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Should Mixue Bingcheng bear the blame when its franchisees get caught up in controversy?

Written by KrASIA Connection Published on   9 mins read

Mixue Bingcheng is earning good money in China, but the perennial challenge of managing franchise stores en masse remains an ongoing struggle.

“Seeing your impoverished appearance, there’s nothing worthwhile to say when you can’t even walk to Mixue Bingcheng.”

The thick-browed and big-eyed “snow king,” representing Mixue Bingcheng, once again surged to the top of trending topics in China.

However, this time, it wasn’t because Mixue launched some new marketing campaign, but rather due to negative news where a student claimed harassment by the 3-year-old son of a Mixue store owner. After the incident, it was rumored that the owner of the store retorted in a post, “Don’t bother about how the child behaves—at least he won’t end up like you, only able to pass some petty college exam.”

In response, Mixue stated that it opposes any form of discriminatory speech and behavior, although it closed the store in question as a result. However, investigations revealed that the discriminatory comments were not made by the involved store manager or staff, raising the possibility of malicious rumors. Analysts believe that such incidents expose concerns about Mixue relying on a franchise model for rapid expansion.

Undeniably, Mixue, with over 20,000 stores nationwide, is the leader of the Chinese milk tea market. However, despite being a top performer in revenue and net profit, it has yet to open the doors to the capital market.

Expanding beyond domestic stores is no longer sufficient for Mixue’s ambitions. In recent years, it has expanded to international markets such as Vietnam, Indonesia, Singapore, Japan, and South Korea. However, in the process of going global, the brand faced some hiccups. For instance, behind the increasing number of stores in Vietnam, some franchisees expressed dissatisfaction with the latest price reduction policy and unreasonable store distribution.

Owner’s apology and Mixue’s official response

According to various reports on November 2, 2023, a student at Guangdong Jidian Polytechnic claimed in a post that there were incidents of harassment by the 3-year-old son of the owner at a Mixue Bingcheng store on campus. The student described the child using foul language, lacking hygiene, and exhibiting unusual behavior, such as hugging strangers and even lifting girls’ skirts.

However, the subsequent reply from the store owner sparked even greater controversy. According to screenshots circulated online, the boss not only did not apologize for the child’s behavior, but instead responded firmly that he didn’t understand what the students were chatting online about. He asserted in his response that the students should have discussed the issue with him in-person at the store rather than voice their displeasure online, insinuating that they are scared to do so.

In this response, the owner even mocked the students’ education. “Can’t distinguish reality after graduating from a college? Don’t bother about the child—at least he won’t end up like you, only able to pass some petty college exam. I told my brother to wait for you at [the store]. If you have the guts, come to the entrance and talk to us. If you don’t, stop complaining online,” the comment read.

In addition, the owner added, “Even if you complain online, what’s the use? Does it affect our revenue? Seeing your impoverished appearance, there’s nothing worthwhile to say when you can’t even walk to Mixue Bingcheng. Do you think your complaints affect our revenue?”

As public opinion continued to escalate, on November 3, related topics started to trend online, with two related entries notably attracting over 34.97 million and 28.69 million views respectively on Weibo.

On the same day, a staff from the polytechnic responded to the matter. According to the staff member, the child involved was only 3 years old and known to be mischievous. He emphasized that the school has asked Mixue to suspend the store’s operations, and the police have also intervened to investigate the matter.

The store owner, who goes by the last name Zhang, claimed that the online replies were not posted by him. The child had accidentally bumped into a student, whom Zhang later apologized to. However, after another student came across the rumors, he gathered other students to pressure him into seeking further apologies.

On November 3, Mixue also responded to the matter through its official Weibo, acknowledging public sentiments while expressing its opposition to any form of discriminatory speech and behavior. The company also announced that the store in question has been closed.

At the same time, Mixue also confirmed that, following investigation, the discriminatory remarks posted online were not posted by Zhang or his staff, and that it could instead be a case of malicious rumors being spread. Aware that the police had intervened, the company said it would await the final investigation results.

Although the controversial remarks related to this incident had no direct connection to Mixue Bingcheng, situations like this expose certain gaps in the way it manages store operations. The lack of effective oversight may also be related to the fact that Mixue Bingcheng relies mainly on the franchise model.

According to Leida Finance, there were a total of 21,619 stores under Mixue Bingcheng’s main brand as of the end of March 2022, based on the company’s September 2022 prospectus. As many as 21,582 of these were franchise stores, accounting for over 99% of the total store count. During the same period, the number of direct-operated Mixue Bingcheng stores was only 37.

According to Zhu Danpeng, a Chinese food industry analyst, although the franchise chain model is conducive to smoothing the capital flow of companies, it is not as controllable as the direct operation model. Franchise stores are prone to inconsistent management, which could lead to deviations from the brand’s management protocols and operating standards. Zhu added that Mixue Bingcheng may be more susceptible to such loopholes as it has to maintain its profit margins while keeping prices low.

Mixue itself has acknowledged the potential downsides of the franchise model in its prospectus, which states that franchisees, franchise stores, and franchisors are independent legal entities, and franchisees are responsible for the operation and management of their stores while accepting the business guidance and supervision of the franchisor.

When will Mixue’s dream of going public come true?

Mixue Bingcheng’s story began in 1997, when Zhang Hongchao, who was still in college at that time, started his career in Zhengzhou. He subsequently turned Mixue into one of the largest domestic beverage chain companies, not just based on store count, but arguably also in terms of brand influence.

Over two decades of development have enabled Mixue to continue growing while instilling in it an ambition to compete in the capital market. According to the China Securities Regulatory Commission (CSRC), Mixue’s A-share listing application was accepted in September 2022. However, after Mixue submitted its prospectus, its story of conquering the A-share capital market came to an abrupt halt.

Industry insiders highlighted the implementation of a new and comprehensive registration system as a key factor. After the change was announced, the Shanghai Stock Exchange and the Shenzhen Stock Exchange stated that they will accept transfer applications from companies under review for main board IPOs and refinancing arrangements from February 20 to March 3, 2023. However, Mixue did not submit an application in this window.

There have been claims by some investment bankers that if an application is not submitted and accepted during this period, any subsequent submissions will be treated as new applications.

Analysts believe that Mixue’s plan to list on the Shenzhen Stock Exchange fell through in part due to new restrictions imposed by the CSRC on main board applications, where companies specializing in certain industries are restricted from applying. Food and catering, which is an industry Mixue is deeply involved in, is one of the industries that fell under those restrictions.

Fast forward to October 2023, news emerged that Mixue had appointed the Bank of America, Goldman Sachs, and UBS to help arrange an IPO of approximately USD 1 billion in Hong Kong, cued for 2024. This was confirmed on January 2 this year, when Mixue reportedly filed its prospectus for a Hong Kong IPO.

Although Mixue has not yet entered the capital market, its revenue and profit indicators are the envy of its peers. According to the prospectus submitted by the company in 2019 and 2020, its revenue was RMB 2.56 billion (USD 359.1 million) and RMB 4.68 billion (USD 656.4 million) respectively. Mixue’s revenue also exceeded RMB 10 billion (USD 1.4 billion) in 2021, reaching RMB 10.35 billion (USD 1.45 billion) and achieving a year-on-year growth rate of 121.18%.

From 2019 to 2021, Mixue’s net profits were RMB 442 million (USD 62 million), RMB 631 million (USD 88.5 million), and RMB 1.91 billion (USD 267.9 million) respectively. Collecting a net profit of nearly RMB 3 billion (USD 420.8 million) in the span of three years highlights the scale of its earning power.

Nayuki, another popular beverage chain, offers a fair point of comparison. In the same period (2019–2021), Nayuki’s revenue was RMB 2.5 billion (USD 350.6 million), RMB 3.05 billion (USD 427.8 million), and RMB 4.29 billion (USD 601.7 million) respectively. Using 2021’s numbers as an example, Nayuki’s revenue was less than half of Mixue’s.

Meanwhile, Nayuki incurred losses of RMB 39.68 million (USD 5.56 million), RMB 203 million (USD 28.4 million), and RMB 4.52 billion (USD 634 million) respectively during this period. While Mixue was busy making money, Nayuki was stuck in a quagmire of losses. This subsequently led Nayuki, which had primarily operated its stores directly, to explore the franchise model that Mixue has utilized successfully.

ChaPanda (also known as Chabaidao), another fast-growing brand, remains lagging behind in terms of its revenue and profit scale. According to the prospectus it submitted to the Hong Kong Stock Exchange in August 2023, ChaPanda’s revenue in 2020 and 2021 were RMB 1.08 billion (USD 151.4 million) and RMB 3.64 billion (USD 510.5 million) respectively. Its profits were RMB 238 million (USD 33.3 million) and RMB 779 million (USD 109.2 million) respectively.

While ChaPanda lacks the scale of Mixue, its net profit margin turned out to be superior to Mixue in 2020 and 2021, reaching 22% and 21% respectively during this period. Mixue’s net profit margins were 13.5% and 18.5%, with its gross profit margin indicators notably declining.

According to Mixue, the company’s gross profit margin is influenced by various factors such as industry development, product structure and prices, raw materials costs, and more. Therefore, any adverse change in one or more of these factors could shrink the company’s gross profit margin and affect its profitability.

Going overseas is no mean feat, even for Mixue

As Mixue Bingcheng is highly cost-effective in its operations, it can afford to sell its products affordably, catering to the masses in China albeit remaining reluctant to base its branding entirely on providing low-cost beverage options, which can hold negative connotations and risk shoehorning it into a highly saturated market segment.

For this reason, even though Mixue has found success in China serving products like lemonade and ice cream for prices between RMB 2–4 (USD 0.2–0.5), it holds the ambition to conquer overseas markets as well. According to the prospectus it submitted in September 2022, Mixue is actively pursuing overseas opportunities and is committed to building the company into a global brand that is centered around freshly prepared drinks and desserts.

In 2018, Mixue expanded abroad for the first time and opened its first overseas store in Hanoi, Vietnam. Subsequently, it entered Indonesia, opening a store in Bandung in 2020. As of the end of March last year, Mixue had opened 317 and 249 stores in Indonesia and Vietnam respectively. Mixue stores started to appear in other countries like Singapore, Malaysia, Japan, and South Korea as well.

In an interview with Xinhua, Bai Di, vice president of Mixue, said that the company has close to 4,000 overseas stores, adding to a total of 32,000 stores globally. Its stores are located across 11 countries and help create up to 500,000 jobs.

However, Mixue’s overseas expansion has not been entirely smooth sailing. While the company had mentioned in its previously submitted prospectus that it has obtained the qualification to delve into franchising in Vietnam, it has not yet provided an official update of the essential details, including the scope of registered franchise activities, trademarks, entity names, and more. Mixue must notify the relevant authorities within 30 days after the update has been made or risk being subjected to penalties.

In addition, the form of contracts signed by Mixue with franchisees in Vietnam may not necessarily comply with current franchise-related laws and regulations in Vietnam, an unnamed Vietnamese law firm told Leida Finance. In the case of non-compliance, there is a risk of fines, revocation of business licenses, and the forced return of illegal proceeds.

It’s also worth noting that, unlike in China, Mixue was making losses in Vietnam. As of March 31, 2022, there were 249 Mixue stores in Vietnam, accruing RMB 9.29 million (USD 1.3 million) in operating income and recording a net loss of RMB 322,000 (USD 45,100).

In September and October last year, Mixue’s strategy of reducing prices was also resisted by franchisees in Vietnam. Multiple franchisees were reportedly dissatisfied with the company’s new policy of reducing product sale prices by 25% and lowering raw material prices by 8–10%, believing that these reductions will further compress their profit margins.

Moreover, due to Mixue’s rapid expansion in Vietnam, the locations and density of its stores have also been subject to criticism from franchisees. Some of them believe that Mixue needs to improve its franchisee protection policies as they are presently competing not only with other brands but also with other Mixue stores for business.

This article was adapted based on a feature originally written by Mo Enmeng and published on Leida Finance (WeChat ID: leidaplus). KrASIA is authorized to translate, adapt, and publish its contents.


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