A few days ago, the two leading coffee brands have released a quarterly report, and the results are difficult to satisfy the market. Luckin Coffee's revenue increased by 41.5% year-on-year to 6.278 billion yuan, however, the net profit was a loss of 61.5 million yuan. Increasing revenue without increasing profits has become a major problem for Luckin.
Starbucks, another coffee giant, doesn't seem to be having a good time. In the first quarter, revenue fell 2% year-on-year, and net profit fell 14.96% year-on-year, both lower than market expectations. Affected by this, after the release of the financial report, Starbucks' share price fell by 15.82%, and its market value evaporated by about 115 billion yuan in a single day.
The embarrassing net profit performance of the two coffee giants is that the coffee is not fragrant, or is there something else hidden?
Luckin: Increase revenue but not profit
A few days ago, Luckin Coffee announced its financial results for the first quarter of 2024, and the main financial indicators were mixed. revenue reached 6.278 billion yuan, a year-on-year increase of 41.5%; The average number of monthly transactions reached 59.91 million, a year-on-year increase of 103.2%; The number of stores worldwide increased by 2,342 to 18,590.
However, with the rapid growth of revenue, the number of stores and the scale of transactions, Luckin Coffee lost money again. According to the financial report, Luckin Coffee's net profit loss in the first quarter was 65.1 million yuan, compared with a net profit of 678 million yuan in the same period last year. The operating profit of self-operated stores was 320 million yuan, a sharp decline from 790 million yuan in the same period last year.
As for the reasons for the loss, Guo Jin, chairman and CEO of Luckin, said repeatedly on the phone that on the one hand, objective factors such as cold waves have inevitably affected consumption and travel; On the other hand, the company takes market share as the main strategic goal, adjusts the pace of store opening, and rapidly expands the market, which subjectively erodes the company's operating profits.
In fact, there is another direct reason for the company's increase in revenue but not profit - large-scale continuous low-price subsidies. According to the data, in the first quarter, Luckin's total operating expenses reached 6.343 billion yuan, a year-on-year increase of 68.8%; Operating expenses as a percentage of net income increased to 101% from 84.7% in the year-ago quarter. At the same time, the average price of products decreased, resulting in higher leasing costs, labor costs and material costs as a proportion of net revenue.
As a result, the profit margin of Luckin's directly operated stores fell sharply from 25.2% in the same period last year to 7% in the first quarter of this year.
Starbucks: The market value has evaporated by more than 100 billion
The world is also cold, and Starbucks, another coffee giant, is not having a good time, and even suffered a decline in revenue and net profit.
Starbucks' latest financial report shows that its revenue in the first quarter was $8.56 billion, down 2% year-on-year; The net profit was 772 million US dollars, a year-on-year decrease of 14.96%.
For Starbucks, the performance of the two major markets in China and the United States is the key to good or bad performance. During the reporting period, store sales in the U.S. market decreased by 3% year-on-year, and store sales in China decreased by 11% year-on-year. The decline in both orders and average customer value ultimately led to a 4% year-on-year decline in Starbucks' sales, which directly affected the decline in revenue and net profit.
Revenue and net profit were lower than market expectations, and as a result, Starbucks' share price fell 15.82%, and its market value evaporated by about 115 billion yuan in a single day. In response to such earnings, Deutsche Bank and other institutions downgraded their stock ratings, and JPMorgan Chase even lowered its price target from $100 to $9.2 billion.
Regarding the decline in performance, Starbucks' chief financial officer said that the weather was colder than usual in January, which affected the level of store attendance across the industry. In addition, the rationality of consumption is also a factor affecting performance. After the first quarter report came out, Starbucks had to revise its 2024 growth target again, from the previous 7% to 10% to "low single digits".
However, similar to Luckin, Starbucks' store count is still expanding. In the first quarter, the net number of Starbucks stores worldwide increased by 364 to 38,951, a year-on-year increase of 6.32%. On the road to store expansion, Starbucks clearly does not want to stop. According to reports, in the second quarter, Starbucks China added 118 new stores, with a total scale of 7,093, and the goal is mainly to sink and cover more regional markets.
In Starbucks' financial report, there is also a data related to price. It is reported that in the Chinese market, Starbucks' fast coffee business accounted for 26%, a record high. Some commentators believe that thanks to a variety of membership coupons and multi-cup discounts, Starbucks members' spending on a single cup of coffee has dropped from 30 yuan+ to 20 yuan+. In essence, the price reduction behavior has driven member consumption to become the key support for revenue.
Is the coffee track okay?
The performance of the world's two major coffee giants has stalled, is it that workers no longer rely on coffee to survive? The answer is obviously no, coffee is still a good medicine for many workers. This can be seen in the size of the Chinese coffee market.
As coffee consumption becomes a daily habit, the market size of the coffee industry is still on a high-speed growth track. According to the latest data, the scale of China's coffee industry will reach 265.4 billion yuan in 2023, with a compound growth rate of 17.14% in the past three years, and the per capita annual drinking capacity will be 16.74 cups, a significant increase from 9 cups in 2016. Some institutions predict that from 2022 to 2028, the scale of China's freshly brewed coffee market will maintain a growth rate of 21.2% in CARG.
The coffee track is still fragrant, why did Luckin and Starbucks stall? Toutiao Jun believes that there are probably two reasons that cannot be ignored:
First, the low-price model is a double-edged sword. Although the low-price model launched by Luckin Coffee can greatly increase the market penetration of coffee in the short term, in the long run, the price war is not a sustainable development strategy. For Luckin and Starbucks, the normal development of the brand needs stable profit support. How to control costs and improve profitability while ensuring revenue growth is the most critical solution.
Second, the track is getting more and more crowded. Although the coffee market is still growing unlimitedly, the increasing number of competitors will undoubtedly erode the "territory" of Starbucks and Luckin. According to data, in recent years, the total number of freshly ground coffee stores in mainland China has been increasing, from 42,000 in 2017 to 138,000 in 2022.
When the 9.9 yuan coffee roll is not moving, what should Luckin roll up? In Toutiaojun's view, the low-price strategy of the coffee market is to exchange price for volume. This strategy is the most popular expansion strategy during the market development period. However, as the industry expands, price wars are out of date. For brands, in the context of consumers lowering prices and quality and price ratios, launching products with more core competitiveness is the fundamental plan for the long-term development of enterprises.
Commenting on the current competitive situation in the coffee market, Starbucks founder Howard Schultz said, "Competition is making coffee accessible to millions of people. Over time, as customers learn more about coffee, they will want to upgrade from lower-end or discounted products. ”