By LU Yibei

Hey Tea is lowering prices. Since the beginning of 2022, many items have cost as much as 30 percent less.

Hey Tea’s move comes as almost all other bubble tea chains are increasing prices, citing rising costs. Materials account for only about 40 percent of bubble tea revenue, and actual margins can be less than 10 percent after rent, utilities and labor, all of which are getting more expensive.

Unlisted Hey Tea does not disclose its financials, but Nayuki, a direct competitor traded in Hong Kong, reported a 19.2 percent profit margin in the first half of 2021. Some estimate Hey Tea’s gross margin at close to 70 percent, versus the industry average of 53 percent. Its stores generate twice as much revenue per square meter as some brands.

Hey Tea said the price cut was a result of prudent supply-chain investments. In other words, Hey Tea can afford to sacrifice profit for market share. Until recently Hey Tea had doubled its number of stores every year, while bubble tea sales grew at around 25 percent a year from 2017 to 2020, but growth has slowed as rents, wages and competition have increased.

Hey Tea opened “only” 194 new stores in 2021, a 26 percent increase versus 2020’s 78 percent. Instead, the company put money into startups that make coffee, alcohol and plant milk.

In a 2019 interview with Jiemian News, founder and CEO NIE Yunchen said he expected Hey Tea to one day become a Coca-Cola style empire. Though its recent valuation of around one billion US dollars barely registers againstCoca-Cola’s 90 billion, but cutting prices to gain more market shares seems to be a good move as the homogeneous cutthroat competition among bubble tea chains is only going to get worse.