Image source @ Visual China
| Market capitalization list, author | Chen Qing, editor| Jia Lele
In the public perception, the fate of a financial fraud listed company is often associated with words such as huge fines, prison disasters, bankruptcy liquidation and so on.
And Luckin broke the cognition, rushed up from the bottom of the valley like a roller coaster, and handed over a good financial report.
According to the financial report, Luckin's operating income doubled in 2021, the loss gap narrowed, and the number of stores surpassed Starbucks, becoming the largest coffee chain brand in China.
How did Luckin save himself? Is there a possibility of further turnaround after the loss is narrowed? After returning, what kind of market is Luckin facing? Where are the obstacles to opening up a sinking market? These issues will be explored in the article.
01 Resurrection: Return to the essence of business
On April 11, Luckin Coffee issued an announcement that it has completed the financial debt restructuring and will no longer be subject to bankruptcy or bankruptcy proceedings in any jurisdiction in the future.
"Today marks a new beginning for Luckin Coffee." Guo Jinyi, chairman and CEO of Luckin, said in the above announcement and said that Luckin will continue to strengthen governance and internal control.
After acknowledging financial fraud, Luckin has been experiencing turmoil and change.
In July 2020, guo Jinyi, the former senior vice president, succeeded Lu Zhengyao as the new chairman and CEO of the company, and the major shareholder Dapu Capital took over the mess of Luckin from chairman Lu Zhengyao, through the gradual acquisition of equity, became the actual controlling party in January this year, and then completed the financial debt restructuring, Luckin finally cut off the word "fraud" on the surface.
Different from the aggressive strategy of the old owner striding forward, what Guo Jinyi did after taking office was to stabilize this crumbling building, and the core was to return to the essential logic of doing business and consumer goods - focusing on profits and cash flow.
In terms of business model, luckin's most criticized by investors before is its crazy expansion and subsidies at any cost.
In terms of the number of stores, Starbucks only reached the scale of 17 years and KFC in 20 years, and Luckin only took 14 months. The large coupons issued in the early days, so that the price of a cup of coffee is basically not more than 10 yuan, and the positioning is a high-quality product of the "master coffee", and the coffee price is inverted with the cost of raw materials and store rent, which is the norm of Luckin.
Spend money while losing money. Luckin was like a money-burning machine at the time, and no one knew when it would start making a profit.
After the thunderstorm, Luckin admitted that "the promotional model of offering a large number of coupons is not sustainable", and users who are accustomed to wool can obviously feel that Luckin has become more expensive. The early 1.8% discount coupon and the free first cup of new users have all been cancelled, and users can only encounter 3.8% off coupons when they are lucky occasionally, but more often than half a cup and a half discount coupon and a 4.8% discount coupon.
Price increases make consumers sensitive, but luckin product prices are reasonable compared to other chain brands.
If the old Luckin left any legacy, the ability to create explosive products must be one.
From the early generation of "net red" meteorite lattes to the raw coconut series in 2019, Luckin basically maintains the speed of a year's explosive model, coupled with small snacks such as deer tea, Rena ice, light food, etc., and the number of new products will reach 113 in 2021.
In the fourth quarter of 2020 and the second quarter of 2021, the average monthly customer transaction growth of Luckin reached a small peak, with an increase of 18.22% and 40.75% respectively. The former just launched the second generation of the explosive thick milk series, and the latter was just when the third generation of the explosive raw coconut series sold 420,000 cups in more than a month.
It can also be seen from these explosive products that in terms of product positioning, Luckin tore off the label of specialty coffee and aimed at shifting to professionals and young consumers. For these people, Luckin launched a milk coffee series that is more suitable for the public's taste, and the spokesperson is also biased towards young idols such as Liu Haoran and Gu Ailing, and has eaten a wave of fan dividends.
Compared with financial fraud, consumers are more concerned about whether the taste is good or not, and whether the price is cost-effective. The reasonable price plus the choice of multiple SKUs allows Luckin to hold on.
02 Is profitable?
Luckin held on, but he hadn't yet come up with a fully profitable report card.
In 2021, Luckin achieved revenue of 7.965 billion yuan, an increase of 97.49% year-on-year, operating loss of 539 million yuan, narrowing by 79.16% year-on-year, and the proportion of operating loss to revenue was 6.77%. If it is indeed profitable in terms of net profit, it is because there is a huge withdrawal of the settlement reserve, which cannot reflect the real level of operation.
Price increases + abandonment of the "master" positioning to reduce costs are important reasons for profit improvement.
Fulfillment costs are an expense between costs and expenses, and if you think of it as an expense, and include material costs, store rental expenses and related depreciation amortization into operating costs, then Luckin's gross margin in 2021 has reached 28.4%.
Another reason for the improvement in profits is the opening of the franchise.
Luckin's early attitude was to operate all directly and not to accept franchises, because of the standardization of product quality and service. Franchises were opened in 2019, but the number is very small, and by the end of 2019, the proportion of franchise stores in the total number of stores will not exceed 6%.
After the thunderstorm, in early 2021, Luckin opened its franchise stores and carried out unified digital management of stores to ensure the quality of coffee supply in stores.
Luckin's franchise stores use a 0 yuan franchise fee, through the sale of beverage materials, machinery and equipment to achieve revenue, when the gross profit reaches a certain amount, proportionally drawn.
In 2021, Luckin's franchise stores increased by 753 to 1627. From an operational point of view, in 2021, the franchise store brought 1.306 billion yuan of revenue to Luckin, an increase of more than 3 times year-on-year.
From another point of view, the franchise system is an asset-light expansion, which can save a lot of new store opening costs.
Luckin's franchisees need to invest about 350,000 to 400,000 yuan in the early stage, carry out pre-decoration of stores, and purchase production equipment. Based on this calculation, these 753 franchise stores have saved Luckin at least 260 million yuan in new store costs.
In essence, Luckin's idea of expanding stores is to spend money, but the source of money is different. Spending shareholders' money to expand, the wool is all out of the same sheep, and the sheep are afraid of nature and easy to run. However, another way of thinking, attracting sheep with common interests, each sheep can be woven into a piece of clothing.
Then, whether the operating loss rate of less than 7 percentage points is expected to touch the break-even line or even cross the past depends on two aspects: 1, whether the product can continue to increase in price; 2, the expansion of franchise stores.
Both issues are related to the geographical distribution of stores.
Luckin Coffee's self-operated stores are mainly distributed in first- and second-tier cities, which is also the area with the strongest demand for coffee. Franchise stores are mainly in lower-tier cities.
According to Deloitte Research Report, the coffee penetration rate in first- and second-tier cities is currently nearly 70%, which is comparable to the penetration rate of traditional brewed tea drinks. In particular, Shanghai, as the main penetration of coffee culture, has 2.85 cafes per 10,000 people, reaching the average level of London, New York and Tokyo.
The active coffee market and demand in first-tier cities have spawned large and small coffee brands. According to Ping An Securities data, in the first nine months of 2021, there were 18 coffee brand financing incidents, amounting to 5.69 billion yuan, which is another high point after the peak in 2018.
New coffee brands such as Manner and Nova Coffee have copied Luckin's financing expansion and rapidly expanded stores in first-tier cities. Manner Coffee, whose target users are highly overlapping with Luckin, has been valued at $3 billion through multiple rounds of financing, and the value of a single store far exceeds Starbucks, becoming a new upstart in coffee.
Overall, the coffee market in first- and second-tier cities is basically mature, there are many competitors and strong, and Luckin has little room to raise prices.
Another reference is that the prices of Neixue and Xicha are going down, and they have a certain degree of overlap with Luckin's products, and also have a substitution effect.
What about lower-tier cities?
03 Is the road to sinking the market easy?
First-tier cities tend to be saturated, and the sinking market is still a blue ocean, but it is not so easy to win.
At the beginning of last year, Luckin's new retail cooperation plan further liberalized the qualifications of franchise stores in 168 cities across the country, basically third- and fourth-tier cities, including some small counties and towns can already drink Luckin.
Luckin's ambition to cut into the sinking market is clear.
But before entering the sinking market, there are two issues to consider: target users and market competition.
Coffee essentially has three main functions: to clear the mind, spiritual sustenance, and social needs.
According to legend, it is precisely because a sheep accidentally ate coffee beans that it is very lively, and people find that this plant can keep people alive and excited. Later, with the development of maritime trade, coffee cultivation spread from Africa to all parts of the world, and a strong coffee culture was formed in Europe, and cafes further produced social functions.
In China, due to the influence of strong tea culture, coffee was once an imported product, associated with words such as Western culture and petty bourgeoisie, representing decency and elegance.
But these are not the most core pain points of small-town youth.
Small-town youth with a relatively slow pace of life do not need coffee as a daily drink to clear their minds, nor do they need coffee to pin emotions, and the social needs of the benchmark can be met by places such as teahouses, bars, mahjong halls, etc. Coffee is more of a dispensable thing.
Even if a coffee shop is opened near his home, the small-town youth will try a taste because of the novelty, how many times will he repeat the purchase? How much favor can coffee shops like Luckin, which rarely offer in-store drinking places, gain?
Luckin's coffee education for residents in first- and second-tier cities is undoubtedly successful, but the explosion of "coffee + other" products such as raw coconut lattes also shows that the people who accept the taste of coffee itself are still small-scale groups, and the habit cultivation of low-tier cities is bound to be more difficult than that of first- and second-tier cities.
Therefore, the greater obstacle to the sinking of Luckin is not from the coffee itself, but from the milk tea industry that has long been rolled up.
Around the most prosperous large-scale shopping malls in the hometown of the fifth-line county, countless milk tea brands such as Mi Xue Ice City, Yihetang, Shanghai Auntie, Shuyi Roasted Immortal Herb, Tea Hundred Ways, and Neon Tea Dance may have a small store next to it. From the 4 yuan lemon tea of Mi Xue Ice City to the roasted fairy grass of more than 20 yuan in the book, each price band is scattered with niche milk tea brands that cannot be named.
Than consumption habits? Milk tea sinks much earlier than coffee, and in the country of tea culture, consumers are obviously more receptive.
Fighting a price war? Milk tea costs less than coffee and naturally has the advantage of low price.
"China Entrepreneur" reported that for the second listing, a middle-level person from Dapu Capital revealed, "Guo Jinyi (chairman and CEO of Luckin Coffee) now says that we want to create a legend of business history, although this legend has not yet happened." ”
Even from the perspective of regaining the trust of investors, Luckin will not easily go back to the old road of initiating large subsidies for market education.
The only good news is that small-town youth who return home after working in first-tier cities are more receptive to coffee and have the ability and willingness to experience consumption.
04 Conclusion
Returning to the average price of the fast coffee market is a wise move for Luckin, and it is also a manifestation of management experiencing a big ups and downs and making more rational decisions.
The layout of franchise stores is not only Luckin's strategy to slow down the army, but also points to the future development direction of Luckin.
Meeting demand and reaping rewards is the essence of business. And high-quality goods and services are the foundation of enterprises to settle down. Deception alone cannot obscure any facts.
Regardless of whether Luckin was once Lu Zhengyao's Ponzi scheme, a series of reforms by Luckin after the thunderstorm revealed its determination to cultivate deep in the volkswagen coffee track.
Luckin returned, but the world was no longer the same world as it once was. Survived, only to win the first war.
bibliography:
[1] Luckin Blitz: The Coffee Retail Revolution Triggered by the Little Blue Cup, Shen Shuaibo;
[2] "2021-2022 Freshly Ground Coffee Market Industry Development Trend White Paper", Analysys Analysis;
[3] "New Consumption Research Coffee Series Report: After The Changes Have Finally Blossomed, watching the Coffee Market Rise and Rise", Ping An Securities;
[4] "700 Days of Ruixing Thunderstorm: "Traitors", Gangsters and Secondary Listings", Chinese entrepreneur;
[5] "Luckin Coffee's Attempt to Flip the Plate", Yuanchuan Research Institute;