Bubble tea has come a long way in the U.S. over the last two decades. What was once an overseas treat found deep within a city's Chinatown has reached the point where food giants like Dunkin (DNKN)-owned Baskin-Robbins and Peet's Coffee are adding it to their menus.
Also known as boba tea, the drink associated with the tapioca pearls at its bottom is projected to grow into a market of $4.3 billion by 2027. In 2019, that number was only at $2.4 billion.
One of the largest global bubble tea brands is Gong cha. Founded out of Taiwan in 1996, the beverage franchise has over 170 stores in the U.S. and more than 1,800 locations across the globe.
Appointed to the position in July, new CEO Paul Reynish comes from a background of executive roles at Dunkin', Subway, Yum! Brands (YUM)-owned Burger King and burger chain Five Guys.
Reynish sat down to talk with TheStreet about the bubble tea market, the franchise model, and expansion plans. This interview has been edited for length and clarity.
TheStreet: While bubble tea started in Taiwan in the 1980s, it started to get really popular in the U.S. over the last decade. Would you say we're in the middle of a bubble tea boom?
Paul Reynish: We opened our first store outside of Asia 11 years ago. I suppose that was the beginning of a trend that started to move over to the U.S., Australia and the UK. A boom suggests a fad and I think [bubble tea] has moved on from a fad to trend. People are looking for alternatives to alcohol, and especially in the way we do it, tea can be both good for you and fun for you.
Tell me about Gong cha's franchise model. How much freedom do the individual store owners have?
Quite a lot within the framework of it needing to have good value, taste great and have a tea base that [fits with] the brand. Whether something starts in the U.S. and goes East or starts in the East and goes West, franchisees have critical insight to help you build a brand. But we also do corporate sales and have a portion of stores that we run ourselves to have capital invested in a few markets. This year, we should open around 300 stores and then keep building that momentum from there.
Franchising is also a great and highly profitable way to build a business. We have 23 master franchisees. Of those, they can subfranchise at least 80% of the potential. We must have at least 1,000 franchisees who are part of the business. In Korea, there are a lot of one-store operators. In Japan, they will take two or three stores and in the U.S. it's usually between 10 to 20. It's a really interesting dynamic but we allow their freedom as long the standards are there from a store design point of view and operations. After that, have fun with it.
Gong Cha/TS
You mentioned how a franchise can be a good way for business-minded people to enter the market.
It's intrinsic to the franchise system. We have a guy who's 23 and got his first business by putting it on his credit card and borrowing some money from his mom. In less than a year, he's already paid back his investment and is highly profitable.
You also have a model for growth. If you want to have a burger franchise or anything where you cook food, it is very challenging because there are only so many places you can go. You've got to have extraction, you've got to have a use clause where you have to operate in a certain area. At Gong cha, we don't need a grease trap or any of those things because we don't cook. We brew the tea throughout the day and then we blend it to the customer's needs and desires. It's a very simple model. That's why I think we've got no issue to develop at this pace and get deeper into every market.
This year we've seen quite a few food chains that are not in the business of bubble tea add it to their menus. Do you see this as competition or a good thing for the drink's popularity?
Every bit of education is a competitor. But I think if it's not core to your menu and you want to try it, good for you. It's also going to help with overall awareness and show who's good and who's bad. We've been doing this for nearly 25 years and refined it to make it great. But it starts with the tea. If you're a bigger brand trying to do a bubble tea, it can be a bit challenging if you don't have a deeper understanding of the provenance of tea.
Do you see bubble tea as a steady trend? Or do you think there will come a point when popularity breaks and the market becomes oversaturated?
All the numbers we're seeing show that consumption is back at pre-covid levels. That's really encouraging given that people have had a tough time over the last couple of years. I really don't see it slowing down [but] of course, I'm always paranoid simply because you never know what the future can bring. But that is what keeps us on our toes.
