Chagee Holdings' Q1 Surge: Rapid Expansion or Strategic Risk?

Chagee Holdings' Q1 2025 results showcase a company in hyper-growth mode: a 63.6% jump in teahouse count and 35.4% revenue surge highlight its aggressive scaling strategy. Yet beneath the headline numbers, red flags emerge. Declining same-store sales, soaring costs, and uneven overseas performance raise critical questions: Is Chagee's expansion sustainable, or is the brand overextending itself? For investors weighing the stock, the answer hinges on whether operational strains are temporary growing pains or signs of structural imbalance.

Operational Momentum vs. Structural Challenges

Chagee's operational growth is undeniable. Total teahouses hit 6,681 as of March 2025—up from 4,083 a year earlier—with franchised locations (6,490) driving 97% of the expansion. Overseas markets now account for 128 stores, up from 94 in 2024, reflecting a push into new geographies. This scale has fueled a 38% rise in total GMV to RMB8.23 billion, though the growth is unevenly distributed.

The problem? Same-store GMV is collapsing. In Greater China, same-store GMV dropped 19.1% year-over-year, while overseas fell 8.4%. This suggests that existing stores are losing customer foot traffic or spending power—a worrying trend for a brand reliant on foot traffic and repeat visits. The decline in average monthly GMV per teahouse in China (from RMB549k to RMB432k) underscores the disconnect between store count and revenue efficiency.

Financials: Growth at a Cost

While revenue growth is robust, profitability is under pressure. Net income rose only 13.8% to RMB677 million, with margins compressing sharply: operating margin fell to 24.2% from 28.2%, and net margin dropped to 20% from 23.7%. The culprit? A 42.8% surge in operating expenses, driven by:
- Soaring marketing costs: Sales and marketing expenses jumped 166% to RMB299 million, reflecting a costly push to build brand awareness in saturated markets.
- Overseas store costs: Company-owned teahouse operating expenses nearly tripled to RMB157 million as international locations—often in higher-cost urban centers—were added.
- R&D and IT investments: R&D spending hit RMB53.6 million, up 62%, as Chagee upgrades its supply chain and digital tools.

Overseas Markets: Opportunity or Overreach?

The 85.6% GMV growth in overseas markets masks deeper challenges. While overseas GMV reached RMB178 million (up from RMB96 million), this still represents just 2.2% of total GMV. Same-store GMV in overseas locations fell 8.4%, suggesting either cultural missteps or execution issues in new markets. The company's reliance on franchising (which requires minimal upfront investment) is a double-edged sword: while it fuels rapid expansion, it also limits control over store quality and customer experience, risking brand dilution.

Scalability: Can the Model Hold?

Chagee's strategy hinges on franchise-led growth and member engagement. The Mobile Mini Program's 192 million registered members (up 109.6%) are a bright spot, though active member growth (21.4%) lags. The key question is whether Chagee can reverse the same-store GMV decline without sacrificing margins.

On one hand, the company has strong liquidity: RMB5.39 billion in cash and the US$472 million IPO war chest provide a buffer for continued investment. On the other, the cost structure suggests that growth is eating into profits faster than revenue gains. The 20.8% rise in material costs alone—a result of expanded sales to franchised stores—implies supply chain inefficiencies or pricing pressures that could persist.

Investment Considerations

For investors, Chagee presents a high-risk, high-reward proposition. The positives include:
- Dominance in China's premium tea market, a category with 15% annual growth potential.
- A scalable franchise model with low capital intensity.
- Strong cash reserves and a clear path to further geographic expansion.

The risks are equally clear:
- Margin erosion: If same-store GMV declines continue, profitability could stagnate despite revenue growth.
- Overexpansion risks: Rapid store openings may strain supply chains and quality control.
- Competition: Players like Luckin Coffee and Starbucks are already targeting similar demographics and locations.

Verdict: Wait for Proof of Scalability

Chagee's Q1 results are a mixed bag. The top-line growth is impressive, but the profit warnings are impossible to ignore. Until the company can stabilize same-store GMV, curb marketing expenses, and demonstrate margin resilience, the stock remains speculative. Investors should consider a wait-and-see approach, focusing on Q2 updates for signs of:
- Improved per-store GMV trends.
- Containment of operational costs relative to revenue growth.
- Overseas market traction beyond just store count.

For now, Chagee's rapid expansion is a double-edged sword. While it fuels growth, the sustainability of that growth—both financially and operationally—is far from certain. The next quarter's results will be critical in determining whether this is a tea brand with lasting appeal or a fleeting brew.