What Lies Behind Rising Coffee Prices and Falling Tea Prices?

At the start of 2022, new-style tea brands cut prices while coffee prices rose. Heytea and Nayuki moved cups down to 9 yuan, while Starbucks and Luckin raised prices one after another, citing higher raw material costs. The split reflects consumers returning to rational spending, a fading traffic dividend for new-style tea, and a coffee market still in an early stage of expansion.

The pressure had been building: a 2020-2021 industry report found 57% of consumers preferred milk tea at 10 to 15 yuan per cup, with only 27% choosing the 15 to 20 yuan range. Food safety scandals in 2021 also weakened trust in the category, and the pandemic sharpened concerns about health and finances, pushing office workers to weigh how coffee is made and priced before buying.

At the start of 2022, office workers lost both their milk tea freedom and coffee freedom in quick succession, but then the new-style tea drink brands voluntarily lowered their prices, with Heytea and Nayuki even offering cups for 9 yuan, while coffee brands like Starbucks and Luckin raised prices one after another due to rising raw material costs. Behind this drop and rise lies the reality that consumers are returning to rationality, the traffic dividend for new-style tea drinks is fading, and the coffee market is still in its early stage of expansion. This article examines the logic behind the price divergence between the new-style tea drink and coffee industries, and looks ahead to the future market landscape.

At the very beginning of 2022, office workers were still worrying about whether they could withstand the successive heavy blows life kept throwing at them—at least last year they could still have a latte in the morning and a milk tea in the afternoon. But as soon as New Year's Day passed, milk tea freedom was gone first; and once Spring Festival was over, coffee freedom was lost too.

However, this "good" scenery did not last long either. Salaries basically stayed the same, but milk tea brands lowered their prices on their own first. Starbucks was still unaffordable, but Heytea and Nayuki were now within reach. By comparison, Chayan Yuese only raised its price by one yuan in five and a half years, which suddenly made it seem less appealing.

It has been seven years since the first high-end new-style tea drink brand appeared. During this period, consumers went from fresh curiosity to frenzied pursuit, and then gradually calmed down. The pandemic also amplified people's sense of insecurity regarding health and finances.

In 2021, new-style tea drink brands were hit by one food safety scandal after another, causing some consumers to lose trust in the category. Many white-collar workers had also already cut back on drinking milk tea because it was rather expensive and not healthy enough. In addition, the "2020-2021 China New-Style Tea Drink Industry Development Report" showed that 57% of consumers were more willing to accept milk tea priced at 10 to 15 yuan per cup, while only 27% chose the 15 to 20 yuan range.

Consumers are becoming more clear-headed and no longer blindly paying for consumerism, and there is more and more criticism that new-style tea drinks are overpriced. The traffic dividend period for new-style tea drinks is fading. As representatives of high-end new-style tea drinks, Heytea and Nayuki also offered a way to sustain growth—both announced price cuts one after another, with the cuts so deep that 9-yuan cups appeared; at the same time, new product pricing was no longer lofty, with Nayuki promising that monthly new tea drinks would not exceed 20 yuan, and Heytea announcing it would no longer launch products priced above 29 yuan. This round of price cuts is intended to compete for a broader market share and penetrate lower-tier markets.

Mixue Bingcheng, which had long been cultivating lower-tier markets, mostly sells products below 10 yuan and earned 6.5 billion yuan in revenue and 800 million yuan in net profit in 2019 alone. Low prices actually brought higher profits, relying on small profits but quick turnover.

Turning to coffee, affected by factors such as international coffee futures prices and operating costs, many coffee brands chose to raise prices. In mid-February, Starbucks took the lead in raising coffee prices, and Luckin and Tims then followed with price adjustments.

New-style tea drinks use complex ingredients, and the raw materials can be controlled by the brands themselves, giving them high flexibility. Heytea said it has accumulated supply chain capabilities, which can ensure quality while also providing room for product price cuts.

Coffee's raw materials are relatively simple, and costs are closely tied to raw material prices. Whenever there is fluctuation in the raw material market, pricing naturally changes accordingly. As a commodity, coffee is greatly affected by timeliness and storage, which is different from tea leaves. When raw material prices rise, coffee companies can only choose to raise prices in order to maintain healthy operations as well as the quality of operations and service.

It can be seen that new-style tea drinks are moving downward, while coffee is moving upward. The "2021 New Tea Drink Research Report" released by the China Chain Store & Franchise Association pointed out that in the next 2 to 3 years, the growth rate of new tea drinks will slow to 10%-15% during this stage. But the new-style tea drink industry is still constantly seeing new brands emerge, and for newcomers, there are not many opportunities left.

The expansion and development of the coffee industry has only just begun. Data from Frost & Sullivan shows that it is expected that China's per capita annual consumption of freshly made coffee will increase from 1.8 cups in 2020 to 5.5 cups in 2023, and the market size of freshly made coffee will grow from 63.3 billion yuan in 2020 to 157.9 billion yuan in 2023.

Starbucks' dominance has been broken, and Luckin has overtaken it with coffee priced at 10 to 20 yuan, becoming the coffee brand with the largest number of chain stores in China. Overseas players such as Tims, Blue Bottle, and Peet's have also set their sights on China's coffee market, this big piece of cake. China's coffee market is large enough, and various brands are still competing for territory. Tims China plans to open 2,750 stores by 2026.

Since the tea drink industry has developed to this day, the gap between brands is narrowing, and price cuts are both a means of competition and a marketing method. Coffee price increases, however, are not only due to raw materials, but also because brands need to establish themselves and widen the gap in the early stage of competition.

Image source: Internet

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The above content is compiled by CoffeeHunters, a coffee news website.