Analysis of Heytea's Strategy Shift from Franchising to Premiumization

Based on the latest market data and industry trends, I provide you with a systematic analysis of the strategic logic behind Heytea’s suspension of franchising and shift to premiumization, as well as the growth prospects of the premium tea beverage market.

On February 10, 2025, Heytea issued an internal company-wide email titled “Rejecting the Digital Game and Scale Involution, Returning to Users and Brand”, officially announcing the suspension of accepting business partnership applications[1]. This strategic adjustment comes at a critical juncture when China’s new tea beverage industry is shifting from “incremental expansion” to “stock competition”:

Data from China Commercial Industry Research Institute shows that the size of China’s new tea beverage market reached RMB 193.3 billion in 2023, and is projected to reach RMB 220.5 billion in 2024, but the growth rate has dropped from over 30% annually in the industry’s early development stage to around 10%[1]. More critically, the “shuffle” at the store level is intensifying - according to data from Zhaimen Canyan, as of July 15, 2025, the total number of milk tea and beverage stores nationwide stands at 426,000, with 118,000 new stores opened in the past year, but the net growth is -39,225, indicating that approximately 157,000 milk tea stores have exited the market over the past year[3].

Heytea expanded aggressively after opening franchising in 2022, but soon faced a significant decline in the number of stores. According to public reports, Heytea saw a net reduction of over 600 stores between 2024 and 2025[4]. This phenomenon is driven by a combination of multiple factors:

1. Inadequate Adaptation to Lower-tier Markets
   : After Heytea opened franchising to non-first-tier cities, many stores were launched in county-level markets, but the consumption level and customer frequency in these markets cannot support the operation of stores with a premium positioning[4].

2. Internal Friction Caused by Regional Store Density
   : The new tea beverage market is continuously saturated, and Heytea’s mid-to-high price point does not have obvious advantages in the current consumption environment; increased regional store density directly drags down the performance of existing stores[4].

After opening franchising, Heytea encountered dual dilemmas of brand asset depreciation and obstacles to technological innovation[1]:

Some franchised stores have slow order fulfillment and frequent quality control issues, with 65% of negative reviews on social media targeting franchised stores[1]. More critically, the usage rate of Heytea’s self-developed “HEYTEA GO” system in franchised stores is only 58%, and data completeness is 37% lower than that of directly operated stores, making it difficult for the headquarters to implement its digital strategy[1].

Heytea’s series of actions mark a fundamental shift in its growth logic - from pursuing store quantity and market share to focusing on single-store profitability and brand value enhancement[3]. This transformation includes the following core considerations:

The capital market values the optimization of the UE model (Unit Economics Model) more than pure scale expansion. After suspending franchising, Heytea’s directly operated stores are expected to see a rebound in same-store sales growth, and profit margins can be increased by 3-5 percentage points[1]. This move also aligns with the secondary market’s shift towards “quality growth” preference.

It is expected that by 2025, the penetration rate of automated tea-making equipment in China’s new tea beverage industry will exceed 60%, intelligent ordering systems can reduce the loss rate by 15%, and AI-driven consumer portrait systems will increase repurchase rates by 30%[1]. These technological changes require enterprises to have stronger independent R&D capabilities and data integration capabilities, while the franchising system has inherent obstacles. Suspending franchising will help Heytea build a unified data platform and supply chain system.

Heytea clearly stated that the industry’s “digital game has come to an end”, and the blind pursuit of store quantity and low-price involution has led to homogeneous competition and store overcapacity[3]. By suspending franchising, Heytea can focus on product R&D, brand building, and service improvement, achieving sustainable development through the multiple balances of quality and speed, direct operation and franchising, scale and efficiency.

According to industry research data, after experiencing explosive growth, China’s premium ready-to-drink tea beverage market is entering a stable development period:

Although the premium tea beverage market still maintains double-digit growth, its growth rate has dropped from over 70% in the early stage to around 30%, and it faces continuous pressure from mid-range and lower-tier markets[5].

Premium tea beverage brands face a fundamental dilemma: groups with high-end consumption capabilities prefer categories such as premium coffee and fine tea, and have low acceptance of sugary new tea beverages; while the core customer base of new tea beverages is mass consumers, whose pricing cannot support a premium positioning[6]. Data from iiMedia Research shows that in 2025, over 76% of consumers focus on mid-priced tea beverages ranging from 11 to 25 yuan[6].

Taking Nayuki’s Tea as an example, its quality commitments such as “changing tea bases every 4 hours” have pushed up raw material loss and procurement costs. The 2025 half-year report shows that Nayuki’s material costs account for approximately 34.1% of total revenue, and combined with costs such as labor, rent, and delivery service fees, the total accounts for nearly 80% of revenue[6]. The high rental costs brought by the large-store model further compress profit margins - from 2021 to 2022, the company’s right-of-use asset depreciation exceeded 400 million yuan annually, accounting for about 10% of revenue[6].

As of the end of 2024, Nayuki’s Tea has 1,798 stores, while Mixue Ice Cream & Tea and Guming have exceeded 46,000 and 9,900 stores respectively[6]. The huge scale gap puts premium brands at a disadvantage in terms of supply chain bargaining power and brand exposure, making it difficult for them to reduce costs through scale effects.

Heytea’s adherence to “low sugar, zero calories” aligns with the main trend in the tea beverage industry. Data shows that in 2025, the usage rate of sugar substitutes in milk tea has exceeded 61%, and the application ratio of plant-based protein milk continues to rise[3]. Tea beverages with clear health orientation will become the core battlefield of product innovation, and premium brands can seize the opportunity with their raw material quality advantages.

Premium tea beverage brands are committed to providing a pleasant tea experience and a relaxing social atmosphere in their stores, capturing the social needs and identity recognition of the younger generation[5]. Although the proportion of takeaway orders continues to increase (Nayuki’s self-pickup + takeaway orders accounted for nearly 90% in the first half of 2025), the emotional connection established by the brand through spatial experience still has differentiated value.

Going overseas is a common choice for major new tea beverage brands to seek growth. Mixue Ice Cream & Tea currently has over 4,800 overseas stores, and Heytea has opened over 70 overseas stores[1][3]. Successful overseas expansion requires in-depth localization adaptation, which puts higher demands on the brand’s supply chain capabilities and operation system.

China’s new tea beverage industry is showing a competitive pattern of “one dominant player, multiple strong players, and rising mid-tier players”[7]:

Mixue Ice Cream & Tea firmly ranks first in the industry with a leading gap, achieving operating revenue of 24.83 billion yuan and net profit of 4.45 billion yuan in 2024[8]. CHAGEE has overtaken Guming and Chabaidao as a dark horse to become the second in the industry. Among premium brands, Nayuki’s Tea recorded a full-year loss of 919 million yuan in 2024, and its market value has shrunk by about 90% from its peak[6].

The essence of industry competition has evolved into supply chain competition. Leading brands such as Mixue Ice Cream & Tea have a self-production rate of core raw materials as high as 60%, achieving ultimate cost control through vertical integration[3]. For Heytea, the high-quality raw materials such as “real fruit, good tea, fresh milk” that its premium positioning relies on require a stronger and more stable supply chain system as support.

Against the background of increasing product homogenization (mainstream brands launched nearly 2,000 new products in the first 7 months of 2025), the importance of brand differentiation value is increasingly prominent[3]. Heytea’s suspension of franchising and focus on premiumization is a reflection of this trend.

More and more brands are expanding into B-end supply chain services, tea beverage equipment manufacturing, product innovation, and digital development, building a multi-dimensional profit matrix[1]. Mixue Ice Cream & Tea has been listed, and CHAGEE has submitted its prospectus, marking the industry’s entry into a new stage in the capital market.

Under multiple pressures of slowing industry growth, quality control difficulties in the franchising model, and hindered digital transformation, Heytea’s suspension of franchising is a necessary measure to prevent continuous depreciation of brand assets and focus on long-term value construction. This move will help optimize the quality of the store network and concentrate resources on product R&D and brand building.

Although the premium tea beverage market maintains double-digit growth, its growth rate has dropped from over 70% in the early stage to around 30%. Under continuous squeeze from mid-range and lower-tier markets, premium brands face dual challenges of scale disadvantages and cost pressure. It is expected that the premium market will develop towards premiumization and differentiation in the future, rather than simply pursuing scale expansion.

The new tea beverage industry is shifting from “incremental expansion” to “stock competition”, and from “scale competition” to “value competition”. Supply chain efficiency, brand differentiation, and digital capabilities will become key factors determining the long-term competitiveness of enterprises.

• Consumer Demand Falling Short of Expectations
  : Macroeconomic pressure may lead consumers to cut spending on non-essential goods
• Intensified Industry Competition
  : Price wars and store overcapacity may further erode industry profits
• Food Safety Risks
  : Food safety issues remain the Sword of Damocles hanging over the new tea beverage industry
• Cost Fluctuation Risks
  : Fluctuations in raw material prices may put pressure on gross profit margins

[1] Sina Finance - Heytea’s Strategic “Turnaround”: Suspending Franchising, Entering the Era of Intensive Cultivation for New Tea Beverages? (https://finance.sina.com.cn/stock/s/2025-02-11/doc-inekasqm3480147.shtml)

[2] DoNews Column - Heytea’s “Slimming”: Instead of Competing on Store Count, What’s the New Focus? (https://www.donews.com/article/detail/8189/94373.html)

[3] 21st Century Business Herald - New Tea Beverages: Drinking Emotion and Health | Consumption Special Topic (https://www.21jingji.com/article/20251010/herald/d6746f6e7f83fb193bb7e7eb03916a4e.html)

[4] Xinhua News Agency - Behind the Disappearance of Over 600 Heytea Stores: Franchisees Trapped in Profit Dilemmas (http://www.news.cn/food/20251216/51d387d4ba6a4d7f9c888e9e7a4e3352/c.html)

[5] Supernova Finance - Premium Tea Beverage Brands “Flocking” to Go Public? A Fundamental Problem Remains Unsolved (https://m.cyzone.cn/article/651278)

[6] Xinhua News Agency - Once a “Capital Favorite”, Its Market Value Shrunk by 90%: Why is Nayuki’s Tea’s Premium Path Struggling? (http://www.news.cn/finance/20251211/7f9fa593a3324252afa86bb92846f8d6/c.html)

[7] POEMS - Is the Capital Market Also Rushing to Drink Milk Tea? An Overview of New Tea Beverages (https://www.poems.com.sg/zh-hans/market-journal/newstyletea/)

[8] CBNData - New Milk Tea Ranking Competition: Who is the Biggest Dark Horse? (https://www.cbndata.com/information/293866)