Mixue Sips Success at the Bottom of China’s Premium Tea Market

The fast-growing chain whose bubble and milk teas typically sell for less than $1.50 has filed for a Shenzhen IPO that could value it at nearly $10 billion

Key Takeaways:

• Low-end premium tea chain Mixue has applied for a Shenzhen IPO to raise 6.5 billion yuan for new product development and expansion
• The company uses a franchise model that helps it control costs, giving it a higher margins than its rivals

By Trevor Mo

Frugality is the new cool these days for Chinese consumers who are tightening their belts as their income takes a hit from a slowing economy exacerbated by frequent Covid-control measures. For many, that means a shift to lower-end products, which explains the increasingly popularity of budget brands like e-commerce specialist Pinduoduo (PDD.US).

Now that trend has seeped into to the arena for pricey milk and bubble teas, where two of the largest players – Nayuki (2150.HK) and Heytea – have been cutting prices for some of their signature products that typically cost $2.50 or more per cup. Riding that consumer trend, a long list of second-tier brands that have long percolated at the lower end of the market are gearing up for IPOs as their business thrives. A leader from that group is Mixue Bingcheng Co. Ltd., which has applied for a domestic A-share IPO in Shenzhen, according to stock exchange filing last Thursday.

While most of China’s premium tea chains were founded in the last decade, Mixue’s history dates back more than two decades to its founding in central Henan province in 1997. But the chain has developed fast in the last few years, adding more than 6,000 stores annually from 2019 to 2021 to reach more than 20,000 as of March. That makes it a clear leader in the crowded tea beverage space, well ahead of Nayuki and Heytea, which each had about 800 stores at the end of last year

The rapid expansion formula owes to Mixue’s use of a more cost-effective franchise model, which we will review in more detail shortly. But another factor that explains its fast expansion is the affordability of its products. Mixue’s milk teas typically cost 5 yuan to 10 yuan per cup ($0.70 to $1.40), compared to starting price of 10 yuan and 15 yuan for many other popular brands.

Mixue plans to raise about 6.5 billion yuan ($918 million) through the Shenzhen IPO, which would value it at a relatively frothy 65 billion yuan based on a 10% share sale. That would represent a big premium over the 20 billion yuan valuation it commanded at the end of 2020, when it raised 2 billion yuan from Chinese investors in its first major fundraising.

The vast majority of Mixue’s stores are franchised, with the company directly owning less than 50 of its more than 20,000 stores as of March, according to its prospectus. The use of such a model means that Mixue spends far less money than it would under a direct ownership model used by many of its rivals such as Nayuki and Heytea.

Such a model means Mixue doesn’t incur expenses related to operations of stores such as rents, allowing it to generate relatively high profit margins. The company reported a net profit of 1.9 billion yuan in 2021, roughly quadruple its 445 million yuan profit in 2019. By comparison, Nayuki, which has a far smaller market cap of HK$9.1 billion ($1.2 billion), reported an adjusted net loss of 145 million yuan last year, and a 254 million yuan loss for the first half of this year.

Growing network

Like other food and beverage operators that use the franchising model, Mixue generates revenues from selling products like food ingredients and packaging materials like cups to its franchisees. As its franchised stores grow, its revenues have also expanded rapidly, reaching a hefty 10 billion yuan last year from just 2.5 billion yuan in 2019.

The company touts that one of its key competitive advantages is its deep involvement across the value chain in its segment of the food and beverage industry. It said its network of self-operated factories across the country gives it a stable supply of ingredients for franchisees. Mixue plans to use part of the funds from the IPO to bolster that network by ramping up its factories’ capacity.

Still, the company’s next development phase could face some significant challenges. For starters, China’s bubble tea market is set to slow after several years of breakneck growth as China’s economy slows in the years ahead. The tea beverage market will still expand, with market research firm iReseach expecting it to reach 374.9 billion yuan by 2025, up from 184 billion yuan in 2020. But the growth rate will slow sharply to just 5.7% by 2025 from 52% in 2021, according to iReseach.

At the same time, competition is also intense. Mixue competes at the lower end of the market with a long list of rivals using a similar franchising model, including Chabaidao, Shuyi Tealicious and Auntea Jenny. And more upmarket players including Nayuki and HeyTea have also recently lowered their prices, further heating up the competition.

Mixue lists “market competition” as one of major risks it faces in its prospectus, acknowledging that low barriers to entry mean rivals can easily copy its model and product ideas. 

The company said it plans to continue diversifying its business to stay ahead of the pack. In addition to tea, Mixue also sells coffee and ice cream under its other brands. But those are still relatively small contributors, and the fact that more than 95% of its 22,000 total stores are Mixue-branded shows that most of its revenues are still brewed up by the tea business.

Its expansion into coffee and ice cream will also face fierce competition, especially for the former category, where it will have to compete with far larger names like Starbucks (SBUX.US) and Luckin (LKNCY.US), as well as a long list of startups including Manner, M Stand and Seesaw. But Mixue believe the market is still in the early stages of development and thus will have room for more players. Citing third-party data in its prospectus, the company said the Chinese market for freshly brewed coffee grew by 38% to 87.6 billion yuan last year, up from 48.4 billion yuan in 2019.

At the end of the day, Mixue’s ability to maintain its success will depend on its ability to keep rapidly growing its business by sticking to its light-asset model, while fending off an increasingly long list of rivals. It will also need it to move into new areas like coffee and ice cream. In the current environment where consumers are increasingly unwilling to pay big mark-ups for such items, its niche as a leading provider of lower-end premium products could definitely give it an edge.

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