Mixue Ice Cream & Tea: Lucky Coffee Faces Struggles, Next Big Bet on Rural Market?

In the previous article, we primarily analyzed Mi Xue Bing Cheng's business model and its core competitive advantages—strong supply chain management, store operation management, and the support of the Snow King IP.

Recently, Mi Xue has been hyped as part of the "New Consumption Trinity" concept, with a fundamental support behind it, which is also the commercial barrier Mi Xue has built among many tea beverage peers through an extreme supply chain.

However, when discussing Mi Xue's investment value based on its current market capitalization, it is also important to evaluate the strengths and weaknesses of its business model, but more crucially, to clearly understand the company's growth potential. And whether the current market pricing has adequately reflected this, or how much it has priced in.

To answer this question, Dolphin Research divides growth into three dimensions: the remaining space for the main brand, the possibility of recreating Mi Xue through category expansion, and the imaginative space for market expansion. Answering these three questions is the key to calculating what kind of risk-return ratio is implied in Mi Xue Bing Cheng's current price level.

There are a total of four questions above, and due to the length of the answers, Dolphin Research has split them into two parts, forming a three-part comprehensive decryption with the previously published first article.

This article is the middle part, focusing on answering the first two dimensions of growth:

1) After Mi Xue's ten thousand stores launch, how large can the "ant army" be accommodated domestically?

2) The second leg—Lucky Coffee, can it double Mi Xue's luck?

Below is the main text:

I Freshly Made vs. Packaged: From "Convenience" to "Quality", Freshly Made Beverages Rise to the Top

To understand Mi Xue's growth potential, we need to first understand the market size & growth potential of the freshly made beverage industry where Mi Xue is located.

Firstly, from the supply side, classified by production method, soft drinks can be divided into packaged beverages and freshly made beverages. Among them, packaged beverages, as the most traditional form of soft drinks, have the greatest advantage in convenience.

From supermarkets, restaurants, various leisure venues, to small husband-and-wife shops and convenience stores, the network coverage density of packaged beverages is extremely high. According to research data provided by Coca-Cola, there are nearly 8 million terminal outlets available for beverage coverage in China, and the current national leading soft drink giants, including Coca-Cola, Master Kong, and Uni-President, can generally cover over 4 million outlets.

While freshly made beverages, despite rapid store openings, currently have only about 430,000 stores nationwide, therefore, if only compared from the perspective of convenience, freshly made beverages still have a long way to go.

However, because freshly made beverages are fresher and healthier, and can meet certain social needs, for consumers, freshly made tea drinks, even as affordable as Mi Xue Bing Cheng, create a demand for consumption upgrade. So if the price difference between freshly made beverages and packaged beverages is not significant, freshly made beverages are likely to take a share from packaged beverages, and the extent of erosion is related to the price of freshly made beverages.

Dolphin Research mentioned in the article "The Pinduoduo of the Fresh Drink World: Mi Xue Bing Cheng: What Gives the Snow King the Confidence to Reign?" that in recent years, with freshly made beverages represented by Mi Xue Bing Cheng continuously lowering product prices through self-built supply chains, the proportion of freshly made beverages in the entire soft drink category has significantly increased, from 24% in 2019 to nearly 40% currently, and according to Mi Xue's prospectus, the proportion of freshly made beverages is expected to reach 50% by 2028.

The key question now is, how much of the pie can Mi Xue get? This is the key question this research attempts to solve: that is, standing at the present situation, how much store opening space does Mi Xue have nationwide in the future?

We calculate separately for Mi Xue Bing Cheng's main brand and coffee brand, Lucky Coffee. By the end of 2024, Mi Xue Bing Cheng will have approximately 42,000 stores in China, with Mi Xue Bing Cheng and Lucky Coffee accounting for 38,000 and 4,000 stores, respectively.

III. Mi Xue Bing Cheng Main Brand: Domestically Surpassing 60,000 Approaching the Ceiling

Dolphin Research provides a thought process for reference, noting that here we only discuss the upper limit of Mi Xue Bing Cheng's store openings from an endgame perspective, and the specific store opening pace & changes in single-store revenue will be discussed in the profitability forecast section later.

Benchmarking Mi Xue's Base Camp—Zhengzhou. As the brand origin and headquarters of Mi Xue Bing Cheng, after more than 20 years of cultivation, whether in terms of local brand awareness or the completeness of the supply chain, it is top-notch nationwide and has now become a benchmark market for Mi Xue Bing Cheng.

In terms of store opening space, according to channel research information, some areas in Zhengzhou have already seen "multiple stores within a hundred meters", leading to cannibalization of some store revenues; therefore, we can assume that the current store density in Zhengzhou is the upper limit for Mi Xue Bing Cheng.

According to data from Narrow Door Restaurant Eye, there are currently 803 stores in Zhengzhou, corresponding to a population size of 13 million, which is equivalent to an average of 6.18 stores per 100,000 people, the highest in the country.

And according to the chart below, looking at the five cities with the most Mi Xue store openings, except for Xi'an, whose store density is close to Zhengzhou (adjacent to Zhengzhou, high brand awareness, and early layout), the store density in other cities is generally less than 60% of Zhengzhou's.

In an extremely optimistic scenario, assuming that the store density of Mi Xue Bing Cheng nationwide reaches the level of Zhengzhou, it can be estimated that the upper limit of Mi Xue's store openings is 1.41 billion/100,000*6.18 — 87,000 stores.

But in reality, considering that Mi Xue Bing Cheng's brand awareness and competitive first-mover advantage in other regions are difficult to reach the level of Zhengzhou, therefore, Dolphin Research neutrally assumes that other regions can increase store density to 65%-70% of Zhengzhou's through denser store openings, corresponding to a store opening space of 57,000-61,000 stores for Mi Xue Bing Cheng domestically, a 50%-60% increase from the current level.

Note that the above estimation process implies two key assumptions:

<1>, Mi Xue Bing Cheng takes a share of the store's share from other freshly made tea brands (especially local non-chain single tea shops). Dolphin Research believes this trend has already begun to play out.

As shown in the chart below, although leading chain tea brands including Mi Xue Bing Cheng, Gu Ming, Cha Bai Dao, and Auntie Shanghai are still in the store opening ramp-up stage, according to statistics from Narrow Door Restaurant Eye, the total number of freshly made tea stores nationwide will see a net decrease of 16,000 stores in 2024, indicating that the elimination race of new tea brands is accelerating:

The trigger for the elimination race began with the price war that started in early 2024. After the high-speed expansion of the entire industry in 2023, China's freshly made beverage industry has entered a stock competition stage in high-line cities and some mature areas, to further seize quality locations and attract franchisees, leading chain freshly made tea brands have almost all made the same move—lowering upfront investment:

Nayuki's Tea directly cut the single-store investment threshold from 980,000 to 580,000, and Gu Ming, Shu Yi Burnt Grass, and Auntie Shanghai all adopted installment payments for franchise fees.

Besides lowering franchise fees, the price war is also reflected in collectively lowering the prices of freshly made tea drinks to attract consumers. According to channel research information, after the fierce price war in 2024, the average price of mainstream brand products has dropped from 15-20 yuan to 10-15 yuan.

In the fierce price war, because most small and medium-sized brands rely on third-party OEMs for raw materials, with higher raw material procurement costs, if they cannot provide franchisees with the same level of preferential subsidies, accompanied by a decline in single-store GMV, it will naturally lead to an extended payback period for franchisees, and some franchisees who cannot withstand it will naturally choose to exit. As shown in the chart below, seven chain freshly made tea brands with over a thousand stores have already experienced negative store growth in 2024.

For Mi Xue Bing Cheng, with its strong self-built supply chain and already extremely low price range, it is almost unaffected in the price war, and can instead take this opportunity to seize quality locations vacated by other brands' exits, achieving further market share improvement.

Mi Xue's prospectus shows that Mi Xue's store closure rate in 2024 is only 3.1%, which is extremely low in the industry (in 2024, many freshly made tea brands have store closure rates exceeding double digits), therefore, Dolphin Research assumes that Mi Xue's future store opening space domestically partly comes from market share improvement.

<2>, Continue to sink and open stores in township areas: Mi Xue Bing Cheng opened up franchise opportunities in township areas in 2022, and by the end of 2024, Mi Xue has covered a total of 4,900 township areas nationwide (an average of one store per township area, corresponding to 4,900 stores).

Recently, Mi Xue Bing Cheng launched wheat field delivery, with the slogan "Harvest wheat and drink Mi Xue, delivery available throughout the town", which has already rolled out to the "fields", and behind this marketing, Dolphin Research sees it as Mi Xue Bing Cheng pushing its township sinking mindset to the extreme.

According to the company, more than 2,000 township stores were added in 2024, and the township market will be the core expansion direction in 2025. Dolphin Research believes the signal behind this is that the high-speed expansion dividend period in urban markets has initially approached its end.

And Mi Xue choosing the township market as the next potential expansion market is also reasonable in Dolphin Research's view:

1) Mid-to-high-end chain tea brands (above 10 yuan) do not match the consumption level of township areas and are difficult to enter, while Mi Xue's price range (4-7 yuan) just fits the consumption level of township areas;

2) Freshly made beverages in township areas are mostly unbranded small shops. From a brand power perspective, Mi Xue, as the largest national chain tea brand, is essentially a dimensionality reduction attack.

In addition, combining channel research information, Dolphin Research roughly estimates the single-store model for township and urban stores. According to the chart below, it is clear that due to lower rent and labor costs in township markets, the final operating profit margin for franchisees is higher.

However, in terms of store opening space, although the single-store model in township areas looks more attractive, among China's nearly 40,000 township areas, not many meet the store opening conditions.

According to Mi Xue's management, the store opening conditions in township areas require a permanent population of over 40,000 and a young consumer group accounting for more than 15%. According to this standard, about 10,000 townships in China meet the criteria; therefore, the future store opening space in township areas is roughly 5,000-6,000 stores.

Overall, in Dolphin Research's view, the probability of realizing assumptions <1> and <2> is relatively high, so the confidence level of the neutral assumption estimation is relatively high.

However, the next 20,000-30,000 new stores, whether in terms of store opening difficulty, the period required for store openings, or even the single-store economics, may be worse than the 20,000-30,000 new stores added in the past few years.

III. Lucky Coffee: Recreating "Mi Xue" with Coffee? Difficult!

If the main brand of Mi Xue Bing Cheng is just a matter of passing the store opening dividend period, then Mi Xue's layout in the affordable coffee track—Lucky Coffee is a matter of not having formed a climate at all.

Before discussing the store opening space of Mi Xue Bing Cheng's coffee store brand, Lucky Coffee, let's briefly introduce the background of Lucky Coffee. In 2019, on the eve of Mi Xue's national high-speed expansion, General Manager Zhang Hongfu personally led the acquisition of the affordable, freshly made coffee brand—Lucky Coffee, entering the coffee field.

The chart below shows the three major products of Lucky Coffee, and it can be seen that the same styles are generally priced nearly half as low as Luckin and Cotti, but the overall price range is higher than Mi Xue Bing Cheng. Apart from changing the product to coffee, the location selection and store operation model are almost entirely consistent with the main brand of Mi Xue. Relying on Mi Xue Bing Cheng's supply chain advantages, Zhang Hongfu boasted to "recreate another Mi Xue" within five years.

Source: Mi Xue Prospectus, Dolphin Research Compilation

But the reality is that by the end of 2024, the number of Lucky Coffee stores nationwide will have exceeded 4,000, and it is not in the same league as the nearly 40,000+ stores of the main brand of Mi Xue Bing Cheng.

Among chain freshly made coffee brands, although Lucky Coffee's store number is second only to Luckin, Cotti, and Starbucks, ranking fourth, its expansion speed is also significantly behind Cotti, which also focuses on the sinking market and only started in 2022.

In addition, according to data from Narrow Door Restaurant Eye, from the distribution of the 4,000 stores already opened by Lucky Coffee, provinces with more than 200 stores are mostly concentrated in Henan and surrounding provinces (Hebei, Shandong, Shaanxi), while other provinces are sparsely distributed and do not form a climate.

In Dolphin Research's view, it can at most be considered a regional brand, which naturally falls short of Zhang Hongfu's initial expectations, so where did the problem lie?

1) "Encircling the Cities from the Countryside", Same Strategy, Different Outcome; Unlike Luckin and Cotti, which initially established brand recognition by opening stores in high-line cities and then gradually penetrating the sinking market, Lucky Coffee imitated Mi Xue Bing Cheng's strategy of "encircling the cities from the countryside", choosing to focus on the sinking market of third-tier and below cities from the beginning, and later seeking to break through upwards.

As shown in the chart below, Lucky Coffee's share in third-tier and below cities exceeds 70%, far higher than Luckin and Cotti.

But the problem is that for third-tier and above cities, the main audience for coffee is the working class and white-collar workers with a certain income, and after being cultivated by affordable high-quality coffee represented by Luckin and Cotti, consumers often have certain requirements for coffee quality, while Lucky Coffee's coffee beans are of ordinary quality, making the final product taste relatively bland, basically equivalent to "caffeinated beverages", with low product strength, making it difficult to attract high-line city consumers who are relatively less price-sensitive.

And for the third-tier and below cities that Lucky Coffee focuses on, since consumers' coffee drinking habits have not yet formed, overall, the acceptance of coffee is significantly lower than that of tea drinks, and since Lucky Coffee is generally opened next to Mi Xue Bing Cheng, from a cost-effectiveness perspective, consumers are more inclined to choose tea drinks, thus diverting from Lucky Coffee.

This results in insufficient demand in the low-line market that Lucky Coffee focuses on, while the high-line cities cannot be penetrated due to a lack of product competitiveness.

2) Extreme Price Competition, Slow Payback Period for Franchisees; From the single-store model, according to channel research information, Lucky Coffee's monthly revenue averages around 70,000 yuan, only about 60% of Mi Xue Bing Cheng's.

In terms of profitability, because Lucky Coffee's coffee bean procurement scale is relatively small compared to Mi Xue Bing Cheng's core raw materials (lemons, tea leaves, etc.), with weaker bargaining power, and since coffee bean prices are mainly overseas production capacity commodities, costs are inherently higher, therefore, with similar labor & store rent, Lucky Coffee's operating profit margin is 8-10 percentage points lower than the main brand of Mi Xue Bing Cheng, which also adopts a low-price strategy.

Therefore, although Lucky Coffee's initial investment is slightly lower than Mi Xue Bing Cheng's, the payback period for franchisees is generally over 2 years.

Finally, returning to the estimation of Lucky Coffee's endgame store opening space, we adopt a similar method to the main brand of Mi Xue. Assuming that the current store density in Zhengzhou is the upper limit for Lucky Coffee (Zhengzhou's Lucky Coffee store density is still the highest nationwide).

According to data from Narrow Door Restaurant Eye, there are currently 218 stores in Zhengzhou, which is equivalent to an average of 1.67 stores per 100,000 people. And according to the chart below, looking at the five cities with the most Lucky Coffee store openings, except for Xi'an, the rest are all within Henan Province. And Xi'an, as the city with the most store openings outside the province, currently has a store density of only 40% of Zhengzhou's.

In an extremely optimistic scenario, assuming that the store density of Mi Xue Bing Cheng nationwide reaches the level of Zhengzhou, it can be estimated that the upper limit of Lucky Coffee's store openings is 1.41 billion/100,000*1.67 — 23,500 stores.

But in reality, considering that Lucky Coffee, as a sub-brand of Mi Xue Bing Cheng, has lower brand awareness than the main brand of Mi Xue Bing Cheng, and is difficult to expand into high-line cities, therefore, Dolphin Research neutrally assumes that Lucky Coffee gradually expands into other third-tier and below cities, with a store density reaching 40% of Zhengzhou's, corresponding to a store opening space of 9,400 stores domestically, with an increase of 4,000-5,000 stores from the current level.

Overall, based on the previous analysis, unless the coffee drinking habits in the third-tier and below consumer markets gradually mature, but considering that Luckin and Cotti are also accelerating their store openings through subsidies to seize quality locations, and the store opening space in the sinking market is also relatively limited, with generally 2-3 stores in county areas reaching saturation, the opportunities left for Lucky Coffee are not very large. Therefore, overall, Dolphin Research is not very optimistic about Lucky Coffee's future performance exceeding expectations.

Summary:

Overall, the domestic market, as the main battlefield for Mi Xue Bing Cheng, uses the dual freshly made dual kings—tea and coffee to lock in future space.

In terms of tea drinks, it indeed uses a deep supply chain + precise positioning to achieve rapid store openings, and the resilience of the business model is brought by low prices, and the future incremental space is focused on targeting the township market, while the stock space is aimed at improving market share.

But in terms of Lucky Coffee, from the current perspective, coffee, as a global commodity mainly produced overseas, even with low-price explosive sales, the corresponding supply chain premium effect is not as strong, and in this case, low pricing will instead severely affect product strength, with the underlying market that has not been cultivated not being very willing to drink, while the cultivated mid-to-high-line market cannot tolerate the low-quality taste of "caffeinated beverages", the second leg of coffee does not seem successful at present, so the store opening space is relatively small.

The discussion on domestic space is paused here, and the next part will continue tomorrow, discussing overseas space and investment value judgment. Stay tuned!

Related Articles:

Dolphin Research Articles:

March 13, 2025 "The Pinduoduo of the Fresh Drink World: Mi Xue Bing Cheng: What Gives the Snow King the Confidence to Reign?"