Green Tea brews up IPO-funded small-town expansion plan

The restaurant operator has made its fourth application for a Hong Kong listing, aiming to use the funds for an aggressive move into China’s less-affluent ‘sunken markets’

Key Takeaways:

  • Green Tea has submitted its fourth application for a Hong Kong IPO, reporting 382 restaurants and a profit of nearly 300 million yuan in its latest year
  • The restaurant operator only has one brand, Green Tea, with an unimpressive average table turnover rate of 3.3 times per day

By Lau Chi Hang

Husband-wife teams in China’s startup business community have always evoked a certain feel of romance, especially when it comes to the country’s food and beverage sector. 

There’s the story of a blind date that led to a union between Zhao Lin and Peng Xin, who would go on to start bubble tea chain Nayuki (2150.HK). There’s also the tale of a casual walk in Shanghai that inspired Shan Weijun and Zhou Rongrong to found the Auntea Jenny tea chain. And then there’s Wang Qinsong and Lu Changmei, who were inspired to open their first Green Tea restaurant while doing business next to West Lake, one of China’s most scenic spots in the coastal city of Hangzhou.

Now, Wang and Lu are hoping to take their romance to the next level with a new application last month to list their “baby,” Green Tea Group Ltd., in Hong Kong.

Green Tea’s success is very much a case of happenstance. Wang and Lu opened their Green Tea Youth Hostel in Hangzhou’s West Lake District in 2004 to cater to the many vacationing backpackers visiting the city from around the world. They experimented with a mixture of different cuisines as they tried to adapt their food to satisfy the tastes of such a global customer base. The end result was a few signature dishes that gained local popularity, increasingly attracting local diners to the hostel. Seizing on the popularity, the couple opened their first Green Tea Restaurant at West Lake in 2008.

Rocky road to listing

Despite its business success, Green Tea Group’s attempt to list has traveled down a bumpier road. It filed for an IPO on the Hong Kong Stock Exchange twice in 2021 and passed its listing hearing at the beginning of 2022 – a key step before a new listing. But it failed to execute the IPO. In April 2022, it made a third attempt that lapsed in October that year.

Green Tea probably hesitated in 2022 in the face of a chilly Hong Kong stock market at that time. But Wang and Lu never abandoned their listing ambitions, as reflected by their latest IPO application. According to the application, the company’s revenue grew steadily from 2.29 billion yuan ($315 million) in 2021 to 3.59 billion yuan last year, as its profit more than doubled from 114 million yuan to 296 million yuan.

The company had 382 restaurants at the time of its latest application. In a show of its resolve to complete the listing this time, the company plans to open its first Green Tea Restaurant in Hong Kong’s popular Causeway Bay shopping and dining district in August. Mainland retailers often take such steps to boost their profile among Hong Kong investors ahead of their IPOs. 

Restaurant has-been

In its earlier days, Green Tea won over consumers and influencers with its traditional Chinese-style decor and original dishes. But it’s hard to stay at the cutting-edge in such a cut-throat industry for long, and Green Tea has lately been losing China’s finicky diners to competitors with the latest eye-catching stores hyped by flashy marketing. Some critics are even starting to call the company a has-been on the Chinese restaurant scene.

Green Tea has failed to keep pace by rolling out new dishes, or, rather, it has failed to find and popularize new tastes like the ones behind its early success. That’s forced it to fall back on its earliest signature dishes such as its “Bread Temptation” and “Green Tea Roasted Chicken,” to keep consumers coming back. But those classics are losing their audience, undermined by copycat dishes from rivals and increasingly shunned by a younger generation always looking for the latest new thing. 

Table turnover trends are another headache plaguing Green Tea. As early as 2014, Wang noted in an interview that table turnover is the lifeblood for any restaurant to operate profitably, the higher the better. A restaurant with daily table turnover of four times can only make ends meet, while seven times represents the highest profit potential, he said.

Green Tea is hardly impressive in that context. Its average daily table turnover rate stood at 3.23 times in 2021, only to fall to 2.81 times at the height of China’s strict pandemic controls in 2022, before rebounding to 3.3 times last year. That’s well below the four times quoted by Wang needed to operate profitably, and hardly much to boast about.

Wang and Lu tried to perk up their company with Playking, a Western food brand that launched in 2016 and had 14 restaurants in six cities within a year. But Western food is often a hard sell for Chinese diners, and the new brand eventually failed. Another attempt at a new brand, stew specialist Guan Dong Zao, also ended in failure, showing it’s not always so easy to repeat an early success. One of the few to accomplish such a feat is rival Jiumaojiu (9922.HK), whose Taier chain serving “sauerkraut fish” has overtaken its original Jiu Mao Jiu brand to become the company’s main breadwinner.

Eye on smaller city diners

Green Tea’s spending per customer could also use some improvement, rising from 60.5 yuan in 2021 to 62.9 yuan the next year, only to drop back to 61.8 yuan in 2023. In light of limited profitability for each store, the company can only rely on opening more outlets to boost its revenue and profit levels. Accordingly, Green Tea is revving up for an expansion spree, aiming to open 675 stores over the next four years – nearly tripling its current count.

The company is already well represented in China’s largest cities, and is eying future potential in smaller ones, locally known as “sunken markets” because of their lower consumption power and visibility. Green Tea plans to speed up openings in such second- and third-tier markets, with about two-thirds of its planned new restaurants aimed at those smaller cities between this year and 2027.

But Green Tea is hardly the only company to notice this potential new gold mine. Rivals like Xiaocaiyuan and Taier are also pouring big resources into such smaller markets, where they will also face competition from local favorites. 

Green Tea’s success will depend first and foremost on its ability to meet its aggressive opening targets, and on whether it can complete its IPO to raise funds for the business expansion. Given the current market where price-to-earnings (P/E) ratios for top players is relatively modest, including 11 times for Jiumaojiu, and 16 times for Haidilao (6862.HK), getting a strong pricing for its shares will be Green Tea’s first big challenge.

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