“We haven’t been fully engaged in the price wars,” Chagee co-founder Shang Xiangmin said in an interview earlier this week at his Shanghai headquarters. “Price wars may be a way to compete, but we want to stick to our long-term strategy to build a premium brand.”
The strategy is now being severely tested as rivals’ cut-throat prices undercut the tea chain’s business.
Chagee’s second-quarter sales growth slowed to 10% from 35% in the previous period, while adjusted operating income dropped 10% compared with double-digit gains in the first quarter. Same-store sales in the Greater China region plunged 23%.
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The company’s sluggish results have since wiped out nearly a quarter of its market valuation. Analysts at Citigroup have cut their full-year Chagee forecast, warning of continued pressure for the remainder of the year.
Shang said he is confident Chagee’s premium drinks will eventually win back consumers temporarily won over by cheaper prices. Beijing’s intervention to curb the bare-knuckles competition will lessen rivals’ price advantages, he said.
Chagee has long positioned itself as the Chinese tea equivalent of Starbucks Corp.
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“Starbucks has brought coffee to the world through decades of development,” Shang said. “We have always wanted to go down the same path to take tea further.”
Chagee has rolled out a line of extracted brewed teas and cha lattes at prices double or even triple what consumers pay for discounted drinks at other chains.
Its Hong Kong flagship store is testing a drink line made of the nation’s premium tea leaves that are brewed and served by in-store specialists. They are offered at prices similar to servings of single-origin coffee at Starbucks Reserve shops in the city, which range from HK$40-HK$50 (US$5.15-US$6.44).
China’s continuing consumption slump, though, is even putting pressure on the Seattle-based coffee maker, which is in the process of looking for a strategic partner to buy a stake in its China operation.
Chagee has more than 200 international stores out of its network of 7,000 stores. Sales in overseas markets surged 70% in the second quarter. Southeast Asia remains a focus for expansion, Shang said. The company has two outlets in the US.
Shang didn’t disclose plans for future expansion.
Chagee is also modelling Starbucks’ spacious coffee shops — so-called third places between home and work — that create a sense of community, he said. Chagee strives to provide roomy spaces in which customers can sip their tea as opposed to the small grab-and-go outlets of competitors.
“We want tea aficionados to sit in our shops and feel the culture,” Shang said.
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