As an American living in China, I’ve noticed some fascinating shifts in consumer behavior and lifestyle choices, particularly in the realm of popular beverages. One intriguing aspect of this shift is how some brands, like Mixue Ice Cream, a popular chain known for its affordable yet delicious drinks, have redefined the market.
Let’s dive into this phenomenon.
The rise of new consumer brands like Mixue often signifies a change in lifestyle and thinking among the mainstream population. This shift starts with a change in the living philosophy of the main consumer group, leading to a trend or culture that influences a broader range of people. Brands cleverly tag themselves with this culture, exploiting market trends to build a “cognitive arbitrage” – essentially capturing the market by aligning with consumer’s evolving perceptions.
The freshly-made tea drink market is a perfect example. Several breakout brands have each met new consumer demands:
Successful and profitable brands seem to have a similar profile – they master the franchising model and possess an efficient supply chain with scale effects. For instance, the popular and affordable “Snow King,” with 36,000 stores as of the first three quarters of 2023, quietly met 23 small financial goals – a typical example of this trend.
This post focuses on Mixue Ice Cream, aiming to unravel the business marketing facade shaped by the tea drink race and to understand the essence of their business model.
Living in China, I’ve been fascinated by the dynamics between franchise brands and their franchisees, especially in the fast-growing tea drink industry. A prime example of this complex relationship can be seen with Mixue Ice Cream, a brand that has exploded in popularity with over 36,000 stores nationwide. Let’s delve into the intricate balance of interests between the brand and its franchisees.
To grasp the crux of the issue, we need to look at the differing objectives of the brand and its franchisees:
For the brand, each franchisee serves dual roles – as a customer in the supply chain and as a marketing agent. From a transaction standpoint, more franchisees mean a larger direct selling network. Mixue Ice Cream, for instance, has established an extensive network in major cities encompassing raw material procurement, production, processing, and logistics distribution. This investment in fixed assets only pays off with a high density of store operations, highlighting cost advantages and operational efficiency.
From a marketing standpoint, brands aim to dominate consumer awareness. The ‘Rule of Seven’ in marketing states that a customer needs to see an advertisement at least seven times before it becomes effective. To achieve this, brands like Mixue Ice Cream leverage all available resources within a 1-kilometer radius of each store, including walls, signboards, barriers, and notice boards. The dense network of stores also plays a crucial role in surpassing this threshold, explaining why Mixue Ice Cream can maintain a significantly lower brand marketing expense ratio (1.2%) compared to its competitors.
For franchisees, selecting the right target customer group and enhancing conversion rates at every stage – from entering the store to making a purchase and returning – is vital. When stores are too close to each other, customer overlap can negatively impact revenue. Therefore, franchisees prefer a lower density of nearby stores.
In essence, when the density of stores is low, franchisees and the brand share mutual benefits and the market is ripe with potential. However, as store density reaches a certain level, conflicts of interest arise, placing franchisees and the brand on opposing sides.
Given Mixue Ice Cream’s expansive franchise model with 36,000 stores, these conflicts are likely quite direct. According to the brand’s website and app, the basic working capital needed for a new store is around 370,000 yuan, with rent being a major variable expense.
As of September 2023, with 36,000 stores and a combined quarterly sales of 37 billion yuan, Mixue Ice Cream’s revenue was 15.4 billion yuan in the same period. This translates to an average monthly sales of 110,000 yuan per store, with about 50,000 yuan spent on purchasing raw materials, leaving a gross profit of 60,000 yuan.
According to expert meetings and data from their prospectus, Mixue Ice Cream’s gross margin per store is around 55%. When we break down the costs:
In an optimistic scenario, considering that summer revenues are higher than winter, the payback period for a single store’s investment could be as short as 24 months under high store density conditions.
Looking at Mixue Ice Cream’s expansion rate, they opened 9,700 and 8,000 new stores in 2022 and the first three quarters of 2023, respectively. This means that nearly half of the current 36,000 stores are likely still operating at a loss. However, astonishingly, Mixue Ice Cream’s closure rate is less than 3%. What’s the secret behind this?
In the bustling and competitive world of Chinese beverage franchises, Mixue Ice Cream stands out with a unique strategy that seems almost magical. The secret? A cleverly structured franchise model that prioritizes the interests of a select few franchisees. Let’s unpack this intriguing approach.
The book “Profitable Thousands of Stores,” written by Chen Zhiqiang, an early investor and long-term consultant of Mixue Ice Cream, might shed some light. The development strategies promoted in the book, particularly the ‘Store Traffic Funnel Model,’ resonate with Mixue’s approach:
Similar to the 3A3R model in the internet industry, physical store traffic can be segmented into five levels: passing foot traffic, targeted consumer group, store entrants, purchasers, and repeat customers. In the real-world store traffic funnel, conversion rates at each level are quite low. Even a slight improvement of one or two percentage points at each level can significantly boost store profits. Therefore, the key to a successful store is selecting the right target customer group, enhancing conversion rates, and reducing customer choice costs by focusing on their needs.
In the dynamic and competitive world of Chinese beverage franchises, the way Mixue Ice Cream manages its sales growth and franchise model offers key insights. The brand’s approach to increasing sales is fundamentally about two things: boosting customer traffic and enhancing conversion rates. However, the interests of the brand, A Class, and B Class franchisees diverge when it comes to new store openings:
Here, A Class franchisees and the brand align in interests. For these franchisees, reaching a certain number of stores means effectively monopolizing sales in a region, so increasing coverage or density actually improves sales efficiency. According to Mixue’s data, this critical number of stores might be around five.
Exploring the competitive landscape of China’s beverage market, Mixue Ice Cream emerges as an interesting case. Its pricing strategy positions it not just against other tea drink brands but, intriguingly, against bottled water.
Based on the prospectus, the average selling price of a Mixue Ice Cream beverage is 6.4 yuan per cup, with the cost of raw materials for franchisees at 2.7 yuan per cup. After subtracting Mixue’s supply chain profit, the actual front-end processing and raw material cost comes down to about 1.9 yuan per cup.
This pricing is not only competitive in the freshly made tea drink market but also closely aligns with the cost and retail price of bottled beverages.
According to a Haitong Securities research report, in the soft drink industry, the costs are distributed across manufacturing and labor (20%), white sugar (15%), juice (10%), and other raw materials (15%). Taking Kangshifu iced black tea with a retail price of 3.5 yuan as a reference, its factory price is approximately 1.9 yuan – the same level as Mixue Ice Cream.
The tea drink market can be segmented into three pricing categories:
Each of these brands has its own positioning, value proposition, and value addition to target customers within their respective price ranges. For instance, Xicha, targeting fresh fruit and middle-class social gatherings, markets itself as not just a taste but a lifestyle attitude. Cha Bai Dao, known for its Chinese-style tea bases, promotes the combination of fresh fruit and Chinese tea as a divine taste.
Mixue Ice Cream’s slogan, “Bringing you a cool summer and a sweet season,” essentially aligns with the basic consumer need to quench thirst and cool down, remarkably similar to the demand for bottled water or iced tea in convenience stores.
This realization perhaps explains why suppliers often advise stores to stock up on drinking water – indicating that in terms of consumer needs, Mixue Ice Cream is competing more directly with bottled water than with other tea drink brands.
Observing the market strategies here in China, Mixue Ice Cream’s approach is quite a revelation. Their competitive pricing not only makes them a strong player in the affordable tea drink segment but also positions them as an alternative to everyday choices like bottled water. This strategy showcases their deep understanding of consumer behavior, highlighting how sometimes the most direct competition comes from an unexpected sector. For anyone navigating the Chinese beverage market, Mixue’s approach offers crucial insights into the art of positioning and competition.
Reference:
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