Bubble and Froth in BBT
I love BBT! - Some random XMM on Hinge, probably ~
One of the most interesting articles I read recently is about the bubble tea listed companies, which are raging hot in china and seeking to raise capital in HK market. As a homegrown Singaporean whom are surrounded by colleagues with a sweet tooth for BBT as a daily fix, I have spend countless afternoons staring at the business operations of the different bubble tea franchises and observing their business operations, on how they sell and market their products, and their respective price point and product niches.
The history of BBT in Singapore is an interesting one. I was first introduced to BBT around 2002 at my primary school days, The original bubble tea is just a mix of sweetened drinks and chewy black tapioca balls, which the combination of iced sweet caffeinated drink turned out to be a great hit upon impressionable teens (similar to coca cola) . To distinguish the drink from each other, different brands used flashy marketing techniques to target their addressable market. Several brands bought (electric doll shakers) as a gimmick to lure kids to see this unusual device, and others whom target the adult audience employed bikini babes to shake the <bubbles> for the tiko uncles.
As the marketing fad died off, bubble tea franchises underwent a major restructuring, before having a resurgence around 2015. Bubble tea chains began massive product innovation and differentiating themself to product niches, ranging from procuring quality tea leaves as premium tea flavors, experimenting with fresh fruit bits and cheese foam (which I first learnt about in my trip to ShenZhen at 2019), as well as having thickened flavored drinks and flagship products to attract customers to stick to them. As a value investor at heart (whom likes to buy a dollar for 60 cents), I am particularly fixated at Mixue Bingcheng, whom is able to set a particularly low price point for reasonably good products. Other bubble tea franchises (such as Liho) employ aggressive promotional techniques (valid until 13 Aug) to use its product as an user acquisition cost to incentivize consumers to download the app, so it will have free shelf space /advertising avenue to target its consumers whenever they open their smartphones.
The Bubble Tea franchising business at first sight looks like a simple understandable free cash flow generative business, and the bbt culture in Singapore does not seem to be dying down anytime. Coupled with its high price point (and attractive gross margins), one might be tempted to consider investing in a bubble tea operational business, or the listed company in HK. But before jumping in to invest in this new business, there are multiple factors to consider
Operational constraints
1) From an consumer behavior perspective, there is little to no switching cost between brands. Because of bubble tea forming taste memory and the tendency of humans to be bored of the same product, it is very hard to enforce consumer loyalty unless the shop is situated at a strategic position (with higher rental costs), and employs attractive loyalty programs (price competition / or volume based pricing).
2) Most of the products ideas can be easily copied by competitor brands and there is no IP protecting the product line. It is very difficult to continue to create innovative products and then have the competitor clone your best ideas in the following week.
3) Although BBT enjoys high margins (20-30%), the nature of using fresh produce as its product input (whipped cream, fresh fruits, cheese foam) and the complexity of its product line (compared to burgers and fries) meant that there is significantly higher costs to maintain a fast and efficient logistics line, with higher cost of spoilage
4) The high sugar content of BBT and its bubbles meant that there is only a limited TAM and cups of tea one can sell to its consumers on a daily basis. And due to health concerns and government intervention, the bbt sector is trending towards moving towards a regulated industry (limiting advertising, necessitating health labeling etc)
Business strategy constraints
5) Most unusually, the growth in BBT franchises in China and SG is based on the <explosive franchise business model> whereby VC funds incur huge losses just to land grab retail shops and use aggressive promotions to buy consumer loyalty. After building top line revenue, their exit strategy is to offload the stock through an IPO. (Nayuki losing 70% of market cap from IPO pricing). This practice reached the point whereby the China A share market regulators banned these companies from listing, necessitating them to source for funding elsewhere.
6) The nature of price competition in brand building meant that once consumers get anchored to the lower price point, they will find it hard to resume the same level of consumption once the promotion is down. This is a strategy that destroys the brand value and pricing power in the long term. This is particular dangerous as these companies attempt to scale the broken marketing / business model without getting the positive unit economics right. Unlike a technology company, Franchise shops do not enjoy the same level of gross margins and operational leverage as they build up more stores, and this cash burning strategy to land grab is certain to be unsustainable in the long run.
Much as I enjoy savoring the spoils of the price wars between the different BBT outlets, I do not foresee myself investing in its franchise or the listed company until I see a unique business model that can overcome the aforementioned constraints and render them invalid.
Portfolio Decisions for the month of July
I partially divested a mid sized position in Silverlake Axis on 26July23 at the price of SGD 0.29 as I believe my original thesis of the core banking business experiencing a trough and due to a cyclical upturn is faulty. Although there is reasonable improvement in its revenue growth and profit margins since I entered the position in 2017, it is not as large as I originally thought. The stock I bought was originally cheap but continued to be cheaper. There are significant bouts of share buyback but that does not translate to an improvement in share price over the years, and I do not have a good insight on why is this happening.
After buying my fair share of value traps in SG in the past, my understanding of value investing in SG is like buying a bag of popcorn. In this widely diversified bag of stocks, some of them will pop once the time is right, and others may stay as duds and become value traps. Without institutional buying or activist investors to shake up the market, I do not have strong faith that the same deep value principles US can be fully scalable in SG. There might be practitioners in SG whom are better in this piece than me and I will love to gain pointers from them.
I invested a mid sized position into Berkshire B on 26July23 at USD 347.38.
I believe that the opportunity cost of staying into a (low growth and limited TAM) company is no longer attractive compared to other companies such as Berkshire, which has a larger TAM and competitive advantage. Berkshire Hathaway is aggressively allocating capital into sectors such as Oil companies and Japanese companies (which are undervalued and out of my circle of competence), and I believe that their capital allocation ability is superior to mine at the moment.
As this blog is focused on the investing piece and started out in an low interest rate environment, the default allocation I used to propagate in the past is to stick it into SSB. It does not make sense to invest large effort to earn (0.5-2 percent) when I can focus on the larger varience bets (-50% to potential multibaggers). However as interest rates peaked up and savings accounts became more appealing, I have been devouring content from legitimate youtubers, whom are more sophisticated in working down the fine print of savings products and optimise the returns from it. Savings plan has became much more competitive since the SSB / fixed D days, and I encourage readers to check them out and optimise the plans they are currently employing!
High Interest Savings Plans
Broker Linked Savings Plan
Conclusion
Some of my personal pursuits did not go as successful as I intended and I decided I need some time to recoup and recover. I also need some time to realign some personal matters before continuing onward. Blogging about market quirks / financial news continue to be my creative outlet and interest and I plan to focus on building my subscriber base in this new platform. Until then, I will strive to simplify my life and stay cheerful for the months ahead!