Chinese “Milk Tea King” Hey Tea reduces price in a market of rising cost

While China’s milk tea industry sees overall inflation of cost, with most brands including the beloved Chayan Yuese recently announcing increases in prices, Hey Tea (a leader of the milk tea drink market in China) has quietly reduced its price.

Some of Hey Tea’s drinks have seen a reduction in price by 3 to 7 RMB ($0.47 to $1.10), with the cheapest offer costing as low as 9 RMB ($1.41), according to the brand’s menu listed on its mini program on WeChat. In comparison, the rival Chayan Yuese has seen an average increase in prices by 1 to 2 RMB ($0.16 to $0.32) from 7 January, with two of the brand’s flagship drinks Youlan Latte and Shengsheng Oolong now priced at 17 RMB ($2.67) and 16 RMB ($2.52) respectively.

Of these two price changes, Hey Tea’s is the outlier, with the rest of the market in line with Chayan Yuese in increasing the price. For Hey Tea, being able to reduce the price for similar products as their competitors has naturally enthused most China’s milk tea lovers, deepening their obsession with the brand at the same time.

Like many other businesses in the food and drink industry, milk tea brands are also among those hit hard by the pandemic, with Chayan Yuese shutting down dozens of its physical stores across the country last year. Many peers have described the price increase as a last resort due to declined revenue and increasing cost in raw materials, on top of the impact of the ongoing pandemic, which has made any catering service rely heavily on takeaway online orders as their lead revenue format.

While being one of the key players in the market, Hey Tea has been facing the same challenges. But the brand’s ability to weather those external impacts lies in “its strong brand effect, continuous optimisation of supply chain and scale advantages (or economies of scale when brands cut down cost by increasing production, therefore, costs are spread over a large number of products)”, as according to a staff member in charge of product development at Hey Tea.

In the meantime, prior to the price adjustment, most of Hey Tea’s drinks were sold at prices between 19 and 29 RMB ($2.98 and $4.56), slightly higher than the market average. The brand has achieved an applaudable gross profit of between 65% and 70%, as per the prediction of Guosen Securities, a Chinese state-owned financial service.

The latest price cut is, therefore, deemed to be a move by the brand to reposition itself as a more affordable drink brand, with a decent profit gain laying the foundation. Such a move strengthens Hey Tea’s position in a time other brands have weakened, with their most ardent consumers naturally delighted to get the same high-quality product for less cost.

In addition, Hey Tea’s price cut is also strategic in winning over those young consumers, who have a huge appetite for milk tea drinks. They have become more price-sensitive in the wake of the pandemic, as job opportunities squeezed and income shrunk, leaving a dip in the market subsequently. Having observed the consumer change, the move has soon seen its fruit, with loyal fans excited to embrace cheaper offers and get back to consuming their favourite beverages.

The step back by Hey Tea back in price has, therefore, turned out to be a brand lift that further strengthened its brand effect, allowing it to corner a larger margin of the market, in turn increasing its consumer base and weakening its competition.

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