Follow the smart money franchisees: Why China’s best franchise models will define its economic future

In “The E-Myth Revisited”, Michael Gerber sets out a sobering truth about entrepreneurship: of the millions who start new businesses each year, 40% fail within the first year and 80% within five¹.

The culprit is what he calls the “fatal assumption”: the idea that being skilled at the technical work of a business (such as baking pies) automatically translates into the ability to run the business itself.

Most founders end up working in their business, not on it. Yet, one model consistently defies this rule: franchising. Where 80% of independent businesses fail, around 75% of franchises succeed.

This distinction – between operating a product and operating a system – is central to understanding where resilient returns can still be found in China today. Franchising is not simply about selling goods and services, but about replicating processes.

Domino’s Pizza’s rise to global prominence reflects more than its recipes – it was powered by a repeatable operating model built on logistics, technology, and delivery.

Japan’s 7-Eleven advanced this further with a data-driven ecosystem – synchronising supply chains so tightly that thousands of stores receive fresh products multiple times a day.

“Franchising is not simply about selling goods and services, but about replicating processes.”

China’s own franchising landscape has evolved through cycles and fads – from over-premiumised braised duck necks that are now facing closures to the recent wave of discount snack formats locked in price wars. Many models were built on momentum, not systems. Few have endured through economic cycles.

Today, in a low-return and deflationary environment, franchise models represent a form of systemic de-risking for entrepreneurs and investors alike, in our view.

At the same time, Beijing is steering the economy toward greater domestic demand. The upcoming 15th Five-Year Plan (2026–2030) emphasises “expanding service consumption” as a core pillar of growth.

This convergence – policy support for domestic consumption alongside a structurally lower-yield backdrop – positions high-quality franchise systems potentially as one of the most durable engines of value creation in China.

The anatomy of a resilient franchise

Not all franchises are built alike. Those that survive and compound across multiple cycles typically share three attributes:

1. They are standard-setters – their foundation is a codified, replicable system of standard operating procedures (SOPs) that ensure consistent quality and predictable outcomes. Success becomes systemic, not charismatic – independent of the founder’s genius or luck.
2. Their supply chain is the moat – cost leadership is earned, not claimed. The most resilient franchisors have spent decades reshaping supply chains, refining logistics and optimising sourcing, preserving margins for both the franchisor and franchisee, even in deflationary cycles.
3. They master hyper-localisation – strong systems are rigid at the core but flexible at the edge. They maintain operational discipline while adapting offerings to regional tastes and behaviours—separating truly scalable models from merely fashionable ones.

Over the past decade, we have studied franchise models across China – from restaurant and coffee chains to parcel-delivery hubs, tutoring centres, and aesthetic clinics. Many peaked in earlier cycles, with franchisees’ returns deteriorating as payback periods lengthened, leading to closures and departures of franchisees.

Two models stand out for having institutionalised these principles at opposite ends of the investment spectrum. Both have delivered superior financial outcomes but have outlasted cycles of consumer preferences and competition.

Mixue: The grassroots MBA of China’s franchise economy

At the mass-market end, Mixue demonstrates how relentless operational discipline – rather than marketing – creates scale in a deflationary environment.

With more than 40,000 outlets nationwide, its 50-cent ice cream and one-dollar milk tea have become fixtures across China’s lower-tier cities. But the company’s real differentiation lies behind the counter: a supply chain that has been compounding efficiency for nearly three decades.

Mixue has built one of China’s most advanced vertically integrated franchise supply systems. It produces nearly all core ingredients, supplies and equipment in-house, while continuously reinvesting in automation, logistics, and quality control.

The outcome is a rarity: a higher product quality at lower unit cost, with stable end-prices. In a market where many brands raise prices to defend margins, Mixue passes gains through to franchisees and consumers – reinforcing both brand equity and system profitability.

“Mixue has built one of China’s most advanced vertically integrated franchise supply systems.”

Its human-capital model completes the system. At its Henan headquarters, Mixue runs a business training institute where franchisees – just 4% of annual applicants are accepted –undergo intensive operational and service training. Many are first-time entrepreneurs investing lifetime savings to earn incomes several times the national average urban wage (US$7,500 per year).

They learn to operate through standardised systems and adhere to strict protocols. This effectively turns Mixue into a “Grassroots MBA”, teaching process discipline, inventory control, and customer management at scale.

Mixue’s story goes beyond lemonade and ice cream: it illustrates how persistent investment in systems, not hype, creates compounding efficiency gains that benefit both franchisees and consumers. In a deflationary economy, that type of growth is increasingly scarce.

H World and Atour: Redefining real estate returns for China’s wealthy

At the premium end of the market, China’s leading hotel franchisors, H World and Atour, are reshaping the country’s property and services landscape through systematic cost innovation.

Where the market sees oversupply and weak room rates, these operators see structural consolidation opportunities anchored in operational modernisation. Decades of investment in design, supply-chain integration and standardisation have reduced total renovation cost per room to levels below those of twenty years ago.

Modular, digitised renovation processes have compressed construction timelines from months to weeks, dramatically improving capital turnover and franchisee returns on investment.

“China’s leading hotel franchisors are reshaping the country’s property and services landscape through systematic cost innovation.”

This efficiency is reinforced by a favourable macro dynamic: rents are falling faster than room rates. In this environment, leading brands such as H World and Atour have continued to command double-digit revenue per available room (RevPAR) premiums over weaker competitors in a hotel market still dominated by unbranded and inefficient operators.

The combination of lower capital expenditure, faster time-to-revenue, and sustained pricing power has enabled franchisees to achieve unlevered returns of 20% or more – a compelling proposition in a low-interest rate economy.

By providing standardised brands, operating expertise, exclusive supply chains and access to vast loyalty ecosystems (H World’s membership base now exceeds 300 million, Atour’s 100 million), franchisors now function less as hotel chains and more as outsourced asset managers.

They are creating a new asset class for China’s high-net-worth investors and property owners, one that converts idle physical space into productive, cash-flowing service infrastructure. Beyond hospitality, this signals a broader shift in how private capital is being redeployed into higher-efficiency, consumption-driven yielding assets.

Follow the smart money

As China moves toward a service-driven growth model, franchising may emerge as one of the country’s most significant institutional innovations – a framework that blends private initiative with systematic discipline.

For investors, tracking where the most capable franchisees choose to deploy their own capital may prove as revealing as studying GDP trends or credit spreads. We believe China’s next wave of value creation may not come from another real estate or construction boom, but from entrepreneurs building businesses designed to outlive their founders – systems, not slogans.

In Gerber’s words: “The true product of a business is the business itself.” In China today, the most capable franchisees – and the investors who follow them – have already internalised that lesson.

¹ The E-Myth Revisited: Why Most Small Businesses Don't Work and What to Do About It, Michael E. Gerber (1995)