Bubble tea industry is growing rapidly in the United States. At the same time, bubble tea business is very profitable and prospective. This paper presents a business plan for the opening of Kung Fu Tea franchise that will specialize in bubble tea serving in Rochester (New York). The business plan describes the product, evaluates strengths and weaknesses of the business, gives an assessment of Kung Fu Tea competitive environment, and provides information regarding the cost of business and the payback period. The analysis is made in order to show that Kung Fu tea franchise is a successful investment decision.
Company Chapter: Who We Are
Kung Fu Tea is a chain of small places that specialize in selling bubble teas. It has been in business for more than a decade and improves constantly. The headquarter of the company is located in New York City. The shops are situated in New York (21 spots), Massachusetts (6 spots), Illinois (2 spots), Pennsylvania (3 spots); and there are 1-2 spots in such states as Georgia, Texas, California, Nevada, Hawaii, Florida, and Minnesota. Also, there are business ventures in Taiwan, Southeast Asia, and China. Most shops work as franchises.
Products and Services
Kung Fu Tea prepares hot and cold bubble tea beverages with various flavors. The standard menu consists of 11 drinks, the most popular of which are the Kung Fu Bubble Milk Tea, the Taro Slush, and the Passionfruit Green Tea. All drinks are served in two sizes – medium and large. However, other options are also possible as any combination of flavors according to the preferences and tastes of a customer can be prepared. Besides, Kung Fu Tea has special summer/winter offers that reflect the seasonal fluctuations in tastes. The company offers high quality drinks made of natural fresh products. Moreover, customers can choose the sweetness level (low, medium, high or sugar-free) and the percentage of ice in a drink. Kung Fu Tea is a shop that sells only drinks. Meals are not offered in Kung Fu tea shops.
An excellent location was chosen for a new store proposed in the current business plan – the College Town in Rochester. It has a good strategic location at the entrance of the University of Rochester. The immediate neighbors of the College Town are the University of Rochester campus and medical center. The university is a large institution that employs over 20000 people. Besides, it is attended by more than 10 000 undergraduate and graduate students. The place is close to downtown area. Thus, opening the Kung Fu Tea shop in a College Town is a good idea as it is a high traffic area with intense demographics of targeted customers (young people who love to try new tastes).
Bubble tea origins from Taiwan and is very popular among Asian people (because of their tea culture). However, in recent years, the bubble tea is gaining more and more popularity across the Western countries, including the USA. According to the forecast of the Tea Association of the USA, Ready-To-Drink tea sector will continue to grow at high rates of approximately 12-15% annually (Simrany, n.d.).
The tea market of the USA is characterized by the following trends:
The continuing appeal to natural products and healthy lifestyle cause a switch in consumer tastes from coffee towards tea. Besides, Ready-To-Drink Tea may win some market share from the soft drinks niche due to a prompt advertisement campaign as it is a “healthier product”.
People become less conservative and prefer foreign cuisine and drinks (Chinese, Italian, etc.). There is a clear sign of preferences for convenient consumption and eating out. Specifically, people are more interested in Ready-To-Drink tea. This tendency adds benefits to the Ready-To-Drink tea category.
The Ready-To-Drink tea category is in the stage of its infancy. This assumes that the category will grow and more companies will enter the market.
The entering barriers in the industry are low, so, in future, the competition may become very tough. New tastes will appear.
People are ready to pay more for the premium or fancy drinks. Thus, a higher price (meaning higher operating margins) is justified.
Consumers expect two main things from bubble tea-spots:
- Quick service (as it is a drink-to-go) in a friendly atmosphere;
- Superlative quality of the product with an emphasis on natural healthy ingredients.
The target audiences for Kung Fu Tea in Rochester are people who study and work at the University of Rochester. It is a primary niche the new place will be targeting. Besides, bubble tea is a good drink for children and adults who live in the neighborhood area. The competition at the market of bubble tea is not as tense as the competition at the coffee market. That is why, Kung Fu Tea has good chances to become a favorite shop for many tea-lovers who want to try new tastes and introduce some changes in personal tea culture. In our view, the market need for a bubble tea is not fully satisfied in Rochester. Therefore, a good location and an existing market demand can help in development of the Kung Fu business in Rochester.
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Competitors and SWOT-Analysis
Even though the consumer demand for the bubble tea is not satisfied in the area, Kung Fu Tea has several direct and indirect competitors. A key competitor is the White Swans Asia Caffe (Leach, 2012). This relatively new but successful Chinese restaurant serves a full set of Asian dishes and beverages. The menu is offered in both Chinese and English. Their prices for the food are relatively low. The food is tasty, and the portions and menu sets are big. White Swans also has bubble tea in its menu. What is more, the drinks are prepared from fresh fruits and freshly brewed tea. White Swans do not use fruit substitutes in their drinks. The drinks have a good look and a good taste. White Swans Asia Caffe is located at 798 S Clinton Ave, a mile away from the College Town center. People love going there for a meal. However, White Swans positions itself as a café or restaurant where people can enjoy their breakfast, dinner or lunch. People do not go there exclusively for a drink. Customers go there to have a meal and additionally order the bubble tea in a complex with a meal. It is not a “quick” place, and they do not have website to process and deliver online orders.
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Another direct competitor of Kung Fu Tea is Saxbys Coffee which is located at the College Town, in the same place where the new Kung Fu Tea shop is supposed to be opened. It is a coffee shop with various kinds of drinks, including various kinds of freshly brewed coffee, teas, and smoothies. They declare that their smoothies are fat-free and contain only natural fresh fruits. Saxbys Coffee allows online ordering, which is very convenient for customers.
There is also an indirect competitor, a chain of Chinese cafes called Yummy Garden. This chain offers a variety of fast-food Chinese dishes and drinks. However, most drinks are standardized soft drinks like Cola, Pepsi, soda, etc. The only point in menu that may create a competition to Kung Fu Tea is a homemade lemonade of various flavors and a homemade ice tea. The prices for the menu items are low. For instance, a large lemonade costs $1.75, which is twice lower than Kung Fu Tea’s cheapest option. Thus, one may see that Yummy Garden is appealing to those consumers who seek for a cheap meal of a decent quality. Besides, Yummy Garden has an effective website where customers can order a meal and choose the specifications they want (for instance, fried or white rice; Cola, Nestea, a lemonade, or any other drink). Although Yummy Garden does not have bubble teas, still they create an indirect competition as some consumers would buy their lemonades or tea as a complementary item to the meal.
The SWOT-Analysis for Kung Fu Tea
It is obvious that Kung Fu Tea has many opportunities for growth and many strong points. The key strengths of Kung Fu Tea are a high markup, excellent quality and natural ingredients of products, quick service and low entrance barriers. The popularity of bubble tea in the USA is growing, so does the market. The weak points of Kung Fu Tea are an inconsistent website, a low concentration of Asian people in the targeted region, and no meals offered (only drinks). There are the following threats of the business: new competitors may enter the market and the demand may fall due to the changes in tastes or any other unpredictable factor. At the same time, Kung Fu Tea has an opportunity to grow, as the market grows annually, and to win the market share from the soft drinks category.
The vision of the proposed business is to become a popular hot-spot for bubble tea consumers in Rochester city.
Kung Fu Tea will rely on a mixed differentiation strategy.
The vertical differentiation will be achieved through the positioning of Kung Fu assortment as “healthier” and “more natural” beverages than drinks of competitors.
The horizontal differentiation will be achieved through a different variety of flavors and non-conventional drinks offered. Bubble tea is a new concept that came to the US from Asia. While coffee-to-go is a regular thing for any business center, city or suburban area, bubble tea-to-go is a relatively new offer. Besides, Kung Fu Tea will be opened until late night hours. Therefore, this place will be the only bubble tea location in Rochester that is available late.
The website of Kung Fu Tea company offers to work as a franchise on certain conditions. They provide the approximate expenses that are mandatory for the start-up. The franchise offering Kung Fu Tea includes such expenses as a franchise fee, a training fee, equipment cost, and cost of renovation. First, a shop should pay the franchise fee in amount of $37,000, the training fee ($10,000), and purchase the equipment, which is from $25,000 to $40,000 depending on the size of the shop. Besides, there is a monthly royalty fee and an annual marketing fee. In addition, the new spot has to pay the rental fee in the College Town center of approximately $2,000 per month. Kung Fu Tea website provides initial costs estimation at $143,000 to $430,000, depending on the size of the franchise, the cost of its renovation and equipment. The store requires the minimum of 500 square feet space in order to locate a bar and a few tables for the visitors. It was decided to start with a small shop; thus, it was estimated that the initial costs would be around $200,000. The division of the costs is provided in a Figure 2.
The costs related to opening and running of Kung Fu Tea franchise:
- Franchise Fee $37,000
- Training Fee $10,000
- Marketing Fee $3,000/per year
- Royalty Fee 3% of gross sales/per month
- Salaries $2,500 per worker
- Cost of raw materials $0,75 per unit
- Rental fee $2,000 per month
- Equipment Cost $25,000 – $40,000 depending on the size of your space
- Renovation Cost depends on the size of the space
Total initial costs $200,000
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The website of Boba Tea Direct, another bubble teashops chain, provides information regarding the profitability of the bubble tea business and the average sales per day. According to their information, the bubble shop serves from 150 to 500 cups of tea on average (Boba Tea Direct, n.d.). However, there are some successful shops in high-traffic areas that serve more than 1,000 cups per day. The approximate cost of materials required to produce one cup of tea is $0,75. Kung Fu Tea sells its teas for a price of $3,50 to $5,00 per cup. This means that a markup in this business is more than 350%. In order to perform an analysis of the prospected costs and incomes, it was chosen to calculate the break-even point for three scenarios – pessimistic, neutral, and optimistic.
Three scenarios for Kung Fu tea in Rochester
According to the assessment, the shop has to sell approximately 400 cups per day to break even on the 7th month from the day of its opening. However, if the shop sells 700 cups per day (which is chosen as an optimistic scenario), it will take only 4 months to breakeven. The bubble tea business has a high markup; that is why it is expected that the shop will pay off quickly.
The factors that will contribute to the high sales are:
- A good location with intense traffic;
- Unsatisfied market demand for the bubble tea;
- A growing interest in eating and drinking out;
- A high quality healthy product offered, which gains more popularity in the USA nowadays.
Taking into account the mentioned conditions, a constant increase in sales is expected, and it is hoped to establish performance at the optimistic level (700 cups per day) on the second month after the shop opening.
The Survival in Terms of Existing and Potential Competitors
The product will be differentiated as a top-quality natural drink of foreign cuisine. The bubble tea belongs to the group of so-called “Fancy drinks”. The price for the cup will range from $3,5 to $5 depending on the ingredients and size. Kung Fu Tea will survive in competition with the existing rivals due to the following reasons:
White Swans (the key competitor) is the full-cycle restaurant where people come to have a meal and a drink. The service is slow. Contrary to them, Kung Fu tea will not serve food. It will be a bubble tea spot that will specialize solely on serving teas and drinks of various tastes. The service is fast (it takes less than 2 minutes to order a drink, pay for it, and get it done). Besides, many customers want just to take a drink without food. They will definitely go to Kung Fu Tea as it has more choices of bubble tea; it is quick and convenient.
Saxbys Coffee is located in the same building; hence, it will share the customers’ base with Kung Fu Tea. While Saxbys is a regular coffee-shop, Kung Fu Tea will bring an innovative culture. This shop is a reflection of the bubble tea boom in the US. Thus, the shop will win the share from Saxbys by the nature of the product offered and its popularity among youth.
Yummy Garden does not serve the bubble teas at all. They offer homemade teas and lemonades. In this light, Kung Fu tea can win a part of their customers by offering delicious bubble teas and drinks.
The customers’ loyalty is planned to be won by the superior quality, unique taste and fast service. Therefore, in few months after the shop opening, the shop is expected to have an immense base of loyal customers. The potential competitors who will also offer bubble teas pose a risk to the shop as a part of customers may switch to their services. However, the flexible approach to preparation of drinks and new tastes will help to keep the repeat customers. Besides, various marketing campaigns (happy hours, social nets promotions, etc.) that will attract new customers will be conducted.
It is also planned to develop the website of the company by providing more information regarding the menu, nutritional information, and ingredients of the drinks offered. Besides, a social platform on the Kung Fu Tea website will be launched, where customers will be able to leave their comments, discuss the tastes of drinks, share their experiences, and leave feedback on the service in shops.
Kung Fu Tea franchise in Rochester College Town is an attractive investment opportunity. The company serves bubble teas of various tastes made from natural healthy products. The bubble tea industry is constantly growing in the US, so Kung Fu Tea franchise has a good possibility to grow along with the market. The market need for the bubble tea and the high markup guarantees will ensure a quick breakeven. Our calculations show that the initial investment in the franchise is approximately $200,000. According to the neutral scenario, the company will pay off on the eighth month after the opening. However, the perfect location and marketing efforts may improve the sales and reach the optimistic scenario with the breakeven on the fourth month. The company will use a mixed differentiation for the market positioning. Altogether, opening of the new Kung Fu Tea franchise in Rochester is a good decision with quick returns.