Should you Invest $352K in a Gong Cha Franchise?

Another strong franchise that benefits from the ever increasing market demand for bubble tea, Gong Cha is a popular franchise opportunity especially for first-time entrepreneurs. Indeed, it only costs $352,000 to set up and there are plenty of financing options.

But should you really buy the franchise and invest in a Gong Cha store? How much profits can you make with this business?

In this article we’re looking into the Franchise Disclosure Document to find out whether you should go ahead and invest in a Gong Cha franchise. Let’s find out!

Gong Cha franchises: key figures

Franchise fee	$30,000
Royalty fee	3.0%
Marketing fee	1.0%
Investment (mid-point)	$353,000
Average sales	$299,000
Sales to investment ratio	0.8x
Payback period*	8 years
Minimum net worth	$300,000
Minimum liquid capital	$150,000

What is Gong Cha?

Gong Cha is a beverage franchise that spreads good vibes and delicious bubble tea. 

The tea drink franchise is headquartered in London, UK, and is famous for its delicious milk foam, coffee, milk tea, tea latte, and creative mixes. 

The brand’s story goes back to 1996 when Wu Zhenhua launched a premium tea shop in Taiwan.

In 2006, Wu opened Gong Cha in Kaohsiung, Taiwan, with a strong commitment to serving delicious drinks to the now-growing customer base in the region. 

The beverage company started franchising in 2009, expanding to Hong Kong to capitalize on the tourists’ craving for high-quality tea. 

The brand’s expansion spread to Korea, Japan, Australia, Mexico, Canada, and the United Kingdom. 

Today, Gong Cha operates over 1,800 units in 20 countries worldwide. 

Gong Cha Franchises: pros and cons

Pros

• Specialized training: franchisees must complete 14 days of extensive training as part of the Franchise Agreement. This helps them stay on par with the latest in restaurant management, customer service, and recipe. Franchisees undergo intense, hands-on training from a global network of Gong Cha bubble tea experts. 
• Raw material supply: Gong Cha boasts a devoted logistics department that streamlines the raw material supply to its franchisees. 
• Centralized and localized marketing support: comprehensive marketing and promotional resources improve brand recognition. This includes co-op advertising, social media, ad templates, and regional advertising. 
• Fast-growing industry: bubble tea is a unique QSR concept that has taken the American food and beverage industry by storm. Franchisees can benefit from strong market growth
• Diverse demographics: the franchisor’s business concept has a strong global appeal. The innovative menu attracts families, adults, students, children, and anyone craving delicious bubble tea. 

Cons

• No financing: the franchisor doesn’t offer direct or indirect financing to restaurant owners. It neither liaises with third-party financing sources nor provides direct funding to business owners. 
• No absentee ownership: franchisees must be involved in the business operations as part of the Franchise Agreement. 
• No part-time ownership: franchisees can’t run the business part-time or as a side hustle. The franchisor expects restaurant owners to have complete control of every business operation and work within the stipulated operating hours every day of the week. 
• Competing brands: Gong Cha is rivaled by its top competitors, such as Kung Fu Tea or Green Mountain Coffee to name a few

How much do you need to invest?

You may need to invest around $352,600 on average to open a new Gong Cha store.

The average investment amount can vary depending on various factors and conditions like your location, restaurant size, the current market price of startup equipment, etc. Generally, the amount ranges between $159,200 and $546,000 (FDD 2021).

What are you paying for?

So why do you need this amount at the beginning, you may ask? Well, this initial investment covers all the startup costs you would need to pay to start a restaurant business. Namely, in addition to the initial franchise fee of $30,000, the investment amount covers:

• Formation costs: architect/engineering fees,  leasehold improvements,  exterior signage, equipment, furniture, security deposit, technology systems,  training expenses, business licenses & permits, etc.
• Initial marketing: grand opening advertising fee 
• Operating costs: inventory, rent, insurance, utility deposits, 3 months working capital, etc.

Type of cost	Low	High
Initial Franchise Fee	$30,000	$30,000
Formation Costs	$86,700	$354,000
Initial Marketing	$1,500	$5,000
Operating Costs	$41,000	$157,000
Total	$159,200	$546,000

What is the turnover of a Gong Cha franchise?

On average, a Gong Cha franchise makes $530,000 in sales per year. Yet note that this number is the annual median sales of 87 franchised restaurants in 2019.

Indeed, due to COVID, sales decreased by -44% in 2020 vs. 2019. Although current information is not available; based on historical data we assume that a Gong Cha franchised restaurant would generate more than $500K a year as of today.

	Number of stores	Median sales	% change
2019	57	$530,257	–
2020	87	$298,504	-43.71%

How profitable is a Gong Cha franchise?

We estimate that an average Gong Cha franchise makes $101,491 in annual profits. This represents a 34% profit margin (adjusted EBITDA margin).

The 34% adjusted EBITDA margin is on the higher end compared to similar franchises as per our intelligence (~25-27% industry average). 

Note that we can not guarantee the accuracy of this adjusted EBITDA margin as Gong Cha does not disclose any cost data. Meaning we could not find actual cost data for franchised restaurants. Indeed, we had to use the industry average for COGS (25% sales), labor costs (29%), and rent costs (8%) to calculate this margin. 

Profit-and-loss	Amount ($)	% of sales
Sales	$298,504	100%
COGS	$(74,626)	25.0%*
Labor	$(86,566)	29.0%*
Rent	$(23,880)	8.0%*
Royalty + marketing fees	$(11,940)	4.0%
Adjusted EBITDA	$101,491	34%

Yet, this adjusted EBITDA does not mean you can keep 34% of the total revenue in your pocket.

Meaning you will earn less than 34% as an owner of a Gong Cha franchise. Indeed, you may need to deduct taxes, debt interest expenses, and other costs from adjusted EBITDA to get to net profits (and then the dividends you pay yourself as the investor).

Should you invest in a Gong Cha franchise?

If you’re considering starting a new Gong Cha store, the good news is that the initial investment is one of the lowest for restaurant franchises ($352,600). Yet does this mean you should go ahead and invest the money?

Indeed before you should pay the $30,000 initial franchise fee you should first consider how much profits you can realistically make from this business, and whether it’s worth the upfront investment.

That’s what we look at when we calculate the payback period: the investment divided by the annual profit. For Gong Cha we found it takes on average 7.9 years for the investment to pay itself back. Although not necessarily bad, this is average and as such a good investment.

In other words, you would wait 8 years to recoup your investment if you were to buy a Gong Cha franchise (either from your own funds, a bank loan or external investors).

How does it compare vs. other franchises?