Zhejiang Delthin supplies flavored concentrates and syrups to almost all of China’s major bubble tea and coffeehouse chains, but company's the main operating revenue in 2022 only grew by 1.2 percent.
Photo from CFP
By ZHANG Xiaoyi
Behind China's massive bubble tea market lies a vast network of suppliers, quietly taking profits behind the scenes.
Zhejiang Delthin supplies flavored concentrates and syrups to almost all of China’s major bubble tea and coffeehouse chains. Delthin’s top three clients are bubble tea chain MXBC, Luckin Coffee and Starbucks.
Delthin’s total revenue has grown from 357 million yuan (US$49.31 million) in 2020 to 535 million yuan last year, with a healthy profit of 75 million yuan, but growth has slowed. The company's main operating revenue in 2022 only grew 1.2 percent.
Delthin is making plans for a Shenzhen IPO amid slowing growth and undependable demand.
As a supplier, revenue largely relies on downstream customers. Since 2019 revenue from the top five customers has fallen from 55.2 percent to 45.4 percent.
Likewise, expansion relies on downstream expansion. With over 20,000 stores, MXBC has quickly become Delthin's best customer and accounted for 16.9 percent of sales revenue last year, up from less than 5 percent in 2021.
A similar story occurred in 2021 when Delthin saw a staggering 486 percent year-on-year increase in sales to Luckin Coffee. The reason behind this surge was Luckin Coffee's own expansion in 2021 and the introduction of the "coconut" latte, in April of the same year.
The head of product development at Luckin Coffee said that they tested over 80 different types of fresh coconut milk and chose a protein beverage concentrate similar to coconut milk provided by Delthin. Delthin generated 100 million yuan of revenue from the goop, but only a year later, Luckin found a new supplier and Delthin’s sales to Luckin tanked, falling by a half.
This demonstrates the difficulties of low-barrier, strong-substitutability products: Delthin has no pricing power.
From 2019 to 2022, the gross profit margin declined as prices of beverage concentrates fell and costs rose.
Ingredient suppliers are in the middle of the chain. Their upstream consists of raw material suppliers such as fruit and vegetable juice, sugar, and tea, while their downstream includes enterprises involved in freshly brewed tea and coffee.
In 2022, beverage ingredient suppliers faced a double squeeze of upstream raw material prices and downstream demand.
The bubble tea chains are also migrating upstream and establishing their own suppliers. MXBC has been growing tea since 2021 and last month opened a 5-billion yuan factory and export base in Chengdu, Sichuan Province.
Delthin’s biggest problem still lies ahead. The entire nation is saturated with bubble tea and coffee. Most chains say they aim to have 10,000 branches by 2025, but what then? The growth of beverage chains in 2020 was 26.1 percent and is expected to fall to 5 percent in the next two or three years.
Delthin is well aware of that. Delthin’s R&D expenditure ratio has grown from 2.8 percent to 3.4 percent in two years. But, the process of taking a product from concept to mass promotion involves numerous stages and phases.
If the market is not accurately assessed and new products are not launched at the right time, growth may be gone for good.
