(Yicai Global) July 7 -- Chinese tea drink brands, including Heytea and Nayuki Holdings, are reportedly charging into smaller city markets due to the cost advantages and the intensity of competition in big cities.

The rivalry between these brands is fierce in large cities, Chinanews.com reported today, citing market insiders. Vying with each other are Heytea and Nayuki, two very popular brands, established mid-end brands that are bringing out new products, and emerging brands such as Cha Yan Yue Se and Chagee. Hence high-end brands are urgently looking for new growth points, they added.

Fruit and bubble tea vendors are quietly shrinking their footprint in big cities. In May, Heytea’s flagship store Heytea Black in Hangzhou was closed. Before that, the company shut the first outlets it had opened in Suzhou, Xiamen, Wuhan, and Hangzhou. The economic pressures are clear, with Hong Kong-listed Nayuki logging a net loss of CNY461 million (USD63.6 million) last year. 

The search is on for untapped markets. Netizens in small cities such as Shandong province’s Zaozhuang, Jiangsu province’s Shuyang county, and Pingjiang county in Hunan province, have recently posted that Heytea is about to open a store in their hometowns. From March to May, Heytea added 278 outlets, most of which are located in third-tier cities and lower, according to media reports.

The big brands are also acquiring smaller ones. Nayuki began to expand into lower-tier products last December when it bought a majority stake in Lelecha, whose main growth regions are the provinces of Hubei, Fujian, Jiangxi, Shandong, and Sichuan, as well as the city of Chongqing, according to the franchise operator's WeChat account.

The biggest advantage for the big fish in small ponds is cost leadership, according to Zhu Danpeng, a food industry analyst. If a tea drink is sold in a first-tier city and a fifth-tier city for CNY20 (USD3), then the seller’s margin is much wider in the latter due to lower overheads, Zhu added.

But major milk tea brands will still need to continue their efforts in product differentiation and quality in the future, the analyst added.

Editor: Emmi Laine