Chagee Holdings: Margin Compression Amid Strategic Expansion—Is the Trade-Off Justifiable?

Chagee Holdings’ aggressive international expansion has propelled its revenue growth but at the cost of significant margin compression. In Q2 2025, the company reported a 10.2% year-over-year increase in total net revenues to RMB3,331.9 million (US$465.1 million), driven by 208 overseas stores and a 85.3% surge in Southeast Asia’s gross merchandise value (GMV) [1]. However, operating margins plummeted to 3.2% from 24.6% in Q2 2024, primarily due to a 41.5% rise in operating expenses, including a 301.1% spike in general and administrative costs [2]. This raises a critical question: Is the trade-off between short-term margin erosion and long-term global dominance sustainable?

The Cost of Global Ambition

Chagee’s expansion strategy has prioritized scale over immediate profitability. Sales and marketing expenses jumped 54.6% to RMB385.0 million, fueled by brand-building campaigns and hiring for overseas operations [2]. General and administrative costs, largely tied to share-based compensation and executive recruitment, ballooned by 301.1% [2]. While gross margin improved to 53.9%—thanks to procurement optimization and economies of scale [4]—this gain was overshadowed by rising operating expenses. The company’s GAAP net income fell 87.7% to RMB77.2 million, though non-GAAP net income remained stable at RMB629.8 million, suggesting resilience in core operations [2].

Balancing Growth and Efficiency

Chagee’s management has acknowledged the margin pressures but remains optimistic about long-term gains. The rollout of 4.0 automated machines aims to reduce labor costs and stabilize margins [4], while premium product upgrades reinforce its brand positioning [2]. In Southeast Asia, where GMV grew 85.3% YoY, the company’s localized offerings—such as the Hojicha Gemini milk tea—have resonated with consumers [2]. Similarly, its U.S. debut in Los Angeles saw over 5,000 cups sold on the opening day, leveraging a health-conscious, low-sugar product line [2].

However, challenges persist. Same-store GMV in Greater China declined by 23.0%, signaling saturation or competitive pressures [2]. Analysts project a 113.5% stock upside for 2025, citing Chagee’s premium pricing resilience and plans for over 200 new overseas stores [2]. Yet, its 15x price-to-earnings (PE) ratio appears undervalued compared to Starbucks’ historical PE when it achieved 30% international revenue [3]. This suggests investors are betting on Chagee’s ability to replicate Starbucks’ global success while maintaining profitability.

Strategic Risks and Rewards

The sustainability of Chagee’s expansion hinges on its ability to balance growth with cost discipline. While automation and supply chain efficiency (e.g., 5.3-day inventory turnover [3]) offer hope, rising general and administrative expenses remain a drag. The company’s focus on residential neighborhoods in the U.S. and Southeast Asia—rather than tourist hubs—aims to cultivate daily beverage habits, mirroring Starbucks’ model [2]. Yet, this strategy requires sustained investment in brand awareness and localized marketing.

Chagee’s long-term vision—to serve 15 billion cups annually across 100 countries—demands continued infrastructure investment. If successful, the company could capitalize on the global premium tea market, which is projected to grow at a 7.5% CAGR through 2030 [5]. However, margin compression may persist until new stores achieve scale and automation fully offsets labor costs.

Conclusion

Chagee Holdings’ margin compression is a calculated risk in pursuit of global dominance. While short-term profitability has suffered, the company’s strategic investments in automation, premiumization, and localized branding position it to capture long-term value. For investors, the key will be monitoring whether these initiatives translate into sustainable margins as international markets mature. If Chagee can replicate its Southeast Asian success in the U.S. and other regions, the trade-off may prove justifiable.

Source:
[1] Chagee Announces Second Quarter 2025 Unaudited Financial Results [https://investor.chagee.com/news-releases/news-release-details/chagee-announces-second-quarter-2025-unaudited-financial-results]
[2] Chagee's Q2 Earnings Divergence: Can Margin Compression Be a Catalyst for Long-Term Growth? [https://www.ainvest.com/news/chagee-q2-earnings-divergence-margin-compression-catalyst-long-term-growth-2508/]
[3] Chagee's Global Potential Far Outpaces Its 15x PE Valuation [https://www.acnnewswire.com/press-release/japanese/100574/chagee's-global-potential-far-outpaces-its-15x-pe-valuation]
[4] Chagee Holdings' Strategic Expansion and Profitability Trade-Offs: Balancing Growth with Operational Efficiency in a Competitive Market [https://www.ainvest.com/news/chagee-holdings-strategic-expansion-profitability-trade-offs-balancing-growth-efficiency-competitive-market-2508/]
[5] (PDF) Competitive Landscape and Strategic Adjustments to Maintain CHAGEE's Market Share [https://www.researchgate.net/publication/385678848_Competitive_Landscape_and_Strategic_Adjustments_of_CHAGEE's_Market_Share]