Trouble brewing in bubble tea haven

The comfort food (or drink to be precise), that is bubble tea needs no introduction. And not too long ago, there were long queues at most of the bubble tea operators especially those in the Klang Valley. Unfortunately, haunted by the spectre of Covid-19, the implementation of the Movement Control Order (MCO) in Malaysia (for about two months from March 18), social distancing and other virus prevention guidelines mean business is not as brisk as it used to be.

EdgeProp.my’s cover story on July 5, 2019 highlighted that bubble tea stores had taken the country by storm with operators concentrating on popular commercial hubs around the Klang Valley including SS15 Subang Jaya’s famed ‘bubble tea street’ (Jalan SS15/4).

However, a visit in the middle of May, 2020 during the Conditional MCO period, found several bubble tea outlets on that street have shuttered with banners put over their shop facades seeking to sell or rent the shop units.

When contacted, one of the bubble tea stores operating in a shop unit being listed for rent in SS15 told EdgeProp.my that they have decided to move to a “better” location and declined further comments.

Over 30 stores used to operate in the area alone — have the multi-coloured boba concoctions reached a saturation point? Are they losing their charm amid Covid-19 fears?

Hectares & Stratas Sdn Bhd real estate negotiator Joe Chua reckons that several bubble tea stores have not been operating during the MCO, and he admits, things have not been rosy prior.

“Even before the MCO, consumer spending was already low. Although [bubble tea] falls under food which is an essential business [during MCO] it was still tough for them to keep their businesses afloat with the reduction in crowd,” Chua tells EdgeProp.my.

“Perhaps the less established brands with smaller market share could not survive with the high operating costs and the ensuing MCO as consumers generally prefer the more established brands,” notes Chua, adding that the recent trend towards healthier yogurt and rice-based beverages could be another factor as well.

Drop in asking rents

Rental rates of shop units in the area have also dropped amid the outbreak. As reported last year, based on EdgeProp.my data in July 2019, asking rents for ground floor units at Jalan SS15/4 went as high as RM12,000 a month.

“When the first bubble tea store opened on Jalan SS15/4 in late 2017, the rental was about RM5,500 per month. Once the trend fully kicked in, some shop lot owners were asking for between RM8,000 to RM12,000 per month as of late last year,” says Chua.

But right now, he adds, the owners are asking for lower rents of about RM7,000 — RM8,000 a month. However, he clarified that no owners are looking to sell their units at the moment despite the many ambiguous ‘for sale/rent’ banners.

IQI Realty Sdn Bhd real estate negotiator Jacky Chong also attributed the situation to a loss of income and sales during the MCO. He too expects a reduction in rental rates moving forward.

“For a ground floor unit facing a main road in SS15, the rent now can go as low as RM6,000 to RM8,000 a month compared with the previous highs of more than RM10,000 per month,” says Chong.

He also discloses that during the bubble tea hype in the area, certain bubble tea stores were willing to offer landlords a higher rental to open shop at SS15, which most probably contributed to the spike in rents then.

Staying positive

Chatto, a bubble tea player that has an outlet operating in SS15 conceded that sales have dipped amid the Covid-19 outbreak.

“Our outlets have been a popular meeting point for people, given the ambience and the healthy drink options we served. We love hosting people in our stores but the MCO has put a stop to it.

“The challenge is to convert our walk-in customers onto delivery services but major food delivery companies are charging between 25% to 35% commission which is affecting our margins,” homegrown handcrafted tea bar Chatto co-founder and CEO Terence Lee shares with EdgeProp.my.

He also acknowledges that many bubble tea outlets in SS15 have closed during the MCO and says it could be a downward trend for the industry. He foresees more closures of bubble tea stores within the next three months. “We even noticed some well-known bubble tea brands from overseas closing shop with losses potentially going up to RM500,000 to RM1million,” he adds.

“But don’t worry, our outlets are still operating,” he assures, adding that Chatto is trying its best to stay afloat in the market. “In this crucial time, cost control is important. Setting up [a Chatto outlet] is affordable while the cost of ingredients has remained reasonable. We foresee Chatto to remain strong in the Malaysian bubble tea market as long as the business owner is able to avoid losses or is able to breakeven within six months,” says Lee.

Nevertheless, he admits that rent is one of the main costs of doing business.

“When the bubble tea craze started, landlords were aware of the high demand and they pushed their rentals higher by 10% to 20% and businesses have to accept the seemingly unreasonable rentals because demand then was high.

“High rentals would not be an issue for the first one to two months while business is still running good with positive sales. However, after a while, there will be a saturation and sales will not be as brisk after the hype dies down — that would be when the rental will become a burden,” shares Lee.

During the MCO, he notes that most landlords were rather understanding with some offering up to 50% discount for their rent. “We really appreciated it. But there are some landlords who refused to provide any discounts as well,” he says.

The local brand is in the midst of getting a halal certification to appeal to a wider demographic. “Perhaps, Chatto could be the second local bubble tea brand in Malaysia after Tealive,” offers Lee, adding that it is also venturing into Australia and Brunei with stores scheduled to open in June 2020.

“Overall, the bubble tea culture will remain although it is not as ‘crazy’ as in the past. While small players exit from the market during this outbreak, the bigger players will be stronger in serving the community once everything goes back to normal.

“The market will hopefully recover year end starting from November if the Covid-19 is under control in Malaysia. Although it is a tough time for all, it is a good opportunity for us to make an even stronger presence in the market,” opines Lee.

Demand and supply

Meanwhile, Institute for Democracy and Economic Affairs (IDEAS) senior fellow Dr Carmelo Ferlito has observed since last year what he dubbed as a ‘bubble tea bubble’.

“The high number of bubble tea shops would not have been sustainable in the long run. The Movement Control Order which froze both supply and demand accelerated the process of closing and many were forced to close due to the MCO. Some shops could have survived the natural ‘bubble tea cycle’ if the MCO had not occurred,” he said.

“When there is a cycle related to a specific product, at the peak of the cycle, we have a high number of players both from the supply and the demand side. When the ‘fashion’ or ‘fever’ is over, demand finds its physiological level and supply adapts accordingly.

“But this process in the market is a discovery process mediated by prices. With the MCO, the market discovery process was put to a halt. The ‘new equilibrium’ or the ‘right’ amount of shops will be determined by the market when demand and supply will be allowed to discover each other again,” Ferlito tells EdgeProp.my.

In light of the Covid-19, for that to happen, it would not be sufficient for the government to merely give the green light to restart operations. “Shops can reopen. But if consumers are not confident to go out and buy, eat or drink, then the market process cannot happen. A real reprise of market conditions will require a change in the strategy of communications implemented; so far, that has been very much centred on fear,” notes Ferlito.

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This story first appeared in the EdgeProp.my e-Pub on May 29, 2020. You can access back issues here.