Can SEA grow into the next Blue Tea Ocean?

Do you want to just sip tea and grow 4x in size?

I spoke with a few folks from the Chinese tea brands (think the equivalent of Starbucks for tea) recently and looked into the South East Asia (SEA) market, now increasingly the blue ocean for Chinese companies in the red. Not surprisingly, water on this side of the sea seems blue-er. But will the tea brewed with this blue-er water taste better?

How did China grow?

Before exploring that, it’s worth starting with an overview of the Chinese market. While not perfect substitutes, made-to-order drinks based on coffee or tea are increasingly consumed interchangeably, especially in countries where this is not a culture yet. Hence, coffee- or tea-based drinks will be combined in this analysis.

This is a snapshot of the Chained Specialist Coffee & Tea landscape in China.?

• 2023 Market size is large and growing fast: $15B in 2023 (45% of Starbucks), 2.5x over the last 5 years- Starbucks had $36B revenue in the latest 12 months- Tim Horton’s or Costa Coffee had $2-3B revenue
• Primarily due to rapid store expansion
• Growth in per capita spend (15%) on drinks outpaced income growth (8%), suggesting that consumers are starting to embrace chain drinks

Can the China model be replicated?

However, the strong volume growth might not be sustainable, as the blitz-scaling drivers are exhausted

• Over-saturation of outlets: Spend/Outlet (same store productivity) peaking and declining
• Low price strategy: Spend/Transaction declining, due to voucher redemptions from the brands or group buy platform discounts

In hindsight, it's obvious that there's such a thing as too many stores - Same store productivity peaked then declined, probably due to over-saturation of stores and the prevalence of discount/promotions. Especially in the tier 1 cities or brands that rely heavily on franchisees to grow store count, it is common to find 4-5 outlets within a mall/block/street. Some might even be different franchisees of the same parent brand.?

With a relatively low entry barrier, where there is no strong product differentiation (any popular flavor will be quickly replicated across brands), the prevailing strategy is to drive traffic to the stores, either through promotions or opening new stores. This created a vicious cycle where more promotional activities happened to fend off novelty and wear competitors out.

This resulted in a capital-intensive business where securing funding is the key to growing fast. There was ~$26B VC funding in the drinks industry from 2017-2022, compared to the market size growing by $9B. While businesses could have reinvested from their operating profits, the existing low-moat model can escalate into price war quickly & easily. With VC funds drying up, brands will need to innovate their business models and grow sustainably.

These data are aggregated nationally, not discounting the tier 3/4 counties/towns for which stores saturation is very low, hence the productivity for actual stores in major cities/counties would be higher and the cannibalization more acute. But the point that over-saturation is a real issue remains.

Growth Driver 1: Open more outlets to reach more people?

Potentially, but headroom likely limited, as outlet saturation is SEA is much higher than in China

Market

• The top 6 markets in SEA are ~$4B in 2023, 25% of China
• The top 3 markets in Revenue & Outlets are Thailand, Indonesia & Vietnam- Thailand has the largest market, but growth is slowing down and highly saturated- Indonesia & Vietnam are next in size and still growing fast- Vietnam is ~3x more saturated than Indonesia, suggesting higher competition

Opportunity: Indonesia & Philippines might have room to 4.5x # outlets (vs. Singapore & Vietnam)

Feasibility (Learning from China)

• SEA is more saturated than China at this stage of development (~2017), hence SEA might not be able to replicate the China model fully- Nationally, SEA countries are 3x (Indonesia & Philippines) ~ 25x (Singapore) more saturated than China- Singapore & Thailand are the most saturated countries- Assuming outlets are primarily in urban areas, the urban-adjusted saturation gap narrows to 2~13x- Thailand, Vietnam and Singapore have the most outlets per urban population

Driver 2: Price Higher??

Limited, unless income improves massively, as SEA already spends more on drinks than China

Opportunity

• Indonesia, Philippines and Singapore consumers could have spend 2-2.5x more per HH, relative to Thailand & Vietnam
• Consolidate stores before expanding again

Feasibility

• Relative to their income, SEA consumers are already spending more than Chinese consumers at this stage of development (~2017)- SEA consumers spent 1.5x (Indonesia) ~ 4x (Thailand) of their income on drinks, compared to China- Other than Singapore and Malaysia, the other countries have lower GDP/Capita than China- Hence, the headroom in pricing higher is limited in SEA
• Only Singapore has similar same-outlet productivity as China, while the other countries are 20-50% of China’s- Hence, the playbook here might be consolidating existing outlets, improving outlet economics & productivity and passing the savings back to consumers to grow market share

Driver 3: Increase per capita consumption

Most feasible, as Indonesia & Philippines are at similar consumption as China in 2017

Opportunity

• Indonesia & Philippines have the largest room to grow, potentially up to 4x
• Market sizes can grow up to- Indonesia (5x): Value +$3.2Bn; # Outlets +27,000- Philippines (3.5x): Value +$1.3Bn; # Outlets +5,000

Feasibility

• Indonesia & Philippines have similar per capita transaction as China in 2017
• Malaysia is similar to where China is in 2023
• Singapore, Thailand and Vietnam are 2-3x China in 2023

How to grow per capita consumption?

Feasible to different extent by countries, most feasible in Indonesia.?

Opportunities:

1. Convert consumers from at-home & convenient to (more elaborate) chain consumption:?- China Chain consumption % grew from 14% in 2017 to 2022- Indonesia & Philippines have the lowest Sales happening through Chains as a % of total consumption, similar to where China was in 2017.?- Other countries already have much higher consumption happening through Chains, potentially limited headroom
2. Grow chain drinks as a new on top of other consumption modes, instead of cannibalizing:?- In China, Convenient consumption (RTD + Food-service) held flat as a % of self-brewed, even as chains grew.?- Indonesia & Philippines are still primarily self-brewed and potentially requires more education to increase out-of-home consumption- For other markets with much higher convenient %, it could be easier to switch users from convenient consumption to chains, if the prices & environment are right
3. Reduce price-gap between chain drinks & RTD:?- In China, price gaps almost halved from 2017 to 2022 as the chains grew, making it easier to switch from RTD to chain consumption- Indonesia, Malaysia, Philippines & Singapore have room to reduce gaps and grow the market- Thailand & Vietnam have the smallest price gaps, explaining the high penetration of chain drinks; but also limiting the room for further closing the gaps

Feasibility

1. Market potentially limited by total coffee/tea consumption:?- China had relatively high per capita consumption in 2017 and grew further- Indonesia, Malaysia and Singapore had even higher per capita consumption, hence the opportunities would be to convert them from convenient & self-brewed to chain drinks- Philippines, Thailand & Vietnam have lower consumption, hence more work is needed to increase acceptance of coffee/tea

Conclusion

There are growth opportunities, but the way to grow differs by country. Hence, the right or right phasing of markets depends on the respective companies’ strengths.?

Key market growth drivers

• Grow number of outlets: Indonesia & Philippines, as outlet saturation is low
• Increase existing prices higher: Unlikely in SEA, as drinks expenditure are high relative to income
• Grow per capita consumption of chain drinks: Most feasible, with different drivers across countries. Indonesia & Philippines have the biggest headroom- Convert users from non-chain consumption to chain: Indonesia & Philippines have the lowest non-chain %- Add new consumption through chains: Malaysia, Singapore, Thailand & Vietnam consumers are used to chain consumption hence the lowest-hanging fruit- Reduce price gaps vis-a-vis Ready-To-Drink: Indonesia, Malaysia, Philippines & Singapore- Indonesia, Malaysia & Singapore have more ingrained coffee/tea consumption, potentially easier to grow further

Country Summary:

• Indonesia has the biggest potential and is also the most feasible to achieve targets.?
• Malaysia and Singapore are highly-developed, but with opportunities in cutting prices to stimulate growth and shifting consumption from Food Services + RTD to Chains and supported by high consumption of coffee/tea.
• Philippines is under-developed but the culture of tea/coffee consumption is not as ingrained. Hence, requires growing the broader coffee/tea consumption culture and very different flavor profiles or ingredients.
• Thailand & Vietnam are highly developed but highly saturated (too many outlets, high existing chain consumption, limited room to cut prices) while per capita consumption of coffee/tea is low. Hence, unit economics might not be as favorable as other countries.

A lot of the numbers above are calculated at national level, hence not reflecting the actual consumption. But the broader trends hold. Please reach out directly if you would like to discuss the actual values.

If you want to be a franchisee, do let me know too!