Over 9,000 Outlets of Gude Already Paving the Way for IPO

New Year, bustling tea-drinking market. Recently, well-known tea-drink brand Gude submitted its prospectus to the Hong Kong Stock Exchange, and on the same day, Honey Snow Ice City also submitted its prospectus, opening up the road for new tea-drink brands in 2024.

Targeting Second-Tier Cities

Gude's stores focus on the mass market for tea drinks, targeting three categories of products: fruit tea, milk tea, and coffee. Unlike other companies in the industry, Gude has chosen to target second-tier cities.

In 2010, Gude's founder Wang Yun'an opened the first Gude store in his hometown of Daxi Township, Zhejiang Province. The township is a typical example of a lower-tier market. This also set the tone for Gude's strategy to focus on lower-tier markets.

As of December 31, 2023, Gude had a total of 9,001 stores in second-tier cities and below, accounting for 79% of its total outlets. Moreover, 38% of its stores are located in rural areas, according to a report by a consulting firm. Among the top five tea drink brands in China by store count, Gude has the highest proportion of stores in lower-tier markets.

Gude's main strategy for expanding its store network is to focus on regional encryption. Specifically, it means that once a single province reaches a scale effect with over 500 stores, Gude will strategically enter adjacent provinces.

Starting from Zhejiang Province, Gude has achieved key scale in Jiangxi and Fujian Provinces, reaching market shares of over 45% in the tea drink market. As of December 31, 2023, Gude had established a store network with more than key scale in eight provinces, accounting for 87% of its GMV.

Through its strategy of concentrating on lower-tier markets, Gude's store count has increased from 5,694 to 6,669, and then further to 9,001 (including six directly managed stores) by the end of 2023.

According to the prospectus, as of December 31, 2023, Gude had established a presence in 15 provinces across the country, but still has 19 provinces that have yet to be entered.

Gude's approach has been nicknamed "surrounding cities with rural areas" by others. As a result, it seems that Gude is more determined than ever to focus on lower-tier cities.

Can the "Second" Stand Firm?

In its prospectus, Gude claims to be China's first mass market tea drink brand based on 2023's GMV and store count. However, it seems that there are still many strong competitors in the domestic tea drink market.

According to the financial reports of other listed tea drink companies, Honey Snow Ice City seems to be the recognized leader in terms of sales revenue. According to its prospectus, as of September 30, 2023, Honey Snow Ice City had over 36,000 stores globally, with more than 29,000 stores in China, making it China's largest mass market tea drink brand, with a store count close to that of the top two or three companies.

From a revenue perspective, according to the prospectus, Honey Snow Ice City achieved revenues of RMB136 billion and RMB154 billion respectively for 2022 and the first nine months of 2023, with year-on-year growth rates of 31.2% and 46.0%, respectively. Net profit was RMB20 billion and RMB25 billion, respectively, with year-on-year growth rates of 5.3% and 51.1%. Gude's revenue for the same period was RMB43.84 billion, RMB55.59 billion, and RMB55.71 billion, with adjusted net profit of RMB7.7 billion, RMB7.88 billion, and RMB10.45 billion.

In its prospectus, Gude also admitted that as of September 30, 2023, it had a market share of 8.3% in the Chinese mass market tea drink brand ranking, with a GMV ranking second in China.

Over the past five years, the Chinese ready-to-drink beverage industry has shown rapid growth, and is expected to continue growing. According to a consulting report, the Chinese ready-to-drink beverage market GMV grew from RMB1488 billion in 2017 to RMB4213 billion in 2022, with a compound annual growth rate of 23.1%. It is expected that by 2027, the market GMV will reach RMB10312 billion, with a compound annual growth rate of 19.6%.

Traditionally, Chinese ready-to-drink tea drink brands are divided into three categories: high-end tea drinks with an average price above RMB20; mid-range tea drinks with an average price between RMB10 and RMB20; and low-end tea drinks with an average price below RMB10. According to the 2022 GMV, the mid-range tea drink market is the largest in terms of scale, and its compound annual growth rate is the highest.

However, it cannot be ignored that the Chinese ready-to-drink beverage market has historically been fragmented and is currently undergoing integration. According to a consulting report, as of September 30, 2023, the top five ready-to-drink tea drink brands accounted for 44.3% of the market GMV.

For Gude, it faces intense competition from other ready-to-drink tea drink brands in various fields, including product development and innovation, product quality and consistency, price competitiveness, store location, consumer experience, and customer retention. In the RMB10-20 price range, Gude not only has Honey Snow Ice City as a major competitor but also other powerful opponents such as Teabao, New Star Tea Queen, etc. In the RMB20+ price range, companies like Nai Xue, Jia Tea, etc. are also working to encroach on market share.

Industry insiders say that Gude's current goal is to consolidate its "second" position and faces a major challenge.

As the lower-tier market develops, the franchise model has become increasingly popular in China, with a total of 91.8% of Chinese ready-to-drink tea drink franchises as of December 31, 2022. Gude has admitted in its prospectus that its main advantage lies in its brand and expansion speed, which is still necessary to maintain the strategy of extensive store opening.

As of now, only Nai Xue's Tea has actually listed on the market, but as the "first horse" in the new tea drink industry, Nai Xue's Tea has seen its stock price plummet from RMB9.11 per share to below RMB3 since its listing in April 2023, with a decline of over 60% from its peak. Many competitors in the RMB10-20 price range are expected to list on the market soon, including Shangri-La Tea, New Star Tea Queen, etc. Against this backdrop of intense competition, can Gude still shoot for the top spot?