Ten years later, Hey Tea finally started franchising. But customers say it’s not the real thing
Photo by Fan Jianlei
By LU Yibei
For China’s ingenious bubble tea drinkers outside the big cities, splurging 30 yuan (US$4.40) on a plastic cup of Hey Tea is a rite of passage when they visit a congested metropolis.
They might be country bumpkins, and they might be naïve suckers for branding over taste, but the rural bubbleheads were still thrilled at the recent news that Hey Tea was coming to their hometowns.
They were thrilled until they tasted the actual tea. There is no doubt that Hey Tea signs have been erected outside tea shops in a few small towns, but whatever is in these cups, it sure isn’t Hey Tea. It seems that the countryside folks are being fobbed off with a second rank product.
The drinks taste bad; the service is poor. Even the signage is poor. Franchise shops, as the bubbleheads learned, are nothing like the real thing.
For ten years, Hey Tea insisted on owning and operating all its shops. NIE Yunchen established his first milk tea shop, Royal Tea, in Jiangmen, a small town in Guangdong Province, in May 2012. Since then Nie – who prefers to be known as Neo - grew Hey Tea into a business of close to 1,000 stores in mainland China, Hong Kong and Singapore. Still only 31, the failed phone repair man has a net worth of 4 billion yuan (US$620 million).
Nie commented in an interview with Jiemian that he did not believe the success of Hey Tea came from a social media frenzy but through an excellent product. Hey Tea specializes in fruit tea, cheesy tea and traditional Chinese tea products. However, Nie’s journey to this point has not always been smooth. When asked about franchising four years ago, Nie’s answer was a high-minded, absolute no.
“I’m very sure only I can build Hey Tea. Franchisees have their own agenda. And their personality directly impacts their teams, which then affects customer perception. I shudder at the idea of franchising before our brand is strong enough,” he said.
Well, apparently, Hey Tea considers itself strong enough now. According to a press release a week ago, it has opened franchise shops in “tens of cities” since November. Nie himself said in an internal meeting last year that one of Hey Tea’s most important goals now is “going mass market.”
Franchising is only the latest move in the deconstruction and reconstruction of Hey Tea. Nie has set his sights way down the market and closed all of his three signature full-service cafes and opened a lot more grab-and-goes.
More importantly, last January Hey Tea gave up any pretense of elitism and lowered prices by as much as 30 percent to bring itself in line with competitors, cheaper competitors. It’s not about battling with Costa on station concourses, though. These competitors include some of the trendiest third-wave coffee shops such as Manner.
After having saturated the biggest and richest cities with nearly 900 shops – more than half were opened in 2020 and 2021 although the pace slowed significantly last year – Hey Tea finally decided that in the rest of the country, not many people are willing to pay 30 yuan for a sugary drink. In 2021, 20-yuan-and-above cups took up only 15 percent of the market. The percentage is likely even smaller now given restaurant spending shrunk by 6 percent last year amid general consumption weakening.
So far Hey Tea seems to be happy about franchising. In the press release, the company said some new shops sell an average of 2,000 cups a day. A location in Meizhou, another small town in Guangdong, sells as many as 3,500 cups. When Jiemian News visited a new shop in Qingyuan located in its largest shopping mall, 25 orders poured in when it opened at 10 in the morning. There were at least 15 other bubble tea shops on the same floor. Almost all of them were idle and empty.
First-time customers may still be drawn to the aura of luxury and novelty. Returning customers, on the other hand, smelled straight away that something was wrong. The famous “cheese tea” is not nearly as cheesy as before. But that’s not all - fruit teas have fewer and smaller fruity chunks. The interior design, once a point of pride for both Hey Tea and its social-media-obsessed customers, is not that attractive now.
“Franchisees are not subject to the same standards as directly owned stores. Hey Tea has to make it affordable,” said a person familiar with the company.
A brochure says it costs about 400,000 yuan, including at least 100,000 yuan for renovations, to open a Hey Tea shop. Franchisees estimate the first-year total to be about 600,000 yuan after rent, utility bills and ingredients. In a small city like Qingyuan, a prefecture-level city in northern Guangdong province, the cost is not much higher than other franchises of a similar caliber, such as Luckin.
Hey Tea plans to make changes to store design and presentation according to feedback from customers and partners. In response to an inquiry from Jiemian News, it said it had already upgraded and reopened more than ten franchise shops. That’s quite an expenditure on stores that have been refitted months before.
The interior design of some of the franchise shops, the company also said, integrates elements of local traditional culture, implying that some cultures have better interior designers than others or better taste.
Pressure from competitors is all around. While Hey Tea has slowed a little from doubling in size every year to only a quarter more shops in 2022, cheaper bubble tea chains maintained their pace and are quickly taking over lower-tier cities.
Sure, Hey Tea never stops reminding customers that it is a high-end brand at mass market price – it uses “real cream” and collaborates with celebrities. How much people are prepared to pay to see a picture of a pop star pretending to drink tea is anyone’s guess.
But in the end, a customer may decide that bubble tea can only taste like bubble tea, and she might as well go to the shop closest to her and buy the cheapest that pleases her.
Hey Tea, like everyone else, is back to the game of getting big faster. Wary of the enormous money and effort needed to train managers and grow its own teams, it recently began to outsource operations by actively looking for qualified regional “partners” and asking them to recruit and manage their own sub-franchisees.
This includes the overseas market. New locations are set to open in more than a dozen countries, most in Southeast Asia, the Middle East, and North America. Hey Tea told round B investors in 2018 that expanding overseas was one of its two main goals of that year (the other was delivery service). So far, only four of its 900+ stores are outside China, all in Singapore.
The beverage market is betting on a post-Covid boom.
Guming, another chain, plans to add 3000 locations this year and push its total to 10000. Luckin added 500 locations in January and started a new round of franchising. Starbucks said last September that the recovering Chinese market will stimulate better consumer demand and aims to have 9,000 stores by 2025.