On November 1, Luckin Coffee (OTC: LKNCY) announced its financial results for the third quarter of 2023, and not surprisingly, its revenue and store scale continued to "soar".
According to the financial report data, Luckin Coffee's total net income in the third quarter of 2023 was 7.2000 billion yuan, a year-on-year increase of 84.9%; GAAP operating profit was RMB961.7 million, with an operating margin of 13.4%.
During the quarter, Luckin further expanded its store size, with a net opening of 2,437 new stores, and the total number of stores increased by 22.5% quarter-on-quarter. As of the end of the third quarter, the total number of Luckin Coffee stores reached 13,273, including 8,807 self-operated stores and 4,466 associated stores, continuing to maintain a leading position in the industry, and the number of stores is expected to reach 15,000 by the end of the year.
2023 Q3 Luckin Coffee's main operating data Image source: Luckin financial report
Luckin may have entered a "positive cycle" of growth, but the market is waiting to see how long this positive cycle can last.
In fact, the top domestic coffee chain brands have continued to expand after the epidemic. Since last year, brands with a large number of offline stores such as PetroChina and Li Ning have begun to make coffee across borders, and convenience stores such as 711 and Convenience Bee have also increased the size of freshly made coffee. In addition, a large number of local chain coffee brands, such as Manner, Lucky Coffee, etc., began to rise, and set a new goal of sinking and expanding stores, and the new chain brand Cudi Coffee, created by Lu Zhengyao, the original founder of Luckin, has more than 6,000 stores in just one year, and has begun to expand overseas.
At a time when competition among local brands is heating up, Starbucks announced in September that Zhang Wei, a former Alibaba executive, will serve on the board of directors since October 1, and Liu Wenjuan will be Starbucks executive vice president and co-CEO of Starbucks China since October 2. As Starbucks understands the Chinese market better, the competition for localization is bound to become more intense in the future.
As the competition of chain brands intensifies, the coffee industry is also accelerating. From January 1 to October 13 this year, nearly 35,000 coffee stores have closed, according to data from Narrow Door Restaurant.
This competitive pressure has also allowed China's coffee industry to continue to grow and gradually mature. Industry insiders believe that the maturity of the industry means that industry segmentation is coming. The domestic coffee market may have ushered in a watershed moment.
How to expand after the gross profit fell by 5.6% and the sales expenses increased significantly?
In the past quarter, one of the market's memories of Luckin is the popular item that has been searched for many times on social platforms: Sauce Latte. According to official data, on the day of its launch, the sales volume of the sauce latte exceeded 5.42 million cups, and the sales of single products exceeded 100 million yuan on the first day, setting a new record for Luckin single products.
The explosive product strategy has had a profound impact on Luckin. As early as 2021, Luckin launched the first market-sense out-of-the-circle hit product "Raw Coconut Latte", which has now become a "standard product" on the menu of local coffee brands. The explosion of raw coconut latte gave Luckin a taste of sweetness, and in this year, Luckin launched 113 kinds of freshly made drinks non-stop. Thanks to the good performance of a number of explosive products, Luckin's monthly sales and gross profit began to increase significantly.
If the explosive product strategy is a way for Luckin to occupy the mind in the consumer market, pull up revenue, and increase gross profit, this year, the explosive product strategy has also become a "golden signboard" to attract franchisees.
At the end of the third quarter, the total number of Luckin stores reached 13,300, a net increase of 2,437 from the previous quarter. Among the 13,000 stores, the number of associated stores reached 4,466, and at the end of the second quarter, there were still 3,648 associated stores, that is, after a quarter, Luckin's associated stores increased by a net of 818.
Luckin Coffee is gradually coming out of the trough and will become a "world-class century-old coffee brand" Image source: Photo by reporter Liu Xuemei
On October 17, Luckin held a partner conference. At the meeting, Guo Jinyi, co-founder, chairman and CEO of Luckin Coffee, said that Luckin Coffee takes digitalization as the core and technology as the driving force, creating the three pillars of "people, goods and places" and collaboratively creating big events, building a leading edge. He also said in a low-key manner that the number of Luckin Coffee stores is expected to exceed 15,000 by the end of this year.
According to the speed of store opening shown in the third quarterly report, it is not a big problem for Luckin to achieve the goal of 15,000.
The continuous expansion and density of the store network has also brought in more new users. According to the third quarterly report, Luckin's average monthly paying users increased by 15.43 million month-on-month to 58.5 million. As of the third quarter, the cumulative consumption customers of Luckin Coffee have exceeded 200 million. The sharp increase in new users is not only the traffic brought by the "new users" of Luckin in the first- and second-tier "basic plate" stores by popular products such as sauce lattes, but also from new users in stores in the sinking market.
From the perspective of store profit, the profit of Luckin's self-operated stores in the third quarter was RMB1,185.4 million, with a profit margin of 23.1%, compared with RMB771.8 million in the same period of 2022, with a profit margin of 26.9%. Revenue from associated stores for the same period was RMB1,840.8 million, an increase of 104.7% from RMB899.1 million in the same period of 2022.
However, it is worth noting that in order to expand its scale, the low-price strategy adopted by Luckin has had a certain impact on profits. In the third quarter, Luckin's gross margin was 36.2%, down 5.6% from the previous quarter, while the year-on-year increase in selling expenses reached 141%.
Nearly 35,000 domestic coffee shops closed the market to usher in a "watershed moment"
At the partner conference in October, Guo Jinyi highlighted the new appointment of Luckin's current management team, and said that Luckin has made fundamental changes to its corporate culture, governance system and corporate strategy.
After the release of the third-quarter financial report, Guo Jinyi also put forward the idea of building Luckin into a "world-class century-old coffee brand".
It can be seen that Luckin's ambitions are far more than a return to the secondary market. At the time of entering the coffee track, the domestic coffee market was still very immature. Luckin spends a huge amount of money on the education market. However, the subsequent financial fraud almost made Luckin miss the opportunity for the development of the domestic coffee market.
According to public data, the market size of the mainland freshly brewed coffee industry will reach 119.1 billion yuan in 2022. Among them, the growth rate of stores in third-tier cities was as high as 19%. The coffee market has been "expansive" in the past two years, and the domestic coffee market as a whole has also entered a stage of rapid growth. According to iiMedia Research, China's coffee market is expected to maintain a growth rate of 27.2%, much higher than the global average growth rate of 2%.
As Luckin continues to turn around and turn around financially, it has seized this opportunity. June this year is a watershed moment for the development of local coffee brands. At the beginning of June, Luckin Coffee broke through 10,000 stores, becoming the largest coffee chain in China; In the same month, Luckin announced its second-quarter earnings report, and its single-quarter revenue surpassed Starbucks China for the first time.
Judging from the third quarter financial report, Luckin's advantage as the head of the local chain coffee brand continues to expand. However, it should also be noted that many domestic coffee brands have entered the game and then gone out. Looking at this year's statistics alone, according to the data of Narrow Door Restaurant, from January 1 to October 13 this year, nearly 35,000 stores in the coffee track have been closed.
Zhu Danpeng, an analyst of China's food industry, told the National Business Daily that independent coffee shops need to "cut corners". "There's already a Matthew effect in the coffee industry. For chain brands, Luckin has entered a positive cycle, and the strong are stronger. When it comes to independent coffee products, uniqueness is the way to survive. ”
Zhuang Shuai, founder of Bailian Consulting, also told reporters that there will be no brand monopoly in the domestic coffee market. Other industry insiders said that it is not wise for cutting-edge brands and independent coffee brands to compare prices with chain brands. Unique offline experiences, cutting-edge products, and loyal customer groups are the starting points for niche coffee brands to break through.
Industry insiders believe that the domestic coffee market is far from the "Red Sea", and with the continuous expansion of the scale of the coffee track, the growth space of cutting-edge coffee brands is still immeasurable. But with the Matthew effect emerging, the coffee industry segmentation is coming.
Source丨National Business Daily
Reporter丨Chen Li