Bubble tea bubble: why investors are decrying the popular drink – BBC News

Image source, Getty Images

Image caption, Bubble tea has found a sweet spot among millions, but has left a bitter taste in the mouths of some investors

  • Author, Joao da Silva
  • Role, Business reporter

From its origins in Taiwan in the 1980s to the current global craze, bubble tea or boba, it has come a long way.

Ask people under the age of 40 anywhere in the world if they’ve ever tried the concoction of milky tea and tapioca balls and chances are they have.

Bubble tea has certainly made a good impression among its many fans, but it has also left some investors with a bitter taste.

The stock market debut of two China-based chains has already taken place flopped. And there are at least two more share sales in the pipeline.

Despite these hiccups, there’s no denying that boba has become a global phenomenon after its popularity spread from Asia to the West.

From London to Helsinki and from Buenos Aires to Cape Town, it’s almost impossible to find a major city where it isn’t on sale.

Image source, Getty Images

Image caption, Although the real inventor is still debated, we do know that bubble tea was invented in Taiwan

There are now an estimated half a million bubble tea shops in China alone – a huge market for the drink, and not far removed from its origins in Taiwan.

Thirtysomething university lecturer Lili, who lives in the southern Chinese city of Guangzhou, first started drinking it when she was in primary school.

Nowadays she can’t go long without her solution. “Bubble tea is an easy-to-obtain pleasure, so I drink it quite often,” she says.

Tina, an office worker from Beijing, also in her thirties, tells a similar story. She first tried boba when she was a child and now drinks it several times a week. She often makes group orders with colleagues and friends at a wide variety of well-known stores.

Lili, Tina and millions of others like them have helped China’s bubble tea companies grow into a nationwide industry that was worth about 145 billion yuan ($20 billion; £15.9 billion) last year, according to estimates by the China Chain Store & Franchise Association .

Image caption, Office worker Tina from Beijing often orders bubble tea for her friends and colleagues

Innovation has been a key to its success “with new flavors and recipes being launched all the time,” said Jason Yu of consumer research group Kantar Worldpanel.

It is a strategy that resonates Lili who says “promotional campaigns, brand collaborations and new flavors” keep her coming back for more.

That approach has also allowed bubble tea chains to expand beyond China’s major cities, Yu says.

This success story continues even at a time when China’s economy is slowing and consumers are tightening their belts.

Bubble tea “provides highly affordable enjoyment to consumers in China,” Mr Yu said, pointing to the “broad price range” of products offered by various bubble tea chains.

However, some investors have not shown the same enthusiasm.

In an effort to cash in on the craze, several Chinese tea chains have tried to sell shares to the public in recent years.

Last month, China’s third-largest bubble tea chain, Sichuan Baicha Baidao Industrial, better known as Chabaidao, made its stock market debut.

The shares plummeted on their first day of trading and have yet to recover.

That followed another disappointing debut from Shenzhen’s Nayuki.

The shares have lost more than 80% of their value since their launch in Hong Kong almost three years ago.

Image source, Getty Images

Image caption, Shares of Chinese bubble tea companies have fallen after their market debut

Analysts point to a number of reasons for this weak performance, including concerns about Hong Kong’s stock market as a whole.

The amount of money raised from new listings in the city since the start of this year has fallen to levels not seen since 2009, according to consultancy Deloitte.

But this hasn’t stopped other bubble tea chains from planning their own stock sales.

Earlier this year, China’s first and second largest chains by number of stores – Mixue Group and Guming Holdings – submitted applications to list on the Hong Kong Stock Exchange.

“Continuing weak market sentiment in Hong Kong is the main reason” for Chabaidao’s market blunder, said Gary Ng, a senior economist at Natixis.

He believes the city will struggle to attract new listings until there is “a clear sign of China’s turn to growth and lower US interest rates”.

However, others say investors are focusing on the problems within the bubble tea industry itself.

It “has relatively low barriers to entry, leading to greater competition,” said Kenny Ng, securities strategist at Everbright Securities International.

“Many companies rely on opening new stores to support sales growth. However, this expansion strategy can lead to a decline in gross profit margins as companies face higher costs associated with store operations and management.”

For bubble tea lovers, the growing competition has its advantages. Han is a regular boba drinker from Beijing who avoided certain premium brands because she found them too expensive.

That has changed. She says price has become less of a factor when choosing between different brands because “they have a lot of discounts and vouchers”.

But for bubble tea makers and their potential investors, lower prices and higher costs may prove to be an unattractive recipe.

“The Chabaidao case highlights the risks and does not bode well for the listings of other bubble tea chains,” Gary Ng warned.

Lili and Han say there’s an even more significant risk associated with the often sugary drink that keeps them from ordering more: gaining weight.

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