Luckin's war burned upstream

Produced by Tiger Sniff Commercial Consumer Group

Author|Miao Zhengqing

Title map|Visual China

On the evening of March 2, Luckin Coffee (hereinafter referred to as "Luckin") announced its financial results for the fourth quarter of 2022 and 2022. According to financial report data, Luckin's total net income in 2022 will be 13.293 billion yuan, a year-on-year increase of 66.9%; GAAP operating profit for the full year was $1,156 million, with an operating margin of 8.7%. This is the first time that Luckin's operating profit has turned around since its establishment, and it is also the first time that Luckin's annual revenue has exceeded 10 billion yuan.

The key information revealed in this earnings report is also the number of stores and the number of users. In 2022, Luckin Net opened 2,190 new stores, a year-on-year increase of 36.4% compared with the end of 2021. By the end of 2022, the total number of Luckin stores reached 8,214, which means that nearly 26.6% of Luckin's stores were newly opened in 2022. On the user side, the average number of monthly trading users of Luckin reached 21.6 million in 2022, an increase of 66.2% compared to 2021.

A relevant person revealed to Tiger Sniff: "In 2023, Luckin may seek to return to NASDAQ. ”

A key signal: In the fourth quarter of 2022, Luckin reached a settlement with the U.S. Securities and Exchange Commission on "previous allegations of financial fraud and paid a fine of approximately 1.14 billion yuan in accordance with the agreement." Under the influence of paying fines, Luckin showed a situation of "increasing revenue without increasing profits" in the fourth quarter, with revenue increasing by 51.9% year-on-year to 3.695 billion yuan and net profit falling 94% year-on-year to 54.5 million yuan in the quarter.

U.S. stock analyst Liu Bin told Tiger Sniff that the probability of Luckin's relisting has further increased after the fine is paid. At the same time, since the financial fraud case, Luckin's "debt restructuring and litigation expenses" are expected to continue to decrease. In 2021, Luckin-related expenses reached 330 million yuan, while in the same period of 2022, Luckin-related expenses decreased to 75 million yuan, and the related expenses in the fourth quarter of 2022 were only 8 million yuan.

But in front of Luckin, there is also bad news.

In 2022, the same-store sales growth rate of Luckin's self-operated stores showed a significant slowdown. From the second quarter to the fourth quarter of 2022, the same-store sales growth rate of Luckin's self-operated stores was 41.2%, 19.4% and 9.2% respectively. There are indeed epidemic factors, and the number of Luckin's stores "temporarily closed every day" in the fourth quarter was as high as 1,500.

And, since 2022, the coffee war around high-tier core cities and sinking emerging markets is making Luckin face more fierce competition. In the third quarter of 2022, Starbucks China released its "2025 China Strategic Vision" and announced that it would add 3,000 stores in three years at a rate of "one new store every 9 hours"; Michelle Ice City's lucky coffee will add more than 1,400 stores in 2022, becoming the fastest expanding coffee brand after Luckin.

Coffee analyst Zhao Chengcheng told Tiger Sniff that China's chain coffee store market may show a situation similar to the dairy market pattern in the future. "In the dairy market, Mengniu Yili's two-way hegemony pattern has been decided; In the coffee circle, Starbucks and Luckin have basically locked in the two-strong pattern, but many mid-waist brands and regional brands are making the coffee war fierce. The direction worth paying attention to in 2023 is: is the coffee circle a two-strong pattern, or will it finally show the triumph of the three countries? It is worth paying attention to whether players such as Lucky Coffee and MANNER Coffee can seize the opportunity to let go after letting go. ”

2022 is a watershed year for Luckin

Luckin's 2022 financial report is a "wayfinding map" to interpret today's Luckin's "living method". Compared to earlier Luckin, Luckin today has undergone three key changes.

On the store side, Luckin is tilting its resources and expansion focus to franchisees.

According to the financial report, as of the end of 2022, among Luckin's 8,214 stores, the proportion of associated stores has reached 31.1%, which is the highest proportion of associated stores since Luckin's establishment. In addition to the number, the associated stores have also become Luckin's money-making engine. Taking the fourth quarter as an example, Luckin's revenue from associated stores was 843 million yuan, accounting for 22.8% of revenue. Compared with the "steady" revenue growth rate of Luckin's directly operated stores, the revenue growth of Luckin Luckin Associates stores is stronger, and the revenue of Luckin Luckin Associates increased by 87.9% year-on-year in the fourth quarter.

In January 2022, Luckin released the franchise again, and the sword finger sank. Some relevant people revealed to Tiger Sniff that Luckin will enter more "blank cities" through franchisees in 2023, and joint stores have been regarded by Luckin as a key means to "rapidly increase stores and increase national penetration".

On the marketing and user side, Luckin further "Internetized".

In 2022, Luckin regards "average monthly transaction users" as a key indicator, and users who place orders through channels such as mini programs, e-commerce platforms, and live broadcast rooms are playing the "foundation of Luckin's business model". Since the second quarter of 2021, Luckin's "average monthly transaction users" has shown a quarterly upward trend, and this growth trend has changed in the first and fourth quarters of 2022 due to factors such as the epidemic, but on the whole, the growth of Luckin's average monthly transaction users is considerable: in the fourth quarter of 2022, Luckin's average monthly transaction users reached 245 million, a year-on-year increase of 51.3%.

It is worth noting that Luckin's new and stimulating repurchase is mainly based on mini programs and WeChat groups, and its new product listing method has also begun to adopt the "horse racing mechanism" and "A/B testing" model that Internet companies are accustomed to. Internet-based Luckin is increasing investment in marketing. In the fourth quarter, for example, Luckin's sales and marketing expenses as a percentage of net revenue rose to 4.7%, compared to 4.1% in 2021. In the growth segment, investment in e-commerce, takeaway and other channels is the key item.

Another change that Luckin will see in 2022 is that it is "getting heavier", and it is shifting its energy and resources to "upstream": increasing investment around factories, raw beans and other supply chain links.

During the evening's conference call, Luckin Coffee's Chairman and CEO Guo Jinyi highlighted the roasting facility in Kunshan in December 2022. Kunshan Bakery is Luckin's second roasting factory and the largest wholly-owned roasting factory established after Luckin's establishment, with a capacity of 30,000 tons/year. For comparison, the joint venture plant built by Ruixing previously had a capacity of about 1.5 tons per year. Building a factory is a key signal for Luckin. In the early days of its establishment, Luckin was more like an "asset-light" company, and its story to the capital world was mainly based on store growth rate, market share and other dimensions.

The fighting will be carried upstream, but the battles will be more intense downstream

"The war between Starbucks and Luckin has burned to the supply chain." A coffee analyst said that after Starbucks and Luckin Luckin are the "top two" in terms of store volume, in order to increase gross margins and improve operational efficiency, both companies will try to demand profits from the supply chain.

Just as Kunshan, Starbucks' largest roasting plant outside of home is already operational. With the construction of Luckin factory, it has become the main roasting battlefield of China's leading coffee brand. In the high-quality coffee producing areas of Africa, Central America and Yunnan, China, Starbucks and Luckin's bean hunters have increased their "bean hunting" since 2021, and even around some fine beans, the two brands are secretly wrestling.

A veteran who has worked in the field of coffee talents for more than ten years said that around factory talents, since 2020, the competition of big names such as Luckin and Starbucks has become increasingly fierce, and even this competition for talents is "global". "In the past, the competition between the two sides was mainly for C-end talents such as store managers and baristas, but now the talent war is burning to the supply chain, raw materials and other links."

A person close to Luckin once revealed to Tiger Sniff that Luckin will increase supply chain investment in 2022 for three reasons: first, it hopes to solve the pressure of rising raw material costs; Second, Luckin has gradually stepped out of the "low-price mentality", it needs to provide users with some upgraded products, and the key to the competitiveness of these products lies in the supply chain; Third, after the number of stores exceeds 8,000, Luckin must optimize the overall profitability by increasing supply chain control and integrating the supply chain, especially in the franchise model, supply chain capability will become a key test for Luckin in the future.

But the C-end battlefield is not "no war".

Due to the emergence of rental dividends in some third- and fourth-tier cities in 2022, a large number of mid-waist brands have begun to expand. Among them, the coffee brand that focuses on the "franchise model" has become the protagonist of expansion. In these cities, Luckin's franchise stores are facing a more intense market. In high-tier cities, Luckin's old rivals such as Starbucks are also restarting expansion, and Starbucks in core cities such as Shanghai and Beijing is upgrading stores to improve market competitiveness.

Even in high-tier cities, tea brands such as Heytea and Naixue are increasing their penetration into the coffee world. In 2022, the proportion of coffee drinks or tea drinks containing coffee in Heytea and Naixue stores has increased significantly, and even some tea brands have increased the purchase of raw coffee beans. Some local distributors in Yunnan told Tiger Sniff that in 2021~2022, mainstream tea brands will be almost the same as coffee brands, and launched "Yunnan coffee bean series drinks". After letting go, the war at the C-end will be more intense. There is a coffee brand that has joined the franchise, and the number of stores (including upcoming stores) has exceeded 1,000 after opening in 2023; Other tea brands have invested in new coffee brands since the fourth quarter of 2022.

"Luckin's product model relies more on large items and super explosive products. In a more intense market, it becomes harder to create explosive products. A senior coffee analyst believes that in 2023, it is very important for Luckin to make new breakthroughs in data such as repurchase rate and average daily single store sales, "For the capital world, Luckin needs new stories and new increments." ”

The latest news shows that in 2023, Luckin will increase its attempts to go to sea. A relevant person told Tiger Sniff that after landing in Singapore, Luckin will also consider markets such as Japan.