By LU Yibei

On June 30, milk tea chain Nayuki was officially listed in Hong Kong. The issue price of HK$19.8 (US$2.55) per share immediately fell to HK$18.86. Before the listing, the mood in discussion forums had been pessimistic, accurately reflecting investor apathy.

Nayuki opened its first store in Shenzhen six years ago when Coffee franchises like Starbucks occupied the best spots. Back then, most people equated milk tea with street stalls. But Nayuki and Heytea soon changed all that. 

The company is well known to the general public. The shares set aside for retail investors were oversubscribed more than 400 times. It seems these happy share shoppers were oblivious to Nayuki’s abysmal numbers. The company has not made a profit in six years.

Catering companies are valued according to the expansion of stores. For Nayuki, the store is a gathering point of demand and a supply center at the same time. Starbucks, with relatively high standardization, shows that there is plenty of room for Nayuki to grow. Starbucks has 5,000 stores in China. Driven by capital, Nayuki stores have increased from a dozen in 2016 to more than 500 today. But each store sells a lot less tea.

The company's same-store profit margin dropped from 24.9 percent in 2018 to 13.5 percent in 2020. Even in Q1, with recovery well underway, same-store profit was only 19.1 percent. More stores do not mean more customers.

The profit of each store is central to balancing the cost of the middle and back offices, not to mention overall profitability. Concentrating on fresh-made tea, expensive materials and labor, and high rents have denied Nayuki any profit so far.

In geographic terms, Nayuki operates in about 70 cities, with 90 stores in base camp at Shenzhen, and a further 80 spread between Beijing, Guangzhou and Shanghai. Starbucks is in 230 cities. Cities with low penetration and huge consumption potential are still opportunities for Nayuki.

The key to expansion will be the success of Pro Stores. These are essentially the old stores, but smaller, without bread and an average staff of 13, compared to 21. Selling pre-packaged snacks, tea bags, souvenirs, soft drinks and coffee, Nayuki is closely tracking the Starbucks model.

Can the Pro store save Nayuki? The average investment cost of a Nayuki Pro store is approximately 1 million yuan, nearly 800,000 yuan less than standard stores. The company says it will open 650 new stores in the next two years. Around 450 of these will be Pro stores.