Conservative Growth of Gu Ming IPO: What We Gained and What We Lost

After the submission of the prospectus by Guming, another new tea beverage company has joined the queue for a Hong Kong IPO.

Among the three companies currently submitting their applications, Guming is somewhat unique: unlike Chabaida, which originated in second-tier cities, Guming's main market highly overlaps with Mixuebingcheng.

However, the pricing range of Guming's products is significantly different from Mixuebingcheng, which follows a low-cost strategy. The price range of 10 to 18 yuan means that Guming's cheapest product could be the most expensive one at Mixuebingcheng.

With this advantage of "misplaced competition," Guming has become the new "king" of the sinking market. According to Zhaoshi Consulting, based on the GMV data as of September 30, 2023, Guming ranks second among Chinese freshly made tea beverage brands, occupying 8.3% of the market share, while Mixuebingcheng, the first-ranked brand, reaches 20%.

In terms of store count, Guming, with over 9,000 stores, still ranks second in the industry.

However, due to Guming's insistence on building its own supply chain and delivering fresh fruits and other raw materials to stores through cold chain distribution, its expansion speed has been objectively slowed down. Most of its stores are located in eight provinces in East China and South China, and currently, Guming has yet to establish a store presence in 19 provinces, including Beijing and Shanghai.

This seems to be somewhat out of sync with the current "overlapping" competition in the new tea beverage market.

Heytea and Naixue's Tea (2150.HK) have already entered the 10-20 yuan price range and have successively opened franchise partnerships in the sinking market, accelerating their expansion and encroaching on the territory of Guming and other brands.

The limited number of suitable locations for opening stores in the sinking market and the even more limited number of franchisees and expansion sites mean that the brands that enter first have a certain first-mover advantage, while the brands that enter later can only compete on the same street. It is likely that in the future, the scene of having 5 or 6 or even more milk tea shops on the same 500-meter pedestrian street will appear in more cities.

Before this IPO, Wang Yun'an, the founder, chairman, and CEO of Guming, formed a concerted action relationship with President Qi Xia, Pan Pingping, and Ruan Xiudi, collectively controlling 79.5% of Guming's shares, while external institutional shareholders such as Meituan Dragon Ball and Sequoia China collectively hold 13.2% of the shares.

A "Conservative" Store Opening Strategy

Similar to Mixuebingcheng and Chabaida, which rely on the franchise model for expansion, Guming also primarily earns money by selling goods and equipment to franchisees.

According to the prospectus, in the three months ended September 30, 2023, Guming achieved revenue of 5.571 billion yuan, a year-on-year increase of 33.9%; and recorded a net profit of 990 million yuan, a year-on-year increase of 265.71%.

Among them, the revenue from selling raw materials such as fresh fruits, dairy products, and packaging materials to franchisees accounted for more than 80%, while the revenue from franchise management services accounted for less than 20%.

What sets Guming apart is that its expansion speed appears to be more "restrained," with 19 provinces, including Beijing and Shanghai, still lacking store presence.

In comparison, competitors such as Chabaida, Shanghai Auntie, and Shuyi Shaoxiancao have already opened stores nationwide and covered at least 300 cities. Guming currently covers less than 200 cities, even lagging behind Heytea, which focuses on first-tier and new second-tier cities. In the increasingly competitive market of new tea beverages, Gu Ming is able to compete with Heytea in the sinking market.

Currently, the growth rate of freshly made tea beverages in the sinking market is faster, which is why new tea beverage brands are opening up for franchising.

According to Zhushi Consulting, from 2017 to 2022, the growth rate of the freshly made tea beverage market in third-tier cities and fourth-tier and below cities was 25.8% and 27.4% respectively, much higher than the 18.8% in first-tier cities.

This is exactly where Gu Ming is focusing its efforts.

By the end of 2023, Gu Ming had a total of 9,001 stores, mainly distributed in second-tier and below cities, accounting for a high proportion of 79%, with third-tier and below cities accounting for as much as 49%.

On the same day, the prospectus submitted to the Hong Kong Stock Exchange by Heytea showed that in 2023, the proportion of Heytea stores in third-tier and below cities reached 56.9%.

Currently, in the competition between Gu Ming and Heytea in the sinking market, it is difficult to determine a clear winner.

In the "home" provinces where Gu Ming is deeply rooted, it has a larger number of stores.

For example, in Zhejiang and Fujian, Gu Ming has more than 2,000 and 1,000 stores respectively.

Gu Ming refers to this store opening strategy as "regional encryption" in its prospectus, and considers having more than 500 stores in a province as "reaching a critical scale", believing that it will highlight economies of scale.

Taking Zhejiang, Gu Ming's stronghold market, as an example, in 2010, founder Wang Yunan opened the first Gu Ming store in Taizhou City.

By the end of 2023, Gu Ming had opened 2,054 stores in Zhejiang Province, and its same-store GMV still achieved a positive growth of 5.1%; in Fujian and Jiangxi markets with a total of more than 1,900 stores, Gu Ming's same-store GMV could reach a growth rate of 12%, and there was no apparent impact from store diversion.

In its prospectus, Gu Ming stated that most of its stores are located in 8 provinces in East China and South China, contributing 89% of GMV and most of the revenue, which, together with the 19 provinces that have not yet been developed, means that it has tremendous growth potential.

However, judging from its supply chain model and store opening speed, the slightly "conservative" store opening strategy may be its only choice.

It's not that they don't want to, but they can't.

The Persistence and Cost of "Freshness"

In the increasingly fierce competition in the second half of the new tea beverage market, brands have begun to seek efficiency from the supply chain, and Gu Ming's large-scale construction of the supply chain seems to be a persistence for "freshness".

In its prospectus, Gu Ming describes its supply chain capabilities in considerable detail.

Gu Ming claims to have "built the largest-scale cold chain warehousing and logistics capabilities in the industry" and is the "only enterprise that can frequently deliver short-shelf-life fruits and fresh milk to stores in lower-tier cities".

According to the prospectus, as of September 30, 2023, Gu Ming operates 21 warehouses with a total area of over 200,000 square meters, and over 75% of its stores are within a 150-kilometer radius of the warehouses. Gu Ming has even established a self-owned cold chain transportation fleet of about 300 vehicles. In its prospectus, Guming stated that its cold chain warehousing and logistics capabilities enable it to use fresh ingredients such as fruits, tea, and fresh milk to make the majority of its made-to-order beverages.

From a business return perspective, Guming's focus on fresh fruit tea for differentiation has yielded considerable returns.

As of the third quarter ended September 30, 2023, Guming's net profit margin reached 17.96%, significantly higher than the full-year figures of 6.61% and 6.68% in 2021 and 2022, respectively, reaching a historical high.

In 2023, Guming's average quarterly repurchase rate for members reached 53%, according to Zhaoshi Consulting, which is higher than the average repurchase rate of less than 30% for popular made-to-order tea drinks priced between 10-20 yuan.

However, on the other hand, Guming's obsession with "freshness" comes at a cost. Its heavier investment in assets means a heavier financial burden.

In 2022, Guming's warehouse and transportation expenses increased significantly by 71.26% YoY to 70.098 million yuan, while depreciation and amortization expenses increased by 77.53% YoY to 48.592 million yuan.

In comparison, during the same period, Chabaida's depreciation and amortization expenses were only 14.242 million yuan.

Guming's heavy asset investment in building its own supply chain also explains its focus on increasing store density in a single region. After all, the cost of distributing materials from one warehouse to 10 stores is not much different from distributing them to 100 stores, while the annual depreciation and amortization expenses remain fixed.

According to a source close to Guming's supply chain, as early as when Guming opened its first franchise store in the early days of its establishment, founder Wang Yun'an would personally deliver raw materials to the stores in a van. The concept of convenience for franchisees and quality control was already deeply ingrained in Guming at that time.

The source mentioned that due to the different ripening periods of seasonal fruits in different regions, Guming currently purchases in batches in different regions and then distributes them to more than 20 warehouses nationwide, based on the needs of the stores. In the future, depending on the expansion of stores in the northern region, Guming will also adjust its supply chain layout accordingly.

In the prospectus, Guming has not explicitly mentioned plans for expansion in the northern region, only stating that it will "steadily and efficiently expand to other provinces and regions."

From the perspective of the use of funds raised, Guming's need for expansion in the north is not urgent.

Its plan is to use the raised funds to improve its digital capabilities, strengthen its supply chain capabilities, build its brand, recruit franchise management personnel, enhance product research and development capabilities, and for general operating expenses. Among these, "improving the digital capabilities of stores" is listed as the top priority.

Due to the larger investment in the supply chain for fresh ingredients, it can be said that Guming has to some extent given up the opportunity to enter the current intense competition in the tea beverage industry at a faster pace.

However, in the current fiercely competitive market, whether this positioning will become an opportunity cost for Guming or reduce operational risks in the highly competitive industry remains to be seen and will require time to verify.