Chagee Holdings’ Strategic Expansion and Profitability Trade-offs: Balancing Growth and Efficiency in a Competitive Market

Chagee Holdings (CHA) has emerged as a global tea chain powerhouse, expanding its footprint by 63.6% in 2025 to operate 6,681 teahouses across Greater China and overseas [1]. This aggressive international expansion has driven total gross merchandise value (GMV) to RMB8.2 billion in Q1 2025, a 38.0% year-over-year increase [1]. However, the company’s rapid growth has come at a cost: operating margins have contracted from 28.2% in Q1 2024 to 24.2% in Q1 2025, while net income growth lagged at just 13.8% [1]. The trade-off between scale and profitability raises critical questions about the sustainability of Chagee’s strategy.

The Expansion-Driven Growth Model

Chagee’s expansion strategy is anchored in franchising, which accounted for 92.8% of total net revenues in Q1 2025 [1]. The company’s focus on international markets—adding 52 new stores in H1 2025 to reach 208 overseas locations—reflects its ambition to replicate its domestic success globally [1]. This approach has delivered robust top-line growth, with net revenues rising 35.4% year-over-year to RMB3.39 billion in Q1 2025 [1]. However, the average monthly GMV per teahouse in Greater China declined by 21.4% to RMB432,000, signaling diminishing returns from market saturation and intensified competition [1].

The company’s financial engineering also reveals a reliance on capital-intensive growth. Chagee raised US$472.9 million through its IPO and over-allotment option, funds it has directed toward store openings and marketing [1]. Yet, this strategy has led to a 166.0% surge in sales and marketing expenses, now accounting for 8.8% of total revenues [1]. While such spending has fueled a 192.4 million-member customer base, it has also eroded profitability, with net income margins falling from 23.7% to 20.0% [1].

Operational Efficiency: A Path to Margin Stabilization?

To counter margin pressures, Chagee has prioritized operational efficiency. The rollout of 4.0 automated machines, designed to reduce labor costs and improve service speed, is a key initiative [1]. Additionally, the company plans to upgrade raw materials in H2 2025 to reinforce its premium brand positioning, a move that could justify higher pricing and offset cost inflation [1]. These efforts have already yielded some results: gross margin improved to 53.9% in Q2 2025, driven by procurement optimization and economies of scale [1].

However, near-term challenges persist. Operating income in Q2 2025 plummeted to RMB107.6 million, down from RMB772.2 million in Q2 2024, as general and administrative expenses surged 301.1% year-over-year [4]. This spike, attributed to share-based compensation and personnel expansion, underscores the difficulty of balancing growth investments with cost discipline. Management’s emphasis on avoiding delivery-platform subsidy wars—a costly tactic used by rivals—suggests a strategic pivot toward sustainable pricing [3].

Long-Term Value: Can Efficiency Offset Margin Pressures?

Chagee’s long-term value hinges on its ability to harmonize expansion with profitability. The company’s international ambitions—targeting over 200 new stores in 2025—are underpinned by localized product strategies and disciplined geographic expansion [1]. Yet, same-store GMV growth has softened due to a high base and price competition, highlighting the risks of over-reliance on new store openings [1].

Operational efficiency measures, such as automation and premium product positioning, offer a potential lifeline. If successful, these initiatives could reduce labor costs by 15–20% and stabilize margins, according to industry benchmarks. However, the timeline for ROI remains uncertain. For instance, the 4.0 machines require upfront capital and training, which may delay cost savings. Similarly, upgrading raw materials could increase input costs, potentially offsetting premium pricing gains.

Conclusion: A Calculated Gamble

Chagee’s strategy is a high-stakes bet: aggressive international expansion to capture market share, paired with efficiency-driven cost-cutting to preserve margins. While the company’s financial resources and brand strength provide a buffer against short-term volatility, the long-term success of this model depends on execution. Investors must weigh the risks of margin compression against the potential rewards of global dominance. For now, Chagee’s ability to innovate operationally—without sacrificing its premium identity—will be the key determinant of its long-term value.

Source:
[1] Chagee Announces First Quarter 2025 Unaudited Financial Results [https://investor.chagee.com/news-releases/news-release-details/chagee-announces-first-quarter-2025-unaudited-financial-results]
[2] Chagee Holdings Reports Q2 2025 Financial Results [https://www.tipranks.com/news/company-announcements/chagee-holdings-reports-q2-2025-financial-results]
[3] Chagee's Q1-Q2 2025 Earnings Calls: Contradictions ... [https://www.ainvest.com/news/chagee-q1-q2-2025-earnings-calls-contradictions-emerge-strategic-priorities-international-expansion-store-sales-trends-2508/]
[4] Chagee Announces Second Quarter 2025 Unaudited ... [https://www.stocktitan.net/news/CHA/chagee-announces-second-quarter-2025-unaudited-financial-nj07z6zyhhbg.html]