This is an English adaptation of a FoodBud historical article originally published on August 7, 2022.
Maison Capital argued in this 2022 analysis that lower-tier markets had become more attractive for chain-store brands during Covid. Its core view was operational: compared with first- and second-tier cities, lower-tier cities had lower store density, more stable footfall, and lower fixed costs.
According to Ministry of Transport data cited by Maison Capital, after a new Covid wave began in March 2022, urban passenger traffic in major first-tier and provincial-capital cities fell 30-40% year on year during March-May 2022. Even in the relatively stable January-February period, passenger volumes were still more than 20% below 2019 levels.
Maison Capital noted that third-tier-and-below cities, home to about 1 billion people, were less disrupted and had more dispersed store networks. For operators, that could mean steadier traffic and revenue. It also highlighted the fixed-cost issue: labor and rent do not fall automatically when sales decline, so higher rent and labor in upper-tier cities can raise the risk of losses or closures when dine-in traffic is disrupted.
The report examined three leading chain brands at different scale stages: Helens, Luckin Coffee, and Juewei Food.
Helens was described as China’s largest chain pub operator. By the end of 2021, it had 782 stores, a net increase of 445, and was still in a rapid growth stage.
Maison Capital said Covid disruption from the second half of 2021 affected Helens’ store-opening pace, prompting the company to introduce a new lower-tier-market format and shift more of its 2022 opening plan toward lower-tier cities.
Based on the company’s prospectus and annual report, Maison Capital noted that from 2019 to 2021, the number of Helens directly operated pubs in third-tier-and-below cities, and their revenue contribution, rose year by year. Operating data from 2020 and 2021 also showed that stores in third-tier-and-below cities had significantly higher store profit margins than those in first- and second-tier cities, while average daily sales per store were close to upper-tier-city levels.
On May 19, 2022, Helens opened its first new “street-food stall + pub” format, Helens Yue, in Lichuan, Enshi. Lichuan, in southwest Hubei province, had an urban resident population of 340,000 under China’s seventh national census, making it a typical lower-tier market.
Maison Capital summarized the format around three changes:
A person close to Helens told Maison Capital that young consumers in county-level cities had less pressure from housing and car loans, and that Helens Yue generated daily sales of about RMB20,000 from Monday to Thursday, with Friday and Saturday about 20% higher.
Maison Capital’s conclusion was that the new format initially supported the feasibility of lower-tier expansion: if daily sales stayed meaningful, a lower fixed-cost ratio could improve store margins and open up growth space under Covid conditions.
By the end of 2021, Luckin Coffee had 6,024 stores, surpassing Starbucks’ China store count at the time and becoming China’s largest coffee chain.
Luckin had opened franchising for Luckin Tea as early as 2019, but the operation did not go smoothly, and franchising was suspended nationwide in April 2020.
In January 2021, Luckin announced through its official WeChat account that it would launch franchising for the main Luckin brand. Its new retail partner recruitment plan covered 168 cities. Maison Capital highlighted that these cities were mainly third- and fourth-tier markets; first-tier cities and provincial capitals were not included. In Guangdong province, for example, the open cities included Chaozhou, Huizhou, and Jiangmen, while Shenzhen and Guangzhou were excluded.
Luckin also did not charge a franchise fee, instead using a gross-profit-sharing model, which reduced franchisees’ fixed-cost burden.
Based on financial reports and expert interviews, Maison Capital compared the cost structure of Luckin’s mostly first- and second-tier direct-operated stores with its mostly third- and fourth-tier franchised stores. It estimated that labor plus rent accounted for about 6 percentage points less in franchised stores than in direct-operated stores, a difference that flowed directly into store profit margins. Assuming similar store area and staffing, lower wages and rent per square meter in lower-tier cities made it easier for franchisees to reach profitability.
In 2021, Luckin added a net 1,221 stores, including a net 753 franchised stores. Franchise revenue contribution rose from 7.9% to 16.4%, and the company’s overall profit improved significantly. Maison Capital viewed this as an initial validation of the franchising expansion strategy.
Juewei Food, a leading braised-snack chain, had 14,000 stores by the end of June 2022, according to Jiuqian data cited by Maison Capital. Its network covered major regions and cities nationwide, with 41% of stores located in third-tier-and-below cities.
A person close to Juewei told Maison Capital that, without the pandemic, Juewei might have waited until it approached the later stage of a 30,000-store network before developing county-level lower-tier markets. Under Covid, however, the company saw opportunity in lower-tier markets and observed broad population return flows across China. Its approach was to develop priority lower-tier markets first, then supplement expansion through its “Spark Program.”
In November 2021, Juewei said all new stores would be added through community, street-front, and lower-tier-market channels. In December 2021, it launched the “Spark Program,” an internal employee store-opening support plan.
Under the program, stores were typically equity-held by experienced employees, who also served as new-store managers. Sites were usually in county-level markets or urban-rural fringe areas. For approved stores, the company provided opening subsidies. After fee reductions, initial investment for a single store was generally below RMB100,000, compared with around RMB150,000 for ordinary stores.
Maison Capital said the first batch of Spark Program stores had a payback period of about 18-24 months, while daily sales per store were lower than high-potential locations.
The operating logic was straightforward: lower rent and labor costs in lower-tier markets, combined with employee equity participation and lower upfront investment, reduced the breakeven point and made store payback periods more controllable.
Across pubs, coffee, and braised snacks, Maison Capital saw a similar pattern among leading chain brands: a shift toward lower-tier markets where traffic was more stable, fixed costs were lower, and store-opening investment could be reduced.
For chain operators, the strategic logic was resilience. By accelerating lower-tier expansion, brands could improve revenue stability, reduce rent and labor ratios, and help both the company and franchisees optimize payback periods during a difficult operating cycle.
Note: Store counts, Covid impacts, expansion plans, IPO/prospectus references, and forward-looking figures are historical as of the 2022 source article.