Jun 07, 2024 08:02 PM

China’s Food and Beverage Brands Can’t Get Their Fill of Small-City Franchises

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Chinese food and beverage brands are increasingly betting that opening franchises in smaller cities will revive their lagging growth, as they’re buffeted by fierce competition and sluggish consumer sentiment.

In March, Hong Kong-listed Chinese hotpot restaurant chain Haidilao International Holding Ltd. announced it would launch a franchise model.

It joins a number of popular F&B chains that have started franchising since late 2022, including tea brands Hey Tea and Nayuki as well as spicy sauerkraut fish specialist Tai Er. In May 2023, Luckin Coffee, the country’s leading affordable coffee brand, devised a new franchise model as it was competing head-to-head with upstart Cotti Coffee, which has been relying heavily on franchisees to expand its reach.

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Chinese F&B brands, including Haidilao and Luckin Coffee, are increasingly adopting franchise models to expand in smaller cities with lower operating costs.
The capital-light franchise approach has led to a significant rise in franchisees, with growth rates of 178% for Chinese cuisine and 85% for beverage and dessert chains in early 2023.
Despite the shift to franchising and targeting lower-tier markets, challenges persist, with many catering companies and franchise stores still struggling to recover profitability post-pandemic.

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Who’s Who

Haidilao International Holding Ltd.: Haidilao International Holding Ltd., a Hong Kong-listed Chinese hotpot restaurant chain, announced in March it would launch a franchise model. This move is part of a broader trend among Chinese food and beverage brands to expand via franchises, particularly in smaller cities, to boost growth amid stiff competition and high operating costs in larger cities.

Hey Tea: Hey Tea is one of the popular Chinese tea brands that started franchising since late 2022. By launching franchises, Hey Tea aims to expand its reach, particularly targeting smaller cities amid fierce competition and sluggish consumer sentiment in larger cities.

Nayuki: Nayuki, a popular tea brand, started franchising since late 2022 as part of a trend among Chinese food and beverage chains to adopt a franchise model. This strategy aims to stimulate growth by expanding into smaller cities due to the intense competition and high operating costs in larger cities.

Tai Er: Tai Er, a Chinese food and beverage brand specializing in spicy sauerkraut fish, started franchising in late 2022. Despite this, revenues from its franchises are generally lower than those from directly operated stores. State-backed securities firm Bocom International Holdings lowered its mid-2024 sales forecast for Tai Er, indicating potential challenges for the brand’s overall performance.

Luckin Coffee: In May 2023, Luckin Coffee, China's leading affordable coffee brand, developed a new franchise model to compete with upstart Cotti Coffee, which relies heavily on franchisees for expansion.

Cotti Coffee: Cotti Coffee, an upstart competitor to Luckin Coffee, relies heavily on franchisees to expand its reach. This aggressive franchising strategy has prompted Luckin Coffee to devise a new franchise model to compete head-to-head with Cotti Coffee.

Haoxianglai: Haoxianglai is a snack chain with franchisees in both larger and lower-tier cities. Stores in smaller locations often outperform those in big cities due to fewer options, plus lower rent and labor costs. In county-level cities, the average customer spends around 50 yuan ($7) at its stores, which is higher than in bigger cities.

Bantianyao: Bantianyao is a grilled fish specialist whose profitability had not yet rebounded to pre-pandemic levels as of last year, with at least 20% of its stores operating at a loss. This highlights the challenges facing the food and beverage industry in recovering from the Covid-19 pandemic amid weakened consumer spending and an uneven economic recovery.

Bocom International Holdings Co. Ltd.: Bocom International Holdings Co. Ltd. is a state-backed securities firm that recently lowered its mid-2024 sales forecast for the sauerkraut fish chain Tai Er. The firm indicated that revenues from Tai Er's franchise stores are typically lower than those from directly operated stores, potentially affecting the brand's overall performance.

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What Happened When

Late 2022：: Popular F&B chains such as Hey Tea, Nayuki, and Tai Er started franchising.

May 2023：: Luckin Coffee devised a new franchise model.

First 10 months of 2023：: The number of franchisees partnering with brands specializing in Chinese cuisine as well as beverage and dessert chains grew 178% and 85% year-on-year, respectively.

By October 2023：: More than half of the surveyed chain brand franchisees, or 56%, were located in larger cities, down 1.6 percentage points from 2022.