(Yicai Global) Jan. 6 -- Heytea, Naixue Holdings and other leading modern Chinese tea chains are changing their tactics after a difficult year last year due to the recurring Covid-19 outbreaks and as competition gets tough.

Heytea has lowered its target market and has reduced the average price of its drinks, Yicai Global has learned. Most of its beverages now cost under CNY29 (USD4.21) and 60 percent are priced between CNY15 and CNY25.

The Shenzhen-based tea chain, which operated under a chain store model for a decade, began to accept franchises as of the end of last year. It is charging a franchise fee of CNY500,000 (USD72,645) which is quite a bit more than other tea brands. A Little Tea, for instance, asks for CNY380,000 and Chaibaidao around CNY350,000.

Leading firms have started to draw on each other’s strengths. Naixue invested CNY525 million (USD76.3 million) in Lelecha last year to become the latter’s biggest shareholder with a 43.6 percent stake.

The modern tea sector is in the midst of a “reshuffle” where the strong always stay strong, and the merging of two brands will likely change the industry landscape, industry insiders said.

China’s modern tea sector is growing fast, but not many companies can survive the fierce competition. Nearly 60 percent of newly founded tea firms folded within three years, according to corporate information provider Tianyancha.

But big chains are also finding it difficult. Shanghai-based Lelecha withdrew from Xi’an in central Shaanxi province in October 2021 and from Guangzhou in southern Guangdong province in February last year. Chayanyuese shuttered outlets three times in 2021 and only began to open new stores last year. Heytea reportedly laid off staff early last year.

Now that China has relaxed its pandemic prevention measures, business should definitely improve, industry insiders said. The market will most likely stabilize in the first quarter, especially after the Chinese New Year holiday at the end of the month and should be fully back to normal by the second quarter and achieve growth by the end of the year.

Editors: Shi Yi, Kim Taylor