%. The sugar substitute was monk fruit juice rather than synthetic or artificial sweeteners. Nayuki described monk fruit juice as one of the most innovative plant-based sweeteners in the RTD industry. The company said its RTD products were selling well in FamilyMart convenience stores.
The 2021 financials show that Nayuki's retail business was still at an early stage. Retail products sold by headquarters, including gift items and retail products such as sparkling water, tea gift boxes, and snacks, generated RMB 87.83 million. Retail products sold through stores generated RMB 81.745 million.
Retail accounted for only 3.9% of Nayuki's 2021 business, though it grew 154.4% year on year from 2020. Given the small base, that growth rate was not unusual.
Nayuki believed three things mattered for retail success: brand, product, and channel. How far tea-drink brands can go in retail products still required time to observe, and Nayuki's retail scale remained small.
Starbucks offers a useful reference point. Its retail path began only after its store scale and brand awareness had grown. Without brand awareness, building a retail business is very difficult.
Nayuki appeared to be using Starbucks as a reference not only for retail expansion but also for city-level store planning. When evaluating expansion scale and feasibility in a city, it reportedly reviewed Starbucks' store count and revenue data in that market.
How retail products and stores should support each other remains an open operating question. Tea-drink brands were still in the early stage of exploring this model.
Starbucks' ready-to-drink coffee also played a role in testing demand in potential store-opening areas. If demand was strong, the company could consider opening stores nearby. Starbucks ultimately sold the channel side of its retail business to Nestle, while RTD product development was handled through a joint venture with PepsiCo.
Nayuki was running multiple lines in parallel: retail products, freshly made tea drinks in stores, and bakery. Its earlier standard-store model had struggled with bakery execution because exhaust requirements limited site selection. The PRO model improved the store format by reducing staffing needs and optimizing bakery production through support from central factories.
The question was whether the three legs of tea drinks, bakery, and retail could carry the brand further.
Note: 2022 store-opening targets, automation rollout timing, cost targets, and market-stabilization expectations are historical forward-looking figures from the 2022 source article.