AIDAN MORGAN CHAN – APRIL 27TH, 2024
EDITOR: ANDREW HO
If you haven’t heard, bubble tea—more colloquially referred to as “boba”—is the choice of beverage for many around the world. This Taiwanese indulgence is the pair of milk-tea with chewy tapioca pearls, and it has begun gaining popularity as East Asia’s cultural traction is celebrated around the world. It has since built a billion-dollar industry, becoming a modern-day, culinary cult classic, fawned upon by many. With that being said, let’s take a look into the boba-economics of the 21st century.
From 2022 to 2023, the number of boba shops in the U.S. increased by about 27.4%. As we begin the first quarter of 2024, their amount is expected to ride this momentous wave and continue growing until the end of the next decade. While it remains a niche industry, macroeconomic conditions are enabling this market expansion. Economic data from the U.S. Bureau of Labor Statistics documented that nonalcoholic beverages expenditure has historically been on the rise and even saw a dramatic increase in the ratio of U.S. dollars spent annually after 2020. This can likely be attributed to the post-pandemic adjustment period of stimulus-backing and increased savings, which led to a 4.2% increase in disposable income, prompting a steady increase in consumer spending. By fostering economic momentum, the U.S. economy grew by 2.3% in 2023, and this established a healthy ecosystem for business development. Economic players, especially boba shop entrepreneurs, could accelerate their growth under such conditions because beverages are classified as normal goods; this means that their demand is proportional to consumer income levels. Consequently, this indicates that as incomes rise, we can anticipate a corresponding increase in the consumption levels of these products.
As such, research predicts that the demand for the Bubble Food and Beverages Market will grow at a compound annual growth rate (CAGR) of about 10.5% for the next decade, rising 1.4% from its rate of 9.1% throughout the last five years. From this, it can be inferred that this market has been consistently burgeoning on a long-term basis. This is an impressive metric, especially compared to that of the restaurant industry. In the past five years, they held a 2.00% mean CAGR of net income and a 6.80% mean CAGR of revenue. Boba stores also have a turnover rate of about 30-40%, whereas restaurants are much more volatile with a rate of 75%. While it is difficult to compare both industries due to their intrinsic variation, this offers entrepreneurs valuable, empirical insights into performance prospects and allows us to gauge which trajectory ought to be favored.
Though it can not be stated whether these values business performance will reflect these values—as real-market dynamism imposes confounding influences—McKinsey & Company conducted a research study that concluded 83% of a business’s growth derives from its core industry. As such, the prospects of success for the boba market are high due to their industry’s intrinsic yield and core competencies, especially given current economic conditions. However, it’s important to note that this doesn’t necessarily imply that this industry is efficient. Current metrics are based on traditional economic theory, maximizing relevant constraints and preferences whilst operating under the pretense of perfect information from our current period. These assumptions, with the fluctuating dynamism of our economy, create an inherent unreliability.
However, as this avenue exhibits an optimistic track record and an upward trajectory, the data often perpetuates that boba ought to be considered the perfect drink for entrepreneurs to capitalize on in 2023. It’s true that the industry has demonstrated steady growth and even offered business owners a consistent 25% profit margin throughout the years, but there is an innate issue stemming from the ubiquitous gravitation towards such lucrative prospects. Currently, there exist low barriers to entry. Therefore, competition for the Bubble Foods and Beverages Market is relatively high, despite most stores having rather obsolete capabilities of product diversification. Therefore, they are subject to higher levels of price elasticity. Theoretically, the industry may inevitably become monopolistic, yielding only a few winners who could withstand being subjected to a zero-profit equilibrium. Within this economic framework, businesses exist in this cyclical limbo. They’re considered “imperfect” because goods and services between establishments are too similar, yet business models try to capitalize off of having a few (self-designated) “niche” or differentiating products. However, due to the extent to which their products overlap, boba stores may still receive the denomination as being (im)perfect competitors. Their business models heavily rely upon qualia or consumer perception to denote differentiability.
As the majority of goods become perfect substitutes, it can be inferred that customer retention rates would not be a driving force in withholding their competitive standing. As previously mentioned, boba stores have a lower turnover rate, indicating they may thrive amidst a monopolistic system. However, any deviance from the aforementioned model would effectively drive competitors out, forcing them to undertake the ultimatum of either liquidating their personal assets to sustain operations—whilst remaining in perfect competition and therefore zero-profit equilibrium—or simply exit the market.
There is a common misconception that zero-profit equilibrium represents zero gains. However, perfect competition is not necessarily bad, and the aforementioned statement doesn’t always hold true. This concept is often interpreted in a literal sense under the pretense that a business will suffer a loss at the break-even point of equilibria. In reality, it’s common to earn enough to account for intangible resources such as opportunity cost and time, thus making the operations “worthwhile” in the perfectly competitive framework.
Until this point, we’ve discussed a hypothetical scenario that posits the Bubble Foods and Beverages Industry always exists in perfect competition – which, of course, is not always true. The geographic density of stores plays a huge role in drawing this conclusion. However, contrary to the previous statement, data from Yelp does, in fact, indicate that the boba market is relatively saturated, especially in Californian cities. San Francisco and Berkeley – the two most competitive markets – have approximately 2.245 stores per square mile. Yet, stores do become less competitive in the Midwest before exhibiting a greater frequency again on the East Coast in states like New York. This is still a relatively new industry, so growth in certain parts of the U.S. is inevitably slower, but by 2033, the industry is projected to be valued at $6.17 billion.
If by the end of the next decade, the Bubble Foods and Beverages Market does become overly saturated (even more so than it is now), ultimately entering an even greater state of perfect competition, what would come next for the industry? Are there any modifications businesses could implement to gain leverage over their competitors? This is where behavioral economic theory and marketing concepts can offer valuable insights into how businesses may restructure their model to recapture a saturated market..
One option could be the implementation of loyalty programs. Research shows that after subscribing to a service, members exhibit a 59% chance of opting to purchase from a company while also engaging with the business at a chance 43% greater than the average consumer. This falls short of expectations because the Bubble Foods and Beverages Industry does not traditionally operate on a paid-subscription basis, meaning their customer retention rates will likely not follow the theoretical conjectures of loss aversion. The post-pandemic economy is also exhibiting a growth in customer acquisition rates in tandem with the decrease in retention rates. Over 35% of American consumers have reported trying new brands, and 77% of American consumers have been documented adopting new shopping behaviors – and this is actually a worldwide phenomenon not unique to this industry. As such, global management consulting company, McKinsey & Company, observed that about two-thirds of loyalty programs fail and may even erode value. They are unable to consistently stimulate a consumer’s willingness to continuously repurchase from their store, especially in cases where products are too niche—like boba.
Behavioral economic theory further proposes that consumers are impatient and derive more utility from instant gratification due to future discounting. Coupled with redemption elasticity, a $7.00 or so cup of boba may not be worth, however many purchases you need to repeatedly make to acquire some future reward. Thus, this implementation wouldn’t be viable to escape a perfectly competitive economy – at least while yielding desirable returns.
The development and implementation of mobile apps such as Snackpass have also contributed to the sales of businesses in the Food Services Industry. By leveraging mobile banking and simplifying the process of ordering foods or beverages, mobile apps exemplify the Solow Residual and emphasize how further technological progress may revamp and stimulate market interaction. Despite this fact, if most boba shops do end up adopting a similar mobile app usage, this would render them ineffective as it would likely be the case that each business gets scaled at an equivalent rate.
Another option to potentially gain an upper hand in the industry—one quite common in the City of Berkeley—is partnerships. Many student-run organizations at the University of California, Berkeley often turn to stores such as ShareTea, TP Tea, and YiFang to fundraise for their campaigns, and this gives them an advantage over the other stores near UC Berkeley’s Campus who do not offer a similar program. Proximity to certain institutions—especially academic ones, which encapsulate a lot of the target audience—can work in the favor of certain businesses. Intuitively, this makes sense—geographical differentiation and nearness to one’s consumer base can help customer captivity.
With all that being said, is the boba market destined for failure? Well, it depends on how one may define failure and how satisfied a business owner is with their company’s performance. In the Bubble Foods and Beverages Market, most will likely end up succumbing to perfect competition and being subject to zero-profit equilibrium. If a consistent, but minimal stream of profits is desirable and deemed sufficient, then it would suffice. Again, it should also be noted that this assumes the businesses will fall into a perfectly competitive market such as Berkeley and San Francisco, but this does not hold true for all locations. For example, the midwest, which does not exhibit a higher density of stores per square mile, may thrive by their given conditional setting, though, this doesn’t speak to whether or not their supply and demand in these respective markets would allow for further expansion.
As various paradigmatic factors predominantly affect consumer microeconomic decisions, it is difficult to posit a conclusion as to what will happen to the market in the future. In the onset of societal demand for healthy consumption and too many competitors oversaturating the industry, the economics of boba brews up a bittersweet ending to milk and tea.
Featured Image Source: Bloomberg
Disclaimer: The views published in this journal are those of the individual authors or speakers and do not necessarily reflect the position or policy of Berkeley Economic Review staff, the Undergraduate Economics Association, the UC Berkeley Economics Department and faculty, or the University of California, Berkeley in general.
