Okay, folks, let’s spill the tea, or should I say, the milk tea. For those of you just tuning in from the land of Stars and Stripes, China’s got a serious thirst for freshly made tea drinks, and the market is absolutely bubbling over. We’re not just talking about your grandma’s Earl Grey here; this is a whole new ball game – a multi-billion dollar industry fueled by innovative flavors, savvy marketing, and a whole lot of sugar.
And just when you thought the market couldn’t get any hotter, another major player has officially stepped into the limelight. Meet Gu Ming (古茗), the Zhejiang-born tea titan that just rang the bell at the Hong Kong Stock Exchange on February 12th. That’s right, folks, Gu Ming has gone public, joining Nayuki’s Tea (奈雪的茶) and ChaBaiDao (茶百道) in the exclusive club of publicly traded Chinese tea drink brands. In the wild world of Chinese “new-style tea drinks” (新茶饮), this is a pretty big deal.
Now, if you’re scratching your head and thinking, “Gu Who-ming?”, you’re not alone. Unless you’re deeply immersed in the Chinese consumer scene, Gu Ming might be a new name. But trust me, in China, this brand is a household name, especially if your household happens to be in one of the countless smaller cities and towns that make up the vast landscape beyond the glittering skylines of Beijing and Shanghai.
So, what’s the story behind this 20 billion RMB (that’s roughly 2.8 billion USD, folks!) tea empire that seems to have sprung up out of nowhere? And why is it making waves by going public now, especially when the market for these trendy drinks is getting seriously crowded? Let’s dive in and unpack the story of Gu Ming, the “hidden king” of Chinese milk tea, and explore why it’s making a bold move on the Hong Kong stock market.
From Small Town Start-Up to National Contender
To understand Gu Ming, you have to go back to its roots, and those roots are firmly planted in the fertile soil of Zhejiang province, specifically, a town called Daxi (大溪镇) in Taizhou (台州). Think of a quintessential Chinese small town – bustling markets, local flavors, and a strong sense of community. This is where Wang Yun’an (王云安), the founder of Gu Ming, started his entrepreneurial journey. Born in 1986 in Yunnan province, Wang’s family ran a small general store near the Myanmar border, instilling in him a practical sense of business from a young age.
After graduating from Zhejiang University of Science and Technology with a degree in Materials Science and Engineering – quite the detour from the tea business, right? – Wang Yun’an wasn’t exactly keen on a typical 9-to-5 job. Instead, his entrepreneurial spirit led him back to his ancestral home in Daxi. In 2010, with a shoestring budget and a whole lot of ambition, he opened the first Gu Ming tea drink shop.
Why Daxi? Well, as Wang Yun’an himself admitted, it was partly out of necessity. Starting a business in a smaller town meant lower costs and less competition compared to major metropolitan areas like Hangzhou. At the time, the trendy tea drink brands that were all the rage in big cities hadn’t yet made their way to these smaller locales. This presented a golden opportunity for a savvy entrepreneur.
That first 30-square-meter shop was nothing fancy, just your average milk tea joint. But what Wang Yun’an lacked in experience, he made up for in sheer grit and determination. As reported by the Taizhou Daily, without established recipes, Wang relied on his own taste buds, experimenting tirelessly to develop new drinks, tasting dozens of samples, sometimes up to a hundred milliliters at a time, each day. He set himself a daily goal: the shop wouldn’t close until it hit 100 RMB in sales.
Business was tough initially. For the first six months, Wang was grinding from 8 AM to 11 PM, barely breaking even. There were days when the revenue was a paltry 98 RMB. But Wang persevered, focusing on improving the taste and quality of his drinks. He even took to the streets with a tricycle, offering free samples to neighbors and passersby. Slowly but surely, word of mouth spread, and customers started trickling in.
As the business picked up, Wang Yun’an saw the potential for expansion. He put a franchising advertisement with his shop’s phone number right on the storefront, cleverly listing it as the “Daxi Deming East Road Store” to give the impression of a chain. He personally oversaw the setup of the first franchise, guiding the franchisee every step of the way.
Wang was a quick study in the art of small-town commerce. He realized that in smaller towns, flashy décor wasn’t as important as bright lighting. In places where streetlights were dim, a brightly lit store stood out, signaling cleanliness and quality to potential customers.
From Daxi, Gu Ming began to spread its wings, first across Taizhou’s towns and then into the city center. From there, it radiated outward, covering southern Zhejiang, eastern Jiangxi, and northern Fujian. Wang Yun’an’s expansion strategy was simple but effective: “Either don’t open a store, or open them densely.” This “regional density” strategy, as Gu Ming calls it, became a cornerstone of its growth.
The Franchise Formula and Down-Market Domination
Like many of its peers in the “new-style tea drink” sector, Gu Ming’s business model is heavily reliant on franchising. In essence, Gu Ming isn’t just selling tea to consumers; it’s selling a business opportunity to entrepreneurs. The vast majority of Gu Ming’s revenue – over 97% – comes from sales to its franchisees, including ingredients, equipment, and franchise management fees. Franchisees also contribute almost 100% of Gu Ming’s Gross Merchandise Volume (GMV), a key metric for e-commerce and retail businesses that represents the total value of merchandise sold. As of September 2024, Gu Ming only operated seven directly-owned stores, highlighting its strong reliance on the franchise model.
Starting a Gu Ming franchise isn’t cheap, but it’s presented as a viable business opportunity. A new franchisee signs a three-year contract with an initial budget starting at 255,000 RMB. This includes a franchise fee of 98,800 RMB, covering brand cooperation, operations, training, and store opening services. On top of that, franchisees need to cough up cash for store decoration, equipment, initial ingredients, marketing, and various refundable deposits. And that’s before even considering rent!
This franchise-heavy model has been a major driver of Gu Ming’s rapid expansion. It’s a capital-light approach that allows for swift growth without the heavy lifting of managing thousands of stores directly. However, it also shifts the primary revenue stream from selling individual cups of tea to consumers to selling supplies and services to franchisees. As the saying goes in the industry, “There are too many tea drink brands, and not enough franchisees!”
Despite the high costs for franchisees, Gu Ming has proven to be a lucrative business, both for the brand and its partners. In 2023, Gu Ming raked in a whopping 7.676 billion RMB in revenue, with a GMV of around 19.2 billion RMB. Net profit for the year was 1.096 billion RMB, with an adjusted net profit of 1.459 billion RMB. These numbers are impressive, placing Gu Ming firmly as the second-largest player in the Chinese tea drink market by store count and GMV, second only to the undisputed king of value, Mixue Bingcheng (蜜雪冰城).
Speaking of Mixue Bingcheng, the two brands share some striking similarities in their business models and market positioning. Both are masters of the franchise model and focus on providing affordable drinks to a broad consumer base, particularly in lower-tier cities and towns. Mixue Bingcheng dominates the sub-10 RMB price range, while Gu Ming reigns supreme in the 10-20 RMB segment. Gu Ming’s product lineup includes fruit teas, milk teas, and coffee drinks, all priced to appeal to budget-conscious consumers.
In 2024’s first three quarters, Gu Ming sold approximately 1 billion cups of drinks. While this is dwarfed by Mixue Bingcheng’s staggering 7.1 billion cups in the same period, it’s still a massive volume. Average sales per store for Gu Ming in this period were around 105,800 cups, compared to Mixue Bingcheng’s 170,700 cups per store. These figures highlight the sheer scale and efficiency of Mixue Bingcheng’s operation, but also demonstrate Gu Ming’s significant presence and growing market share.
Regional Density and Supply Chain Prowess
Gu Ming’s “regional density” strategy is a key element of its success. The idea is to concentrate store openings in specific geographic areas, creating a strong brand presence and leveraging economies of scale in logistics and supply chain. According to Gu Ming’s prospectus, once a province reaches 500 stores, it’s considered to have achieved “critical mass,” enabling significant scale efficiencies. Using the experience gained in these key provinces, Gu Ming then strategically expands into neighboring regions.
Zhejiang, Gu Ming’s home turf, was the first market to reach critical mass, and it has since grown to over 2,000 stores. By 2023, eight provinces had achieved critical mass, accounting for 87% of Gu Ming’s total GMV. In Zhejiang, Fujian, and Jiangxi – the first provinces to reach critical mass – Gu Ming boasts the largest market share among all price-range tea drink brands, measured by GMV.
This dense store network also boosts efficiency in warehousing and logistics. By the end of the third quarter of 2024, about 76% of Gu Ming’s stores were within a 150-kilometer radius of a warehouse. This proximity allows for bi-daily cold chain deliveries to approximately 97% of its stores, a significant advantage over competitors who typically deliver every four days. This robust supply chain is crucial for maintaining the freshness and quality of Gu Ming’s fruit-based drinks, a key selling point for the brand.
The “regional density” approach has fueled Gu Ming’s rapid store expansion. From 2021 to 2023, the total number of stores jumped from 5,694 to 9,001, adding nearly 3,300 stores in just two years. By the end of the third quarter of 2024, the store count had reached 9,778, inching closer to the 10,000 mark.
True to its down-market roots, Gu Ming continues to focus on smaller cities and towns. As of the end of 2023, 79% of its stores were located in second-tier cities and below, increasing to 80% by the third quarter of 2024. Notably, 38% of its stores were in townships and villages, rising to 40% in the same period. Gu Ming claims to have the highest proportion of stores in these areas among China’s top five mass-market tea drink brands, where the average township store ratio is less than 25%.
The IPO Gamble and Market Challenges
Despite its impressive growth and market position, Gu Ming is going public at a challenging time for the “new-style tea drink” sector. The initial public offerings of Nayuki’s Tea and ChaBaiDao were met with lukewarm reception, with both stocks falling below their issue prices shortly after listing. This “broken IPO” phenomenon reflects a cooling sentiment towards the sector in the capital markets.
The intense competition within the Chinese tea drink market is a major factor contributing to this market skepticism. The sector is fiercely competitive, with brands constantly vying for market share through price wars, product innovations, and marketing gimmicks. The infamous “9.9 RMB price war” (around $1.40 USD) has blurred the lines between brands and squeezed profit margins across the board. The aggressive expansion of numerous brands has led to store saturation in many areas, cannibalizing sales and hurting franchisee profitability.
Data from Narrow Door Meal Eye (窄门餐眼) shows that despite nearly 130,000 new tea drink stores opening in the past year, the total number of stores actually decreased by nearly 18,000, indicating that closures outpaced openings by a significant margin. In 2024 alone, nearly 150,000 tea drink stores closed down, highlighting the brutal Darwinian dynamics of the market.
Gu Ming itself acknowledges the intense competition in its prospectus, noting a decline in key performance indicators in the first three quarters of 2024 compared to the same period last year, including same-store GMV, daily GMV, cups sold per store, average order value, and daily orders per store.
Store location competition has become so fierce that brands are literally setting up shop within 50 meters of each other. Gu Ming’s franchise agreements typically include a clause promising not to open new stores within a 50-meter radius of existing ones without franchisee consent.
To attract franchisees in this cutthroat environment, brands are lowering the barriers to entry. In 2024, Gu Ming launched a “zero franchise fee” policy for the first year, and allowed franchise fees to be paid in installments over three years, with no remaining fees upon contract termination.
Despite these challenges, Gu Ming is pressing ahead with its IPO, aiming to raise capital for further expansion, digital upgrades, supply chain enhancements, brand building, and franchisee support. Expanding its store network remains a core strategy.
However, as stores become increasingly dense, diminishing returns are inevitable. The market is also seeing a rise of new and emerging brands like Moli Meibai (茉莉奶白), Grandpa Doesn’t Make Tea (爷爷不泡茶), and Tea Talk Nong (茶话弄), further intensifying competition.
The concern isn’t just about franchisees running out; it’s about consumers potentially running out of appetite in an increasingly saturated market. The “new-style tea drink” sector is entering a phase of elimination round, a battle for survival where only the fittest will thrive.
Why IPO Now? A Gamble for the Future
Given the market headwinds and IPO performance of its predecessors, why is Gu Ming choosing to go public now? As one industry observer put it, “Even being the ‘milk tea number two’ doesn’t guarantee safety.”
One key factor is likely the need for capital to fuel its ambitious expansion plans, especially in supply chain infrastructure. To keep pace with its rapid store growth, Gu Ming must continuously invest in its supply chain, which requires significant capital expenditure. From 2021 to the first three quarters of 2024, Gu Ming’s capital expenditure totaled around 1.2 billion RMB, and this figure is likely to escalate as it scales further. Mixue Bingcheng, for comparison, had already reached this level of capital expenditure back in 2021.
In a market where competition is increasingly about supply chain efficiency and cost control, Gu Ming needs to bolster its capabilities to compete with giants like Mixue Bingcheng. The IPO is a crucial fundraising opportunity to secure the necessary capital for these investments.
Another compelling reason for IPO could be overseas expansion. “Go global or go bust” is becoming a mantra in the Chinese tea drink industry. Brands like Heytea (喜茶), Nayuki’s Tea, Mixue Bingcheng, and Chabaidao (霸王茶姬) have all ventured overseas, seeking new growth opportunities in international markets.
While Gu Ming has focused primarily on the domestic market, with nearly 10,000 stores in China, its international footprint is minimal. Its prospectus mentions “continuously assessing opportunities to enter overseas markets,” but details are scarce. Given the slowing growth and intensifying competition in the domestic market, overseas expansion is likely to become a strategic imperative for Gu Ming.
However, venturing abroad is not without its challenges. Supply chain adaptation is a major hurdle. Mixue Bingcheng, despite its supply chain prowess in China, faced initial hiccups in Southeast Asia, experiencing stockouts in Thailand and Malaysia due to logistical issues. Building a robust and efficient overseas supply chain is akin to “starting a second business,” requiring substantial capital and effort.
In this context, a successful IPO and the capital it raises could be Gu Ming’s key to unlocking overseas markets and navigating the next phase of competition in the global tea drink arena. The IPO is not just a financial event; it’s a strategic gamble for Gu Ming’s future in a fiercely competitive market.
So, there you have it – the story of Gu Ming, the Zhejiang milk tea brand that’s quietly become a national powerhouse and is now taking a bold leap into the public markets. Whether this IPO will be a sweet success or a bitter brew remains to be seen. But one thing is for sure: the Chinese tea drink market is far from lukewarm, and the competition is only going to get hotter. Stay tuned, folks, because this tea party is just getting started.
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