Raw coconut lattes can be copied, but can Luckin be copied? 丨See wisdom research

When it comes to Luckin Coffee, everyone may immediately think of explosive products such as "thick milk latte", "raw coconut latte" and "raw cheese latte". Because of the taste of milk coffee that meets the preferences of Chinese and the price that is close to the people, Luckin Coffee is becoming the choice of more white-collar workers and young people.

The running of Luckin's explosive model has not only attracted many coffee industry players to follow suit, but now even the beverage track can't help but want to get a piece of the pie. The slogan of Michelle Ice City's new product "Coffee Coconut Coconut" "Raw coconut latte, I also have coconut" seems to be directly calling out Luckin's raw coconut latte, and the location of the nearby store has also been ridiculed by netizens as full of gunpowder.

The price of only 7 yuan is less than half of Luckin, and a cup of freshly ground coffee can press the price to 10 yuan or even close to 5 yuan, which makes people wonder, can Luckin's business model be copied? In other words, can capital create another "Luckin" by fighting a price war?

Product development is difficult, but the barriers are not as high as imagined

First of all, the reason why Luckin has been able to launch explosive products one after another is simply because of strong research and development capabilities and fast new speed. Luckin has launched a total of 140 new products in 22 years, and the number of new products in one quarter is almost equivalent to Starbucks' annual volume. Among them, the sales volume of the new annual explosive "raw cheese latte" reached 6.59 million cups in a single week in the fourth quarter, which also made the fourth quarter, although greatly affected by the epidemic (the peak closed 1,500 stores in a single day), still maintained more than 50%, the same revenue growth rate as the peak season.

In fact, Luckin's explosive products have long been a common topic in the market, Zhizhi Research believes that although Luckin's research and development capabilities are strong, but the barriers are not as high as imagined, after all, raw material suppliers and supply chains are almost transparent, generally a product can be copied within a few weeks, such as the coffee version of Michelle Ice City "Lucky Coffee" and Fino co-branded "coconut latte", Fino is also Luckin's "raw coconut latte" thick coconut milk supplier.

Kudi Coffee, which often carries the name of Luckin's former boss "touch porcelain marketing", has been established for less than half a year, and when you open Kudi's menu, the overlap of popular products is high and that of Luckin, and the promotional price of 8.8 yuan is less than half of Luckin.

In order to improve the quality of coffee and create differentiation, chain brands have "rolled" to the category of upstream coffee beans and approached the route of specialty coffee. For example, Luckin Luckin is positioned as a "boutique and professional" small black cup, and has launched a series of SOE Yegasuefei, Yunnan Red Honey, Huakui, Paradise Manor, Yunnan Pu'er, Guixia well-known fine bean seeds. Kudi, who bears the gimmick of Luckin's former founder and is similar to Luckin, is also rightly compared with Luckin's taste, but the IIAC Gold Award Sirius coffee beans that have been given high hopes do not seem to meet Cudi's expectations, and most of the current evaluations of Cudi are that the taste of dark roasted beans is too bitter, too burnt, and the coffee taste is too light.

Zhizhi Research believes that it is not difficult to copy a product, but imitation alone cannot form a product differentiation, and it is difficult to appear "phenomenal explosion". Moreover, the size of new stores may not be enough for large-scale marketing, and it is difficult to obtain sufficient profit margins when the operational efficiency is not as good as that of the head brand.

When new and cross-border players are still imitating, the head players have already "rolled" into the upstream coffee bean category, and the differentiation of future products will come more from the boutique and differentiation of coffee beans.

Scale is a moat deeper than the product

Compared with products that are easy to be imitated, scale is a deeper moat for a coffee brand. On the one hand, the scale, coverage and density of stores will greatly affect the order volume and profitability. On the other hand, in today's highly competitive market, greater scale means lower costs and better ability to fight the "protracted war".

We can see that Luckin's store expansion speed in the past two years has been very fast, and after opening 2,190 new stores in 2022 (a year-on-year increase of 36.4% over last year), the total number of stores has reached 8,214, which is only one step away from the target of 10,000 stores. And with store expansion at such a rapid pace, sales per store still maintained a slight increase, although growth is gradually slowing. In the short term, the decline in same-store growth in Q4 is mainly due to the impact of the epidemic, if Beijing and Shanghai are excluded, same-store growth is still at double-digit levels, and with the recovery of post-epidemic consumption, same-store growth in the first quarter is expected to return to double-digit growth.

However, in the long run, in the process of rapid expansion of new stores, the purchase frequency of new users is low, and the average number of monthly purchases will be diluted to a certain extent. In addition, as the traffic will be diverted to newly opened stores, the average number of monthly transaction users per store will also decline, and is expected to remain between 2,500 and 3,000. Another factor affecting the growth of same-store revenue has also increased from less than 10 yuan in 19 years to 15 yuan, and the room for growth is limited. In this way, Luckin has passed the days of relying on aggressive price subsidies to obtain growth, and will gradually return to normal growth from high growth in the future, while long-term growth depends on highly attractive products to increase user purchase frequency.

See Chi Research Homemade Diagram

Of course, the new entrants represented by "Kudi" and "Lucky Coffee" are also rapidly expanding their stores, eager to grab more market share, but Jianzhi believes that the scale advantage that Luckin has established may be difficult for these newcomers to catch up. Not to mention that the advantage point has been preempted, even if the store can be expanded quickly in the short term, it may fall into the situation of "the more you open, the more you lose". On the one hand, the new brand is still in the stage of price for volume, the UE model is immature, and it is necessary to attract users through lower prices, in addition, the demand climbing period of coffee stores is longer, UE costs are higher, it is difficult to quickly form a money-making effect, and it may require capital to continue to "blood transfusion subsidies". In other words, when Luckin has gone through the stage of subsidy exchange and returned to normal growth, these new entrants are still standing at the starting point.

The sinking market is the next place to fight

So when the goal of 10,000 stores is achieved, where will Luckin go?

See Chi Research Homemade Diagram

From the perspective of store types, there are two types: self-operated and associated, self-operated mainly concentrated in first- and second-tier cities, and joint operation is mainly joined in bottom-tier cities. Luckin's stores are mainly self-operated, with only 30% of associates accounting for only 30% by the end of 22. However, from the perspective of growth rate, the annual revenue of self-operated stores increased by more than 50%, and the revenue of associated stores increased by as much as 135%. The growth rate of associated stores exceeded market expectations, and also revealed the huge potential of the sinking market.

Mainly because in first- and second-tier cities, coffee has cultivated strong user habits, with a penetration rate of 67%, and limited imagination. In cities below the third tier, many consumers still regard freshly ground coffee as synonymous with high price and niche, and most users have not cultivated the habit of drinking coffee, and the low penetration rate means that there is still a lot of room for growth.

Of course, not only Luckin, but also competitors such as Lucky Coffee and Kudi under Michelle Ice City have also set their sights on the huge cake of the sinking market.

From the price point of view, Luckin's customer unit price is the highest, almost double that of lucky coffee. It should be known that the increase in the unit price of Luckin's customers is mainly driven by the price increase driven by new products, and the tiramisu cheese launched at the end of last year and the acacia red bean latte launched at the beginning of this year are more than 20 after the coupon. However, in the lower tier market, high prices will limit the drainage effect of new products. Kudi and Luckin are positioned similarly, the same product is currently 2-3 yuan lower, the promotion period is only 9.9 yuan, but when the promotion period ends, the price advantage will be reduced.

From the perspective of franchise costs, Luckin's joining requirements are the most demanding, compared with lucky coffee accepting a store area of less than 10 square meters, Luckin requires a store area of 35 square meters. Kudi's store type selection is more flexible, including store-in-shop, quick pick store, standard store, brand store 4 different store types, the price from the lowest 100,000 to 650,000, because in the rapid expansion period, it also provides two guarantee policies of guarantee mode and promotion period discounts, which can effectively improve the enthusiasm of franchisees and reduce the risk of loss.

Zhizhi Research believes that this needs to be analyzed from two aspects. First of all, from the perspective of store distribution, although Luckin stores are mainly distributed in the first- and second-tier markets, because the scale of stores is far ahead, Luckin is still ahead of other brands in the sinking market and has a first-mover advantage. In addition, Luckin already has a mature UE model compared to Kudi and Lucky Coffee, which is also a certain degree of profit protection, and the payback cycle is relatively shorter. The profit model of the new brand has not yet been opened, and the enthusiasm of franchisees can only be improved through lower requirements.

Source: Ping An Securities

summary

In general, Luckin Research believes that after a 20-year rectification period and a 21-year adjustment period, Luckin finally ushered in the explosion of financial data in 22 years, and it was also the first full-year profit.

"Explosive products" is the biggest label attached to Luckin in recent years, but the barriers are not as high as imagined, Luckin's real advantage is the scale advantage and mature profit model, which are late-entry players can not make up in the short term, even if they can quickly expand stores in the short term, can not quickly form a money-making effect, need capital continuous "blood transfusion".

As the goal of 10,000 stores approaches, when the goal is achieved, Luckin's imagination space in first- and second-tier stores will become more and more limited, and the sinking market will be a must for the next brands. In the process of cultivating coffee habits in lower-tier cities, brands with higher cost performance will have more advantages. At present, Luckin does not have an advantage in price, but the scale of the sinking market is still in the lead. It is believed that after the opening of the low-tier market with low penetration, the competition in the coffee market will be more fierce and more new possibilities will be created.